Learning Center for Tax and Financial Insights

Article Highlights:IRS Compliance CampaignNew Reporting Requirement for Crypto ExchangesForm W-9Form 1099-BCryptocurrency as PropertyDigital Assets DefinitionTransfer ReportingCash Transaction Reporting1040 Crypto QuestionOver the last 3 years, the Internal Revenue Service has been engaged in a virtual currency compliance campaign to address tax noncompliance related to cryptocurrency use. The IRS’ efforts have included outreach to taxpayers through education, audits of taxpayers’ returns and even criminal investigations. Soon the IRS will have another arrow in its quiver. Thanks to a requirement included by Congress in the Infrastructure Investment and Jobs Act (IIJA) of 2021, signed into law November 15, 2021, cryptocurrency exchanges will be subject to information reporting requirements similar to those that stockbrokers have to follow when a taxpayer sells stock or other securities. These new rules generally will apply to digital asset transactions starting in 2023, so the first reporting forms related to cryptocurrency transactions will be issued to the IRS and crypto investors in January 2024.Form W-9 – As crypto exchanges gear up for the new reporting requirement, and if they don’t have a record of their users’ taxpayer identification numbers (usually a Social Security number), they will contact their users for the information, likely using IRS Form W-9, Request for Taxpayer Identification Number and Certification. If the taxpayer doesn’t complete and return the W-9 to the requestor, the taxpayer may be subject to back-up withholding, which means the exchange would have to withhold 24% of future transactions and submit the withheld tax to the IRS. Form 1099-B – At this time it’s not known if the IRS will modify Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, currently most commonly used by brokers to report stock sales, for reporting crypto transactions, or if a new form will be created.As with the information on the 1099-B that brokers report, the IRS will then use the reported crypto transaction details – sales proceeds, acquisition and sale dates, tax basis for the sale, and character of the gain or loss – to match to the information reported on the taxpayer’s tax return. Those who don’t report, or don’t properly report, their cryptocurrency transactions will be liable for the tax, penalties, and interest. In some cases, taxpayers could be subject to criminal prosecution.Crypto is Treated as Property – Although cryptocurrency may seem like money, according to the IRS it is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. So, it is necessary to report the disposition of cryptocurrency when it is sold for cash, used to buy something or traded for another cryptocurrency. But just transferring the currency from an on-line wallet to an exchange, or vice versa, is not a disposition. The character of the gain or loss from the transaction generally depends on whether the cryptocurrency is a capital asset in the hands of the taxpayer. Generally, a taxpayer realizes capital gain or loss on the sale or exchange of cryptocurrency that is held as a capital asset. On the other hand, a taxpayer generally realizes ordinary gain or loss on the sale or exchange of cryptocurrency that he or she does not hold as a capital asset. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.

Article Highlights: • Employee Retention Credit• Infrastructure Investment and Jobs Act• Retroactive Repeal of 4th Quarter Employee Retention Credit• Advance Payments• 4th Quarter Employment Tax Deposits• Failure to Deposit PenaltiesIf you claimed the employee retention credit (ERC) in the fourth quarter of 2021, you better read this about a retroactive change affecting the credit for the fourth quarter of 2021. Background: The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and the American Rescue Plan Act (ARP Act) extended the ERC for wages paid through December 31, 2021. Now the recently passed Infrastructure Investment and Jobs Act (IIJ Act) has retroactively repealed the ERC for the fourth quarter of 2021 for all taxpayers except recovery start-up businesses. A recovery start-up business is an employer that began carrying on any trade or business after February 15, 2020, and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined.Many businesses already claimed the ERC for wages paid the fourth quarter of 2021 before the IIJ Act was passed in mid-November. Thus, other than recovery start-up businesses, employers that have claimed a fourth quarter 2021 ERC will be required to repay advance payments but will not be subject to any penalties. IRS Notice 2021-65 provides guidance on how to repay any advance credit payments and how to avoid penalties. Employers That Received Advance Payments - If an employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer must repay the amount of the advance. Employers who need to repay these advance ERC payments must do so by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021.

Article Highlights: 2022 RMD What Are RMDs? Age 72 Distributions IRAs and Qualified Plans Computing the RMD Required Minimum Distributions (RMD) are required taxable distributions from qualified retirement plans and are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these 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, then he or she may have to pay a 50% penalty on the required distribution amount that is not distributed. The penalty can be waived where the failure to take the required distribution was due to reasonable cause and steps are being taken to remedy the shortfall. The penalty waiver must be applied for, creating additional hassle, not to mention the potential additional tax created by multiple year distributions in one year. Note: RMDs do not apply to Roth IRAs while the account owner is alive. Individuals must begin taking RMDs in the year they reach age 72. The first year’s distribution for those turning age 72 in 2022 can be delayed to no later than April 3 of 2023. However, delaying the first distribution means taking two distributions in 2023, which could have adverse tax consequences. RMDs for 2022 are determined based upon the values of the accounts as of December 31, 2021, divided by the distribution period. The distribution period is based on the taxpayer’s life expectancy determined from the Uniform Lifetime Table for the taxpayer’s current age. If you have been calculating your RMD in the past, be aware that a new uniform lifetime table applies effective in 2022, as illustrated below. CURRENT UNIFORM LIFETIME TABLE – THROUGH 2022 Age Dist. Period Age Dist. Period Age Dist. Period Age Dist. Period Age Dist. Period 80 20.2 90 12.2 100 6.4 110 3.5 81 19.4 91 11.5 101 6.0 111 3.4 72 27.4 82 18.5 92 10.8 102 5.6 112 3.3 73 26.5 83 17.7 93 10.1 103 5.2 113 3.1 74 25.5 84 16.8 94 9.5 104 4.9 114 3.0 75 24.6 85 16.0 95 8.9 105 4.6 115 2.9 76 23.7 86 15.2 96 8.4 106 4.3 116 2.8 77 22.9 87 14.4 97 7.8 107 4.1 117 2.7 78 22.0 88 13.9 98 7.3 108 3.9 118 2.5 79 21.1 89 12.9 99 6.8 109 3.7 119 120+ 2.3 2.0

In September of 2021, the Congressional Budget Office announced a proposal to increase funding for the Internal Revenue Service by as much as $80 billion over the next ten years. The argument is that doing so would ultimately increase the revenue the organization is able to generate by as much as $200 billion over the next decade.A significant portion of the new money — to the tune of about $60 billion — is aimed at empowering enforcement actions in particular. All told, that means by 2031, the IRS will double the number of people working for it and will have a 90% higher budget than they do right now.This, of course, has led people to wonder — does that mean that more people than ever are about to get audited?Obviously, the situation is a lot more nuanced than people on both sides of the aisle are giving it credit for. Therefore, understanding what this means and what implications it may have requires you to keep a few key things in mind.The Current Situation With the IRS: What You Need To KnowWhile it's difficult to say exactly what the future might hold, some Republicans believe that the plan would indeed increase the rate at which people are audited. House Minority Leader Kevin McCarthy, for example, cited research saying that the funding would lead to an increase of 1.2 million additional audits each year compared to those that are taking place right now. More than that, he claimed that roughly 50% of them would target homes making under $75,000 per year.

Dementia, Alzheimer’s disease, and other cognitive decline diagnoses are among the health issues that people fear the most. Cognitive decline is devastating for the patient as well as for their loved ones, who not only bear witness to the deterioration but who are often tasked with ensuring that all financial matters have been addressed in keeping with the individual’s wishes. Even with a definitive diagnosis, raising the subject can be cause for discomfort, but the earlier you do so the more effective these conversations can be, and the more certain you can be that you’re doing the right thing. Here are our tips for what to do when a loved one is declining mentally. Don’t delay. It is so easy to put off difficult conversations, but when it comes to financial planning in the face of a dementia diagnosis, the sooner you do it, the better. In most cases, there is enough time between diagnosis and significant deterioration for you to discuss your loved one’s wishes and put them into place without fear that their abilities are compromised. Now is the time to ask what type of care they want, to take them to different facilities and choose where they would like to be, to ask how they want their assets allocated, and more. Just keep in mind that time is not your friend. Act early, and if you meet resistance, keep pushing. Once everything is in place, everybody can take a deep breath and relax a bit. Don’t ambush the individual. People who are facing cognitive decline are already vulnerable, so you don’t want the conversation to be intimidating. Give careful consideration to who will participate, and where and how you will broach the subject. Have a specific goal in mind so that the conversation can be controlled. This means that if you hope to have papers signed or brochures reviewed, you should bring them with you. Be mindful of your loved one’s condition and how different times of day and setting impact their cognition. You want to choose a time when they are generally attentive, strong and engaged. Familiarize yourself with the proper paperwork. Addressing the needs of a person in cognitive decline requires more than agreement. There are legal documents that codify their wishes about their finances and medical directives, and if these are signed while the person is still in control of their mental powers, these documents will be extremely helpful. The most important documents to have in place are a durable power of attorney to indicate who is in charge of financial decisions, a will to indicate both the executor of the estate and its beneficiaries, and a living trust to designate the person who will manage all assets when they are no longer able. An advanced directive for medical decisions is also important.Get control of the paperwork. We’re all familiar with our own daily transactions and documents – we receive and pay invoices, balance our checkbooks, and make sure that all of our financial obligations are attended to. The same is true for your loved one, but they will not be able to continue much longer. Now is the time to sit down with them and make sure that you know exactly what these duties are and make sure you have all of their obligations and tasks organized so that you can assume responsibility when the time comes.Find professional help. Taking care of your loved one’s economic well-being is overwhelming, especially when you’re also taking care of your own needs. Do not be afraid to turn to financial planners, tax planners, social workers and others who have the experience and resources to help you manage your loved one’s finances, medical needs, expenses, and other tasks. Their expertise will prove to be invaluable as you try to find the right way to address each legal, medical, and financial issue that arises, including government benefits and tax issues.

Article Highlights:Definition of Tax BasisCost BasisAdjusted BasisGift BasisInherited BasisRecord Keeping For tax purposes, the term “basis” refers to the monetary value used to measure a gain or loss. For instance, if you purchase shares of a stock for $1,000, your basis in that stock is $1,000; if you then sell those shares for $3,000, the gain is calculated based on the difference between the sales price and the basis: $3,000 – $1,000 = $2,000. This is a simplified example, of course—under actual circumstances, purchase and sale costs are added to the basis of the stock—but it gives an introduction to the concept of tax basis.The basis of an asset is very important because it is used to calculate deductions for depreciation, casualties and depletion, as well as gains or losses on the disposition of that asset. The basis is not always equal to the original purchase cost. It is determined in different ways for purchases, gifts and inheritances. In addition, the basis is not a fixed value, as it can increase as a result of improvements or decrease as a result of credits claimed, business depreciation or casualty losses. This article explores how the basis is determined in various circumstances.Cost Basis – The cost basis (or unadjusted basis) is the amount originally paid for an item before any improvements and before any credits, business depreciation, expensing or adjustments as a result of a casualty loss. Adjusted Basis – The adjusted basis starts with the original cost basis (or gift or inherited basis), then incorporates the following adjustments: increases for any improvements (not including repairs), reductions for tax credits claimed based on the original cost or the cost of improvements,reductions for any claimed business depreciation or expensing deductions, andreductions for any claimed personal or business casualty-loss deductions. Example: You purchased a home for $250,000, which is the cost basis. You added a room for $50,000 and a solar electric system for $25,000, then replaced the old windows with energy-efficient double-paned windows at a cost of $36,000. You claimed tax credits of $7,500 and $200, respectively, for the solar system and windows. The adjusted basis is thus $250,000 + $50,000 + $25,000 - $7,500 + $36,000 - $200 = $353,300. Your payments for repairs and repainting, however, are maintenance expenses; they are not tax deductible and do not add to the basis.Example: As the owner of a welding company, you purchased a portable trailer-mounted welder and generator for $6,000. After owning it for 3 years, you then decide to sell it and buy a larger one. During this period, you used it in your business and deducted $3,376 in related deprecation on your tax returns. Thus, the adjusted basis of the welder is $6,000 – $3,376 = $2,624.Keeping records regarding improvements is extremely important, but this task is sometimes overlooked, especially for home improvements. Generally, you need to keep the records of all improvements for 3 years (and perhaps longer, depending on your state’s rules) after you have filed the return on which you report the disposition of the asset. Gift Basis – If you receive a gift, you assume the donor’s (giver’s) adjusted basis for that asset; in effect, the donor transfers any taxable gain from the sale of the asset to you.