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How IRS Taxes Fire Victims

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Do wildfire victims worry about their taxes? You bet. How fire victims are taxed depends on what they collect, what they claim on their taxes, if they are rebuilding their property, their insurance and more. Another big variable is whether they sue PG&E. It can build out a complex tax picture, especially now that there is a new tax on litigation settlements, as many legal fees can no longer be deducted.

The IRS (and California’s notoriously tough Franchise Tax Board) require annual tax filings, so several years may be peppered with fire items. Say you lose a $1M home, but collect $1M from your insurance company or PG&E. There’s no tax, right? Not so fast. You need to know about the tax basis of the property, usually purchase price, plus improvements. Your property might be worth $1M when it was destroyed, but if the original purchase price plus improvements was only $100K, there is a $900K gain.

Does that mean a fire victim must pay tax on $900K? Not necessarily. If you qualify and replace your home, you can apply your old $100K tax basis to a replacement. That means you should not need to pay tax on that $900K gain until you eventually sell the replacement home. The replacement must generally be purchased within two years after the close of the first year in which any part of the casualty gain is realized. For Federal Declared Disasters, you get four years. However, if your insurance company has paid you enough to create even $1 of gain on your destroyed property, the clock for acquiring replacement property may already have started.

Another big issue is claiming a casualty loss. Up until 2018, many taxpayers could claim casualty losses on their tax returns. For 2018 through 2025, casualty losses are allowed only if your loss was the result of a Federal Declared Disaster. Most major California wildfires are a Federal Declared Disaster, but determining whether claiming a loss is a good move can be complex.

How to handle expenses for temporary housing and similar expenses can also be tricky. If your primary residence is damaged or destroyed, insurance proceeds intended to compensate you for living expenses like housing and food may be partially tax-free. However, if the insurance proceeds pay you for living expenses you would have normally incurred if your home had not been damaged, say your mortgage payment or your typical food expenses, that portion may be taxable income to you. If the insurance proceeds exceed the actual amount you spend on temporary housing, food, and other living expenses, that surplus can be taxable.

For victims who eventually get a legal settlement, how will it be taxed? Health problems from smoke inhalation or from the exacerbation of pre-existing medical problems can be enough for tax-free damages. Section 104 of the tax code excludes damages for personal physical injuries or physical sickness. But the damages must be physical, not merely emotional, and that can be a chicken or egg issue.

Most money in fire cases is fully taxable, and if you do not reinvest in time, you may have a big capital gain. However, up to $500K from a primary residence may be tax free for a married couple filing jointly. It isn’t only the IRS that collects tax. States do too, notably California, where all income is taxed at up to 13.3%, even capital gain.

Many fire victim plaintiffs use contingent fee lawyers. Up until 2018, it was clear that legal fees were virtually always tax deductible. Now, however, many legal fees are no longer deductible. Thus, some plaintiffs may have to pay taxes on their gross recoveries, even though 40% or more is paid to their lawyer, who also must pay tax on the same fees. The tax treatment of the legal fees has become a major tax problem associated with many types of litigation. Fortunately, if the money can be treated as capital gain, the legal fees can often be treated as additional basis or as a selling expense. In effect, it can mean paying tax only on the net recovery.

Understandably, most fire victims hope not to face any tax hit at all. That is possible in some cases, but it can involve scrupulous attention to timing and details. When it comes to taxes or fire, be careful out there.

This is not legal advice. For tax alerts or tax advice, email me at Wood@WoodLLP.com.

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I handle tax matters across the U.S. and abroad (www.WoodLLP.com), addressing tax problems, tax disputes, writing tax opinions, tax advice on legal settlements

 

Source: How IRS Taxes Fire Victims

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U.S. Bank Regulatory Easing Is Negative For Investors And Taxpayers

Storm clouds behind the exterior of the Federal Reserve building in Washington, DC

Storm clouds behind the exterior of the Federal Reserve building in Washington, DC

In a disappointing decision, the Federal Reserve Board announced yesterday that effective this year, it will limit its use of the “qualitative objection” in Dodd-Frank’s Comprehensive Capital Analysis and Review (CCAR). Under Dodd-Frank’s Title I, banks that are designated as systemically important are required banks to design a model using stress scenarios from the Federal Reserve. In order to pass the stress test, banks need to demonstrate that they would be able to meet Basel III capital and leverage requirements even in a period of stress.  It is in the qualitative portion of CCAR, that the Federal Reserve can identify and communicate to the market if a bank is having problems with its internal controls, model risk management, information technology, risk data aggregation, and whether a bank has the ability to identify, measure, control, and monitor credit, market, liquidity and operational risks even during periods of stress.  Easing this requirement, in combination with all the changes to Dodd-Frank that have been taking place since last year, is dangerous to investors, not to mention taxpayers, especially so late in the credit cycle.

Parts of the test that each firm is subject to this year in addition to the hypothetical scenario.

Parts of the test that each firm is subject to this year in addition to the hypothetical scenario.

*All firms subject to the qualitative objection, except TD Group, will have their fourth year in the 2020 cycle. TD Group’s fourth year will be the 2019 cycle.

According to the Federal Reserve’s press release “The changes eliminate the qualitative objection for most firms due to the improvements in capital planning made by the largest firms.”  Yes, there have been improvements in capital planning precisely, because there were consequences to banks which failed the qualitative portion of CCAR. Banks were prohibited from making capital distributions until they could rectify the problems the Federal Reserve found in the CCAR exercise.  This decision essentially defangs the CCAR qualitative review of banks’ capital planning process.

Nomi Prins

Nomi Prins

Dean Zatkowsky

“It is absolutely reckless of the Fed to relinquish its regulatory authority in such a manner, rather than retain the option of qualitative oversight, which has turned up red flags in the past,” said Nomi Prins former international investment banker. “We are after all, talking about what the banks deem a reporting burden versus necessary oversight that could detect signs of a coming credit or other form of banking related crisis from a capital or internal risk management perspective. Why take that risk on behalf of the rest of our country or the world?”

In writing about the Federal Reserve’s decision, the Wall Street Journal wrote that “Regulators dialed back a practice of publicly shaming the nation’s biggest banks through “stress test” exams, taking one of the biggest steps yet to ease scrutiny put in place after the 2008 crisis.” It is not public shaming. It is called regulators doing their job, that is, providing transparency to markets about what challenges banks may be having. Without transparency, the bank share and bond investors cannot discipline banks.

Just last month, the Federal Reserve Board announced that it would be “providing relief to less-complex firms from stress testing requirements and CCAR by effectively moving the firms to an extended stress test cycle for this year. The relief applies to firms generally with total consolidated assets between $100 billion and $250 billion.”

Christopher Wolfe

Christopher Wolfe

Fitch Ratings

Investors in bank bonds, especially, should be concerned about recent easing of bank regulations. Immediately after the Federal Reserve decision was announced yesterday, Christopher Wolfe, Head of North American Banks and Managing Director at Fitch Ratings stated that “Taken together, these regulatory announcements raising the bar for systemic risk designation and relaxed standard for qualitative objection on the CCAR stress test reinforce our view that the regulatory environment is easing, which is a negative for bank creditors.”  Fitch Rating analysts have written several reports about the easing bank regulatory environment being credit negative for investors in bank bonds and to  counterparties of banks in a wide array of financial transactions.

Dennis Kelleher

Dennis Kelleher

Better Markets

Also, a month ago, the Federal Reserve announced that it will give more information to banks about how it uses banks’ data in its model to determine whether banks are adequately capitalized in a period of stress.  In commenting on the Federal Recent decisions, Better Markets President and CEO Dennis Kelleher stated that “Stress tests and their fulsome disclosure have been one of the key mechanisms used to restore trust in those banks and regulators.  By providing more transparency to the banks in response to their complaints while reducing the transparency to the public risks snatching defeat from the jaws of victory in the Fed’s stress test regime.”

Gregg Gelzinis

Gregg Gelzinis

Center for American Progress

Gregg Gelznis, Policy Analyst at the Center for American Progress also expressed his concern about the Federal Reserve’s recent changes to the CCAR stress tests.  “While Federal Reserve Chairman Jay Powell and Vice Chairman for Supervision Randal Quarles have spoken at length about the need for increased stress testing transparency, this transparency only cuts in one direction.” He elaborated that the Federal Reserve’s decision “benefits Wall Street at the expense of the public. The Fed has advanced rules that would provide banks with more information on the stress testing scenarios and models. At the same time, they have now made the stress testing regime less transparent for the public by removing the qualitative objection—instead evaluating capital planning controls and risk management privately in the supervisory process.”

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Source: U.S. Bank Regulatory Easing Is Negative For Investors And Taxpayers

IRS Will Offer Free Help For Those Struggling With Withholding Taxes

Businessman opening envelope with paycheck

If the changes to tax rates and withholding over the past year have you scratching your head, help is on the way. The Internal Revenue Service (IRS) is offering a free online information session on how to do a Paycheck Checkup.

Here’s why many taxpayers are confused. The Tax Cuts and Jobs Act (TCJA) introduced many changes beginning in 2018, including caps on state and local tax deductions, a zeroed-out personal exemption amount, and the elimination of reimbursed job expenses. Additionally, new withholding tables were not available to employers until mid-January 2018, and some employees didn’t see a switch in withholding until mid-February 2018.

(You can find out more about updating your form W-4 here.)

The combination of new rules, new withholding tables, and even new tax forms meant that many taxpayers didn’t withhold properly. In January of 2019, the IRS advised that they will waive underpayment penalties so long as withholding and estimated tax payments total at least 85% of the tax shown on the return for the 2018 taxable year. Just a few days ago, the IRS expanded the relief to those whose withholding and estimated tax payments total at least 80% of the tax shown on the return for the 2018 tax year.

To avoid the same kinds of problems next year, the IRS is encouraging taxpayers to plan ahead. By plugging your current tax data into the withholding calculator on the IRS website, you can do a paycheck checkup and avoid any nasty surprises at year end. You should consider a checkup even if you did one in 2018: another review can help make sure you’re withholding the right amount for 2019.

The IRS webinar will walk you through how to use the online IRS Withholding Calculator (you can find out more about the withholding calculator here). Folks who might need a checkup include those taxpayers who had a large tax refund or tax bill for 2018 when they filed their tax return this year, or had a major life change (like a wedding, birth of a child or bought a house) in 2019. Other taxpayers who might need a checkup include two-income families or those taxpayers who have two or more jobs at the same time, or those who claimed refundable tax credits like the Child Tax Credit or Earned Income Tax Credit.

The seminar, scheduled for Thursday, March 28, 2019, will be offered twice: once in English (at 2 p.m. Eastern) and once in Spanish (at 11 a.m. Eastern). There will also be a special Q&A session. To register for the English version, click here. Para inscribirse en la versión en español, haga clic aquí. Closed captioning will also be available.

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Source: IRS Will Offer Free Help For Those Struggling With Withholding Taxes

How To Turn Tax Refunds Into Savings

The ongoing flap over tax refunds has once again highlighted a serious issue: Americans use tax withholding from their paychecks as a major savings tool. They give the government more than they owe in income tax throughout the year just so they can get a check the following spring. For many low-income filers, overwithholding has become their preferred, and perhaps their only, way to save. They ought to have a better option. Traditional economists say deliberately having too much tax withheld throughout the year is, not to put too fine a point on it………..

Source: How To Turn Tax Refunds Into Savings

2019 Tax Refund Chart Can Help You Guess When You’ll Receive Your Money


If anyone tells you that they have the 2019 tax filing season all figured, they’re lying. By all accounts, the upcoming tax season is going to be tricky. Despite a shoestring staff due to the shutdownnew tax forms and new tax rules, the 2019 tax season is still set to open on January 28, 2019. The Internal Revenue Service (IRS) claims that the season will operate as close to normal as possible—including issuing tax refunds. So when are those tax refunds coming……….
Source: https://www.forbes.com/sites/kellyphillipserb/2019/01/21/2019-tax-refund-chart-can-help-you-guess-when-youll-receive-your-money/#6522e9684ba2

IRS Announces Tax Season Start Date Despite Government Shutdown

The Internal Revenue Service (IRS) has announced that tax season will open on Monday, January 28, 2019. The IRS will begin accepting paper and electronic tax returns that day. The IRS made the start date announcement despite the ongoing government shutdown. “We are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period,” said IRS Commissioner Chuck Rettig………

Source: IRS Announces Tax Season Start Date Despite Government Shutdown

UK tax authority issues tax guidance for crypto users – TokenPost

Her Majesty’s Revenue and Customs, the UK government department responsible for the collection of taxes, on Wednesday published tax guidance for people who hold crypto assets. The paper, “Cryptoassets for individuals,” sets out the agency’s view of the appropriate tax treatment of cryptoassets, and outlines what taxes crypto users may need to pay, and what records they need to keep.

Source: UK tax authority issues tax guidance for crypto users – TokenPost

Is There a Credit Card Rewards Tax? – Gabriel Wood

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When you trade in your credit card rewards for a heap of cash back or travel credit, your moment of elation may be interrupted by a sobering thought: are these rewards taxed? After all, the IRS taxes investment income, cryptocurrency and casino winnings, so it would make sense for there to be some kind of credit card rewards tax. Unfortunately, it’s an issue that takes some digging to get to the bottom of, and even then, the answer isn’t completely clear-cut. To learn about the law surrounding taxes on credit card rewards and find out if you need to fret about giving the IRS its due, keep reading.

The law isn’t clear

This would be an easy question to answer if there was a law that definitively stated whether credit card rewards are subject to taxation, but there currently isn’t one. The IRS may push for such a law soon, since credit card intro bonuses are very generous right now and it may want to start regulating them, but that’s just speculation. Instead, all the legal precedent we have to go on is one IRS announcement and one tax court decision. The announcement, made in 2002, says that frequent flyer miles and other promotional items that you receive as the result of business travel, but that you use for personal purposes, do not produce a tax liability. However, it also says that exception doesn’t apply to travel or other promotional benefits that you convert into cash, or to compensation that is paid in the form of promotional benefits. Since many credit card issuers let you trade their rewards for statement credit or cash, lawyers could interpret that to mean there is a credit card rewards tax.

The court’s decision in the 2014 case Shankar and Trivedi v. Commissioner of Internal Revenue was similar. In the case, couple Parimal Shankar and Malti Trivedi failed to report to the IRS airline tickets that they had purchased with rewards points gained from opening a bank account. The couple argued that the dollar value of the rewards points shouldn’t count as income, since they received it as part of a promotional offer, but the U.S. Tax Court ruled against them.

Tax experts lean toward no

Even though both of the precedents mentioned above make your chances of avoiding a rewards tax look grim, some experts say credit card rewards are largely tax-free. Because you have to spend money in order to earn credit card rewards, whether you’re receiving cash back on your purchases or meeting the spending requirement for an intro bonus, apparently the IRS views those rewards as more of a rebate or discount rather than taxable income. Additionally, even if the IRS taxed credit card rewards, you wouldn’t have to worry about reporting that money unless it met or exceeded $600 per credit card issuer. That’s because $600 is the minimum amount of money you can report on a 1099 form for miscellaneous income, so any amount below that is safe from taxation.

While your credit card rewards are probably safe, the same can’t be said for other financial rewards. In 2012, Citi (a NextAdvisor advertiser) shocked a lot of customers by mailing 1099 forms out to anyone who took advantage of a promotional offer that gave new banking customers a large amount of frequent flyer miles. Citi determined the value of the miles given exceeded $600 per customer, so everyone who received the miles had to pay taxes on them. What’s the takeaway from this? If a reward (including a credit card reward) only requires you to sign up for an account and doesn’t entail spending any money, the IRS is much more likely to view that as a gift, payment or prize and tax it if it’s worth at least $600.

In conclusion, if you’re crazy about earning credit card cash back or points, you shouldn’t fear running into a rewards tax. If for some reason you do receive a 1099 form in the mail from your credit card issuer, though, make sure you factor it into your taxes to stay square with the IRS. For more answers to any credit card question you can think of and then some, check out our credit cards blog.

 

 

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Patagonia’s Billionaire Founder To Give Away The Millions His Company Saved From Trump’s Tax Cuts To Save The Planet – Angel Au-Yeung

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Yvon Chouinard, billionaire founder of outdoor apparel firm Patagonia, has traditionally shied away from politics. But things have changed for the rock-climbing, fly-fishing outdoorsman since Donald Trump moved into the Oval Office. On Wednesday, Patagonia announced it has an additional $10 million in profits on its books for 2018 as a result of Trump’s “irresponsible tax cut” last year, which lowered the corporate tax rate from 35% to 21%. Instead of investing the additional dollars back into its business, Patagonia said it would give $10 million to grassroot groups fighting climate change, including organizations that work in regenerative organic agriculture to help reverse global warming.

 

 

 

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Ohio Becomes The First State To Allow Taxpayers To Pay Tax Bills Using Cryptocurrency – Kelly Phillips Erb

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By now, most taxpayers understand that there are tax consequences associated with cryptocurrency, but ironically, until recently you couldn’t pay those taxes using cryptocurrency. That’s about to change: With the launch of OhioCrypto.com, Ohio will become the first state in the nation to accept tax payments using cryptocurrency. “We are proud to make Ohio the first state in the nation to accept tax payments via cryptocurrency,” said Ohio Treasurer Josh Mandel. “We’re doing this to provide Ohioans more options and ease in paying their taxes and also to project Ohio’s leadership in embracing blockchain technology……………..

 

 

 

 

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