Learning Center for Tax and Financial Insights

Article Highlights:Increase in Corporate Tax RateIncrease in Top Marginal Individual Income Tax RateIncrease in Capital Gains Rate for Certain High-Income IndividualsDeduction for Certain Employee Trade or Business ExpensesApplication of Net Investment Income Tax to Trade or Business IncomeLimitation Qualified Business Income DeductionLimitations on Excess Business Losses of Noncorporate TaxpayersSurcharge on High-Income Individuals, Trusts, and EstatesTermination of Temporary Increase in Unified CreditEstate Tax Valuation for Real Property Used in FarmingCertain Tax Rules Applicable to Grantor TrustsValuation Rules for Certain Transfers of Nonbusiness AssetsContribution Limits for Individual Retirement PlansIncrease in Minimum Required DistributionsLimiting Back Door IRA ConversionsStatute of Limitations with Respect to IRA NoncomplianceInvestment of IRA Assets in Entities Where Owner Has a Substantial InterestIRA Owners Treated as Disqualified PersonsFunding of the Internal Revenue ServiceLimiting Qualified Conservation Contribution DeductionsLimitation on Deduction of Excessive Employee RemunerationTermination of Employer Credit for Paid Family Leave and Medical LeaveTemporary Rule to Allow Certain S Corporations to Reorganize as Partnerships Without TaxEnhancement of Work Opportunity Credit During COVID-19 Recovery PeriodResearch and Experimental ExpendituresThe House Ways and Means Committee has released an extensive list of proposed tax changes that impact individual, retirement, international and corporate tax law. We have been selective and have only included a portion of the proposed changes. A full list of proposed changes is available from the PDF file titled Responsibility Funding Our Priorities. As you read through the article you will quickly become aware that the provisions are aimed at higher income taxpayers. The full list available from the link above includes numerous provisions not included in this article and are primarily related to corporate foreign transactions.Increase in Corporate Tax Rate - This provision replaces the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18 percent on the first $400,000 of income; 21 percent on income up to $5 million, and a rate of 26.5% on income thereafter. The benefit of the graduated rate phases out for corporations making more than $10,000,000. Personal services corporations are not eligible for graduated rates. The domestic dividends received deduction is adjusted to hold constant the tax on domestic corporate-to-corporate dividends. Increase in Top Marginal Individual Income Tax Rate - The provision increases the top marginal individual income tax rate to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021Increase in Capital Gains Rate for Certain High-Income Individuals - The provision increases the capital gains rate to 25%. The amendments made by this section apply to taxable years ending after the date of introduction of this Act. A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction. Gains recognized later in the same taxable year that arise from transactions entered into before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of introduction.Deduction for Certain Employee Trade or Business Expenses - The provision allows for up to $250 in dues to a labor organization be claimed as an above-the-line deduction. The provision is effective for taxable years beginning after December 31, 2021. Application of Net Investment Income Tax to Trade or Business Income - This provision expands the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates. The provision clarifies that this tax is not assessed on wages on which FICA is already imposed. Effective for taxable years beginning after December 31, 2021. Limitation Qualified Business Income Deduction – The provision amends IRC Sec 199A pass through deduction by setting the maximum allowable deduction at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate. (Effective for taxable years beginning after December 31, 2021). Limitations on Excess Business Losses of Noncorporate Taxpayers - This provision permanently disallows excess business losses (i.e., net business deductions more than business income) for non-corporate taxpayers. The provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year. Effective for taxable years beginning after December 31, 2021. Surcharge on High-Income Individuals, Trusts, and Estates - This provision imposes a tax equal to 3% of a taxpayer’s modified adjusted gross income more than $5,000,000 ($2,500,000 for married individuals filing separately). Effective for taxable years beginning after December 31, 2021. Termination of Temporary Increase in Unified Credit - This provision terminates the temporary increase in the unified credit against estate and gift taxes which for 2021 is $11,700,000, reverting the credit to its 2010 level of $5,000,000 per individual, indexed for inflation. Estate Tax Valuation for Real Property Used in Farming - This provision would increase the special valuation reduction available for qualified real property used in a family farm or family business. This reduction allows decedents who own real property used in a farm or business to value the property for estate tax purposes based on its actual use rather than fair market value. This provision increases the allowable reduction from $750,000 to $11,700,000. Certain Tax Rules Applicable to Grantor Trusts - This provision adds IRC Sec 2901, which pulls grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Prior to this provision, taxpayers were able to use grantor trusts to push assets out of their estate while controlling the trust closely. The provision also adds a new section 1062, which treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. The amendments made by this section apply only to future trusts and future transfers. Valuation Rules for Certain Transfers of Nonbusiness Assets - This provision clarifies that when a taxpayer transfers nonbusiness assets, those assets should not be afforded a valuation discount for transfer tax purposes. Exceptions are provided for assets used in hedging transactions or as working capital of a business. A look-through rule provides that when a passive asset consists of a 10-percent interest in some other entity, the rule is applied by treating the holder as holding its ratable share of the assets of that other entity directly. The amendments made by this section apply to transfers after the date of the enactment of this Act.Contribution Limits for Individual Retirement Plans - Under current law, taxpayers may make contributions to IRAs irrespective of how much they already have saved in such accounts. To avoid subsidizing retirement savings once account balances reach very high levels, the legislation creates new rules for taxpayers with very large IRA and defined contribution retirement account balances. Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). The legislation also adds a new annual reporting requirement for employer defined contribution plans on aggregate account balances more than $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported. Effective for taxable years beginning after December 31, 2021. Increase in Minimum Required Distributions - If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit. In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above. Effective for taxable years beginning after December 31, 2021.Limiting Back Door IRA Conversions - Under current law, contributions to Roth IRAs have income limitations. For example, the income range for single taxpayers for making contributions to Roth IRAs for 2021 is $125,000 to $140,000. Those single taxpayers with income above $140,000 generally are not permitted to make Roth IRA contributions. In 2010, the similar income limitations for Roth IRA conversions were repealed, which allowed anyone to contribute to a Roth IRA through a conversion. irrespective of the still-in-force income limitations for Roth IRA contributions. As an example, if a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA. To close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.Statute of Limitations with Respect to IRA Noncompliance - The bill expands the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years to help IRS pursue these violations that may have originated outside the current statute’s 3-year window. This provision applies to taxes to which the current 3-year period ends after December 31, 2021. Investment of IRA Assets in Entities Where Owner Has a Substantial Interest - To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50 percent or greater interest. However, an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50 percent threshold to 10 percent for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer. Further, the bill modifies the rule to be an IRA requirement, rather than a prohibited transaction rule (i.e., to be an IRA, it must meet this requirement). This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments.IRA Owners Treated as Disqualified Persons - The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner’s death) is always a disqualified person. This section applies to transactions occurring after December 31, 2021.Funding of the Internal Revenue Service - This provision appropriates $78,935,000,000 for necessary expenses for the IRS for strengthening tax enforcement activities and increasing voluntary compliance and modernizing information technology to effectively support enforcement activities. No use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000. Further, $410,000,000 is appropriated for necessary expenses for the Treasury Inspector General for Tax Administration to provide oversight of the IRS. Finally, $157,000,000 is appropriated for the Tax Court for adjudicating tax disputes. These appropriated funds are to remain available until September 30, 2031. Limiting Qualified Conservation Contribution Deductions - To curb syndicated conservation easement tax shelters, this provision denies charitable deduction for contributions of conservation easements by partnerships and other pass-through entities if the amount of the contribution (and therefore the deduction) exceeds 2.5 times the sum of each partner’s adjusted basis in the partnership that relates to the donated property. This general disallowance rule does not apply to donations of property that meet the requirements of the 3-year holding period rule, and contributions by family partnerships. In addition, certain taxpayers whose deeds are found to have certain defects and are notified by the Commissioner can correct such defects within 90 days of the notice. This ability to cure does not apply in the case of reportable transactions and transactions for which deduction is disallowed under this section. Various accuracy-related penalties apply, including gross valuation misstatement penalty, and adjustments are made to the statute of limitations on assessment and collection by the IRS, in case of any disallowance of a deduction by reason of this provision. This section applies to contributions made after December 23, 2016 (the date of the relevant IRS Notice). In the case of contributions of easements related to the preservation of certified historic structures, this section applies to contributions made in taxable years beginning after December 31, 2018. The ability to cure defective deeds are permitted for returns filed after the date of the enactment and for returns filed on or before such date if the section 6501 period has not expired as of such date.Limitation on Deduction of Excessive Employee Remuneration - This provision moves up the effective date of the amendment to section 162(m) in the American Rescue Plan Act of 2021 (ARPA) to tax years following December 31, 2021. The ARPA expanded the set of applicable employees under section 162(m) to include the eight most highly compensated officers other than the principal executive and principal financial officers for a taxable year, beginning in tax years after December 31, 2026. The additional five employees scoped in under the ARPA amendment are not considered permanent covered employees for the purposes of the section. The provision also applies the section 414 aggregation rules for covered health insurance providers to the general rule under section 162(m), expands the IRS’s regulatory authority under the general rule, and expands the definition of applicable employee renumeration. Termination of Employer Credit for Paid Family Leave and Medical Leave -This provision accelerates termination of employer credit for wages paid to employees during family and medical leave to taxable years beginning after 2023. Currently, the credit will terminate for wages paid in taxable years beginning after 2025. Temporary Rule to Allow Certain S Corporations to Reorganize as Partnerships Without Tax - This provision allows eligible S corporations to reorganize as partnerships without such reorganizations triggering tax. Eligible S corporation means any corporation that was an S corporation on May 13, 1996 (prior to the publication of current law “check the box” regulations with respect to entity classification). The eligible S corporation must completely liquidate and transfer substantially all its assets and liabilities to a domestic partnership during the two-year period beginning on December 31, 2021.Enhancement of Work Opportunity Credit During COVID-19 Recovery Period - This provision increases the Work Opportunity Tax Credit (WOTC) to 50% for the first $10,000 in wages, through December 31, 2023, for all WOTC targeted groups except for summer youth employees. The increase is also available for qualified wages earned by a WOTC target group employee in his or her second year of employment (current law limits allows WOTC to be claimed only on first-year wages).Research and Experimental Expenditures - This provision delays the effective date of section 13206 of Public Law 115-97. That section provides for amortization of the research and experimental expenditures starting taxable years beginning after December 31, 2021. Under this provision, the amortization of research and experimental expenditures will begin for amount paid or incurred in taxable years beginning after December 31, 2025.

Article Highlights: Required Minimum Distribution Recent Law Changes RMDs Resume in 2021 Still Working Exception First Year RMD Exception Determining the RMD Amount Excess Accumulation Penalty Qualified Charitable Distribution Designated Beneficiaries When Congress established tax-favored retirement plans, they allowed taxpayers to take a tax deduction for the amount of their allowable contribution to the plans. But they also included a requirement for a portion of the funds to be distributed each year and be subject to income tax. Such a distribution is referred to as a minimum required distribution (RMD). RMDs are commonly associated with traditional IRAs, but they also apply to 401(k)s, SEP IRAs and other qualified retirement plans. The tax code does not allow taxpayers to keep funds in their qualified retirement plans indefinitely. Eventually, assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, he or she may have to pay a 50% penalty on the amount that is not distributed. There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. There have been some recent tax law changes that have led to some confusion among taxpayers subject to the RMD requirement. Prior to 2020, the required starting age for RMDs was 70½. Thanks to the Secure Act passed by Congress in late December 2019, the age at which distributions have to begin was increased to age 72 starting in 2020. However, as part of the 2020 COVID relief, Congress suspended the RMD requirement. Thus those turning 72 in 2020, and those who turned 70½ in prior years, were not subject to the RMD requirement for 2020. RMDs Resume in 2021 - Since the suspension was for one year only, the RMD requirement resumes for 2021. Of course, the resumption applies to those that attained the age of 70½ in years before 2021, those who turned 72 in 2020 and those who turn 72 in 2021. Still Working Exception – If you participate in a qualified employer plan, generally you need to start taking RMDs by April 1 of the year following the year you turn 72. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RMD is postponed to April 1 of the year following the year you retire. This delayed-until-retirement distribution provision does NOT apply to IRAs, so even though someone age 72 or older with an IRA is still working, and perhaps still contributing to the IRA, they are required to take a minimum distribution from the IRA each year. First Year IRA RMD Exception – If a taxpayer so chooses, he or she can delay an RMD for the first year an RMD is required until the second year, thus making the distribution includible in the second year’s tax return. This is sometimes desirable if the taxpayer has substantial wages or other income in the year the mandatory distribution age is reached and expects less income the next year. In this situation, by delaying the distribution to the second year the tax bracket could be substantially lower. If the taxpayer chooses that option, then: The first year RMD must be taken by April 1 of the following year, and The taxpayer must also take the second year RMD distribution by December 31 of year two, thus doubling up the distributions in year two. Determining the RMD Amount - The required withdrawal amount for a given year is equal to the value of the retirement account on December 31 of the prior year divided by the life expectancy (“distribution period”) from the Uniform Lifetime Table illustrated below, with the exception where the taxpayer’s spouse is 10 years younger, in which case the Joint and Last Survivor Table is used. It is not illustrated because of its size. Uniform Lifetime Table - Through 2021 Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period Age Distribution Period 70 27.4 80 18.7 90 11.4 100 6.3 110 3.1 71 26.5 81 17.9 91 10.8 101 5.9 111 2.9 72 25.6 82 17.1 92 10.2 102 5.5 112 2.6 73 24.7 83 16.3 93 9.6 103 5.2 113 2.4 74 23.8 84 15.5 94 9.1 104 4.9 114 2.1 75 22.9 85 14.8 95 8.6 105 4.5 115+ 1.9 76 22.0 86 14.1 96 8.1 106 4.2 - - 77 21.2 87 13.4 97 7.6 107 3.9 - - 78 20.3 88 12.7 98 7.1 108 3.7 - - 79 19.5 89 12.0 99 6.7 109 3.4 - -

Are you withholding enough tax for the year 2021, or do you need to prepay additional tax? Watch this video for common situations where you will need to adjust your withholding or make an estimated tax payment. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

The Identity Protection PIN Program by the IRS has been expanded to cover not only victims of identity theft but also all eligible taxpayers. What benefit does the program bring to the normal taxpayers and should you apply for it? Watch this video to find out.

Here are five things that happened this past month that affect your small business.1) House Ways & Means Committee releases tax policy outline.Every business owner should be monitoring the debate and tax policy coming out of Washington DC. The latest tax proposals may change before Democrats craft the final bill but include changes to capital gains, estates, and marginal tax rates. The Ways and Means Committee is scheduled to debate tax policy in the coming weeks. Full story via CNBC.Why this is important for your business:If changes occur, strategic tax planning can help minimize the impacts on your finances.2) Are digital advertising taxes the wave of the future? The Maryland digital advertising tax is applied to gross revenue derived from digital advertising services. The proposed Maryland regulations raise at least three major issues: definitional ambiguity, suspect sourcing rules, and unworkable geolocation requirements. Full story via The Tax Foundation. Why this is important for your business:If other states follow, businesses driving revenue through digital advertising might have some unpleasant tax surprises. 3) Is inflation transitory or building?U.S. businesses are experiencing escalating inflation that is being aggravated by a shortage of goods and likely will be passed onto consumers in many areas. Full story via CNBC.

Article Highlights:Who Qualifies for Education CreditsAmerican Opportunity CreditLifetime Learning CreditQualificationsWho Gets the Credit1098-TQualified ExpensesIf you think that education credits are just for sending your children to college, think again—the credits are available to you, your spouse (if you are married), and your dependents. Even if you or your spouse is only attending school part time, you still may qualify for a tax credit.There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester, or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary postsecondary institution that can participate in the U.S. Department of Education’s student aid programs. The credits phase out for higher-income taxpayers who are married filing jointly or who are unmarried. Those who are married filing separately do not qualify for either credit.The following table provides the qualifications and details for both credits:QUALIFICATIONSAOTCLLCAllowance PeriodFirst 4 years of postsecondary educationAny postsecondary education for any number of yearsEnrollmentMust be considered at least a half-time student by the educational institutionNot required to be enrolled at least half-timeProgram TypeMust be pursuing a program leading to a degree or another recognized educational credentialNot required to be enrolled for the purpose of obtaining a degree or other credentialCredit Applied Per studentPer familyCredit Amount 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses20% of up to $10,000 in qualified expensesCredit Refundable?*40% No, can only reduce taxQualified ExpensesQualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendanceQualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution High-Income AGI Phase-out RangesMarried Filing Jointly: $160,000 to $180,000 Married Filing Separately: No credit allowed Unmarried: $80,000 to $90,000Married Filing Jointly: $160,000 to $180,000Married Filing Separately:No credit allowed Unmarried: $80,000 to $90,000 Claim Both Credits on Same Return? Yes, but not for the same student Yes, but not for the same student*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.Many individuals who both work and attend school can be enrolled less than half-time and still qualify for the LLC.