In a normal year, March is the busiest month in our office. The April 15th tax filing deadline means we have a full team on site working through tax returns and clients visiting us daily. This is NOT a normal year. The COVID-19 pandemic is changing the way the world works and we have had to adjust our business operations as well. We wanted to provide an update on what we are doing to try to be there for each of you in these trying times, while also keeping everyone as safe as possible. 

March 23, 2020

In a normal year, March is the busiest month in our office. The April 15th tax filing deadline means we have a full team on site working through tax returns and clients visiting us daily. This is NOT a normal year. The COVID-19 pandemic is changing the way the world works and we have had to adjust our business operations as well. We wanted to provide an update on what we are doing to try to be there for each of you in these trying times, while also keeping everyone as safe as possible. 

At this time Governor Lamont has deemed us to be an essential service.  Unless further restrictions are put into place, our office will be open Monday – Friday from 9AM, - 5PM; however, we cannot hold any client meetings, conferences or in person review/signing of tax returns.  While we are open, we encourage everyone to follow the recommendations of the health experts and limit your trips out of your home and practice safe social distancing.  We encourage the use of priority mail, Federal Express/UPS, telephone, fax, email, scanning and our portal site.  If you need to drop off or pick up, please follow the process in place:

DROP OFF – Plastic Bin inside our door (label outside of package with your name)

PICK UP – Notify office of your expected day and time, package will be available at the counter

The tax deadline for Federal, CT and NY has been extended from April 15, 2020 to July 15, 2020 for most return types.  Many other states have done the same.  Information is quite fluid at this time so we will share it as it becomes available.

Due to the current situation, we know it may be difficult for you to sign the 8879 forms and return them to us to indicate we have your approval to efile.  As a result we are allowing clients facing these circumstances to email us the following as a substitute for signing the 8879 if they cannot return the form:  “ (Specify Name(s)) have reviewed my/our 2019 tax returns and are in agreement as prepared to efile them today (specify date)”.  We will then attach your email to the 8879 form as your signature.

If your returns are complete or significant work has been completed but you choose not to file currently due to the extended filing deadline, we may invoice you for progress work.  Upon filing, you will receive a supplemental invoice for processing work and fees.

There is much that is out of our control right now so it's important to focus on what you can control. Practice safe social distancing, wash your hands, check in on those most at risk and be kind to each other. This is a scary time but we will get through this together. 

Thank you for your cooperation, support and patience at this unprecedented time in the world –

Walter J. McKeever & Company, LLC

The Tax Organizers to assist in compiling the information necessary to prepare your 2019 individual income tax return(s) were mailed early to mid-January 2020. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2019 Tax Organizer or if you would like a blank version.

The Tax Organizers to assist in compiling the information necessary to prepare your 2019 individual income tax return(s) were mailed early to mid-January 2020. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2019 Tax Organizer or if you would like a blank version.

The Internal Revenue Service and State Taxing Authorities are matching information returns submitted by businesses, employers and financial institutions with amounts reported on individual tax returns.  Negligence penalties may be assessed when income is underreported. Please be certain to mail or bring with you all of the following original unstapled forms as well as your Organizer (Form # is shown in the upper right-hand corner of the Organizer):

1) Dependent information including names, relationship, date of birth and social security numbers (if a dependent is no longer a student please indicate) (Forms 3 and 3A).  Please remember that names and social security numbers must match exactly in order for the dependent to be allowed.

2) All W-2 forms for wages (Form 3A).

3) All 1099 forms for interest, dividends, sales of securities, pension / IRA distributions, social security benefits, commissions and other income received as well as brokerage statements and realized gain/loss schedules (Forms 5A, 5B, 5EA, 7, 9, 9A and 13).  If you have a foreign bank account, please list it and all applicable information on Form 5C.  Congress has been sharply focused on requiring taxpayer reporting of foreign bank/financial accounts and assets for the last several years.  Besides filing the Report of Foreign Bank and Financial Accounts, information may be required to be attached to the taxpayer's income tax return for those assets with aggregate values exceeding specific thresholds.  If applicable, you will be requested to provide additional information. 

NOTE: Form 114 FinCEN (previously known as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) (FBAR) must be electronically filed via the BSA E-Filing System.  Our firm can assist you with the preparation and submission of the electronic FBARs; however, the primary responsibility for this filing remains with the taxpayer.  2019 FBAR filings are due April 15, 2020 with a maximum extension for a 6- month period ending October 15, 2020 to file.

4) All notices from corporations, financial institutions or mutual funds that advise of special tax treatment for earnings.

5) Report of tax-exempt interest and dividends received (Form 5A, 5B and 5EA) with payer identification.

6) Supporting information (including 1099 MISC forms) for business income and expenses (Forms 6, 6A, 6B, 6C and 6D).  For business use of your home, please include the square footage of your home used exclusively for business as well as total square footage of your home on Form 6D (this is required information).

7) Copies of closing statements for any real estate, co-op or condominium purchases or sales which occurred during the year and a copy of the Form 1099B received for gross proceeds (Form 8).  Please remember to include the acquisition date of the property sold, the original cost and improvements. 

8) All 5498 forms and support for 2019 retirement contributions made to date or anticipated to be made for the 2019 tax year (Form 9 and 9A).  Please indicate on Form 9 if you want maximum contribution limits calculated.

9) All 1098 and 1099 MISC forms supporting rental income and expenses (Forms 10 and 10A).  Please be sure to include details for all improvements made and capital assets purchased including acquisition dates.

10) All Schedule K-1 forms (Form 11) from partnerships, limited liability companies, S corporations, trusts and estates including all supporting literature received including state specific K-1s and transmittal/cover letters.

11) All 1099G forms (Form 13) issued/received from State Taxing Authorities.  These forms are available from Connecticut and New York online only. 

12) Adjustments to Income (Forms 13 and 13A) – please be sure to include educator expenses, alimony paid/received, health savings account contributions/distributions and student loan interest paid including all 1098-E forms.  For Health Savings Accounts, please include a statement(s) and 1099 forms that recap the 2019 activity in order to verify the beginning and ending balances of the account.

13) Real estate and personal property taxes paid – please be sure to include only taxes paid during the calendar year 2019.

14) All 1098 forms for interest expense deductions - Please identify for each 1098 form if the loan interest paid is for a home mortgage (secured by principal residence or vacation home) or investment activity (Form 14A).  If your total debt exceeds $1 million, please include the balance of each loan at January 1, 2019 and December 31, 2019.  In addition, please supply new home acquisition balances from December 15, 2017 and beyond if the debt exceeds $750,000.  NOTE: With respect to home mortgages, please note the question on Form 2C should also reference new home mortgages incurred after December 15, 2017 and whether the loan balance exceeds $750,000. See tax planning letter for more details.

15) Contributions (Form 15 - See note on top of the form) – be careful in reporting your contributions as the IRS is aggressively challenging those which appear to be excessive in dollars and valuation.  Please include supporting documentation for cash contributions with values in excess of $250 and noncash contributions with values that exceed $500.

16) Child/Dependent care expenses (Form 18) – Please provide the name, address and social security # and/or employer identification # of the providers as this is required.

17) Household Employment Taxes (Form 19) including W-2 forms for wages paid and quarterly state unemployment returns filed for the 2019 tax year.

18) A schedule of estimated taxes paid (Forms 20 and 20A) for federal and state income taxes including payments made in January 2020 for the 2019 tax year and payments made in January 2019 for the 2018 tax year.  Please be sure to include the date for each payment made.

19) All W-2G forms (Form 13) for gambling winnings.

20) IMPORTANT: (Form 2) Notification received from providers documenting the existence of health insurance coverage for 2019 for you, your spouse and/or dependents. (include Forms 1095-A, 1095-B and/or 1095-C as applicable).

21) Copies of any notices or other communications received during the year from the Internal Revenue Service and State Taxing Authorities.

22) Identity Protection Personal Identification Number (Form 3A) – If you have received notification that an IP PIN has been assigned to you and/or your spouse by the IRS, it is imperative that this information be provided to us with your tax documents as you cannot efile your income tax return without it and our firm has no access to this information.

Because of government enforcement regulations and fraud prevention initiatives, we are requesting that you include copies of the social security cards for yourself, spouse and dependents.  If you provided us with copies of social security cards in the past, you do not have to provide it again; however, the driver’s license and passports on file must be current.  Also, if you are a new client to the firm, include a copy of the current driver’s license for yourself and your spouse as we are required to input the current information in order to electronically file. If you have any questions, please call our office to verify your information on file.  Please review and correct, if necessary, the personal and dependent information, including dates of birth on Forms 3 and 3A. The spelling of names must match the social security cards issued or correspondence from the IRS will be generated.  Returns cannot be filed electronically if discrepancies exist between the tax return and the Social Security Administration.  Refunds will not be issued until the matter is resolved. 

When completing Form 7 in the Tax Organizer, Sales of Stocks, Securities, Capital Assets & Installment Sales, special care should be taken in providing complete and accurate information, especially acquisition dates and cost. For re-investment programs, such as mutual funds and dividend reinvestment programs, it is necessary to provide all data since initial acquisition unless the fund/broker provides the cost information.  Taxpayers are required to complete Form 8949, Sales and Other Dispositions of Capital Assets, along with Schedule D to report this activity.  Form 8949 captures the detail data of each individual sales transaction in conjunction with cost basis information as reported by your broker/financial institution under reporting regulations.

In order to continue providing quality service on a timely basis, we urge you to collect your information as soon as possible.  If information from a “pass-through” entity such as a partnership, S corporation, limited liability company, trust or estate is the only data you are missing, please send the data you have assembled and forward the missing information as soon as it is available. Please clearly indicate which information is missing.  If we do not receive your complete information by March 23, 2020, we cannot guarantee timely completion of your tax returns for the April 15, 2020 filing deadline.  

After completing the Tax Organizer, please sign and date the COVER SHEET before returning it to our office.  Please be sure to include all of your contact information on the COVER SHEET as well - telephone numbers, fax numbers and email addresses, if applicable and the preferred method of contact.

If you or your spouse worked in New York with your residence outside of New York or you worked in Connecticut with your residence outside of Connecticut, please complete the enclosed allocation of wage and salary income.  If you held multiple jobs during the year, please provide a separate allocation schedule for each job.

Two full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last two years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

Two full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last two years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

The following is a discussion of the rules applicable to the filing of 2019 individual income taxes.

TAX RATES - For 2019 there are seven income tax brackets ranging between 10% and 37% for ordinary income.  The 37% tax bracket is imposed on taxable income over threshold amounts as follows:

• $612,350 for married taxpayers filing jointly and surviving spouses
• $306,175 for married taxpayers filing separately
• $510,300 for heads of households
• $510,300 for single taxpayers

For 2020, there are still seven brackets and the 37% tax bracket is imposed on taxable income over the following thresholds:

• $622,050 for married taxpayers filing jointly and surviving spouses
• $311,025 for married taxpayers filing separately
• $518,400 for heads of households
• $518,400 for single taxpayers

These rates apply, absent new legislation, to all years until December 31, 2025.

Besides the reduction in rates and expansion of the tax brackets, perhaps the biggest change to deductions was the elimination of the personal exemption effective 2018.  This is to be offset, in part, by the increase in the standard deduction.  For 2019, the standard deduction has essentially been doubled to $12,200 for single taxpayers and $24,400 for married couples filing jointly.  For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for married filing jointly.

On December 28, 2018 New York State Department of Taxation issued a Technical Memorandum stating that they decoupled from certain personal income tax IRS changes for 2018 and after implemented via TCJA.  These items include certain itemized deductions, alimony or separate maintenance payments, qualified moving expenses reimbursement and moving expenses, Empire State child tax credit and New York 529 college savings account withdrawals.

LONG TERM CAPITAL GAINS AND QUALIFYING DIVIDENDS TAX RATE – The favorable rate of 0% for taxpayers in the 10% and 15% brackets remains unchanged from 2017.  In the TCJA, these rates apply at different thresholds for 2019 and 2020 as follows:

• The 0% tax rate applies to adjusted net capital gain up to $78,750 and $80,000 for joint filers and surviving spouses, $52,750 and $53,600 for heads of household, $39,375 and $40,000 for single filers, $39,375 and $40,000 for married taxpayers filing separately and $2,650 and $2,650 for estates and trusts;
• The 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to $488,850 and $496,600 for joint filers and surviving spouses, $461,700 and $469,500 for heads of household, $434,550 and $425,800 for single filers, $244,425 and $248,300 for married taxpayers filing separately, and $12,950 and $13,150 for estates and trusts; and
• The 20% tax rate applies to adjusted net capital gain over $488,850 and $496,601 for joint filers and surviving spouses, $461,700 and $469,051 for heads of household, $434,500 and $441,451 for single filers, $244,425 and $248,300 for married taxpayers filing separately, and $12,950 and $12,950 for estates and trusts.

Remaining unchanged from prior years is the 25% rate for unrecaptured Code Sec. 1250 gain, the 28% rate for collectibles and gain on qualified small business stock equal to its partial exclusion.

Qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains.  Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies, and farmers’ cooperatives.

NET INVESTMENT INCOME TAX (NIIT) – An additional Medicare surtax of 3.8% is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold.  However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty related expenses, and state and local taxes allocable to items included in net investment income:

• Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business
• Gross income from a trade or business that is a passive activity
• Gross income from a trade or business of trading in financial instruments or commodities
• Gain from the disposition of property, other than property held in an active trade or business

Individuals are subject to the 3.8% NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

• $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child
• $125,000 for married taxpayers filing separately
• $200,000 for single and head of household taxpayers

ADDITIONAL HI (MEDICARE) TAX - Higher income (HI) individuals continue to be subject to an additional 0.9% HI (Medicare) tax, not to be confused with the 3.8% Medicare surtax on NIIT. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35% Medicare tax rate (normal 1.45% plus additional .9%). The additional Medicare tax also applies to self-employed individuals.   

ALTERNATIVE MINIMUM TAX (AMT) – The TCJA temporarily increased the Alternative minimum tax (AMT) exemption amounts for 2019 and 2020 as follows:

• $111,700 for married taxpayers filing jointly and surviving spouses for 2019 and $113,400 for 2020
• $71,700 for unmarried taxpayers and heads of household, other than surviving spouses, for 2019 and $72,900 for 2020
• $55,850 for married taxpayers filing separately for 2019 and $56,700 for 2020

Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25% of the amount by which an individual’s AMTI exceeds a threshold level.  The threshold amounts for calculating the exemption phase-out are adjusted for inflation as follows:

• $1,020,600 in 2019 and $1,036,800 in 2020 for married taxpayers filing jointly and surviving spouses
• $510,300 in 2019 and $518,400 in 2020 for unmarried taxpayers and heads of household, other than surviving spouses
• $510,300 in 2019 and $518,400 in 2020 for married taxpayers filing separately

For 2019 and 2020, the AMT rates are 26% and 28% on the excess of AMTI over the applicable exemption amount. You should not ignore the possibility of being subject to the AMT as it can negate certain year-end tax strategies; however, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to AMT should accelerate income into AMT years and postpone deductions into non-AMT years.

STOCK LOSSES – Taxpayers should continually review their investments for return and portfolio balance.  They should monitor their investments to take steps necessary to time the recognition of capital gains and losses to minimize their net capital gains tax and maximize the benefit of capital losses.  Remember for tax purposes it is not how much your investments have gone up or down in value but rather how much gain or loss you have realized when an investment is sold since its original purchase date.  The maximum capital loss deduction available to offset ordinary income is $3,000 ($1,500 for married taxpayers filing separately) with the additional capital losses being carried forward until used.  Taxpayers also need to take “wash sale” rules into consideration when generating losses.  The wash sale rule defers use of a tax loss realized upon a sale of stock if the investor repurchases it within 30 days before or after the sale.  Worthless stock also generates an immediate capital loss; however, the rules for “worthless” stocks are very strict.  Stocks and securities must be totally worthless for a taxpayer to take a loss deduction; a mere decrease in value, no matter how great, will not trigger a loss deduction.

ROTH IRA CONVERSIONS - Modified gross income limitations applicable to Roth IRA conversions were repealed and 2010 was the first year in which a taxpayer could convert all or part of their traditional retirement accounts to a Roth account, regardless of income, age or filing status.  A conversion is a taxable transfer and is taxable in the year of conversion.  Under prior law, a Taxpayer could recharacterize IRA contributions from one type of IRA to another.  TCJA provides that a recharacterization cannot be used to unwind a Roth conversion. A taxpayer may still make a contribution to a traditional IRA and convert the Traditional IRA to a Roth IRA but the change is that the Roth conversion can then not be unwound using recharacterization.

IRA & ROTH IRA CONTRIBUTIONS – The maximum contribution is $6,000 for 2019 and 2020 provided you have at least $6,000 respectively of wage, salary or net self-employment earnings.  An additional “catch-up” contribution of $1,000 is allowed for taxpayers over 50 years of age by the end of the tax year for 2019 and 2020.  Contributions to a Roth IRA may continue after age 70 1/2 (by the end of the tax year) but not to a traditional IRA.  Remember that IRA and Roth IRA contributions for the 2019 tax year can be made up to April 15, 2020.

401K AND 403B CONTRIBUTIONS - The annual limit on employee elective deferrals to these plans for 2019 is $19,000 and $19,500 for 2020.  The maximum “catch-up” contribution to a 401K and 403B plan for taxpayers over 50 years of age by the end of the tax year is an additional $6,000 for 2019 and $6,500 for 2020.

CHILD DEPENDENT CARE (CDC) CREDIT – For 2019, the maximum amount of qualifying expenses to which the credit may be applied is $3,000 for individuals with one qualifying child or dependent (for a maximum credit of $1,050) or $6,000 for individuals with two or more qualifying children or dependents (for a maximum credit of $2,100).  For taxpayers with AGI between $15,000 and $43,000, the 35% credit rate is reduced by 1% for each $2,000 of AGI until the credit percentage is 20% for taxpayers with AGI of $43,000.

CHILD TAX CREDIT (CTC) – Beginning in 2018, the CTC doubled to $2,000 for each qualifying child under the age of 17.  For example, a taxpayer with two qualifying children will be entitled to a credit of $4,000.  The refundable portion of the credit is increased to a maximum amount of $1,400 per qualifying child.  In addition, the earned income threshold for determining refund ability is decreased to $2,500 (from the $3,000 amount that was in effect before TCJA was enacted).  A qualifying child must have a Social Security Number to be eligible for the CTC. 

Taxpayers are allowed a $500 credit per qualifying person for any dependents who are not eligible for CTC.  Eligibility is subject to certain rules including the tax tests for dependency.

For 2019, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000.  The threshold is $200,000 for all other taxpayers.  So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

EDUCATION INCENTIVES – The following are education incentives which exist under current law. 

American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) was made permanent by the 2015 PATH Act and was not changed by TCJA.  This $2,500 maximum credit per eligible student is subject to the higher income phase-out ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers) and contains a 40% refundable credit component.  The eligibility extension to the first four years of post-secondary education contains an inclusion for text books and course materials as eligible expenses. The Lifetime Learning Credit was also retained.

Student Loan Interest Deduction: If your modified adjusted gross income during 2019 is less than $85,000 ($170,000 for married filing jointly), a deduction is allowed for interest paid on a student loan used for higher education up to a maximum of $2,500.  This figure will continue to be adjusted each year for inflation. 

Coverdell Education Savings Accounts (ESAs): Total contributions for the beneficiary of this account cannot exceed $2,000 in any year no matter how many accounts have been established.  Contributions to a Coverdell ESA are not deductible but amounts deposited in the account grow tax free until distributed.

Employer-Provided Education Assistance: Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer's nondiscriminatory "educational assistance plan." 

Scholarship Programs: An amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income.  The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student as a required condition for receiving the qualified scholarship.  However, scholarship recipients with obligatory service requirements under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses as well as amounts that represent payment for services.

Section 529 Accounts:  TCJA expanded potential usage of 529 Plans to include elementary and secondary school tuition for public, private and religious schools up to $10,000 per year per student.  Previously, only Coverdell ESA funds could be used for primary and secondary expenses.  New York opted not to follow TCJA; therefore, for New York purposes, withdrawals for kindergarten through 12^th grade school tuition are NOT qualified withdrawals under the New York 529 college savings account program.

MEDICAL EXPENSE THRESHOLD -  For tax years beginning after December 31, 2018, a deduction will be allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents to the extent the expenses exceed 7.5% of adjusted gross income through the end of 2020.  In 2021, the 7.5% will move up to 10%.  Prior to the last minute tax law changes signed right before the new year, the 2019 threshold was supposed to be 10% of adjusted gross income.

CHARITABLE GIVING –

• Congress has long used the tax laws to encourage charitable giving and for many individuals, charitable giving is also a part of their year-end tax strategy. The PATH Act of 2015 made permanent the popular charitable giving incentive with tax-free IRA distributions to public charities by individuals age 70 1/2 and older up to a maximum of $100,000 per qualified taxpayer per year. Individuals taking this option cannot claim a deduction for the charitable gift as the distribution is not claimed as income.
• Congress tightened the rules for substantiation requirements for charitable contributions effective August 17, 2006. The IRS will not allow charitable deductions, regardless of the amount, without proper documentation. Contributions of $250 or more must be substantiated by a written acknowledgement from the donee organization; the acknowledgement must include the date of the donation, amount of cash or a description of property donated and a description and good faith estimate of the value of any goods or services received in exchange for the contribution.  If the donor does not receive a written acknowledgment from a charitable organization, it is the donor’s responsibility to obtain it in order to claim the charitable contribution.  Contributions under $250 must be substantiated by cancelled checks, bank records or receipts from the donee organization.  If it would be impracticable to obtain a receipt, the donor must maintain reliable written records. 
• Just like the rules for cash gifts, the rules for substantiating deductions for donations of clothing and household items (i.e. furniture, furnishings, electronics, appliances) were tightened after August 17, 2006 and will only be allowed if the property is in “good used condition or better”. Donors must have a written acknowledgement from the charity documenting the donation date, description of property donated, a description and good faith estimate of the value of any goods or services received in exchange for the contribution and a valuation/qualified appraisal of the property donated, if applicable.  A deduction for the noncash goods will be allowed, without regard to condition, only if a qualified appraisal is attached to the return for each single item or group of similar items over $500.  We recommend that pictures be taken of any noncash goods that are donated as it will be helpful in supporting the deduction.

Taxpayers donating vehicles (i.e. car, truck, boat, and aircraft) to a charity valued over $500 must obtain from the charity and attach to the tax return Form 1098-C and/or a written acknowledgment of the contribution.  The donation amount is usually limited to the gross proceeds from the sale of the vehicle by the charity.

Gifting of appreciated securities for making charitable contributions continues to be a significant alternative instead of using cash.  In this manner, the appreciated value will not be taxed, low cost basis stock is removed from your portfolio/estate and the fair-market value of the security will be used as the charitable contribution.

IRS has been aggressively reviewing and challenging charitable donations in response to these new substantiation requirements.  It is expected that this trend will continue.  The burden of proof will be on the taxpayer so it is imperative that good records and supporting documentation is maintained.

EDUCATOR EXPENSES – The 2015 PATH Act permanently extended the teacher's classroom expense deduction that allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.  Eligible expenses in excess of the $250 limit are no longer deductible as a miscellaneous itemized deduction on Schedule A.  Even though the $250 limit is subject to adjustment for inflation, it remains the same for 2019 and 2020.

BONUS DEPRECIATION & SECTION 179 BUSINESS EXPENSING ELECTIONS –

Bonus Depreciation: Pursuant to TCJA for qualified purchases placed into service after September 27, 2017, 100% of the purchase price can be expensed. This 100% expensing will continue until 2022.  There is a scheduled phase-down to 80% starting in 2023 and ending at 20% in 2026, after which the provision is set to expire.  Unlike regular depreciation, where half year and mid quarter conventions may apply, a taxpayer is entitled to the full 100% bonus depreciation based on when the asset is purchased. Therefore, year-end placed in service strategies provide immediate “cash discount” for qualifying purchases, even when considering finance costs.

Bonus depreciation under old law is available only for new property (i.e. property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. An enticing provision under the new law whereby qualified property includes property that has been used (i.e. the original use does not have to originate with the purchaser).  A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until the tax return is filed. Bonus depreciation is not a preference item for alternative minimum tax.

Code Sec. 179 Expensing: The PATH Act’s provisions made the enhanced Section 179 expense deduction permanent for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (generally defined as depreciable tangible property that is purchased for use in an active trade or business) as an expense rather than a capital expenditure. Thus, the current Section 179 dollar cap for 2019 and 2020 is $1,020,000 and $1,040,000 with an overall investment limitation of $2,550,000 and $2,590,000.

Revised Repair/Capitalization Rules: IRS issued comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property.  Beginning January 1, 2014, businesses were required to use these new rules in determining whether they can deduct their costs as repairs under Code Section 162(a) or must capitalize the costs, to be recovered over a period of years under Code Section 263(a).

A relatively new election that is available for “de minimis” asset purchases if certain requirements are met.  When this election is in place, your business may simply expense that which falls below a specified level to the extent that the amounts are deducted for financial accounting purposes or in keeping with your books and records.  The de minimis threshold can be up to $5,000 (per invoice or per item as substantiated on the invoice) if your business has financial statements audited by an independent certified public accountant (CPA) or issued to a state or federal agency.  The threshold is $2,500 for firms without such financial statements.

AUTOMOBILE MILEAGE RATE - Many taxpayers use the standard mileage rates to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting the applicable business percentage of the actual costs of your vehicle such as maintenance and repairs, gas and oil, insurance, license and registration fees.  If you choose to use the actual expense method to calculate your business vehicle deduction, you must maintain very careful records by keeping track of the actual costs during the year to maintain and run your vehicle.  One of the most important tools is a mileage log book that details date, miles driven, location and purpose for the vehicle during the calendar year.  Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate: The business standard mileage rate for 2019 is 58.00 cents per mile.  The 2020 rate is 57.50 cents per mile. 

Medical/Moving standard mileage rate: The medical/moving standard mileage rate for 2019 is 20.00 cents per mile.  The 2020 rate is 17.00 cents per mile. 

Charitable standard mileage rate:   Taxpayers who itemize deductions may be able to claim a deduction for miles driven in service of a charitable organization. The standard mileage rate for charitable miles as determined by IRS for 2019 and 2020 is 14.00 cents per mile. 

COLLEGE SAVINGS PROGRAMS/PLANS – Connecticut allows a deduction from federal adjusted gross income for contributions made into a CT higher education trust fund (CHET).  New York allows a deduction from federal adjusted gross income for contributions into a New York 529 college savings plan.  The maximum deduction in each state is $5,000 for a single taxpayer and $10,000 for married filing joint.  However, Connecticut allows contributions in excess of these limits to be carried forward for five years; New York does not allow for any carry forward. 

RESIDENTIAL ENERGY CREDIT – The tax credit for making qualified energy improvements to your principal residence, including windows, energy-saving exterior doors, insulation, and certain metal roofs expired in 2016.  Credit for solar electric and solar water heating property expenditures was extended through 2021.  The 30% credit rate is available through 2019 and the credit rate drops to 26% in 2020 and 22% in 2021.

HEALTH CARE REFORM - The Affordable Care Act (ACA) brought a sea of change to our traditional image of health insurance.  Taxpayers and employers will continue to weigh the benefits and costs of obtaining coverage in a public marketplace or a private insurance exchange for themselves and their employees.  Small businesses may be eligible for a tax credit to help pay for health insurance.  Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. 

Taxpayers began to comply with the tax reporting provisions of ACA in 2014 and employers began complying in 2015.  The reporting level of information continued in 2018.  Individuals reported if they had minimum essential health coverage for all or part of the year, for themselves and their dependents unless exempt.  Taxpayers who were covered for the entire year by health insurance obtained through their workplace will have to check a box to indicate that they had coverage.  Taxpayers will receive Forms 1095-B and/or Form 1095-C from their employers documenting coverage.  The rest of those filing individual tax returns either will have received health coverage through a Health Insurance Marketplace or will not have health insurance coverage.  Those who obtained insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which will explain their coverage and detail any premium tax credit they received in advance.  Individuals who are not covered by minimum essential coverage and who are not exempt may be liable for an individual shared responsibility payment (also known as a penalty).  For 2019 and 2020, the shared responsibility payment has been eliminated. 

Individuals with flexible spending accounts (FSAs) and similar arrangements should take a look at their annual spending habits and project how they will use these tax favored funds in the future.  The maximum salary reduction contribution to a FSA is $2,700 for 2019 and $2,750 for 2020.  Adjusted for inflation, the annual limitation on deductible contributions to health savings accounts (HSAs) for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,500 for 2019 and $3,550 for 2020; $7,000 for 2019 and $7,100 in 2020 for family coverage. The HSA catch up contributions for age 55 or older is $1,000 for 2018 and 2019 for single and family coverage.

Please note the deadline for employers to issue 1095-B and 1095-C forms for tax year 2019 is March 2, 2020 so these will be arriving late.

GIFT TAXES – Slow and steady estate planning can yield dramatic results - take advantage of the annual gift-giving limits to reduce your income and estate tax liabilities. For 2019 and 2020, the annual exclusion is $15,000 ($30,000 per person for couples.) Remember that if you gift stock, the recipient of the gift takes over the donor’s cost basis and holding period for the security; therefore, the donor needs to provide the recipient with this information.  Effective January 1, 2005, Connecticut laws changed and no gift tax was due by a donor until their cumulative gifts from this date forward added up to $2,000,000; however, a gift tax return has to be filed annually declaring all federal taxable gifts that are made in a tax year.  Due to recent legislation, these exemptions are now $3,600,000 for 2019, $5,100,000 in 2020, $7,100,000 in 2021, $9,100,000 in 2022, and the federal basic exclusion amount for 2023 and thereafter.  Direct payments of educational expenses to a qualified institution for family members, or other beneficiaries, is not treated as a gift for tax purposes and does not count against the annual exclusion amount or the lifetime exemption.

ESTATE TAX REFORM – While TCJA retains the estate tax rate at 40%, for 2019 and 2020 the estate tax exemption moves up $11,400,000 and $11,580,000. TCJA did not repeal the death tax as had been a goal and also did not make the above changes permanent as they expire after 2025. The portability election remains as part of the tax law. Portability allows the second spouse to have the benefit of the deceased spouse’s unused portion of the $11,400,000 exemption even if the second spouse dies when a lower exemption is in effect, possibly after 2025.  No changes were made in TCJA with respect to step up in basis despite the increase in the exemption.

AUTOMATIC REFUND REDUCTIONS - With the number of information sharing acts signed by federal and state taxing authorities as well as other organizations, please be aware that refunds will be automatically reduced for the following matters: delinquent federal taxes, delinquent state taxes, back spousal and/or child support and delinquent non-tax federal debts such as student loans.  If the Department of Treasury’s Financial Management System (FMS), which disburses IRS refunds, offsets the refund for a delinquent amount (correctly or incorrectly), they will send a letter to the taxpayer explaining the reduction and giving the taxpayer the right to challenge the offset.

MAILING & RECORDKEEPING OF TAX PAYMENTS AND TAX RETURNS - When mailing tax returns or payments to federal and state taxing authorities, we advise the use of registered or certified mail to prove timely filing.  We also recommend that you make copies of the checks before mailing for your records.  The IRS has stated that other than direct proof of actual delivery, a mail receipt would be the only evidence of the timely delivery of tax documents.  It is also a good practice to make sure that you have good copies of the front and the back of the check images (where available) once your payments clear the bank in case you have to present this information at a later date.  Please keep in mind that as electronic systems of filing continue to be required, manpower at the federal and state taxing authorities will continue to decline causing longer delays in resolution of matters and placing the burden of proof on the taxpayer.

INCREASED REPORTING PROVISIONS ARE IN EFFECT AIMED AT COMPLIANCE AND REVENUE GENERATION - Banks and other processors of merchant payment cards are required to report a merchant’s annual gross payment card receipts to the IRS along with the merchant’s EIN #.  The law also requires reporting of third-party network transactions such as ones used by online retailers.  Expanded information reporting will continue to assist the IRS in increasing the compliance among merchants.  The IRS plans to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported, estimating to raise more than $9.5 billion over 10 years as a result of the increased reporting and monitoring.

As of 2013, new rules were fully implemented that required brokers to file information returns that not only provided the IRS and customers with details on the sales proceeds from each trade executed during the year, but also the customer's adjusted basis in the security and whether any gain/loss is short or long term. These information reporting requirements effect business customers as well. Securities subject to the reporting requirements include stocks, bonds, debentures, commodities, derivatives and other financial instruments designated by Treasury.  Brokers notified customers in 2011 regarding elections to make in their accounts concerning the methods to be used for reporting cost basis.  This provision is estimated to raise $6.7 billion over 10 years.

In response to the implementation of broker reporting changes, the IRS introduced Form 8949 Sales and other Dispositions of Capital Assets in 2011.  Form 8949 is used to list all capital gain and loss transactions previously reported on Schedule D of Form 1040.  The subtotals from Form 8949 are then carried over to Schedule D where gain or loss is calculated in the aggregate.  Accurate reporting and matching of data reported by the brokers directly to the IRS as well as the customers is the key focus and purpose of this new form.

Foreign Compliance Activities:  Foreign Account Tax Compliance Act (FATCA) dominated international news beginning in 2014 and still continues today.  Along with FACTA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency.  Since 2014, the IRS provided transition relief with good faith efforts to comply and an offshore voluntary disclosure program (OVDP).  With closure of the OVDP on September 28, 2018, authorities are getting tighter with compliance efforts and the grace periods of transition relief are expected to end.  FinCen Report 114, Report of Foreign Bank and Financial Accounts (FBAR), reporting for tax year 2019 is due by April 15, 2020 with a 6-month extension available until October 15, 2020.

Identity Theft:  Tax fraud and identity theft have become a growing problem over the years.  Further initiatives continue to be taken by the industry to combat identity theft issues for taxpayers throughout the country.  IRS announced joint efforts have been taken with various state taxing authorities and tax preparation software companies to create a security plan to safeguard taxpayer information.  Tax preparers are required to input the current driver’s license state identification number, issue date and expiration date for ALL taxpayers prior to e-filing without exception.

CONNECTICUT DEPARTMENT OF REVENUE NEWS –

Connecticut Income Tax Exemption for Teacher Pensions:  The previously authorized 50% income exemption of any taxable pension received from the Connecticut Teacher’s Retirement System is delayed.  The exemption remains at 25% for 2019 and 2020.

Limitation of Property Tax Credit: For 2019, the property tax credit may only be claimed by Connecticut residents who attain the age of 65 before the end of the year or who validly claim one or more dependents on their federal income tax return.  The maximum income tax credit remains at $200.

Exemption of Social Security Benefits from Connecticut Income Tax:  For 2019, adjusted gross income thresholds for determining the amount of Social Security benefits excluded from Connecticut income tax have been increased.

Pension and Annuity Income Modification:  For taxable years beginning January 1, 2019, an individual with the federal filing status of single, married filing separately or head of household with federal adjusted gross income (AGI) of less than $75,000 or married filing jointly with federal AGI of less than $100,000 will be allowed to subtract 14% of any pension or annuity income received when calculating Connecticut AGI.  This applies to the extent that the pension and annuity income has been properly included in federal AGI.

LOOKING AHEAD ……

Even with the significant amount of TCJA guidance issued, the uncertainty and volume of changes in the law have made it difficult for some taxpayers to take full advantage of the opportunities provided by TCJA.  On December 20, 2019, President Trump signed into law “The Further Consolidated Appropriations Act” and “The Consolidated Appropriations Act, 2020”.  Here are some of the retirement provisions:

• Allowing employers to include annuities as an investment selection for their employer 401K plans.
• No longer allowing an individual who inherits a pension or IRA from a decedent to “stretch” the required minimum distributions over their lifetime. Instead the withdrawals would have to be withdrawn over a 10-year period.  This would apply to inherited amounts after Dec. 31, 2019.
• For plan years beginning after December 31, 2019, the new law allows the employer who automatically enrolls their workers in certain 401K plans to allow them to raise the employee savings rate to 15% of annual earnings over time. This is an increase in the current rule which was up to 10%.
• Beginning in 2020, taxpayers can contribute to a traditional IRA regardless of age as long as they have adequate compensation. Prior to this new law, you could no longer contribute once reached age 70 ½.
• The bill also increases the required minimum distribution (RMD) age from retirement accounts from 70 ½ to 72. This change is effective for RMDs for individuals who attain age 70 ½ after December 31, 2019.  For those turning age 70 ½ in 2019 or earlier, this new provision would not apply and they must continue to take their annual RMDs under provisions of the old law. 

Other items to highlight from the new legislation: 

• The act extends the treatment of mortgage insurance premium as qualified residence interest through 2020.
• The above the line deduction for qualified tuition and related expenses for higher education is extended through 2020.
• Non business energy property credit for windows, doors, skylights and roofs allows a credit of 10%. The credit can be used through the end of 2020.
• The refundable credit for health insurance costs of eligible individuals is extended through 2020.
• Penalty free withdrawals up to $5,000 per taxpayer from retirement plans beginning January 1, 2020 if made during the one year period beginning on the date on which a child is born or legal adoption is finalized.
• 529 distributions made after December 31, 2018 are expanded to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments of principal and interest of the beneficiary.
• All ACA taxes are repealed. This includes the medical device excise tax, health insurance provider’s fee and high-cost employer-sponsored health coverage tax (Cadillac plans).  This does not repeal the 3.8% tax Obama put on investment income.

Kiddie tax is reinstated and the unearned income of children is taxed at the top marginal rate of their parents.  This change is effective for tax years beginning in 2020; however, you can elect to apply this change to 2018 or 2019 (or both).

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

Today, with the increase in catalog and online shopping, many taxpayers are buying items out of state that would be subject to tax if they were purchased in their resident state.  The state tax authorities, especially Connecticut and New York, are actively pursuing the collection of this use tax in order to meet budgetary constraints.  In fact, the states, along with the Internal Revenue Service and U.S. Customs, have signed information sharing agreements to help each other collect all outstanding tax money.  Working together, the authorities have many resources available to gather their information.

Keep in mind that the taxing authorities are specifically targeting the purchase of items such as automobiles (and parts), appliances, furniture, jewelry, cameras, computers, electronics, cigarettes and other tobacco products, alcohol, boats, art and antiques.  However, they are also seeking out those taxpayers who are steady catalog and online shoppers not paying sales tax. 

The individual use tax is declared and paid when you file your resident state individual income tax return. 

If all the goods purchased and brought into Connecticut at one time total $25 or less, you do not have to pay Connecticut use tax.  The $25 exemption does not apply to goods shipped or mailed to you.  Connecticut requires that taxpayers separately list any individual item with a purchase price of $300 or more.  When listing this information, you must provide the date of purchase, a description of goods or service, the retailer or service provider and the purchase price.  Items with an individual purchase price under $300 do not have to be listed separately; instead the total combined purchases must be given to calculate the use tax due.

The general Connecticut sales and use tax rate for 2019 was 6.35%; however, there are categories with different tax rates from the general rates.  There are too many categories to list for the purposes of this letter; however, there are a few that need to be highlighted.  Specifically a use tax rate of 7.75% applies to the following: the sale of most motor vehicles exceeding $50,000, the sale of each piece of jewelry exceeding $5,000, the sale of each piece of clothing or pair of footwear exceeding $1,000 and a handbag, luggage, umbrella, wallet or watch exceeding $1,000.

New York provides two options for calculating the use tax due on purchases of less than $1,000 (excluding shipping and handling) each that are not related to a business, rental real estate or royalty activities - the exact calculation method or the sales and use tax chart.  For the exact calculation method, the taxpayer must provide the purchase price, purchase date and jurisdiction of purchase.  The sales and use tax chart is a simple, time-saving method whereby the taxpayer pays use tax based on their federal adjusted gross income according to the chart established by the state.  The exact calculation method must be used on each purchase of $1,000 or more.  For individual items subject to use tax greater than $25,000, the following information must be provided: date item was purchased, description of item purchased, seller’s name and address, delivery address/address of use and purchase price.

Failure to pay use tax may result in the imposition of penalties and interest.  The states are requiring taxpayers to declare an obligation for use tax on their individual income tax returns.  Zero is a valid declaration if you do not have a liability.  If you do not make an entry on the individual use tax line of your resident tax return, you are considered to not have filed a use tax return.

Therefore, when providing your information for payment of use tax, please be sure to specify the following complete information:

• Details of purchase information as specified by the state thresholds for reporting individual purchases
• Details of purchase information as specified by the special categories in Connecticut

Internal Revenue Service regulations along with the tax authorities of Connecticut and New York mandate that tax preparers electronically file individual, fiduciary and business income   tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2019 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Internal Revenue Service regulations along with the tax authorities of Connecticut and New York mandate that tax preparers electronically file individual, fiduciary and business income   tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2019 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Our firm has informed you of the regulations and mandates for electronic filing.  However, the decision as to whether your income tax returns will be electronically filed or not rests with you, the taxpayer.  If you choose not to file electronically, we will inform you of the necessary procedures that need to be followed for opting out.

Electronic filing offers the following benefits:

1. Allows the Revenue Departments to process returns quickly and accurately, saving tax dollars.
2. Taxpayers who have a return with a balance due can file their return early and choose to make payment anytime on or before April 15, 2020.
3. Taxpayers who file returns with refunds receive those refunds faster especially if the refund is directly deposited into their bank account.
4. Electronically filed returns receive an acknowledgment of receipt from the Internal Revenue Service and the applicable State Tax Authority and are verified to be mathematically correct, eliminating data entry errors and lost or misplaced mail.

If we did not prepare your returns for 2018, we will need copies of your driver’s licenses and social security cards or passports. 

How does this affect the process of preparing your 2019 income tax returns?

The actual preparation process of your return does not change.  However, the administration, review process and completion of the returns will be effected.  The following is an overview of how the electronic filing process will work.

1) Taxpayers should forward complete information for the preparation of their 2019 income tax returns including all supporting documentation.  Regulations for electronic filing require that our firm maintain copies of the social security cards and driver's licenses for yourself, your spouse and all dependents claimed on the 2019 tax return.  NOTE:  If you provided this information to us last year regarding the preparation of your 2018 tax return, you do not have to provide it again.  However, the driver’s license and passports on file must be current.  Please call our office to verify your information on file if you have any questions.

2) Electronic filing provides various methods for payment and receipt of your refunds.  Payments can be made by 1) paper check, 2) credit card (a convenience fee will be charged by the processing company used by tax authorities) and 3) direct debit out of a designated account.  Refunds can be issued by 1) paper check, 2) application of all or a portion to the 2020 tax year and 3) direct deposit into designated account(s) – see NOTE below.  Returns filed electronically can be filed early but payment not made until a later date designated by you whether payment is by check, credit card or direct debit.  Please complete the enclosed Organizer Form 4A (Direct Deposit and Withdrawal) to indicate to us how you would like to handle payments and/or refunds and return it with the information to prepare your tax return.  If you desire to use direct deposit or direct debit, please enclose a voided check so we have complete account information and the financial institution routing transit number.  It is the taxpayer’s responsibility to provide proper banking information and to verify that the payments have been withdrawn from the designated account.  Please allow enough time when scheduling payments to be made directly from accounts.  If problems with payment by direct debit are encountered, taxpayers need to have enough time available for a paper check to be submitted on a timely basis.

NOTE:  Generally, if you do not elect direct deposit, the State of Connecticut will issue refunds by paper check; however, they are encouraging direct deposit.  Direct deposit will NOT be available for first time Connecticut filers.  The State of New York is offering the option for receipt of refunds by direct deposit or paper check.  IRS is offering refunds by paper check or direct deposit. 

WARNING: It is suggested that refunds on joint tax returns should only be directly deposited into joint bank accounts.  The federal banking regulations, as applied by each bank, may not accept a joint refund into an individual account; our firm has no knowledge of how your bank will handle this matter.  Also, be aware that refunds will be retained, not issued or decreased for any of the following: 1) delinquent federal taxes, 2) delinquent state taxes, 3) delinquent student loans, 4) delinquent spousal and/or child support, 5) delinquent state unemployment compensation debts and 6) debts owed to other state and/or federal agencies.

3) Once your return has been prepared, our firm will forward a "Review Copy" to you.  This review copy can be sent electronically using access through a portal system for your protection or by hard copy (either mail or you can pick it up at our office).  Please let us know the delivery method for the "Review Copy" on the bottom of the enclosed engagement letter which should be submitted with your tax information.

4) If you review the return and are in agreement with the return as prepared, the taxpayer(s) will need to sign Form 8879, IRS e-file Signature Authorization, Form TR-579-IT New York State e-file Signature Authorization, Form FTB 8879 California e-file Signature Authorization, Form M-8453, Massachusetts e-file Signature Authorization, as applicable, and any additional efile form(s) as necessary and included in your "Review Copy" package.  Connecticut and New Jersey accept the federal signature on Form 8879.  Tax returns cannot be filed electronically until our firm is in receipt of the signature authorization forms signed by the taxpayer(s). 

5)  If you review the return and are NOT in agreement with the return as prepared, please call our office to discuss the questions/issues.  If necessary, a new "Review Copy" and signature authorization forms will be prepared.  Please remember that the only way electronically filed tax returns can be changed is by amending the returns.  Therefore, it is imperative that you are in complete agreement with the returns before returning the signature authorization forms to us. 

6) Once we receive your completed signature authorization forms, our firm will electronically submit your Federal, Connecticut, Massachusetts, New York, New Jersey and/or California income tax returns.  Income tax returns for all other states will be filed on paper at this time unless we deem it appropriate to electronically file in the other state(s).  Once we receive acknowledgement that your electronically filed returns have been accepted by the taxing authorities, we will forward a complete package to you which will include the following documents: 1) your original information if it has not already been returned with your review copy, 2) 2019 payment vouchers to taxing authorities, if necessary, 3) 2019 income tax returns for other states to be filed by paper, if necessary, 4) 2020 estimated tax payments, if necessary, 5) a copy of the 2019 individual return electronic transmission history and acceptance notification, and 6) a final signed copy of your electronically filed 2019 Federal and state income tax returns, if requested.  Please include on the bottom of the enclosed engagement letter how you would like to receive this complete package.

Some extensions for filing 2019 tax returns must be filed electronically as paper is no longer an acceptable filing method.  Therefore, taxpayers must allow enough time for completing this process.  Please contact our office by Friday, March 23, 2020 if you will need to file extensions for the 2019 tax year.

We ask for your continued cooperation in implementing these income tax return preparation and filing requirements.  If you have any questions, please give us a call.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

2021 Wage Cap
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent Social Security tax, also known as Old Age, Survivors, And Disability Insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:

• an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

The IRS has adopted previously issued proposed regulations ( REG-106808-19) dealing with the 100 percent bonus depreciation deduction. In addition, some clarifying changes have been made to previously issued final regulations ( T.D. 9874). Changes to the proposed and earlier final regulations are largely in response to various comments submitted by practitioners, and generally relate to:

• the definition of qualified used property;
• the election to claim bonus depreciation on components acquired or self-constructed after September 27, 2017, for larger self-constructed property for which manufacture, construction, or production began before September 28, 2017;
• application of the mid-quarter convention;
• clarifications to the definition of qualified improvement property, predecessor, and class of property; and
• clarifications to the rules for consolidated groups
  The rules for consolidated groups have also been moved from Proposed Reg. §1.168(k)-2(b)(3)(v) to new Reg. §1.1502-68.

Used Property
The 2019 final regulations provide that in determining whether the taxpayer or a predecessor had a depreciation interest in property prior to its acquisition, only the five calendar years immediately prior to the current placed-in-service year are considered. The latest IRS regulations clarify that the five calendar years immediately prior to the current calendar year in which the property is placed in service by the taxpayer, and the portion of such current calendar year before the placed-in-service date of the property without taking into account the applicable convention, are taken into account. In addition, the five-year look-back period applies separately to the taxpayer and a predecessor.

Furthermore, if the taxpayer or a predecessor, or both, have not been in existence during the entire look-back period, then only the portion of the look-back period during which the taxpayer or a predecessor, or both, have been in existence is taken into account.

Expanded Component Election
The prior regulations allow taxpayers to election to claim 100 percent bonus depreciation on components of certain larger constructed property that qualifies for bonus depreciation if the construction of the larger property began before September 28, 2017. The components must be acquired or constructed after September 27, 2017, and the larger property must be placed in service before 2020 (2021 in the case of property with a longer construction period). The final regulations remove the 2020/2021 cutoff date. In addition, the final regulations provide that eligible larger self-constructed property also includes property that is constructed for a taxpayer under a written contract that is not binding and that is entered into prior to construction for use in the taxpayer’s trade or business. The definition of a larger constructed property is also clarified.

Qualified Improvement Property
The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer. However, qualified improvement property received by a transferee taxpayer in a nonrecognition transaction described in Code Sec. 168(i)(7) is not eligible for bonus depreciation.

Mid-Quarter Convention
The final regulations clarify that depreciable basis is not reduced by the amount of bonus deduction in determining whether the mid-quarter convention applies.

Binding Contracts
Generally, property acquired pursuant to a binding contract entered into after September 27, 2017, does not qualify for bonus depreciation at the 100 percent rate. The final regulations clarify that a contract for a sale of stock of a corporation that is treated as an asset sale as the result of a Code Sec. 336(e) election made for a disposition described in Reg. §1.336-2(b)(1) is a binding contract if enforceable under state law.

Floor Plan Financing
The IRS intends to issue guidance relating to transition relief for taxpayers with a trade or business with floor plan financing indebtedness that want to revoke elections not to claim bonus depreciation for property placed in service during 2018.

The IRS will not allow a taxpayer to limit the amount of its otherwise deductible floor plan interest in order to qualify for bonus depreciation. However, guidance will address transition relief for the 2018 tax year for taxpayers that treated Code Sec. 168(j)(1) as providing an option for a business with floor plan financing indebtedness to include or exclude its floor plan financing interest expense in determining the amount allowed as a deduction for business interest expense for the tax year.

Effective Date
In general, the regulations apply to property acquired after September 27, 2017, and placed in service during or after a tax years that begins on or after January 1, 2021. However, they may be relied on for earlier tax years.

Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.

Final regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. These regulations finalize, with some changes, previously released proposed regulations, NPRM REG-100814-19.

Changes to Code Sec. 274 under the TCJA
For most expenses paid or incurred after 2017, TCJA:

• repealed the "directly related to a trade or business" and the business-discussion exceptions to the general disallowance of entertainment expense deductions;
• eliminated the general business expense deduction for 50 percent of entertainment (but not meal) expenses; and
• repealed the special substantiation rules for deductible entertainment (but not travel) expenses. Taxpayers may rely on the proposed regulations until they are finalized.

Entertainment Expenses
Among other things, Reg. §1.274-11:

• restates the statutory rules of Code Sec. 274(a), including the entertainment deduction disallowance rule for dues or fees to any social, athletic, or sporting club or organization;
• substantially incorporates the existing definition of "entertainment" from Reg. §1.274-2(b)(1); and
• confirms that the nine exceptions in Code Sec. 274(e) continue to apply to deductible entertainment expenditures.

The regulations also confirm that "entertainment" does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are included in the entertainment costs.

Food and Beverage Expenses
As under the proposed regulations, Reg. §1.274-12 allows taxpayers to deduct 50 percent of business meal expenses if:

• the expense is an ordinary and necessary business expense;
• the expense is not lavish or extravagant; the taxpayer or an employee is present when the food or beverage is furnished;
• the food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and
• food and beverages that are provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.

With respect to the fourth requirement listed above, the final regulations adopt the definition of "business associate" in Reg. §1.274-2(b)(2)(iii), but expands it to include employees. Thus, these requirements would apply to employer-provided meals to employees as well as non-employees. The final regulations also flesh out the fifth requirement listed above, and clarify that the separate charges for entertainment-related food and beverages must reflect their actual cost, including delivery fees, tips, and sales tax. Indirect expenses such as transportation to the food are not included in the actual cost.

Exceptions and Special Rules
Food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs. The final regulations apply the TCJA changes to the exceptions and special rules for deductible food and beverages in Code Sec. 274(e), Code Sec. 274(k) and Code Sec. 274(n), including:

• reimbursed food or beverage expenses;
• recreational expenses for employees;
• items available to the public; and
• goods or services sold to customers.

The final regulations also provide examples on several specific scenarios to illustrate the rules.

The IRS has issued a final regulation addressing tax withholding on certain periodic retirement and annuity payments under Code Sec. 3405(a), to implement amendments made by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA). The regulation affects payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments. The final regulation adopts, without modification, a proposed regulation that updated and replaced the provisions of three questions and answers with a new regulation regarding the default withholding rate on periodic payments made after December 31, 2020.

The IRS has issued a final regulation addressing tax withholding on certain periodic retirement and annuity payments under Code Sec. 3405(a), to implement amendments made by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA). The regulation affects payors of certain periodic payments, plan administrators that are required to withhold on such payments, and payees who receive such payments. The final regulation adopts, without modification, a proposed regulation that updated and replaced the provisions of three questions and answers with a new regulation regarding the default withholding rate on periodic payments made after December 31, 2020.

Withholding on Periodic Payments
Before the TCJA, if a withholding certificate (Form W-4P) was not in effect for a periodic payment, the default withholding rate on the payment was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended Code Sec. 3405(a)(4) so that the default withholding rate on such a periodic payment is instead determined under rules prescribed by the Treasury Secretary.

After the TCJA was enacted, the IRS issued three notices providing that, for calendar years 2018, 2019, and 2020, the default withholding rate on periodic payments under Code Sec. 3405(a)(4) is based on treating the payee as a married individual claiming three withholding allowances ( Notice 2020-3, I.R.B. 2020-3, 330; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2018-14, I.R.B. 2018-7, 353).

Under new Reg. §31.3405(a)-1, the default rate of withholding on periodic payments made after December 31, 2020, is determined in the manner described in the applicable forms, instructions, publications, and other guidance prescribed by the IRS.

Applicability Date
The final regulation applies to periodic payments made after December 31, 2020.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:

• address the amount of federal income tax that employers withhold from employees’ wages;
• implement changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.

TCJA Changes
The TCJA made many amendments affecting income tax withholding on employees’ wages. The TCJA made many amendments affecting income tax withholding on employees’ wages.After the TCJA was enacted, the IRS issued guidance to implement the changes (for example, Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020-3, 330). The IRS updated Form W-4 and its instructions with significant changes intended to improve the accuracy of income tax withholding and make the withholding system more transparent for employees. It also released IRS Publication 15-T, Federal Income Tax Withholding Methods, which provides percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year.

On February 13, 2020, the IRS published a notice of proposed rulemaking ( REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.

The final regulations adopt the proposed regulations with a few revisions.

Form W-4
The final regulations do not require all employees with a 2019 or earlier Form W-4 in effect to furnish a redesigned Form W-4. Comments expressed concerns that the proposed regulations and the related forms, instructions, publications, and other IRS guidance would require employers to maintain two different systems for computing income tax withholding on wages: one for 2019 or earlier Forms W-4, and another for the redesigned Forms W-4.

In response, the IRS is acknowledging concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.

The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.

Lock-in Letters
The IRS issues a "lock-in" letter to notify an employer that an employee is not entitled to claim exemption from withholding, or is not entitled to the withholding allowance claimed on the employee’s Form W-4. The lock-in letter prescribes the withholding allowance the employer must use to figure withholding. After the lock-in letter becomes effective, the IRS may issue a subsequent modification notice, but only after the employee contacts the IRS to request an adjustment to the withholding prescribed in the lock-in letter.

Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.

The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.

Estimated Tax Payments
The final regulations revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax payments into account, as long as the employee (1) follows the instructions to the IRS’s Tax Withholding Estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS Publication 505, (2) is not subject to a lock-in letter or modification notice, and (3) does not request withholding from wages that falls below the pro rata share of income taxes attributable to wages determined under forms, instructions, publications, and other IRS guidance. The IRS intends to update its Tax Withholding Estimator and Publication 505 to reflect this rule.

Applicable Date
The final regulations generally apply on the date they are published in the Federal Register. Reg. §31.3402(f)(2)-1(g), regarding withholding compliance, applies as of February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the requirement to use the current version of Form W-4, applies as of March 16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the combined income tax withholding and employee FICA tax withholding tables, applies on and after January 1, 2020.

Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the final regulations on and after January 1, 2020, and before their applicability date set forth in the regulations.

The Treasury and IRS have released final regulations that provide guidance for Achieve a Better Living Experience (ABLE) programs under Code Sec. 529A to help eligible individuals pay for qualified disability expenses.

The Treasury and IRS have released final regulations that provide guidance for Achieve a Better Living Experience (ABLE) programs under Code Sec. 529A to help eligible individuals pay for qualified disability expenses. The regulations provide guidance on:

• the requirements for ABLE programs,
• requirements for establishing and contributing to an ABLE account for a designated beneficiary,
• rules regarding changes in the designated beneficiary of an ABLE account,
• rollover and transfers from one ABLE account to another, and
• federal gift and generation-skipping tax consequences of an ABLE account.

The final regulations adopt proposed rules issued in 2015 and 2019 with a few modifications.

Qualified ABLE Programs
A qualified ABLE program is a program established and maintained by a State, or agency or instrumentality of a State. Several factors are provided in the final regulations in determining whether a State, or its agency or instrumentality, is actively involved in the administration of the program. Among those factors is the nature and extent of the State’s role in selecting and overseeing private contractors contracted to provide administrative or other services (for example, Community Development Financial Institutions (CDFIs)).

A qualified ABLE program may be maintained by two or more States or agencies or instrumentalities of a State in a consortium to offer broader investment choices, streamlined program administration, and lower fees for account holders. Consistent with legislation, the final regulations eliminate any reference to a residency requirement and a qualified program may allow an ABLE account to be established for an eligible individual regardless of his or her residence.

ABLE Accounts
An ABLE account is a tax-favored savings account established and owned by an eligible individual under a qualified ABLE program to pay qualified disability expenses of a designated beneficiary. The designated beneficiary of an ABLE account is the eligible individual who established and owns the ABLE account or who has succeeded the former designated beneficiary through a rollover distribution or change of beneficiary.

The final regulations provide that an ABLE account may be established on behalf of the eligible individual by his or her parent, legal guardian, or agent under a power of attorney. In addition, the regulations provide an expanded ordering rule of persons who may establish an ABLE account exercise signature authority over an individual’s ABLE account if necessary.

A qualified ABLE program may provide a certification process that an individual is eligible for an ABLE account, under penalties of perjury. Certification may be made by verifying that the individual is eligible for benefits under title II or XVI of the Social Security Act and the disability giving rise to those benefits occurred before the date on which he or she attained age 26. The other method of satisfying the definition of an eligible individual is by obtaining a disability certification and filing it with the Secretary.

A designated beneficiary is generally limited to only one ABLE account at a time. Once an ABLE account is established, generally no account that is subsequently established for that beneficiary can be treated as an ABLE account except for rollover and transfer purposes, as well as the return of excess contributions. Under the final regulation, an eligible individual is not prohibited from establishing an ABLE account merely because he or she previously closed another ABLE account.

Distributions and Transfers
Distributions from an ABLE account are excluded from the designated beneficiary’s gross income to the extent of his or her qualified disability expenses for the tax year. The final regulations maintain the expansive definition of qualified disability expenses, but the regulations do not provide either a comprehensive list of qualified disability expenses or a short list of expenses that would not satisfy that standard.

A qualified ABLE program may permit a successor designated beneficiary to be named during the lifetime of the designated beneficiary. If no successor designated beneficiary is named, the assets in the ABLE account are payable to the beneficiary’s estate and subject to the Federal estate tax. Moreover, the final regulations permit a qualified ABLE program to limit successor designated beneficiaries to a sibling who is an eligible individual. If a successor designated beneficiary is not a sibling, the former designated beneficiary receives a deemed distribution of the amount transferred to the successor.

The final regulations continue to permit rollovers from ABLE account but do not require the use of a program-to-program transfer. A rollover may occur from a qualified tuition account under Code Sec. 529 to an ABLE account for the same designated beneficiary. However, upon a rollover or program-to-program transfer, all the attributes of the former ABLE account are applicable to the recipient account.

Federal Gift and GST Taxes
The final regulations provide that contributions to an ABLE account by a person other than the designated beneficiary are treated as completed gifts. Thus, no distribution from an ABLE account to the designated beneficiary is treated as a taxable gift. Also, neither gift nor GST taxes apply to the change of designated beneficiary of an ABLE account if the new designated beneficiary is an eligible individual who is a sibling of the former designated beneficiary.

The IRS has released final regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions.

The IRS has released final regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:

• costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust;
• the personal exemption of an estate or non-grantor trust;
• the distribution deduction for trusts distributing current income; and
• the distribution deduction for estates and trusts accumulating income.

These deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. The final regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. The regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries.

Clarifications of Proposed Regs
A notice of proposed rulemaking ( NPRM REG-113295-18) containing proposed regulations under Code Secs. 67 and 642(h) was published on May 11, 2020. The final regulations summarize the provisions of Code Secs. 67 and 642(h) and of the proposed regulations.

In response to comments, Reg. §1.642(h)-2 was clarified so that a beneficiary may claim all or part of the excess deductions before, after, or together with the same character of deductions separately allowable to that beneficiary. Reg. §1.642(h)-5(b), Example 2 was clarified to (1) offset the real estate expenses on rental property with the rental income to avoid any unintended issues with Code Sec. 469; (2) include personal property tax paid by the trust rather than taxes attributable to rental real estate; and (3) illustrate the application of trustee discretion as found in Reg. §1.652(b)-3(b) and (d).

The IRS has issued final regulations that address the gain or loss of certain foreign persons on the sale or exchange of an interest in a partnership that is engaged in a trade or business in the United States. The regulations provide guidance on determining the amount of gain or loss treated as effectively connected income under Code Sec. 864(c)(8), as well coordination rules. The final regulations retain the basic approach and structure of the proposed regulations ( REG-113604-18) with certain revisions. Proposed regulations ( REG-105476-18) on information reporting and withholding on dispositions of these interests will be finalized at a later date.

The IRS has issued final regulations that address the gain or loss of certain foreign persons on the sale or exchange of an interest in a partnership that is engaged in a trade or business in the United States. The regulations provide guidance on determining the amount of gain or loss treated as effectively connected income under Code Sec. 864(c)(8), as well coordination rules. The final regulations retain the basic approach and structure of the proposed regulations ( REG-113604-18) with certain revisions. Proposed regulations ( REG-105476-18) on information reporting and withholding on dispositions of these interests will be finalized at a later date.

Deemed Sale Gain or Loss
If a nonresident alien or foreign corporation disposes of an interest in a partnership that is engaged in any trade or business in the United States, the gain or loss is treated as effectively connected gain or loss under Code Sec. 864(c)(8). The amount of gain or loss is limited to the portion of the foreign transferor's distributive share of gain or loss that would have been effectively connected had the partnership sold all of its assets at fair market value (the deemed sale limitation).

The foreign transferor must first determine its gain or loss on the transfer of the partnership interest (outside gain or outside loss). Once the outside gain or loss is determined, the following steps are taken to derive the limitation based on the deemed sale, against which the outside gain or loss is compared:

Step 1: Determine the amount of gain or loss from each partnership asset as if the partnership conducted a deemed sale of all of its assets on the date of transfer (these amounts are referred to as deemed sale gain or deemed sale loss);
Step 2: Determine the amount of the deemed sale gain or loss that would be treated as effectively connected gain or loss with respect to each asset (these amounts are referred to as deemed sale EC gain or deemed sale EC loss); and
Step 3: Determine the foreign transferor’s distributive share of deemed sale effectively connected gain or deemed sale effectively connected loss.

Sourcing Rules
The final regulations address the sourcing rules that are often material in determining whether gain or loss is effectively connected with the conduct of a trade or business within the United States (Step 2). Because the sales are deemed sales, the regulations provide simplifying factual assumptions that generally treat deemed gain and loss as U.S. source where there is a partnership office in the United States (U.S. office attribution rule). The final regulations clarify that the general rules apply to personal property held by the partnership on the date of the deemed sale. The regulations also clarify that the U.S. office attribution rule does not apply unless the partnership maintains an office or other U.S. fixed place of business in the United States.

The final regulations provide additional sourcing rules for determining the foreign source portion of deemed sale gain and loss attributable to inventory, intangibles, and depreciable personal property specifically included in the deemed sale. The sourcing rules are needed because gain or loss from actual sales of each of these assets would be subject to specific sourcing rules under the Code, but sourcing deemed sale gain or loss under those rules would generally require facts that are not determinable in a deemed sale.

Under a 10-year rule, assets that have no nexus to the United States are removed from the deemed effectively connected gain or loss determination. The 10-year period is adjusted for partnerships not in existence for the period. The testing period is also adjusted to include periods during which the asset was held.

Treaties and Coordination Rules
The final regulations also address treaty coordination rules and provide that (1) treaty provisions are taken into account in computing the Step 3 amount, above; and (2) treaty benefits are available only if the transferor meets limitation of benefits (LOB) requirements. The final regulation also provide additional rules to coordinate the regulations with treaty provisions governing the disposition of U.S. real property interests.

The Step 3 amount does not include amounts that are excluded from the foreign transferor’s gross income or otherwise exempt from U.S. federal income tax by reason of an applicable provision of the Code, or amounts excepted under Code Sec. 897.

The final regulations clarify the interaction between the Code Sec. 897 coordination rule (i.e., application of Code Sec. 864(c)(8) over Code Sec. 897(g)) and the nonrecognition rules. Any transfer of an interest in a partnership as part of a nonrecognition transaction will not be subject to Code Sec. 864(c)(8) to the extent that the gain or loss on the transfer is not recognized. Rather, if the partnership owns one or more U.S. real property interests, Code Sec. 897(g) and its regulations will apply with respect to the unrecognized gain or loss.

Applicability Dates
The regulations generally apply to transfers occurring on or after December 26, 2018, which is the date on which the proposed regulations were filed with the Federal Register. Additionally, the final regulations apply to amounts taken into account on or after December 26, 2018, pursuant to an installment sale (as defined in Code Sec. 453(b)) occurring on or after November 27, 2017, and before December 26, 2018.