Rich Americans Who Were Warned on Taxes Hunt for Ways Around Them

For wealthy Americans worried about higher taxes, the future is looking bleaker. It’s all but inevitable that the Biden administration, as well as lawmakers at the state level, will target millionaires and billionaires for more levies. The new reality could feel harsh for investors who got used to paying a top rate of 23.8% on their capital gains, an amount they can lower further with many of the deductions, incentives and accounting tricks offered by the U.S. tax code.

Advisers, of course, will certainly try to help their clients adapt to whatever the new rules may be. “We’re not going to evade taxes, but we’re going to avoid them and defer them as much as we can,” Bill Schwartz, managing director at Wealthspire Advisors, said in an interview. “We’re only beginning to explore. Give us a year or two and we’ll find ways around things.”

Wealthy Americans were amply warned that President Biden and Democrats in Congress want to raise their taxes. But what has surprised at least some of them is the size and speed of proposals.

On Thursday, Bloomberg reported that Biden plans to nearly double taxes on capital gains, pushing the top rate to 43.4% for those earning $1 million or more. If passed by the Democrats’ narrow majorities in Congress, it would fulfill a campaign pledge “to reward work, not just wealth” by bringing the tax on investors up around the level paid on ordinary wage income.

Some members of the top 0.1% expressed anger, denial and grief. The stock market, which has steadily risen since Biden won the election, reacted with dismay, with U.S. equities falling the most in five weeks on Thursday.

“Obviously, this is eye popping,” John Norris, chief economist at Oakworth Capital Bank, said in a note sent to clients. He calmed clients with the suggestion that “it likely won’t come to pass, at least at these levels,” adding: “Remember, elected officials on both sides of the aisle have wealthy donors who probably won’t like this very much.”

Epic Shift

Biden is signaling an epic shift in tax policy: For more than a generation, presidents and Congresses have rolled out the red carpet for investors. When not cutting taxes on capital gains and dividends, lawmakers introduced incentives designed to encourage investment in targeted areas.

They were following both campaign contributors and economic orthodoxy, which insisted that low taxes encourages the sort of investment that boosts economic growth. But then a new generation of economists pointed out that the real-world evidence for those theories was flimsy.

Tax cuts don’t seem to have juiced economic growth in the U.S. over the last few decades, even as they coincided with soaring income and wealthy inequality. Incentives programs — such as Opportunity Zones, a bipartisan idea to steer money to low-income areas implemented by President Donald Trump — have been criticized for rewarding investment that would have taken place anyway.

“Nobody has a crystal ball,” James Bertles, managing director at Tiedemann Advisors in Palm Beach, Florida, said in an interview. However, after the federal government spent trillions of dollars on Covid-19 relief, “most people think taxes are going to go up — it’s inevitable. We just don’t know which taxes are going to go up.”

If Biden is successful, Wall Street and investors who make most of their money from capital gains may need to get used to the idea that their taxes will look more like those of wealthy professionals such as doctors, lawyers, entertainers and even investment bankers who currently face marginal income tax rates north of 50% in high-tax states.

“Nothing is going to surprise us as this point,” said Tara Thompson Popernik, director of research for Bernstein Private Wealth Management’s wealth planning and analysis group. “We’ve been telling our clients for some time that this is likely coming.”

Tax Strategies

Strategies to avoid a higher capital gains rate will depend on the details of the proposal, and on what other provisions get changed. An obvious technique, Schwartz and other advisers said, would be to keep incomes under $1 million — or whatever threshold is in the final legislation.

Investors might also avoid the higher rate by holding onto assets for as long as possible. That strategy, however, could be complicated by other provisions that Biden and Democrats have floated, like beefing up the estate tax and ending a rule, called step-up-in-basis, that allows asset-holders to wipe away capital gains taxes at death.

Life insurance products could also be a way for investors to cut investment taxes, as long as Democrats don’t target those strategies as well.

Alternatively, investors and business owners could rush to sell assets now, or before the end of the year — assuming tax changes aren’t made retroactive to the beginning of the year — to lock in lower rates. Advisers said they’ve been discussing sales of art and family businesses, along with highly appreciated stock, by year-end.

“If you’re going to do it anyway, maybe do it now,” Bernstein’s Thompson Popernik said. “The worry is that in the fourth quarter everyone else is going to be trying to make those changes at the same time.”

Thursday’s drop in the market prompted worries that, as Biden’s plans solidify and Congress starts to take action, stocks could continue to sell off. But it might not work that way.

“I would tell people to temper their fear of a significant drop-off in the markets,” said Bob Schneider, director of financial planning at Johnson Financial Group. Historically, markets have often risen even while taxes are going up, he said.

Indeed, stocks climbed on Friday after strong economic data. Also, what else are investors going to do with their money? Especially at a time when the economy seems to be bouncing back from the pandemic, many investors want exposure to stocks.

“Yields are very low, so there aren’t a whole lot of other options,” Schneider said. “People will realize their gains and probably turn right back around and put their money back in the market.”

By:

Source: Rich Americans Hunt for Ways Around Tax Hikes They Were Warned About – Bloomberg

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Why Tax Refunds Are Taking Longer Than Usual

Tax refunds typically arrive within 21 days of when you file your individual tax return. One reason it may take longer: if you made a mistake calculating your recovery rebate credit.

Wondering where your tax refund is? In its Covid-19 operations update, the Internal Revenue Service has added an explanation for why in many cases it’s taking longer than the typical 21 days to process tax refunds for individual taxpayers. We’re talking about tax returns filed for the 2020 tax year during the 2021 tax season that opened in February and runs through May 17.

May 17? That’s right. 2020 individual tax returns are due on Monday, May 17—instead of the typical April 15th due date. The delayed due date is because of the many ways the coronavirus pandemic has upended people’s lives and their tax pictures. Note: Quarterly estimated taxes for the 2021 tax year are still due on April 15th, 2021.

As of April 2, the IRS had received 93.2 million returns, had processed 83.7 million returns, and had issued 62.3 million tax refunds, averaging $2,893 each, according to the latest 2021 filing season statistics.

So why are refunds taking longer than usual? For one thing, the IRS is still wading through the backlog of prior year tax returns. As of March 26, there were 2 million individual tax returns received prior to 2021 in the pipeline. That’s down from 2.6 million as of March 5.

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IRS Tax Return 2021: When You Will Get Your Tax Refund 2021? Where is Your Tax Refund 2021? How to Track Your Refund IRS My Refund Status. Tax Refund Dates. Updated New Deadline. IRS Where is My Refund? : https://www.irs.gov/refunds IRS Get Refund Status – https://sa.www4.irs.gov/irfof/lang/en… VITA – https://irs.treasury.gov/freetaxprep/ California covers topics like: Stimulus Checks, Medicare, Food Stamps (SNAP), Social Security, Unemployment, Rental Assistance , Health Insurance, Tax updates, Student Loan Forgiveness, and Paycheck Protection Program. These stimulus packages come from bills like the CARES act, the recent government spending bill, and potential plans like the American Relief plan, that is being proposed by President Biden. We hope that you find our videos helpful, useful and interesting.

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There are two other main reasons 2020 returns are stuck in the unprocessed pile. For taxpayers who used their 2019 income to figure the Earned Income Tax Credit and/the Advance Child Tax Credit, an IRS employee has to validate the return. The second reason is many returns are requiring a correction to the Recovery Rebate Credit amount claimed on the return.

Neither of these two cases requires the IRS to correspond with taxpayers, but the “special handling” means that it’s taking the IRS more than 21 days to issue any related refund. If a correction is made on the return, the IRS will send an explanation letter.

The IRS has a whole Q&A page set up for questions related to 2020 Recovery Rebate Credit corrections after 2020 tax returns are filed. Taxpayers who were eligible but didn’t get the Round 1 or Round 2 stimulus payments (from the March 2020 CARES Act and the year-end 2020 spending package) could claim those payments on their 2020 tax return as a recovery rebate credit.

If you were eligible for the recovery rebate credit but didn’t claim it, you need to file an amended return. If you entered an incorrect amount for the credit on your return, you should NOT file an amended return, the IRS says. The IRS will calculate the correct amount, make the correction to your tax return, and continue processing it.

Some of the reasons the IRS is changing credit amounts include: the taxpayer was claimed as a dependent on another taxpayer’s return, there was an issue with Social Security numbers or taxpayer identification numbers, a child exceeds the age limit (17), or your adjusted gross income was too high.

For the quickest refund, e-file your return and choose direct deposit. To check the status of your refund, use the IRS Where’s My Refund? tool.

Further reading:

Plus-Up Stimulus Payments Start Arriving In Taxpayer Bank Accounts

Tax Refund Scammers Target College Students

Follow me on Twitter or LinkedIn.

I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997. Follow me on Twitter: @ashleaebeling and contact me by email: ashleaebeling — at — gmail — dot — com

Source: Why Tax Refunds Are Taking Longer Than Usual

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How To Claim Work Expenses On Your 2021 Taxes

The pandemic has turned many corporate employees into remote workers for the foreseeable future as well as driving layoffs and furloughs. People have had to navigate working from home — and the expenses that came with it if a workspace wasn’t already set up. For now, the most well-known employment-related tax deduction — for home office expenses — is reserved for those who are both self-employed and have a dedicated home space for working.

Read more: Tax return deadline 2021: How to estimate refund, claim stimulus money and more

“We know that there has been an increase in the number of people working from home due to the coronavirus,” Lisa Greene-Lewis, CPA, and tax expert with TurboTax said last year. “In general, only those who are self-employed can take deductions for expenses related to working from home.”

Still, there are a handful of other work-related expenses that both corporate employees and the self-employed may be eligible to claim on their taxes. And it’s worth noting that tax laws change from year to year — and it’s quite possible that the IRS will unveil a host of new tax deductions related to COVID-19, and its impact on remote working, some time between now and next April.

For now, here’s a list of the work expenses and deductions that you can presently claim.

Read more: Tax scams can still target you after you’ve filed your taxes. What to know and do

How to claim work expenses on your taxes: Choose a deduction

Before you start going through every line item of every receipt, you may want to save yourself the trouble and figure out which you’ll take: the standard deduction or the itemized deduction.

Standard deduction: The standard deduction is an all-encompassing flat rate, no questions asked. For tax year 2020, the flat rate is $12,400 for single filers and those married filing separately. The rate is $24,800 for married filing jointly. Taking this route is much easier than itemizing.

Itemized deduction: If you want to claim work expenses, medical payments, charitable contributions or other expenses, you’ll use the itemized deduction. It’s more time-consuming than the standardized deduction — and you’ll need proof of the expenses you wish to deduct.

If you’re going to claim and itemize your work expenses, you’ll need to complete Schedule A of Form 1040. You need to have sufficient proof for each itemized expense, which means tracking down receipts. If your standard deduction is greater than the sum of your itemized deductions, save yourself the trouble and take the flat-rate.

Common tax deductions to claim

Before you start adding up all the line-items, make sure you know what’s covered and what isn’t. Here are some of the most common deductions for folks working from home.

1. Home office deduction

Greene-Lewis says that although the home office deduction may be the largest deduction for self-employed people, many are hesitant to take it. The most significant requirement is that the space be reserved for and dedicated entirely to your work.

Read more: Why you can’t claim the home office tax deduction — even after working from home for a year

“Can you deduct a home office if you work at your kitchen table?” she says. “Unfortunately, no. You not only have to be self-employed — but have a dedicated space in your home that is exclusively related to your business. You can’t deduct the space at your kitchen table if your family also eats dinner there.”

If you have a dedicated workspace at home, you can use the IRS regular method or simplified option, though you can’t use a combination of them in a single tax year. Some things that qualify for home office deductions:

  • Insurance: You can deduct a percentage of your home insurance that covers the business space in your home.
  • Utilities: Expenses for utilities, like electricity and gas, can be deducted — but only the percentage used in your home office.
  • Depreciation: If you own your home, you can deduct the cost of wear and tear on the portion used exclusively for business.

All of these calculations are based on the percentage of your home that you use for business. To find the percentage, compare the size of space you use for business to that of your entire home, and then apply the percentage to the specific expenses. For instance, if your home is 1,800 square feet total, and your home office measures 300 square feet, your home office deductions could be applied at a rate of 16%.

Greene-Lewis says that if you take the simplified option, you can deduct $5 per square foot, up to 300 square feet, or $1,500 total. This would be an alternative to calculating the various individual home expenses.

2. Travel

Regular commutes from your home to work are considered non-deductible personal expenses. If you have to commute between multiple locations or travel for work, however, some of those costs may be deductible. Flights, hotel rooms, rental cars, meals and tips for service are all considered travel expenses. If a passport is required for your travel, you can claim that as well.

In the past, mileage accrued while driving your own car for business travel was an expense you could claim on your taxes — but the Tax Cuts and Jobs Act eliminated that for employees. The self-employed and business owners, however, are still eligible for this deduction.

Read more: Best tax software for 2020: TurboTax, H&R Block, Jackson Hewitt and more compared

3. Work uniform

If you have to buy clothes that you only wear for work, you can write off the cost. You can also claim expenses incurred for dry cleaning or laundering work clothes. The deduction cannot exceed 2% of your adjusted gross income.

4. Continuing education and certifications

In some fields, you can claim the enrollment cost of any required continuing education courses, classes or certifications. You can also deduct professional organization dues and fees — as long as the organization isn’t political. And if you’re a lawyer, you can deduct the price of membership for your state bar or any other similar organization.

If you’re a teacher, the Teacher Education Deduction lets you claim up to $250 of out-of-pocket costs related to teaching supplies. And Green-Lewis says if you and your partner are both teachers, you both can claim the deduction.

Read more: The truth about paying taxes on unemployment checks

5. Supplies

If you own your own business, you can deduct the cost of some business supplies. And the deduction threshold is generous.

“Self-employed business owners can deduct up to $1,020,000 for qualified business equipment like computers, printers and office furniture,” Greene-Lewis says.

Dori Zinn headshot

 

By:

 

Source: How to claim work expenses on your 2021 taxes – CNET

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Understanding The Research & Development Tax Credit – What Small Businesses Need To Know

Three women and two men in a business meeting.

It’s tax season, let the sales pitches begin! Tax return preparation companies and do-it-yourself software providers are hard at work convincing individual taxpayers that their services and products are the way to maximize a tax refund or pay the lowest amount of tax. And, judging by what I’m seeing on social media, companies that specialize in the Credit for Increasing Research Activities (also known as the R&D tax credit) are also selling hard, looking for businesses who may qualify for this credit—especially startups.

They are casting an extremely wide net. While it’s true that the R&D credit is often overlooked by small businesses and their return preparers, it’s not as easy to qualify for the credit as some of these companies want small business owners to believe. Buyer beware.

For sole proprietorships, partnerships, and S-corporations the R&D credit is claimed by filing Form 6765 with the business return (Schedule C of a Form 1040, Form 1065, or Form 1120-S, respectively). Qualifying small businesses can elect an up to $250,000 payroll tax credit instead of an income tax credit.

I’m not going to get into the mechanics of taking the credits here but it is easy to see how this election could benefit a startup in the early stages with payroll expenses and the associated taxes but not much income to be taxed. Nevertheless, the mere fact that a business is new or has a new product does not automatically make expenses qualified research expenses for the purposes of this credit.

Section 174 of the Internal Revenue Code allows a taxpayer to treat “research or experimental expenditures” as expenses instead of having to amortize them over 60 months. The R&D credit uses the same definition of research or experimental expenditures as IRC Section 174. Qualified research expenses are defined in Treasury Regulation 1.174-2. The expenditures must be “incurred in connection with the taxpayer’s trade or business” and must “represent research and development costs in the experimental or the laboratory sense.”

The regulation goes on to state that “expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.” Additionally, qualification depends on the “nature of the activity to which the expenditures relate, not the nature of the product or improvement being developed.” It is on these semantic rocks that many tax credit ships have foundered.

In Connection With The Taxpayer’s Trade or Business

For an expenditure to be incurred in connection with a trade or business, the business must be a functioning business. Deductions exist for startup expenses for businesses but those should not be confused with the R&D credit.

Research activities conducted before a business is a business may be legitimate (and deductible) startup expenses but they do not qualify for the R&D credit. In other words, you must start your startup and then do the research, not develop the product and build the business around it in order for research expenditures to be considered qualifying expenses for the R&D credit.

The Experimental Or The Laboratory Sense

To qualify, research and development expenditures must be paid to eliminate uncertainty concerning the development or improvement of a product. This concept is perhaps best described as traditional trial and error using the scientific method. The idea of evaluating alternatives is important as is systematic testing of various alternatives. Testing and debugging an existing product is not enough to qualify for the credit. Neither is evaluating a set of alternatives or features for a given product.

For example, research to determine which set of code objects are necessary to implement a given software solution would not qualify. Quality control and assurance testing is also specifically excluded. A taxpayer must be evaluating alternatives to create a new product or improve an existing product. Additionally, the improvement must be related to the product’s performance and not simply a matter of cosmetics, taste, or fashion. Perhaps the best example of qualifying expenses would be those incurred to develop and test prototypes of a new product.

What about software and app development? What indeed. Determining whether software development costs are qualified research expenditures requires special analysis. Expenses incurred to develop software for internal use are specifically excluded from qualification. In Accounting Standard Codification (ASC) 730, the IRS Large Business & International unit indicated that internal use software includes software “used to provide a service or produce a product that the customer neither acquires nor gains any right to future use of.”

That is, the expenses incurred to develop a customized user experience for your website’s shopping cart will not qualify where expenses incurred to develop and test a new game for a gaming company to sell, most likely would—at least up to the point that “technological feasibility is established” (again, according to ASC 730).

The Nature Of The Activities Not The Nature Of The Product

For expenditures to qualify substantially all (substantially all has been defined as 80%) of the research activities must relate to a process of experimentation for a new or improved product. Corn Island Shipyard, Inc. recently found this out the hard way when the U.S. Tax Court ruled that the 80% requirement was not satisfied “simply because at least 80% of the product’s elements differ from those of the products the taxpayer previously developed.”

The ruling in Little Sandy Coal Company, Inc., v. Commissioner of Internal Revenue (T.C. Memo 2021-15) held that the “substantially all” test applied to activities, not to physical components of the product being developed or improved. In other words, even though the company’s two products (a ship and a dry dock) were 80% different from the company’s other products, because the research activities involved in developing the two new products did not comprise 80% of the research and development activities the expenses did not qualify for the credit.

Developing the two new products only required a small amount of actual experimentation to create a substantially different product. And, for the purposes of this credit, it’s the activities that count, not the product.

The R&D credit can be an excellent benefit for small companies, especially those who are developing new products or product lines. Nevertheless, the rules for claiming the credit are complex and nuanced. Correctly claiming the credit may be beyond the skills of many tax professionals who serve small companies. If you think your company may qualify for the credit it can be a good idea to work with a company that specializes in qualifying companies and determining qualifying expenses.

Those companies should be willing to work with your tax professional (and vice versa). Startup owners should, however, proceed with caution when it comes to firms with big marketing budgets and great sales pitches that promise to qualify them for this credit without knowing anything about the company or its products. There be (tax) dragons.

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I own Tax Therapy, LLC, in Albuquerque, New Mexico. I am an Enrolled Agent and non-attorney practitioner admitted to the bar of the U.S. Tax Court. I work as a tax general practitioner preparing returns for individuals and (really) small businesses as well as representing individuals before the IRS and, occasionally, the U.S. Tax Court. My passion is translating “taxspeak” into English for taxpayers and tax practitioners. I write to dispel myths with facts and to explain “the fine print” behind seemingly simple tax concepts. I cover individual tax issues and IRS developments with a focus on items of interest to taxpayers and retail tax practitioners. Follow me on Twitter @taxtherapist505

Source: Understanding The Research & Development Tax Credit – What Small Businesses Need To Know

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Can We Claim Medical Expenses on Our Taxes

Extensive series of several doctors with various patients in a medical exam room.

Medical expenses can take a bite out of your budget, especially if you have unforeseen emergencies that are not fully covered by your insurance. The Internal Revenue Service allows taxpayers some relief, making some of these expenses partly tax-deductible. To take advantage of this tax deduction, you need to know what counts as a medical expense and how to claim the deduction.

Deduction value for medical expenses

In 2020, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income.

Your adjusted gross income (AGI) is your taxable income minus any adjustments to income such as contributions to a traditional IRA and student loan interest.Your resource on tax filingTax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.Go Now

For example, if you have an adjusted gross income of $45,000 and $5,475 of medical expenses, you would multiply $45,000 by 0.1 (10 percent) to find that only expenses exceeding $4,500 can be deducted. This leaves you with a medical expense deduction of $975 (5,475 – 4,500).

Which medical expenses are deductible?

The IRS allows you to deduct preventative care, treatment, surgeries and dental and vision care as qualifying medical expenses. You can also deduct visits to psychologists and psychiatrists. Prescription medications and appliances such as glasses, contacts, false teeth and hearing aids are also deductible.

The IRS also lets you deduct the expenses that you pay to travel for medical care such as mileage on your car, bus fare and parking fees.

What’s not deductible?

Any medical expenses for which you are reimbursed, such as by your insurance or employer, cannot be deducted. In addition, the IRS generally disallows expenses for cosmetic procedures. You cannot deduct the cost of non-prescription drugs (except insulin) or other purchases for general health such as toothpaste, health club dues, vitamins or diet food, non-prescription nicotine products or medical expenses paid in a different year.

Claiming the medical expenses deduction

To claim the medical expenses deduction, you must itemize your deductions. Itemizing requires that you not take the standard deduction, so you should only claim the medical expenses deduction if your itemized deductions are greater than your standard deduction (TurboTax will do this calculation for you).

If you elect to itemize, you must use IRS Form 1040 to file your taxes and attach Schedule A.

  • On Schedule A, report the total medical expenses you paid during the year on line 1 and your adjusted gross income (from your Form 1040) on line 2.
  • Enter 7.5% of your adjusted gross income on line 3.
  • Enter the difference between your expenses and 7.5% of your adjusted gross income on line 4.
  • The resulting amount on line 4 will be subtracted from your adjusted gross income to reduce your taxable income for the year.
  • If this amount, plus any other itemized deductions you claim, is less than your standard deduction, you should not itemize.

Remember, TurboTax will ask you simple questions about your expenses, tell you which deductions you qualify for, and fill in all the right forms for you.

For more tax tips in 5 minutes or less, subscribe to the Turbo Tips podcast on Apple Podcasts, Spotify and iHeartRadio

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Debi Peverill

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