Hadas Stein CPA, Inc.

PTE TAX

Pass-through entity taxes were passed by 15 states in 2021, adding to the seven already in existence, in response to the $10,000 SALT deduction cap in the Tax Cuts and Jobs Act. These permitted a PTE to deduct its state and local taxes as a tax on the business at the federal level, followed by a deduction for the PTE tax on the distributive share of the owners’ income

“Depending on the structure of the PTE tax, owners generally claim a corresponding tax credit against their personal income tax liability or an exclusion on the portion of the owner’s pass-through income tax,” explained Yesnowitz. The IRS confirmed in late 2020 that these tax regimes would be respected for federal income tax purposes.

Prediction: At least five additional states will enact PTE tax regimes in 2022 to the extent that the SALT deduction limitation remains in place.

Get ready for taxes: Here’s what's new and what to consider when filing in 2022

The IRS encourages taxpayers to get informed about topics related to filing their federal tax returns in 2022. These topics include special steps related to charitable contributions, economic impact payments and advance child tax credit payments. Taxpayers can visit IRS.gov/getready for online tools, publications and other helpful resources for the filing season.

Here are some key items for taxpayers to know before they file next year.

Changes to the charitable contribution deduction

Taxpayers who don't itemize deductions may qualify to take a deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

Check on advance child tax credit payments

Families who received advance payments will need to compare the advance child tax credit payments that they received in 2021 with the amount of the child tax credit that they can properly claim on their 2021 tax return.

Taxpayers who received less than the amount for which they're eligible will claim a credit for the remaining amount of child tax credit on their 2021 tax return.
Eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the child tax credit when they file a 2021 federal income tax return next year. This includes families who don't normally need to file a return.
In January 2022, the IRS will send Letter 6419 with the total amount of advance child tax credit payments taxpayers received in 2021. People should keep this and any other IRS letters about advance child tax credit payments with their tax records. Individuals can also create or log in to IRS.gov online account to securely access their child tax credit payment amounts.

Economic impact payments and claiming the recovery rebate credit

Individuals who didn't qualify for the third economic impact payment or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax information. They'll need to file a 2021 tax return, even if they don't usually file, to claim the credit.

Individuals will need the amount of their third economic impact payment and any plus-up payments received to calculate their correct 2021 recovery rebate credit amount when they file their tax return.

In early 2022, the IRS will send Letter 6475 that contains the total amount of the third economic impact payment and any plus-up payments received. People should keep this and any other IRS letters about their stimulus payments with other tax records. Individuals can also create or log in to IRS.gov online account to securely access their economic impact payment amounts.

Some important things all taxpayers should do before the tax year ends

The IRS reminds taxpayers there are things they should do before the current tax year ends on Dec.31.

Donate to charity
Taxpayers may be able to deduct donations to tax-exempt organizations on their tax return. As people are deciding where to make their donations, the IRS has a tool that may help. Tax Exempt Organization Search on IRS.gov allows users to search for charities. It provides information about an organization’s federal tax status and filings.

The law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations even if they don't itemize their deductions. Taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.

Most cash donations made to charity qualify for the deduction. However, there are some exceptions. Cash contributions include those made by check, credit card or debit card as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization.

Check Individual Taxpayer Identification Number
An ITIN only needs to be renewed if it has expired and is needed on a U.S. federal tax return.

If an Individual Taxpayer Identification Number was not included on a U.S. federal tax return at least once for tax years 2018, 2019 and 2020, the ITIN will expire on Dec. 31, 2021.

As a reminder, ITINs with middle digits 70 through 88 have expired. In addition, ITINs with middle digits 90 through 99, if assigned before 2013, have expired. Individuals who previously submitted a renewal application that was approved, do not need to renew again.

Find information about retirement plans
IRS.gov has end-of-year tax information about retirement plans. This includes resources for individuals about retirement planning, contributions and withdrawals.

Contribute salary deferral
Taxpayers can make a salary deferral to a retirement plan. This helps maximize the tax credit available for eligible contributions. Taxpayers should make sure their total salary deferral contributions do not exceed the
$19,500 limit for 2021.

Get banked and set up direct deposit
Direct deposit gives taxpayers access to their refund faster than a paper check. Those without a bank account can learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool.

Veterans should see the Veterans Benefits Banking Program for access to financial services at participating banks.

Connect with the IRS
Taxpayers can use social media to get the latest tax and filing tips from the IRS. The IRS shares information on things like tax changes, scam alerts, initiatives, tax products and taxpayer services. These social media tools are available in different languages, including English, Spanish and American Sign Language.

Think about tax refunds
Taxpayers should be careful not to expect getting a refund by a certain date. This is especially true for those who plan to use their refund to make major purchases or pay bills. Just as each tax return is unique to the individual, so is each taxpayer's refund. Taxpayers can take steps now to Get Ready to file their federal tax return in 2022.

https://go.usa.gov/xeE3N

What small business owners should know about the depreciation of property deduction

Depreciation is an annual tax deduction that allows small businesses to recover the cost or other basis of certain property over the time they use the property. It is an allowance for the wear and tear, deterioration or obsolescence of the property.

Small businesses can depreciate property when they place it in service for use in their trade or business or to produce income. The business stops depreciating property when they have fully recovered their cost or other basis or when they retire it from service, whichever happens first.

What property is depreciable?
Small businesses can depreciate machinery, equipment, buildings, vehicles, and furniture. They cannot claim depreciation on personal property. If a business uses an asset, such as a car, for business or investment and personal purposes, the business owner can depreciate only the business or investment use portion. Land is never depreciable, although buildings and certain land improvements may be.

Businesses may depreciate property that meets all these requirements. The business must:

• Own the property. The business is considered to own property even if it is subject to a debt.

• Use the property in a business or income-producing activity. If the property is used to produce income, the income must be taxable. Property that’s used solely for personal activities can’t be depreciated.

• Be able to assign a determinable useful life to the property. This means that it must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes.

• Expect the property to last more than one year. It must have a useful life that extends substantially beyond the year a business places it in service.

• Not depreciate excepted property. Excepted property includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.

Small businesses should use Form 4562 to figure their deduction for depreciation.

New things taxpayers should consider as they get ready to file taxes in 2021

When people get ready to file their federal tax return there are new things to consider when it comes to which credits to claim and what deductions to take. These things can affect the size of any refund the taxpayer may receive.

Here are some new key things people should consider when filing their 2020 tax return.

Recovery rebate credit
Taxpayers may be able to claim the recovery rebate credit if they met the eligibility requirements in 2020 and one of the following applies to them:
• They didn't receive an Economic Impact Payment in 2020.
• They are single and their payment was less than $1,200.
• They are married, filed jointly for 2018 or 2019 and their payment was less than $2,400.
• They didn't receive $500 for each qualifying child.

Refund interest payment
People who received a federal tax refund in 2020 may have been paid interest. The IRS sent interest payments to individual taxpayers who timely filed their 2019 federal income tax returns and received refunds. Most interest payments were received separately from tax refunds. Interest payments are taxable and must be reported on 2020 federal income tax returns. In January 2021, the IRS will send a Form 1099-INT, Interest Income, to anyone who received interest of at least $10.

New charitable deduction allowance
New this year, taxpayers who don't itemize deductions can take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. For more information, people should review Publication 526, Charitable Contributions.

Several tax provisions set to expire at end of 2020 Among the expiring provisions are the lower 7.5% AGI floor for medical expense deductions and the deduction for qualified tuition and related expenses.

Tax Diversification

Are you familiar with strategies that are available to help you spread your investments across taxable, tax-­‐deferred and tax-­‐free accounts?

The subject of "diversification" is often discussed when topics such as mutual funds, stocks, bonds, real estate and other investment classes are on the table. However, what about tax diversification?

The primary reason for developing a tax diversification strategy is it’s impossible to know precisely what your tax rate will be throughout your retirement years, especially if retirement is still many years away for you.

Putting all of your investments in only one type of account is unlikely to be the most tax-­‐ efficient strategy. Tax diversification can help protect your investments and minimize risk from significant tax rate changes.

Talk to your personal tax professional or distribution specialist about this to make sure your investments are set up the way you want!

Are You Responsible for a Gift Tax?

If you give a non-spouse a gift valued more than the annual exclusion amount, you
could be subject to a gift tax.
For 2019, the annual federal gift tax exclusion amount for gifts to a non-spouse is
$15,000 per person, per year.
If you are married, you and your spouse may give up to $30,000, per person, per
year, free from federal gift tax.
Although there are no immediate tax concerns for the recipient of a gift because
federal gift tax is imposed upon the donor, the recipient could be liable for capital
gains tax in the future. Highly appreciated gifts such as real estate or stocks will
render the recipient liable for capital gains tax when he or she decides to sell the
gift at a later date.
The general rule from the IRS is that the recipient’s basis in the gifted property is
the same as the basis of the donor. The IRS provides this example: If you were
given stock that the donor had purchased for $10 per share (which was also
his/her basis) and you later sold it for $100 per share, you would pay tax on a gain of $90 per share.

Divorce or separation may have an effect on taxes

Taxpayers should be aware of tax law changes related to alimony and separation payments. These payments are made after a divorce or separation. The Tax Cuts and Jobs Act changed the rules around them, which will affect certain taxpayers when they file their 2019 tax returns next year.

Here are some facts that will help people understand these changes and who they will impact:

The law relates to payments under a divorce or separation agreement. This includes:
Divorce decrees.
Separate maintenance decrees.
Written separation agreements.

In general, the taxpayer who makes payments to a spouse or former spouse can deduct it on their tax return. The taxpayer who receives the payments is required to include it in their income.

Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.

If an agreement was executed on or before Dec. 31, 2018 and then modified after that date, the new law also applies. The new law applies if the modification does these two things:
It changes the terms of the alimony or separate maintenance payments.
It specifically says that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

Agreements executed on or before Dec. 31, 2018 follow the previous rules. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications don’t do what’s described above.

Prohibited Transactions and IRAs

A prohibited transaction is an impermissible transaction under the Internal Revenue Code that
occurs between an IRA and a disqualified person.
Disqualified persons include the IRA owner, the owner’s spouse, the owner’s lineal descendants (and
their spouses), IRA beneficiaries and any IRA fiduciary.
If you engage in a prohibited transaction, under IRS rules, your entire IRA will lose its status as an
IRA. Your tax-deferred IRA will then be treated as though the assets were distributed to you as of
the first day of the year the prohibited transaction occurred. Ordinary income tax will be due on the
distributed amount and if you are under age 591⁄2 you will also be subject to a 10% early distribution
penalty.
Below are just a few common examples of traditional IRA prohibited transactions:
• The sale, exchange or leasing of property involving your IRA
• Borrowing money from or lending money to your IRA
• Receiving personal benefits or payments from your IRA
• Using your IRA as collateral for a loan
• A transfer of your IRA plan income or assets to, or use of the assets by or for the
benefit of, a disqualified person

Strategy Tip: If you are unsure whether the transaction you wish to participate in with your IRA is
prohibited (a lot of self-directed IRA owners have faced this problem) you may want to consider
splitting your IRA prior to the transaction. You will essentially carve out the amount you want to use
from your original IRA, creating a separate IRA specifically for the questionable transaction. This
way, if it turns out that the transaction you wish to engage in is in fact a prohibited transaction, it
will only impact this second IRA and you avoid destroying your entire original IRA.

What a Will, Will and Will Not Do
Sound confusing? Many Americans are confused by what can and what cannot pass by their will. Many also assume that a will takes care of everything.

There are several situations in which a will does not control the transfer of an asset. Disposition of property may be determined by state law, federal law or a private contract, depending on the form of ownership of an asset. For example, IRA assets pass to heirs via beneficiary designation forms, not a will.

Regardless of how perfect and well drafted a last will and testament may be, the terms of your will do not override the terms of your insurance policies, IRA or 401(k) custodial agreement.

It is critical to make sure all beneficiary designation forms are up to date. If you made a beneficiary designation mistake, it could be too late to fix it – some errors cannot be corrected. Do a beneficiary review at least once per year and any time a life changing event occurs such as a birth, death, marriage, divorce or other event that impacts your assets.

Here are just a few common assets that do not pass through a will:

• IRA • Joint Tenancy Property
• 401(k) • POD Account
• Pension Plan • Totten Trust
• Annuity
• Community Property with Right of Survivorship
• Life Insurance Policy

2019 IRA Quiz

True or False?
Q: The IRS can waive the IRA one-rollover-per year rule.
A: FALSE. While the IRS may choose to waive the 60-day rollover requirement under
certain circumstances for reasonable cause, the IRS cannot waive the one per year
rollover limitation.

Q: An IRA could be subject to tax on unrelated business income (UBIT).
A: TRUE. For example, if you have self-directed IRA that invests in debt-financed real
estate, a hedge fund arrangement, LLC, LP or other entity that doesn’t pay corporate
tax, your IRA could be subject to UBIT.
Q: If I change my mind, I can recharacterize my Roth IRA conversion.
A: TRUE. FALSE. This rule changed effective December 31, 2017. You can no longer
recharacterize your Roth IRA conversion.

Q: If I am still working, I can delay RMDs from my IRA until I retire.
A: FALSE. While some employer plans such as a 401(k) or 403(b) may offer this option, the still working exception does not apply to IRAs.