Learning Center for Tax and Financial Insights

On July 14, 2023, the IRS issued Notice 2023-54 announcing that IRA owners who will attain age 72 in 2023 (that is, individuals born in 1951) will have an RMD required beginning date of April 1, 2025, rather than April 1, 2024.

Article Highlights:BackgroundCourt BattleForgiveness Under Income-Driven Repayment (IDR) PlansDebt Relief IncomeAmerican Rescue Plan ActGeneral Welfare ExceptionInsolvent Taxpayer ExclusionEmployer-Provided Educational AssistanceSec 529 PlansBack in August of 2022, President Biden issued an executive order that would forgive federal student loan debt for lower income individuals. The program would have provided up to $20,000 in loan relief to borrowers with loans held by the Department of Education (DOE) whose individual income is less than $125,000 ($250,000 for married couples) and who received a Pell Grant. Borrowers who meet those income standards but did not receive a Pell Grant in college would have received up to $10,000 in loan relief.However, this program subsequently hit a snag when two court cases put a hold on the plan, which was one of Biden’s campaign promises. Those who brought the suits, as well as others, contend the President does not have the authority to forgive the debt, that it is the sole prerogative of Congress. The issue wound up at the Supreme Court which ruled against the plan at the end of June 2023.The Biden administration has since turned toward forgiveness under the income-driven repayment (IDR) plans where under the Higher Education Act and the DOE’s regulations, a borrower is eligible for forgiveness after making 240 or 300 monthly payments—the equivalent of 20 or 25 years—on an IDR plan or the standard repayment plan, with the number of required payments varying based upon when a borrower first took out the loans, the type of loans they borrowed, and the IDR payment plan in which the borrower is enrolled. Inaccurate payment counts over the years have resulted in borrowers losing progress toward loan forgiveness, so as part of the new arrangement the records have been cleaned up. This action also addresses concerns about practices by loan servicers that put borrowers into forbearance in violation of Department rules. Under this Biden plan, $39 billions of student debt would be wiped away for approximately 804,000 borrowers in the very near future.So, if your student loan debt is forgiven, what are the tax consequences? The Internal Revenue Code Section 61, says that all kinds of income, including earned, found, or won, is income for tax purposes unless specifically excluded. Taking that to extremes, if you find, for example, a $20 bill on the sidewalk while out for your morning walk that is technically income.However, the American Rescue Plan Act (ARPA) passed in 2021 included a provision that makes student loan forgiveness free from federal income tax for 2021 through 2025if the loan was one of the following.A loan for postsecondary educational expenses from the federal or a state government or most educational organizations.A private education loan made expressly for postsecondary educational expenses.A loan from an educational organization that maintains a regular faculty and curriculum and normally has a regularly enrolled student body at its facility.A loan from an organization exempt from tax–for example, charitable, religious and educational organizations–to refinance a student loan.

Article Highlights:Mid-Year PlanningAvoiding Unpleasant SurprisesEvents That Have Tax ConsequencesWaiting until after the close of the tax year to worry about your taxes can result in missed opportunities that could have reduced your tax liability or provided financial benefits. Mid-year is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and avoid unpleasant surprises after it is too late to address them. Here are some events that can trigger tax consequences. Did you (or are you going to):Get Married, Divorced,or Become Widowed?Change Jobs or Has Your Spouse Started Working?Have a Substantial Increase or Decrease in Income?Have a Substantial Gain from Selling Stocks or Bonds?Buy or Sell a Rental?Start, Acquire, or Sell a Business?Buy or Sell a Home?Retire This Year?Reach Age 73 This Year?Refinance Your Home or Take Out a Second Home Mortgage This Year?Receive a SubstantialInheritanceThis Year?Take Advantage of Tax-Beneficial Retirement Savings?Make Any Significant Equipment Purchases for Your Business?Purchase a New Business Vehicle and Dispose of the Old One?Adequately Document Your Cash and Non-Cash Charitable Contributions?Keep Up with Your Self-Employed Estimated Tax Payments?Make Any Unplanned Withdrawals from an IRA or Pension Plan?Make Energy Saving Improvements to Your Existing Home?Add a Solar Electric System to Your Home or Purchase an Electric Vehicle?Hire Veterans or Other Individuals in Your Business Who May Qualify for the Work Opportunity Tax Credit?Trade in, Mine, Sell, or Receive Cryptocurrency?Incur Expenses Adopting a Child?Start Receiving Social Security Benefits?Exercise an Employee Stock Option?Start Using a Part of Your Home for Business This Year?Exchange Real Properties Used in Your Trade or Business or Held for Investment?Start a Retirement Plan in Your Self-Employment Business?Make Gifts of Over $17,000 to Any One Individual This Year?

Increasingly complex tax laws make it more likely that errors are made, or items are omitted, on tax returns, but they can, and should be, corrected by amending the return, generally within 3 years of filing the original return. In some cases, the IRS will catch the mistake; don’t delay in replying to the IRS if you receive a correction notice or other inquiry about your return.

Article Highlights:Head of household filing statusEarned income tax creditChild tax creditChild care credit for certain working grandparentsGrandchild’s education creditsMedical and dental expensesMore and more individuals who thought their child-rearing days were over are now raising their grandchildren. It is estimated that 6.5 million children in the United States currently live with at least one grandparent, accounting for approximately 9% of all children nationally and more than half of those not living with their parents.Another study found that the number of grandchildren living with their grandparents has increased 50% over the past ten years. Grandparents in this challenging situation should be aware that a variety of tax breaks may be available to ease the financial burden of becoming primary caregivers for grandchildren. These include:Head of household filing status - An unmarried grandparent may be eligible to use the head of household filing status. This filing status generally is more favorable than the single filing status. To qualify, the grandparent must maintain a household that is the principal place of abode for the grandchild for more than half the year. Generally, the grandchild must not be self-supporting and must be under the age of 19 (24 if a full-time student) at the close of the tax year or permanently and totally disabled.Earned income tax credit – A grandparent who is working and has a grandchild who is a qualifying child living with him or her may be able to take the earned income tax credit (EITC), even if the grandparent is 65 years of age or older. Generally, to be a qualified child for EITC purposes, the grandchild must meet the same requirements as to be a dependent but without the requirement that the child didn't provide more than half of their own support.To qualify for EITC for 2023 on account of a grandchild or grandchildren, a taxpayer's adjusted gross income (AGI) must be less than: $56,838 ($63,398 for married filing jointly) if he or she has three or more qualifying children; $52,918($59,478 for married filing jointly) if he or she has two qualifying children; and $46,560 ($53,120 for married filing jointly) if he or she has one qualifying child. There's no EITC if the taxpayer files as married filing separately, isn't a U.S. citizen or resident alien all year, files Form 2555 (relating to foreign earned income), doesn't have earned income, doesn’t have a valid Social Security number, or has more than $11,000 of investment income for 2023 ($10,300 for 2022).Child tax credit - A grandparent who is raising a grandchild may qualify for a $2,000 child tax credit and, under certain specific circumstances, up to $1,600 of the credit may be refundable for 2023.To qualify, the grandchild must be under the age of 17 as of the end of the year, a U.S. citizen or resident alien, and the grandchild must be the grandparent’s dependent. The credit is reduced for higher-income taxpayers.Credit for grandchild care expenses – A grandparent may also qualify for the child and dependent care credit if the grandparent pays someone to care for a dependent grandchild under the age of 13 or a grandchild who is physically or mentally not able to care for himself or herself, and the grandparent works or looks for work and has the same principal place of abode as the grandchild for more than half the tax year.Eligible expenses include those for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten, while expenses to attend kindergarten or a higher grade aren't allowed. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may qualify. Summer school and tutoring programs aren't for care so their costs don’t count for the credit.The credit is 35% of the eligible care expenses for taxpayers with an AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but never below 20%. The maximum amount of care expenses that may be used to compute the credit is $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. These maximums must be reduced, dollar-for-dollar, by the total amount excludable from gross income through an employer’s dependent care assistance program.Grandchild’s education expenses - There are a number of tax breaks that may be available to a grandparent who pays his or her dependent grandchild's education costs, including:Education credits - An individual taxpayer may claim an income tax credit of up to $2,500 for the American Opportunity tax credit (AOTC) and the Lifetime Learning credit (up to $2,000) for higher education expenses of their dependent grandchild at accredited post-secondary educational institutions. The AOTC is available for qualified expenses of the first four years of higher education. The Lifetime Learning credit is available for qualified expenses of any post-high school education at "eligible educational institutions." Both credits can't be claimed in the same tax year for any one student’s expenses, and they phase out for higher-income taxpayers.Deduction for interest on qualified education loans – Grandparents may qualify to claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan for any debt they incurred solely to pay qualified higher education expenses for a dependent grandchild, who is at least a half-time student. The deduction phases out for higher-income taxpayers.These education tax benefits only apply to a grandparent who claims the grandchild as a dependent. Many generous grandparents pay these types of expenses for a non-dependent grandchild, but unfortunately, they get no tax breaks for doing so.Medical and dental expenses – A taxpayer who itemizes deductions can deduct certain unreimbursed medical and dental expenses, including those paid for a dependent grandchild during the year. The grandchild’s medical expenses are combined with the grandparent’s medical deductions and are allowed to the extent that the total exceeds 7.5% of the grandparent’s adjusted gross income for the year.

Article Highlights:Taxation of Inherited PropertyInherited BasisDate of Death ValueAlternate Valuation DateJoint TenantsMarriedGain or Loss on SaleCertified AppraisalsDeducting Loss on Sale of Inherited Home If you are the recent beneficiary of an inheritance, you may be wondering if you will need to pay tax on the cash, stocks or real property that you received. Generally, the answer is no, and you don’t even need to report the receipt of the inheritance on your income tax return. But there is an exception: if you receive untaxed income that a decedent had earned or had a right to receive during their lifetime, you’ll be taxed on it just as the decedent would have been. Examples of this type of income are payments of compensation, wages, bonuses, commissions, vacation and sick pay that the decedent had earned but hadn’t received before they died; uncollected rent; installment payments from property sold before the decedent’s death; and most frequently, traditional IRA distributions. Another situation you may be concerned about is what happens if you sell the inherited property, particularly if it had been the decedent’s personal residence. After all, the property may have been purchased years ago at a low cost by the deceased person but may now have vastly appreciated in value. The usual question is: “Won’t the taxes at sale be horrendous?” You may be pleasantly surprised by the answer—special rules apply to figure the tax on the sale of any inherited property. Instead of having to start with the decedent’s original purchase price to determine gain or loss, the law allows taxpayers to use the value at the date of the decedent’s death (the inherited basis) as a starting point. This is commonly termed a “stepped up” basis, but it would be a “stepped down” basis if the value at the date of death is less than the decedent’s basis. Sometimes the executor of the decedent’s estate can elect to use the value at an alternate date (usually 6 months after the date of death) but this is rare, as it can only be used to lower the estate tax. Currently, the value of the decedent’s entire estate would need to exceed nearly $13 million ($26 million if married) before estate tax might be owed. About 6,200 estate tax returns were filed in 2021, and of those only around 2,500 had a tax liability. So, the chance that the alternate valuation date method will apply is very low, and the date of death value will be used in nearly all cases. Determining basis gets a little tricky when the decedent wasn’t the sole owner of the property. For example, in the case of unmarried joint tenants, when the first joint tenant dies, the presumption is that the entire value of a joint tenancy asset is included in the decedent’s estate. However, this is not the case if the surviving joint tenant can prove what amount he or she contributed toward purchasing the property. Then the surviving joint tenant’s basis is only increased by an amount equal to the amount included in the decedent’s estate (even when no estate tax return was required to be filed). The surviving tenant’s original basis (reduced for business or rental property by any depreciation or depletion claimed by the surviving joint tenant) is added to the value of the property that was included in the decedent’s estate. For married taxpayers, where a property is held as separate property by one of the spouses and inherited by the other spouse, the basis in the hands of the inheriting spouse will be fair market value of the entire property at the deceased spouse’s date of death. Where a property is jointly owned (not community property) by both spouses and one spouse passes away, the surviving spouse already owns 50% and only inherits the deceased spouse’s 50%. Thus, the surviving spouse’s basis in the inherited portion will be 50% of the property’s fair market value when the deceased spouse died plus 50% of the joint basis.