Practical IRS Tax Insights – May 2020
So much has happened since my last newsletter. As we all deal with the health concerns and economic impact of COVID-19, many clients have contacted me with questions. At first, there were many more questions than answers about government action related to the pandemic. I think we have a better handle on the implications of the CARES act, and I would like to share them with you. Here are some common client questions and the answers as of now:
Do I have to pay tax on my stimulus payment?
No. The tax rebate is an advance payment of a special 2020 tax credit…so it is nontaxable.
I owe back taxes. Will my rebate be reduced?
No. IRS will not apply the stimulus payment to offset past-due taxes or other federal or state debt, except for delinquent child support owed by a person.
I just got my rebate. What if my 2020 AGI ends up being too high to qualify?
Do I have to repay the money?
No. Rebates generally don’t need to be repaid. For more on stimulus payments, see www.kiplinger.com/letterlinks/checks. It has answers to lots of queries and includes a description of two new IRS web tools: One is for people who would qualify for a stimulus payment but didn’t file a 1040 for 2018 or 2019 because their income was under the threshold amount to file a return. The other is for people to enter bank account information to get their rebates faster through direct deposit, and for individuals to check on the status of their payment.
I took a required minimum distribution from my traditional IRA in Feb.
Now that Congress has waived RMDs for 2020, can I put it back into the IRA?
Yes, and it will be treated as a tax-free rollover, provided you return the funds to the IRA by July 15, and you don’t violate the one-rollover-every-12-months rule. Normally, you have 60 days to do a tax-free rollover, but IRS extended the time period for rollovers otherwise due between April 1 and May 15 of this year to July 15. If you took an RMD in Jan., you’re out of luck…at least for now. You can’t redeposit the funds back into the IRA and treat it as a tax-free rollover. But tax practitioners tell us they expect the Revenue Service to issue guidance on the new RMD waiver, and that those rules may provide broad rollover relief.
My small business is applying for a Paycheck Protection Program loan.
If my firm gets the loan and it is forgiven, is the canceled debt taxable?
No. The stimulus law says that loan amounts forgiven under the PPP are nontaxable.
Are unemployment benefits taxable?
Yes, for federal income tax purposes. State taxation is a mixed bag. 33 states and D.C. fully tax the income. Ind. and Wis. tax them in part. Ala., Calif., Mont., N.J., Pa. and Va. don’t tax them. Alaska, Fla., Nev., N.H., S.D., Tenn., Texas, Wash. and Wyo. have no income tax.
IRS broadly extends most tax return filing and payment deadlines to July 15.
The relief generally applies to all taxpayers with a filing or payment deadline that is otherwise due on or after April 1 and before July 15. Individuals, Americans living abroad, trusts, estates, corporations, exempt organizations and others qualify for the additional time. Among the federal tax returns extended: Forms 1040, 1040-SR, 1040-NR, 1041, 1120, 990-T, 706, 709, 5500 and many more. Also extended are estimated tax payments for individuals and corporations, so estimated payments for the first and second quarters are now due by July 15. Taxpayers have more time to file Tax Court petitions and refund claims. Filings otherwise due April 1 through July 14 are now extended to July 15. See Notice 2020-23 for details on the extended tax filings, payments and actions.
Keep this rule in mind if you use 529 funds for your kid’s college education…
And you got a refund from the school for canceled classes or housing as a result of the school’s closing its physical campus because of coronavirus concerns. Tax legislation enacted in 2015 waives tax and penalties if, after a distribution is made from the account, the student gets a refund from the college or university. To qualify for relief, you generally must redeposit the funds into a 529 account
for the same beneficiary within 60 days. The recontribution is treated as principal.
Penalties for failing to report overseas accounts are stiff.
$13,481 apiece for nonwillful violations…the larger of $134,806 or 50% of the highest balance in the account for willful failures. Be sure you comply with the reporting rules, because increasing taxpayer compliance in this area is a key IRS enforcement priority.
The standard for willfulness includes reckless conduct or willful blindness. A man living in Mich. failed to report Canadian accounts he had for several years. IRS slapped him with a penalty of nearly $1 million. According to a district court, the following factors demonstrate reckless disregard of the reporting requirements: The man didn’t review Schedule B of his 1040, which asks about foreign accounts. He didn’t bother to ask his preparer about his obligations to disclose the accounts. He had all correspondence on the accounts sent to his sister’s address in Canada. Additionally, he had lots of money stashed overseas (Ott, D.C., Mich.).
Businesses get limited relief from IRS on filing claims for quick refunds.
Firms can temporarily send refund claims relating to net operating loss changes to IRS via fax instead of mail. The federal stimulus law requires taxpayers with NOLs arising in 2018, 2019 or 2020 to carry the loss back to each of the preceding five years, unless the taxpayer waives the carryback. Eligible refund claims filed on Form 1139 can be faxed to 844-249-6236. Those filed on Form 1045 are faxed to 844-249-6237.
Revoking a tax delinquent’s passport doesn’t violate the U.S. Constitution.
A man who owed $250,000 in back taxes was ordered to give up his passport by the State Dept. after IRS certified that he had a seriously delinquent tax debt. He claimed this violated his constitutional right to travel. A court tossed the case, saying that collecting tax debts is a legitimate government interest (Maehr, D.C., Colo.).
Businesses should take note of this easing in the federal stimulus law:
Employers may defer payment of their 6.2% share of Social Security tax, otherwise required to be made from March 27 through the end of the year. Half of the deferred amount is due Dec. 31, 2021, and the other 50% on Dec. 31, 2022. Self-employed individuals can defer payment of up to 50% of their SECA tax. Special rules apply to employers that receive paycheck protection loans under the new program for small firms administered by the Small Business Admin. Employers who get a paycheck protection loan may defer deposit and payment
of their share of Social Security tax, without penalty, through the date that the lender issues a decision to forgive the loan. Once an employer receives that decision, the employer is no longer eligible for the payroll tax deferral on an ongoing basis. However, the amount that was previously deferred will continue to be deferred through the end of 2021 and 2022, IRS says in a set of frequently asked questions