Author: Alexis Long

This holiday season, you may want to make cash gifts to loved ones. The annual gift tax exclusion for 2023 is $17,000 ($34,000 for married couples). You can give up to that amount to an unlimited number of people by Dec. 31, and the gifts will be exempt from gift tax, the generation-skipping tax and filing obligations.

You can’t “carry over” tax-exempt gifts from year to year, but there may be strategies for making larger gifts. If, for example, you and your spouse want to help your daughter buy a house, you can give her $34,000 on Dec. 31. Then on Jan. 1, you can give an equal or higher amount, when 2024’s gift tax exclusion is projected to be $18,000 ($36,000 for married couples).

Contact one of our experts for help with tax planning.

Taxpayers who purchase assets for business use may be eligible to deduct the full cost in the year of purchase, subject to Section 179 limits. A taxpayer must prove the asset’s cost, where and when it was purchased, and the percentage of business use. Only the percentage of cost that applies to business use may be deducted.

The owner of an electrical services corporation purchased a forklift and a plow attachment, used mostly for business, and a boat that he said was used to entertain clients. The U.S. Tax Court approved a partial deduction for the business use of the forklift and plow. The boat was used mainly for personal purposes, so the court denied that deduction. (TC Memo 2023-114)

Contact one of our experts with questions about tax planning.

The IRS is continuing to warn businesses about aggressive marketing by nefarious actors involving the Employee Retention Tax Credit (ERTC). It has suspended the processing of ERTC claims until at least year end because of a spike in the number of fraudulent claims.

The IRS has now issued a series of red flags businesses should bear in mind. Warning signs include unsolicited calls mentioning an “easy application process,” claims from fraudulent promoters that a business qualifies for the ERTC even before any discussion of the company’s tax situation, large upfront fees, and additional fees based on a percentage of the refund claim. For more information: https://bit.ly/46fh4Yd

Contact one of our experts if you have questions.

As the IRS begins compliance work on cryptocurrency transactions, taxpayers who participate in them should prepare their documentation for scrutiny. You need to keep good crypto activity records because you may not be able to rely on your transaction platform to provide that data. However, some platforms, such as Coinbase, send Form 1099s to customers who earn more than $600 over the course of a tax year.

The IRS has suggested that during this transition period, it will be lenient with taxpayers who owe tax or haven’t kept good records because they didn’t know they’d need them. Also, the agency has talked about using artificial intelligence to enforce compliance with crypto reporting rules.

Contact one of our experts with questions about cryptocurrency tax compliance.

Mark your calendars for this important date, Sept. 15, if you must make quarterly estimated tax payments. That’s the due date for the third estimated tax payment for 2023.

Who must pay estimated tax? Generally, those who have taxable income that isn’t subject to withholding must make payments if they expect to owe tax of $1,000 or more when they file their tax returns. Estimated payments are used to pay not only income tax, but also self-employment taxes. With the rise of the gig economy, more people, such as rideshare drivers, are now required to make estimated tax payments.

If you’re not sure if this includes you, contact us or learn more here: https://bit.ly/3AYci4R

Businesses that receive more than $10,000 in cash must report the transactions to the IRS. This is done on Form 8300, Report of Cash Payments Over $10,000. Although many cash transactions are legitimate, information reported on Form 8300 can help combat those who evade tax, profit from the drug trade, or engage in terrorist financing.

The IRS recently announced that beginning Jan. 1, 2024, businesses must electronically file Form 8300 instead of filing paper returns. Indeed, the new requirement for e-filing Form 8300 applies to businesses mandated to e-file certain other information returns, such as the Form 1099 series and Forms W-2. For more information from the IRS: https://bit.ly/47RPimh

Contact us with questions.

Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West. Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain. To qualify for the exclusion, you must meet these tests: You must have owned the property for at least two years during the five-year period ending on the sale date. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.) In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary income rate, which could be more than double your long-term rate. If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT. However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT. The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use. You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible. As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales. © 2023

The SECURE 2.0 law, which was enacted last year, contains wide-ranging changes to retirement plans. One provision in the law is that eligible employers will soon be able to provide more help to staff members facing emergencies. This will be done through what the law calls “pension-linked emergency savings accounts.” Effective for plan years beginning January 1, 2024, SECURE 2.0 permits a plan sponsor to amend its 401(k), 403(b), or government 457(b) plan to offer emergency savings accounts that are connected to the plan.

Basic distribution rules

If a retirement plan participant withdraws money from an employer plan before reaching age 59½, a 10% additional tax or penalty generally applies unless an exception exists. This is on top of the ordinary tax that may be due. The goal of these emergency accounts is to encourage employees to save for retirement while still providing access to their savings if emergencies arise. Under current law, there are specific exceptions when employees can withdraw money from their accounts without paying the additional 10% penalty but they don’t include all of the emergencies that an individual may face. For example, while participants can take penalty-free distributions to pay eligible medical expenses, they can’t take them for car repairs.

Here are some features of pension-linked emergency savings accounts: The accounts can only be offered to employee-participants who aren’t highly compensated. In general, a highly compensated employee is one who is a 5% or more owner of a business or has compensation in the preceding year that exceeds an indexed limit (for 2024, $150,000 or more of compensation in 2023). Plan sponsors can automatically enroll employee-participants in these accounts at up to 3% of their salary. Plan participants may opt out of making these contributions or pick a different rate to be taken from their pay. Annual contributions are capped at the lesser of $2,500 (indexed for inflation) or an amount chosen by the plan sponsor. Contributions to pension-linked emergency savings accounts are made on a Roth after-tax basis. Contributions reduce an employee’s other retirement contributions that can be made to a plan. A participant must be allowed to make withdrawals from his or her account at least once per month. No reason needs to be provided and a participant must not be subject to any fees or charges for the first four withdrawals from the account each plan year. (However, subsequent withdrawals may be subject to reasonable fees and charges.)

Another option to help employees

In addition to these accounts, SECURE 2.0 adds a new exception for certain retirement plan distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions beginning January 1, 2024.

Determine whether there’s time

In addition to what is outlined here, other rules apply to pension-linked emergency savings accounts. The IRS is likely to issue additional guidance in the next few months. Be aware that plan sponsors don’t have to offer these accounts and many employers may find that they need more time to establish them before 2024. Or they may decide there are too many administrative hurdles to clear.

Contact us with questions. © 2023

The IRS on July 26 released a draft 2023 revision of Form W-9, “Request for Taxpayer Identification Number and Certification,” that includes a new reporting line for flowthrough entities like partnerships and trusts.

Individuals or entities that are required to file certain information returns with the IRS use Form W-9 to request the taxpayer identification number (TIN) from U.S. persons and resident aliens for the required reporting. Taxpayers that do not reply to W-9 requests with their correct TIN may be subject to backup withholding.

The draft 2023 revised form adds a new line 3b checkbox relating to flowthrough entities. Line 3 of the current form (2018 revision) asks respondents to check a box to indicate their federal tax classification as an individual, C corporation, partnership, etc. The revised form breaks off a new line 3b, adding an additional checkbox for entities that select “partnership” or “trust/estate” on line 3a (current line 3) and that are providing the Form W-9 to a partnership, trust, or estate. The form instructs these entities to check the box in line 3b if they have any foreign partners, owners, or beneficiaries.

The IRS explains that the change is intended to give flow-through entities information regarding indirect foreign partners, owners, or beneficiaries for purposes of complying with relevant reporting requirements. This includes requirements for partnerships with indirect foreign partners to complete Form 1065 Schedules K-2 and K-3.

The instructions to the draft Form W-9 clarify that for purposes of the checkbox in line 3b, partnership includes a limited liability company classified as a partnership for U.S. federal tax purposes. They further state that respondents must check the line 3b box if they receive a Form W-8 (or documentary evidence) from any partner, owner, or beneficiary establishing foreign status or if they receive a Form W-9 from any partner, owner, or beneficiary that has checked the box on line 3b.

The draft Form W-9 has a revision date of October 2023. Once finalized, withholding agents are generally required to accept the current version Form W-9.

Meet ATA’s international tax expert, Jim Duncan, CPA.