Author: Slattery & Holman, P.C.

President Trump recently signed an executive order to defer payroll tax for a short period of time. In theory, this would assist Americans struggling from the economic effects of Coronavirus by keeping more money in every paycheck for a specified time.

Below we’ve broken down some of the basics you should know about this payroll tax deferment.

What is payroll tax and a payroll tax holiday?

Payroll taxes are paid by both the employer and employee for contribution to federal programs such as Medicare or Social Security. President Trump’s order specifically defers the 6.2% employee’s share of Social Security contributions.

Who is eligible for the payroll tax holiday?

To qualify for this payroll tax holiday, a person must earn less than $4,000, pre-tax, every two weeks. People currently unemployed are not eligible. It is not yet clear if self-employed and those who pay Social Security taxes with income taxes will be eligible.

How long is the payroll tax holiday?

As it’s stated in President Trump’s executive order, there will be a four-month period from September 1 to December 31 for the payroll tax holiday.

Does this guarantee I will have a larger paycheck?

This payroll tax holiday is simply a deferment of Social Security tax payments. Without further action or legislation, repayment will be required sometime next year. It is up to the employer if they choose to hold onto the excess funds now in anticipation of the repayment or give the excess funds to employees right away through increased paycheck amounts.

Do I have to pay this amount back later?

Currently, this is a payroll tax deferment, meaning you will need to pay the amount back at some point. Treasury Secretary Steven Mnuchin has the ability to forgive the deferment according to President Trump’s executive order.

While this is not the first payroll tax cut in our country’s history, there is still much that is unclear about it. Read the full article about this memorandum at CNet.com.

The global coronavirus pandemic has changed every single facet of our world – from the way we work to how we live our day-to-day lives – and we have been forced to quickly adjust to a new normal.

Unfortunately, there are people out there who seek to take advantage of this turbulent time.

The Internal Revenue Service and other government agencies have noted a rise in scams and other fraudulent activities surrounding the COVID-19 crisis. There are individuals and groups both in the United States and in countries across the world who are attempting to take advantage of unwitting taxpayers and business owners.

Let’s take a look at some potential threats you should watch out for as you navigate the current environment.

Economic Impact Payments

While many Americans may have already received their economic impact payment (sometimes called stimulus checks), there are still some citizens awaiting their payments. Individuals should stay alert for phone calls, emails, or other methods of communication from those seeking their personal information related to the economic impact payments.

Targeting Tax Refunds

Taxpayers have experienced numerous scams and illegal actions which target intercepting a tax refund owed to a taxpayer, or in some cases, fraudulently creating tax returns with a taxpayers’ personal information.

The scams are numerous and come in a variety of forms.

One scheme involves filing a fraudulent tax return on behalf of an unsuspecting taxpayer. When the refund is deposited into the taxpayer’s bank account, the fraudster contacts the taxpayer impersonating an IRS representative. The fake IRS representative advises the taxpayer that the refund has been deposited in error and encourages them to purchase gift cards in order to restore the balance to the IRS.

When the actual IRS representatives eventually discover the scam, the taxpayer is responsible for repaying the funds a second time.

A second scam involves the scammer creating fraudulent tax returns using a taxpayer’s personal information. In this case, the fraudster uses their own deposit information as a way to intercept the refund.

If you are expecting a tax refund or receive a deposit from the IRS that you do not recognize, you should reach out directly to the IRS to confirm your status or to receive instructions on next steps.

Fake Charities and Investment Opportunities

The IRS has advised that there are people setting up charities purported to be for the benefit of those impacted by the COVID-19 virus. In addition, some individuals are maintaining that they represent companies who are working on a vaccine to combat the virus. They offer to allow you to invest in their companies and receive a significant return on your investment once the vaccine is ready.

What Should You Do?

If you think that you may have been the victim of a COVID-19 related scam, you are encouraged to file a report with the appropriate government authorities.

The National Center of Disaster Fraud has a complaint form on its website where you can voice your concerns. If you prefer to speak to someone, you can call their hotline number at 866-720-5721.

The Treasury Inspector General for Tax Administration is available to receive complaints related to the theft of your economic impact payment.

Finally, if you are the subject of a phishing scam, where fraudsters are seeking to gain your personal information, you should alert the Internal Revenue Service at their phishing@irs.gov email address.

It is important to stay vigilant against those seeking to steal your hard-earned money or personal information during this troubling time.

If you have any questions about COVID-19 related fraudulent schemes, or you would like more information, please feel free to reach out to us to schedule an appointment.

The CARES Act waived required minimum distributions (RMDs) from IRAs for 2020.  However, the CARES Act was passed after many individuals had already taken their RMD for the year.

That issue was originally alleviated when the federal government declared a coronavirus-related disaster that then enabled the IRS to extend numerous deadlines and due dates, including the rollover period for traditional IRAs and qualified employer plans such as 401(k)s. Accordingly, the IRS said that any 60-day rollover period that ended on or after April 1, 2020, and before July 15, 2020, was extended through July 15, 2020. This meant that distributions taken in January of 2020 weren’t covered by this extended rollover period.

Normally, RMDs are not allowed to be rolled over, but because the CARES Act waives the requirement to take a 2020 distribution, these distributions are not treated as RMDs for 2020 but are considered distributions that are eligible to be rolled over.

In Notice 2020-51 the IRS has provided additional relief, which now includes those who took their RMD in January, by extending the normal 60-day rollover requirement and allowing individuals who took an RMD in 2020 to roll the RMD back into their IRA or retirement plan by no later than August 31, 2020. This means that if you took a distribution in 2020, you can roll it back (redeposit it) into the IRA or retirement plan and avoid being taxed on it in 2020, if you do so by August 31, 2020.

RMDs are required 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 amount that is not distributed.

The CARES Act RMD waiver applies to:

• The 2020 RMD for taxpayers who turned 70½ before 2020.
• The 2019 RMD for taxpayers who turned 70½ in 2019 and chose to defer their first distribution to 2020.
• The 2020 RMD for taxpayers who turned 72 in 2020.
• The RMDs for beneficiaries.

Be aware, however, that any part of the distribution from a traditional IRA or qualified retirement plan that you don’t roll over will be taxed. This means that if federal and/or state income tax was withheld from the distribution and you want to roll over the gross amount of the distribution so none of it is taxable in 2020, you will need to use funds other than those from the distribution in order to fully roll it over. Regrettably, the withholding can’t be refunded when you make the rollover. Instead, the withheld tax will be claimed as a credit on your 2020 return. In this case, your 2020 estimated tax installments and/or withholding on other income can be adjusted.

The recent Notice also explains that the IRS won’t treat recontributing an RMD to an IRA as a rollover for purposes of the rule which states only one IRA rollover per 12-month period is permitted.

Please call our office if you have any questions about RMDs and how rolling over an RMD you’ve already taken will impact your tax return.

2020 brought significant economic uncertainties. Couple that with an election year, and the outcome of the November elections could have a major impact on taxes for the wealthy.

Regardless of who wins the November election, with rising deficits at the state and federal levels, government spending skyrocketing, and revenue dropping due to the COVID-19 pandemic, taxes are sure to go up in coming years, and the likely focus for generating this additional tax revenue is the wealthy.

Biden has already said that the wealthy will be targeted and has proposed the following changes:

• Return the statutory tax rates to what they were before the 2017 tax reform enacted in the Tax Cuts and Jobs Act (TCJA), which means for higher-income taxpayers, the top tax rate will increase from 37 to 39.6 percent.
• Tax long-term capital gains and qualified dividends as ordinary income for taxpayers making over $1 million.
• End the step-up in basis for inherited assets, which will result in increased taxes on beneficiaries when those assets are sold.
• Phase-out the Sec 199A pass-through deduction for households with taxable income in excess of $400,000.
• Reinstate an overall limit (often referred to as the Pease limit) on itemized deductions. When itemized deductions are subject to the Pease limit, the itemized deductions begin to phase out when a taxpayer’s adjusted gross income (AGI) exceeds a threshold amount. In 2017, the last year the Pease limit was in effect, the phase-out threshold was $261,500 for single filers and $313,800 for married taxpayers filing jointly.
• Limit the tax benefit of itemized deductions to 28%.
• Resume the 12.4% Social Security payroll tax once earnings reach $400,000. Currently, for 2020, this tax only applies to the first $137,700 of compensation. Employees pay half and their employers pay half; self-employed individuals also pay into this program. The amount subject to this tax is inflation-adjusted each year. If Biden’s plan were currently in effect, this payroll tax would apply for the first $137,700 of earnings and resume when a worker’s earnings reach $400,000, creating a gap between $137,700 and $400,000 in which this tax wouldn’t apply.

Some strategies higher-income taxpayers are contemplating in preparation for tax increases include:

1. Sell appreciated stocks that have been held for over one year to take advantage of the lower capital gains rates in 2020 as a hedge against not qualifying for the capital gains rates in the future. If a taxpayer wants to maintain a position in the stock, it can always be repurchased immediately, since wash sale rules only apply to losses, not gains.
2. If you are considering selling a rental property or other real estate that you’ve owned for over a year, it might be appropriate to close the sale in 2020, when the top capital gains tax rate is 20%, as a hedge against the gain being subject to the proposed ordinary income rates of 39.6%.
3. Although not mentioned by either presidential candidate, estate tax will be a likely target and during the last election, the Democratic ticket proposed dropping the lifetime estate tax exclusion to $3 million. It is currently at $11.58 million ($23.16 million for couples). The wealthy should consider gifting money to family members and friends to utilize the current lifetime exemption and avoid the 40% estate tax. This could just be the motivation to give gifts that were already planned for the future.
4. If possible, wealthy owners of private businesses should look for ways to accelerate income into 2020 and shift expenses to 2021 to avoid potentially higher income tax rates in 2021.
5. As a result of the COVID-19 pandemic, many taxpayers have found they can do their work at home, and that shift in lifestyle combined with potentially higher state taxes has many people considering relocating to a state with no income tax. Taxes in states such as CA, NY, and NJ are exceptionally high; CA, for example, is even considering reinstating a state estate tax.

Everyone’s circumstances are unique. Please call if you would like to review your tax situation to determine if there are actions you can take in 2020 to avoid the potentially higher federal and state taxes that could begin in 2021.