The world finds itself in an unprecedented time filled with anxiety, stress, and concern. We hope that you and your family are healthy and safe.

Thank you for your flexibility and patience as we work together during the COVID-19 pandemic. As the situation surrounding COVID‑19 rapidly evolves, we want to assure you that Philip L. Liberatore, CPA is committed to providing you with seamless and uninterrupted service, as we continue to maintain our operations and protect our employees and communities.

Federal, State and some local governments have been responding to the evolving need for relief in this time, here are some important things that you should know:

IRS filing deadline: The Treasury Department has extended the April 15 deadline to file returns and to pay taxes to July 15.

California deadlines: The Franchise Tax Board has extended both the filing and payment deadline to July 15 for those impacted by COVID-19.

SBA Economic Injury Disaster Loan Program

If you need cash to offset lost revenue and help keep your business afloat, the programs below can help. The U.S. Small Business Administration (SBA) coronavirus resource page provides a list of relief programs, as well as offering guidance to small business owners during this crisis.

The SBA is administering a lending program for small businesses. The SBA is providing low-interest working capital loans of up to $2 million to small businesses and nonprofits affected by the coronavirus in presidential and SBA-declared disaster areas. The disaster assistance is made in the form of low-interest loans to businesses

These loans carry an interest rate of 3.75% for small businesses and 2.75% for nonprofits. Loan repayment terms vary by applicant, up to a maximum of 30 years.

How to Apply

• Apply online and select “Economic Injury” as the reason you’re seeking assistance.
• You’ll need to supply required supporting documentation that could include the business’s most recent tax returns, a personal financial statement and a schedule of liabilities that lists all your current debts.

• Call the SBA Disaster Assistance Customer Service Center at 1-800-659-2955 for help with your application.

Apply here: https://www.sba.gov/funding-programs/disaster-assistance

City of Los Angeles Small Business Emergency Microloan Program
Businesses and microenterprises in Los Angeles that are responsible for providing low-income jobs can get an emergency microloan of $5,000 to $20,000. Loans with repayment terms of six months to one year carry an interest rate of 0% and five-year loans have interest rates of 3% to 5%.

Who’s eligible: To get a loan, you must meet requirements including having “reasonable and responsible” individual credit history, committing to use the loan for working capital only and ensuring your business is located within the City of Los Angeles. If you own 20% or more of the business, you must guarantee the loan.

How to apply: 

Apply online and provide supporting documentation including business and personal tax returns, three months of bank statements and business and personal financial statements.

Apply here: https://ewddlacity.com/index.php/microloan-program
Los Angeles has also instituted a moratorium on evictions of businesses impacted by the coronavirus through March 31.

The city has also released a coronavirus resilience kit as a guide in dealing with the crisis, see it here: Coronavirus resilience kit

Mandates for Employers under the Families First Coronavirus Response Act
President Trump on Wednesday signed into law the Families First Coronavirus Response Act, the initial coronavirus relief bill. The new law requires small employers — those with fewer than 500 employees — to provide limited paid-leave benefits to employees who are affected by the coronavirus emergency. Small employers are given new tax credits and federal payroll-tax relief to pay for the new mandatory benefits.

To read the Families First Coronavirus Response Act, go to: www.congress.gov/bill/116th-congress/house-bill/6201.

We have a task force and leadership team who are working tirelessly to ensure that we are prepared for any contingency in serving you during these challenging times.

We want to encourage you to stay informed of things that you can do to keep yourself and your family safe using reliable sources. For your convenience, we have provided the links below, as well as the attached CDC informational sheet.

CDC COVID-19 Information page
WHO COVID-19 Information page

Philip L. Liberatore, CPA remains committed to providing you with seamless and uninterrupted service, feel free to reach out to us and we pray that you and your family are healthy and safe.

Philip L. Liberatore, CPA
(562) 404-7996 | (714) 522-3337
Facsimile (562) 404-3126
[email protected]

As our country continue to fight this pandemic, we will continue to update you with pertinent information that may impact you or your business.

As part of a growing effort to stem the financial pain from the coronavirus pandemic the IRS is extending the federal income tax filing deadline to July 15^th without incurring penalties or interest.

The IRS is still processing refunds, as a result, we are designated as an essential business and will remain open to provide you with your tax and accounting needs.

However, for your protection we kindly ask if you are experiencing any of the symptoms that have been associated with the COVID-19 virus, please allow us to render our services via conference call, email, mail or fax, or reschedule your appointment to a later date.

Please contact us with any questions or concerns. We truly appreciate you, our thoughts and prayers are with you and your family.

Thank you for being the best part of Philip L. Liberatore, CPA.

Blessings,

Philip L. Liberatore, CPA
(562) 404-7996 | (714) 522-3337
Facsimile (562) 404-3126
[email protected]

On January 2, 2020, The IRS announced the official date in which they will begin accepting individual income tax returns for the 2019 tax season. Tax season will officially commence on Monday, January 27th through April 15th.

With tax season beginning in less than a week, many Americans can expect to encounter several challenges when dealing with the IRS. Customer services continues to top the list at number one. The IRS has continued to place budget cuts. As a result, a decrease in the number of employees and an increased workload for current employees. In 2019 alone, the IRS received roughly 100 million calls and representatives only answered about 29% of them.

So how can you ensure that your returns are accepted quickly? Decide who will prepare your taxes. The ever-changing filing industry has made it possible for many untrained preparers who have little to no knowledge of tax law to enter the business. Unlike most preparers, Certified Public Accountants are required to pass exams and continue their education to renew their license each year.

“If you had major life events in 2019, such as starting a business, growth in business or a sale of a property, your taxes will be more complicated and you need to hire a reputable professional to prepare them”, Phil Liberatore, CPA says. “Don’t wait until the last minute to make that decision because you could end up overpaying your taxes.”

The tax preparation process can be stressful and burdensome, hiring a reputable CPA can relieve that weight off your shoulders. They would have the knowledge and experience to efficiently assist you with your current tax needs. “The IRS has established a more scrutinized approach to certain deductions that you might take, so If you plan on including dependents, claiming head of household, tuition and/or itemizing your deductions, make sure you provide the accurate records for each along with your income statements such as W-2’s or 1099’s that you have received for 2019.”

To ensure that you receive your refund in a timely manner, have your bank account information handy for a direct deposit.

There is an increase in tax scams like phone calls, emails and text messages from scammers pretending to be the IRS. “It is crucial to understand that the IRS will NEVER call you to collect payment over the phone, send you a text message or an email,” Phil Liberatore CPA says. “If you are a recipient of one of these scams, DO NOT respond and immediately report them to the IRS at [email protected].”

Phil Liberatore, The IRS Problem Solver, and his team are dedicated to serving all individuals and businesses by providing a strategic and customized approach to your specific tax needs by delivering an exceptional level of outstanding service.

Article Highlights:

• Appropriations Act of 2020
• History of the Deduction
• Other Education Expense Benefits
• Which Tax Break Provides the Best Benefit

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, among them retroactive extension of certain tax provisions that expired after 2017 or were about to expire, several retirement and IRA plan modifications, and other changes that will, as a whole, impact a large portion of U.S. taxpayers. This article is one of a series of articles dealing with those changes and how they may affect you.

Looking back a few years, a taxpayer who had higher education expenses could generally take advantage of four* possible tax benefits: an itemized deduction if the education was job-related, a higher education tuition and expenses tax credit using either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLC), or an above-the-line deduction for higher education tuition and fees. However, the 2017 tax reforms did away with the itemized deduction through 2025, and Congress allowed the above-the-line deduction for higher education tuition and fees to expire at the end of 2017, leaving only the two education credits as options.

As part of the Appropriations Act of 2020, Congress has retroactively reinstated the above-the-line deduction for 2018 through 2020.

For purposes of the higher education expense deduction, “qualified tuition and related expenses” generally has the same definition, with certain exceptions, as the AOTC and LLC use for higher education expenses, including tuition and fees paid for an eligible student attending school at an eligible higher education institution. The deduction can be claimed for the taxpayer, the taxpayer’s spouse or a dependent of the taxpayer for attending an eligible higher education institution. The deduction, up to $2,000 or $4,000 depending on adjusted gross income (AGI), is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for other filing statuses, although no credit is allowed for taxpayers using the married filing separate status). These phase-out amounts are not inflation-adjusted.

Thus, taxpayers now have three* optional tax benefits for post-secondary education expenses, and the rules related to each are different. Although one of the education tax credits will generally provide the greatest benefit, deciding which option is best can sometimes be complex. Each has a different AGI phase-out limitation, and the AOTC, besides only applying to the first 4 years of post-secondary education, has an additional half-time student requirement. The above-the-line deduction, on the other hand, reduces AGI, and because AGI often limits other benefits on a tax return, the effect of a lowered AGI on other elements of the return needs to be considered.

If you have questions related to the extended above-the-line education deduction, please give us a call.

*There is actually an additional possibility for self-employed individuals who have business-related education expenses. These costs may be claimed as a business expense in lieu of an education credit or the personal above-the-line deduction.

If you missed any of the earlier tax law change articles you can view those articles at the links below:

• Congress Allowing Higher Medical Deductions for 2019 and 2020
• Employer’s Pension Startup Credit Substantially Increased

Article Highlights:

• New California Legislation
• Employee or Independent Contractor
• Dynamex
• ABC Test
• Impact on Employers
• Impact on Workers
• Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, for a worker to be classified as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.

Background: The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the so-called “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test: Several states, including Massachusetts and New Jersey, have also adopted this so-called ABC test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a simpler, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surly enrich California labor attorneys.

Impacts on Employers: Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers.

Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back: Some larger employers are fighting back and challenging AB-5. Uber and Doordash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome is no doubt months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. Of course, the safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Article Highlight:

• Appropriations Act of 2020
• Medical AGI Limitations
• Sometimes Overlooked Deductions
• Deductible Health Insurance
• Above-the-Line Health Insurance Deduction for Self-Employed

On December 20, 2019, President Trump signed into law the Appropriations Act of 2020, which included a number of tax law changes, including extending certain tax provisions that expired after 2017 or were about to expire, a number of retirement and IRA plan modifications, and other changes that will impact a large portion of U.S. taxpayers as a whole. This article is one of a series of articles dealing with those changes and how they may affect you.

Medical expenses are deductible as an itemized deduction but only to the extent they exceed a percentage of a taxpayer’s adjusted gross income (AGI). For a long time, the percentage was 7.5%, which was then raised for under-age-65 taxpayers to 10% for 2013 through 2016 and then lowered back to 7.5% for all taxpayers for years 2017 and 2018. It was scheduled to go back up to 10% starting with tax year 2019. However, with the passage of the Appropriations Act of 2020, Congress reduced that percentage back to 7.5% for tax years 2019 and 2020, allowing more taxpayers to qualify for the medical deduction.

However, keep in mind that the total of the itemized deductions must exceed the standard deduction before the itemized deductions will provide a tax break. So even if your medical deductions exceed the 7.5% floor, this doesn’t necessarily mean you will have a tax benefit from them.

To help you maximize your medical deductions, the following are some medical expenses other than those for doctors, dentists, hospitals, and prescriptions that are sometimes overlooked:

• Adult Diapers
• Acupuncture
• Birth Control
• Chiropractor Visits
• Drug-Addiction Treatment
• Fertility Enhancement Therapy
• Gender Identity Disorder Treatments
• Guide Dog Expenses
• Health Insurance Premiums* – Including the premiums you pay for coverage for yourself, your dependents, and your spouse, if applicable, for the following types of plans:
  o Health Care and Hospitalization Insurance
  o Long-Term Care Insurance (but limited based upon age)
  o Medicare B
  o Medicare C (aka Medicare Advantage Plans)
  o Medicare D
  o Dental Insurance
  o Vision Insurance
  o Premiums Paid through a Government Marketplace, Net of the Premium Tax Credit

  *However, premiums paid on your or your family’s behalf by your employer aren’t deductible because their cost is not included in your wage income. If you pay premiums for coverage under your employer’s insurance plan through a “cafeteria” plan, those premiums aren’t deductible either because they are paid with pre-tax dollars.

• Home Modifications for Disabled Individuals
• Lactation Expenses
• Learning Disability Special Education
• Nursing Home Costs
• Nursing Services (which need not be performed by a nurse)
• Pregnancy Tests
• Smoking-Cessation Programs

This is not an all-inclusive list, so please call with questions related to expenses that you think might qualify as a medical expense.

As a tax tip, if you are self-employed, you may be able to deduct 100% (no 7.5%-of-AGI reduction) of the cost of medical insurance without itemizing your deductions. This above-the-line deduction is limited to your net profits from self-employment. If you are a partner who performs services in that capacity and the partnership pays health insurance premiums on your behalf, those premiums are treated as guaranteed payments that are deductible by the partnership and includible in your gross income. In turn, you may deduct the cost of the premiums as an above-the-line deduction under the rules discussed in this article.

No above-the-line deduction is permitted when the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer’s spouse, any dependent, or any child of the taxpayer who hasn’t attained age 27 as of the end of the tax year. This rule is separately applied to plans that provide coverage for long-term care services. Thus, an individual who is eligible for employer-subsidized health insurance may still deduct long-term care insurance premiums, as long as he or she isn’t eligible for employer-subsidized long-term care insurance. In addition, for the insurance to be treated as subsidized, 50% or more of the premium must be paid by the employer.

This above-the-line deduction is also available to more-than-2% S corporation shareholders. For purposes of the income limitation, the shareholder’s wages from the S corporation are treated as his or her earned income.

The above-the-line deduction includes the premiums you pay for health coverage for yourself, your dependents, and your spouse, if applicable, for the types of plans listed under “Health Insurance Premiums” above.

If you have any questions related to medical itemized deductions or the self-employed above-the-line deduction for health insurance premiums, please give us a call at 562-404-7996.

Article Highlights:

• Standard Mileage Rates for 2020
• Business, Charitable, Medical and Moving Rates
• Important Considerations for 2020
• Switching between the Actual Expense and Standard Mileage Rate Methods
• Employer Reimbursements
• Employee Deductions Suspended
• Special Allowances for SUVs

The Internal Revenue Service (IRS) computes standard mileage rates for business, medical and moving each year, based on a number of factors, to determine the standard mileage rates for the following year.

As it does annually around the end of the year, the IRS has announced the 2020 optional standard mileage rates. Thus, beginning on Jan. 1, 2020, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

• 57.5 cents per mile for business miles driven (including a 27-cent-per-mile allocation for depreciation). This is down from 58 cents in 2019;
• 17 cents per mile driven for medical or moving* purposes. This is down from 20 cents in 2019; and
• 14 cents per mile driven in service of charitable organizations.

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for 22 years).

Important Consideration: The 2020 rates take into account 2019 fuel costs. Based on the potential for substantially higher gas prices in 2020, it may be appropriate to consider switching to the actual expense method for 2020 or at least to keep track of the actual expenses, including fuel costs, repairs and maintenance, so that the option is available for 2020.

Taxpayers always have the choice of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension and expansion of the bonus depreciation as well as increased depreciation limitations for passenger autos in the Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year when a vehicle is placed into business service.

However, the standard mileage rates cannot be used if you used the actual method (using Section 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of the employment-connected business travel, and returns any excess payment to the employer. This reimbursement arrangement is referred to as an accountable plan.

The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, during this period employees may not take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans. Since they no longer get any tax benefit, employees with significant job-related auto usage should ask their employers to set up an accountable plan to reimburse them.

Members of a reserve component of the U.S. Armed Forces, state and local government officials paid on a fee basis and certain performing artists continue to be allowed to deduct unreimbursed employee travel expenses, including the business standard mileage rate, because they are deductible from gross income rather than as an itemized deduction. Self-employed individuals continue to be able to deduct use of their personal vehicle for business purposes as an expense of the business if properly substantiated.

Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation. Taxpayers who purchase a heavy SUV and put it into business use in 2020 can utilize both the Section 179 expense deduction, up to a maximum for 2020 of $25,900, and the bonus depreciation (if the Section 179 deduction is claimed, it must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (self-employment income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered. Generally, for vehicles weighing more than 6,000 pounds, using 100% bonus depreciation is the better option.

If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give us a call at 562-404-7996.

Article Highlights:

• When You Are Required to File
• Self-Employed Taxpayers
• Filing Thresholds
• Benefits of Filing Even When Not Required to File
• Refundable Tax Credits

This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to the individuals’ BENEFIT to file a return even if they are not required to file.

When individuals are required to file:

• Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds generally are the same amount as the standard deduction for individual(s).
• Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
• Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance through a government Marketplace and received a higher advance premium tax credit (APTC) than they were entitled to, are required to repay part of it. Therefore, all individuals who received an APTC must file a return to reconcile the advance payments with the actual credit amount, even if their income is less than the filing threshold amount and even if they don’t need to repay any of the advance credit.
• Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.

When it is beneficial for individuals to file:
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:

• Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
• Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
• Child Tax Credit – This is a $2,000 credit for each qualifying child, a portion of which may be refundable for lower income taxpayers, and phases out for higher income taxpayers.
• American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
• Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.

DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So, the refund period expires for 2019 returns, which were due in April of 2020, on April 15, 2023.

For more information about filing requirements and your eligibility to receive tax credits, please contact our office.

Article Highlights:

• Discharge of Qualified Principal Residence Indebtedness
• Mortgage Insurance Premiums
• Above-the-Line Deduction for Qualified Tuition and Related Expenses
• Medical AGI Limits
• Residential Energy (Efficient) Property Credit
• Employer Credit for Paid Family and Medical Leave
• Maximum Age Limit for Traditional IRA Contributions
• Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption
• Increase in Age for Required Minimum Pension Distributions
• Difficulty of Care Payments Qualifying for IRA Contributions
• Expansion of Sec. 529 Plan Uses
• Required Distributions Modified for Inherited IRAs and Retirement Plans
• Increase in Penalty for Failure to File
• Major Change to Kiddie Tax Rules

Congress, at almost the last minute, has passed a large number of tax changes, including retirement plan issues that will become effective in 2020, as well as extensions through 2020 of a number of tax provisions that had expired or were about to end. The list of changes is quite large, so we have only included those that are most likely to affect individual tax returns. Here is a run-down on some of the new tax provisions:

TAX EXTENDERS

The tax changes retroactively revive a number of provisions that had previously expired or were going to at the end of 2019, and extend them through 2020. So, review them carefully to see if any of them provide you with an opportunity to amend your return for a refund.

Discharge of Qualified Principal Residence Indebtedness – When an individual loses his or her principal residence to foreclosure, abandonment, or short sale or has a portion of their loan forgiven under the HAMP mortgage-reduction plan, they will generally end up with cancellation-of-debt (COD) income. COD income is equal to the amount of debt on the home that is forgiven by the lender. To the extent that the mortgage debt becomes COD income, it is taxable income unless the taxpayer can exclude it based on specific provisions in the tax code.

After the housing market crash a few years back, Congress added the qualified principal residence COD exclusion, which allowed taxpayers to exclude up to $2 million ($1 million if married filing separately) of COD income, to the extent it was discharged debt used to acquire the home, termed acquisition debt. Equity debt was not eligible for the exclusion. However, equity debt is deemed to be discharged first, thus limiting the exclusion if both equity and acquisition debt are involved in the transaction.

This COD exclusion was temporarily added in 2007, was extended, and then expired at the end of 2017. Under the current legislation, the exclusion for qualified principal residence indebtedness is retroactively extended through 2020. Thus, if you paid taxes on principal residence COD income in 2018, be sure to call attention to that fact so your return can be amended for a refund.

Mortgage Insurance Premiums – For tax years 2007 through 2017, taxpayers could deduct the cost of premiums for mortgage insurance on a qualified personal residence as an itemized deduction. The premiums were deducted as home mortgage interest on Schedule A. To be deductible:

• The premiums must have been paid in connection with acquisition debt (note: acquisition debt includes refinanced acquisition debt).
• The mortgage insurance contract must have been issued after Dec. 31, 2006.
• It must be for a qualified residence (first and second homes).
• The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000).

Qualified mortgage insurance means mortgage insurance provided by the:

• Dept. of Veterans Affairs (VA),
• Federal Housing Administration (FHA), or
• Rural Housing Services (RHS), as well as
• Private mortgage insurance.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Above-the-Line Deduction for Qualified Tuition and Related Expenses – An above-the-line deduction for qualified tuition and related expenses for higher education has been available since 2002 and was previously extended through 2017. For purposes of the higher education expense deduction, “qualified tuition and related expenses” has the same definition as for the American Opportunity and Lifetime Learning credits for higher education expenses – that is, with certain exceptions, tuition and fees paid for an eligible student (the taxpayer, the taxpayer’s spouse, or a dependent) at an eligible higher education institution. The deduction – up to $2,000 or $4,000, depending on AGI – is not allowed for joint filers with an AGI of $160,000 or more ($80,000 for other filing statuses), except no deduction is allowed for taxpayers using the married filing separate status. The phase-out amounts are not inflation-adjusted. The same expenses can’t be used for both an education credit and the tuition and fees deduction.

This deduction was previously allowed through 2017 and has retroactively been extended through 2020.

Medical AGI Limits – For 2017 and 2018, individuals could claim an itemized deduction for unreimbursed medical expenses, to the extent that such expenses exceeded 7.5% of their AGI. For post-2018 years, the percent of AGI has been increased to 10%. The provision retroactively extends the lower threshold of 7.5% through 2020.

Residential Energy (Efficient) Property Credit – This non-refundable credit has been available in one form or another since 2006 and through 2017, with credit amounts varying from 10% to 30% and the maximum credit ranging from $500 to $1,500. Most recently, the credit percentage was 10%, with a lifetime credit amount limited to $500. This credit is best described as an energy-saving credit since it applies to improvements to the taxpayer’s existing primary home to make it more energy efficient. Generally, it applies to insulation, storm windows and doors, and certain types of energy-efficient roofing materials, energy-efficient central air-conditioning systems, water heaters, heat pumps, hot water systems, circulating fans, etc., but the expenses eligible for the credit do not include installation costs.

The recent legislation extends this credit through 2020, with a lifetime credit cap of $500.
Caution: The lifetime credit extends to returns going all the way back to 2006.

Employer Credit for Paid Family and Medical Leave – This credit provides an employer with credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The maximum amount of family and medical leave that may be taken into account for any qualifying employee is 12 weeks per taxable year. The credit is variable and only applies if the leave wages are at least 50% of the individual’s normal wages. The credit percentage is 12.5% and increases by 0.5%, up to a maximum of 25%, for each percentage point that the payment rate exceeds 50%.

The credit was originally only for 2018 and 2019 but has been extended through 2020.

RETIREMENT PLAN AND IRA CHANGES

Maximum Age Limit for Traditional IRA Contributions – The legislation repeals the maximum age for making traditional IRA contributions, which, prior to this legislation, prohibited traditional IRA contributions after an individual reached the age of 70½. The provision is effective for contributions made for taxable years beginning after December 31, 2019.

Penalty-Free Pension Withdrawals in Case of Childbirth or Adoption – The legislation allows a penalty free but taxable distribution of up to $5,000 from a qualified plan made within one year of birth or in the case of a finalized adoption of an individual aged 18 or younger or an individual who is physically or mentally incapable of self-support. Distributions can later be repaid to avoid the tax on the distribution.

Increase in Age for RMDs – For decades, individuals were required to begin taking distributions from their traditional IRAs and qualified plans once they reached age 70½. These distributions, commonly referred to as a required minimum distribution or RMD, have never been adjusted to account for increases in life expectancy. The legislation changes the required beginning date for mandatory distributions to age 72, effective for distributions required to be made after December 31, 2019, with respect to individuals who attain the age of 72 after this date.

Special Rule – Difficulty of Care Payments – Many home health-care workers do not have a taxable income because their only compensation comes from “difficulty of care” payments that are exempt from taxation under Code Section 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. This provision will allow home health-care workers to contribute to a qualified plan or IRA by amending the tax code so that tax-exempt difficulty of care payments are treated as compensation, for purposes of calculating the contribution limits to defined contribution plans and IRAs. This is effective for plan years after December 31, 2015, and IRA contributions after the act’s date of enactment (December 20, 2019).

Sec. 529 Plan Modifications – Sec. 529 plans (also referred to as qualified state tuition plans) were originally created to allow tax-free accumulation saving accounts for a child’s education but generally limited the funds’ use to post-secondary education tuition and certain college fees. Since then, Congress has continued to expand the use of funds to include supplies, books, equipment, and reasonable room and board expenses for attending college. With the passage of the tax reform at the end of 2017, Congress allowed up to $10,000 a year to be used for elementary and secondary school tuition expenses. This new legislation adds the following to the list of qualified expenses:

• Qualified higher education expenses associated with registered apprenticeship programs certified by the Secretary of Labor under Sec. 1 of the National Apprenticeship Act
• Payment of education loans, up to a maximum of $10,000 (reduced by the amount of distributions so treated for all prior taxable years), including those for siblings

These changes are effective for distributions made after December 31, 2018.

RMDs for Designated Beneficiaries – The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the account owner’s death. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or a child of the employee (or IRA owner) who has not reached the age of majority must generally be distributed by the end of the tenth calendar year following the year of the employee’s or IRA owner’s death. A special rule for children requires any remaining undistributed funds to be distributed within 10 years after they reach the age of maturity.

This is a major change since beneficiaries previously had options to take certain lifetime payouts. This will require careful planning to minimize the tax on the distributions. The change applies to distributions with respect to employees or IRA owners who die after December 31, 2019.

Penalty for Failure to File – The legislation increased the minimum penalty for failure to file a tax return within 60 days of the return’s due date to $435, up from $330, for returns with a due date (including extensions) after December 31, 2019. Thus, the $435 penalty will apply to 2019 returns and will be inflation adjusted for future years.

Kiddie Tax – The tax reform enacted late in 2017 changed how the income of dependent children is taxed, causing a child’s unearned income to be taxed at fiduciary rates that very quickly reach the maximum tax rate of 37%. That change created an unintentional tax increase for survivors of service members and first responders who died in the line duty. This last-minute change reverts the kiddie tax computation to the pre–tax reform method for years beginning in 2020. It also allows taxpayers to choose whichever method provides the lowest tax for 2018 and 2019. Taxpayers can amend their 2018 return if doing so will provide a better outcome.

The changes are extensive and, in many cases, open the door to amending prior years’ returns. If you have any questions or think any of these changes might benefit you for a prior year, please give contact us.