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.

The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:

The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:

• the due date for the withholding and payment of the employee’s portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
• the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.

The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security tax, the deposit obligation is delayed by operation of the tax regulations.

7508A Relief
In light of the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security tax, and the employee’s portion of the RRTA equivalent tax, on wages and compensation paid from September 1, 2020, through December 31, 2020. The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.

The Treasury Secretary has determined that employers required to withhold and pay the employee share of the Social Security tax under Code Sec. 3102(a) or the RRTA tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.

Applicable Wages
The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020 (collectively "applicable wages"), but only if the amount of wages or compensation paid for a biweekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.

Applicable wages are determined on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period. In that case, the relief provided in the guidance applies to the wages or compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.

Paying Deferred Taxes
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid deferred taxes.

If necessary, the employer can make arrangements to otherwise collect the total deferred taxes from the employee.

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020. For computing the amount allowable as a deduction for travel away from home, the guidance is effective for M&IEs or for incidental expenses only paid or incurred on or after October 1, 2020.

Transportation Industry Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $66 for any locality of travel in the continental United States (CONUS), and
• $71 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2019-55 (the per diem substantiation method) are:

• $292 for travel to any high-cost locality, and
• $198 for travel to any other locality within CONUS.

The amount of these rates that is treated as paid for meals, and the per diem rates in lieu of the rates described in Notice 2019-55 (the M&IE only substantiation method), are:

• $71 for travel to any high-cost locality, and
• $60 for travel to any other locality within CONUS

The guidance provides a list of localities that have a federal per diem rate of $245 or more, and are high-cost localities for a specified portion of the calendar year. The list differs from the high-cost locality list in Notice 2019-55:

• Added to the list: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; Virginia Beach, Virginia.
• Localities that have changed the portion of the year in which they are high-cost localities: Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina.
• Removed from the list: Midland/Odessa, Texas; Pecos, Texas.

The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.

The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.

TCJA Provisions
The TCJA transitioned the United States from a primarily deferral-based international system of taxation (i.e., current taxation of subpart F income) to a participation exemption system with immediate taxation of certain offshore earnings. The TCJA introduced:

• the Code Sec. 245A dividends received deduction;
• the Code Sec. 965 transition tax; and
• the global intangible low-taxed income (GILTI) regime under Code Sec. 951A.

The Code Sec. 245A deduction provides a 100-percent deduction to domestic corporations for certain dividends received from a specified foreign corporations (SFC) after December 31, 2017. Earnings and profits generated before the deduction became available are subject to the Code Sec. 965 transition tax on post-1986 earnings and profits.

The GILTI regime subjects certain intangible income of a controlled foreign corporation (CFC) to current taxation, for tax years starting in 2018.

The subpart F regime was retained for tax years starting in 2018. The regime subjects certain earnings of a CFC to current taxation. The regime also provides that dividends received by a CFC, from a related CFC, are not included in the recipient CFC’s income and subject to current tax under subpart F, if certain requirements are met under the Code Sec. 954(c) exception.

Earnings and profits that are previously taxed under the transition tax, or subpart F or GILTI regimes, are treated as being distributed before non-previously taxed earnings and profits, and a distribution of previously taxed earnings and profits (PTEP) is not treated as a distribution of a dividend eligible for the Code Sec. 245A deduction.

Limits on Deduction
The final regulation limit the Code Sec. 245A deduction with respect to a dividend received by a U.S. corporation from certain SFCs so that the deduction is not available for the earnings and profits attributable to base erosion-type income. The final regulations limit the deduction to the portion of the dividend that exceeds the ineligible amount of the dividend. The ineligible amount is the sum of (1) 50 percent of the extraordinary disposition amount, and (2) the extraordinary reduction amount.

An extraordinary disposition is a disposition of an asset by a SFC that:

is outside of the ordinary course of activities to a related party during the disqualified period (between January 1, 2018, and the end of the foreign corporation's last taxable year beginning before January 1, 2018), and
exceeds the lesser of $50 million or 5 percent of the gross value of the SFC’s assets.
The Code Sec. 245A deduction is limited with respect to extraordinary dispositions, because earnings and profits generated in those transactions are not subject to tax under the transition tax, or the GILTI and subpart F regimes and, as a result, are not of the residual type for which the Code Sec. 245A deduction is intended to potentially be available.

Extraordinary reductions result from transfers of CFC stock where:

a controlling Code Sec. 245A shareholder transfers more than 10 percent of its stock of the CFC, or
there is a greater than 10 percent change in the controlling Code Sec. 245A shareholder’s overall ownership of the CFC.
The Code Sec. 245A deduction is limited in connection with extraordinary reductions because the deduction can result in complete avoidance of U.S. tax with respect to subpart F income or tested income that, absent the extraordinary reduction, would have been included in income by the selling U.S. shareholder under the subpart F or GILTI regimes, respectively

The final regulations require taxpayers to compute, track, and report information relevant for determination of extraordinary dispositions and extraordinary reductions. If an SFC is sold and there is no Code Sec. 245A shareholder of the target SFC after the transaction, the extraordinary disposition account of the target SFC is generally eliminated.

A taxpayer may elect to close the tax year of the CFC for all purposes of the Code on the date of an extraordinary reduction. This prevents disallowance of the Code Sec. 245A deduction. Under the election, the CFC’s earnings and profits for the tax year up to the date of the extraordinary reduction are subject to taxation under the subpart F or GILTI regimes in the seller’s hands, while the remaining earnings and profits of the CFC for the year would be subject to taxation under the subpart F or GILTI regimes in the buyer’s hands. The final regulations clarify that there must be agreement between the buyer and seller of the CFC that was subject to the extraordinary reduction for the election to be made.

Limits on Exception
Application of the Code Sec. 954(c)(6) is also limited when portion of a dividend is paid out of an extraordinary disposition account, or when an extraordinary reduction occurs.

The Code Sec. 954(c)(6) exception is limited where its application would otherwise allow earnings and profits that had accrued after December 31, 2017 (the last measurement date for determining the amount of earnings and profits subject to the transition tax), and that was generated by income that had never been tested under the subpart F and GILTI regimes, to inappropriately qualify for an exception to the subpart F regime.

Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.

Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.

Generally, the regulations are applicable as of the date they are published in the Federal Register.

Eligible Terminated S Corporation (ETSC) Under Section 481
In the case of an S election revocation with a retroactive effective date, the revocation may be treated as occurring on the retroactive effective date for ETSC qualification as well.

The treasury department amended Reg. §§1.481-5(b)(2) and (3) so that a corporation may test compliance with the revocation requirement and the shareholder identity requirement on either:

• the date the revocation was made; or
• in the case of a revocation with a retroactive effective date, the date the revocation was effective.

To qualify as an ETSC under Code Sec. 481, a corporation must satisfy the revocation requirement by making a revocation of its S election during the two-year period beginning on December 22. It also must satisfy the shareholder identify requirement that the owners of the stock of the corporation on the date the S election was revoked are the same owners as on December 22, 2017.

The two year period during which an S corporation can revoke its S election ends on December 23. Reg. §1.1362-2(a)(2) provides that Code Sec. 7503 applies where the last day for making a revocation occurs on a Saturday, Sunday, or legal holiday.

No Newcomer Rule
Reg. §1.1377-2(b) applies to a corporation’s taxable years beginning after the date of the publication of final regulations. It eliminates the no-newcomer rule for special treatment under Code Sec. 1371(e)(1) of distributions of money by a corporation with respect to its stock during the PTTP.

In the case of a corporation using the calendar year as its annual accounting period, newcomers are not entitled to receive distributions of the accumulated adjustments account (AAA) before January 1, 2021, unless the corporation chooses to apply Reg. §1.1377-2(b) before January 1, 2021.

The final regulations allow but do not require corporations to apply the final regulations addressing distributions made during the ETSC period to tax years beginning on or before the date that the final regulations are published.

Distributions of Money by ETSC
Reg. §1.1371-1 addresses distributions of money by an ETSC. It provides rules for qualified distributions and distributions where Code Sec. 301 applies during the tax years of the ETSC period, including the tax year in which the ETSC period ends.

Under Reg. §1.1371-2, if an intervening audit PTTP arises, the ETSC period immediately stops. Then, the ETSC period resumes provided that the ETSC’s AAA balance is greater than zero. Otherwise, later distributions by the ETSC are treated in the manner provided in Code Sec. 301(c).

Applicability Dates of the Regulations
A corporation may choose to apply the rules set forth in Reg. §§1.481-5, 1.1371-1, and 1.1371-2 to tax years beginning on or before the date the regulations are published in the Federal Register. In addition, a corporation generally may choose to not apply the no-newcomer rule in Reg. §1.1377-2(b) to tax years beginning on or before publication as long as the three year period described in Code Sec. 6501(a) has not expired.

Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).

Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).

TCJA Changes to Rehabilitation Credit
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended the rehabilitation credit for amounts paid or incurred after 2017. The credit is now claimed ratably over a five-year period that begins in the year the QRB is placed in service. The ratable share for each year is 20 percent of the qualified rehabilitation expenditures (QREs) for the building. However, a transition rule allows certain taxpayers to claim the credit all in one year under pre-TCJA rules if the 24- or 60-month period selected for the substantial rehabilitation test began by June 20, 2018.

Final Rehabilitation Credit Regs Include Coordination Rules and Examples
The amended version of the rehabilitation credit is still determined in the year the QRB is placed in service. This single credit is then claimed ratably over five years. This single-credit approach also applies to the recapture, basis adjustment, and leased property rules. These results are consistent with pre-TCJA law.

To reflect these changes, the final regs provide:

• a general rule for calculating the rehabilitation credit;
• definitions of "ratable share" and "rehabilitation credit determined;"
• a rule coordinating the amended credit with the Code Sec. 50 rules for the investment credit; and
• examples illustrating the interaction of the credit with Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property); and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).

Effective Date for Rehab Credit Regs
The final regulations apply to tax years beginning on or after the date they are published in the Federal Register. However, taxpayers may apply them to QREs paid or incurred after December 31, 2017, as long as they apply them in their entirety and in a consistent manner.

The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.

The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.

Effective Date
These regulations are effective on the date of publication in the Federal Register.

Exemption Amount
On June 9, 2020, the Treasury and the IRS published a notice of proposed rulemaking REG-118997-19. Consistent with Notice 2018-70, the proposed regulations provide that, in determining whether an individual is a qualifying relative for purposes of various provisions that refer to Code Sec. 152 in tax years in which the exemption amount is zero, the Code Sec. 151(d) exemption amount will be the inflation-adjusted Code Sec. 152(d)(1)(B) exemption amount in the annual revenue procedure setting forth inflation-adjusted items that is published in the Internal Revenue Bulletin. Thus, the exemption amount to be used for this purpose is $4,150 for tax year 2018 (section 3.24 of Rev. Proc. 2017-58, 2017- 45 I.R.B. 489, modified and superseded by Rev. Proc. 2018-18, 2018-10 I.R.B. 392); $4,200 for tax year 2019 (section 3.25 of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for tax year 2020 (section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).

The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.

The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.

Under the Affordable Care Act (ACA), certain taxpayers who obtain their coverage through an Exchange may claim a premium tax credit under Code Sec. 36B. However, taxpayers are only allowed the credit for months they are not otherwise eligible for minimum essential coverage.

Minimum essential coverage includes coverage under government-sponsored programs, including Medicaid, but certain health care coverage providing limited benefits is exempted.

The Treasury Department and the IRS have determined that Medicaid coverage limited to COVID-19 testing and diagnostic services is not minimum essential coverage under a government-sponsored program. Thus, an individual’s eligibility for this coverage for one or more months does not prevent the individual from claiming the premium tax credit under Code Sec. 36B.

The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).

The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).

Business Credit
The SECURE ACT added a new Code Sec 45T, which provides a business credit to an eligible employer that establishes an eligible automatic contribution arrangement under a qualified employer plan. The credit is equal to $500 per year and applies to tax years beginning after December 31, 2019.

The notice clarifies than an eligible employer can only receive a credit during a single three year credit period. For example, if Employer X includes an automatic contribution arrangement for Plan A during 2021, 2022, and 2023 and then includes an automatic contribution arrangement for Plan B during 2022, 2023, and 2024, they can receive no more than $500 as a credit for 2021, 2022, and 2023, and are not permitted to receive a credit for 2024. The employer must include the same arrangement in the same plan for years two and three.

The credit applies separately to each eligible employer that participates in a multiple employer plan.

IRA Contribution Age Limit
Prior to the SECURE Act, an individual was not permitted to make contributions to their IRA if they were age 70 and 1/2 or older by the last day of the year. The SECURE Act eliminated that age limit for contributions after 2019.

The notice clarifies that a financial institution is not required to accept contributions after age 70 and 1/2, but if it does choose to accept them, it must amend its IRA contract and distribute a copy of the amendment and disclosure statement to each individual.

Individuals are not permitted to offset the amount of their required minimum distribution by the amount of their post-age 70 and 1/2 contributions for the same year.

Individuals are able to take their required minimum distributions as qualified charitable distributions. The example below illustrates how this would interact with the new lack of age limit on contributions.

Imagine Bob is over 70 and a 1/2 before 2020. He deducts $5,000 for contributions for 2020 and 2021, but makes no contribution for 2022. He makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022. Bob’s excludable amount of qualified charitable distributions for 2021 is the $6,000 of qualified charitable distributions reduced by the $10,000 aggregate amount of post-age 70 1/2 contributions for 2021 and earlier taxable years. For this individual, these amounts are $5,000 for each of 2020 and 2021, resulting in no excludable amount of qualified charitable distributions for 2021 (that is, $6,000 - $10,000 = ($4,000)). The excludable amount of the qualified charitable distributions for 2022 is $2,500 ($6,500 - $4,000 = $2,500). Because the $4,000 amount reduced the excludable amount of qualified charitable distributions for 2022, that $4,000 amount does not apply again in later years, and no amount of post-age 70 1/2 contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent taxable years.

Qualified Birth or Adoption Distributions
Code Sec. 72(t)(1) generally imposes a 10 percent additional tax on an early distribution from a qualified retirement plan (including an IRA or Roth IRA), unless the distribution qualifies for an exception. The SECURE Act provides a new exception to the 10 percent penalty for any qualified birth or adoption distribution up to $5,000 from an applicable retirement plan if made during the 1-year period beginning on the date on which the child is born or the adoption is finalized. The parent must include the name, age and the Taxpayer Identification Number of the child on their tax return the year the distribution is made.

The distribution can be made from any eligible retirement plan described in Code Sec. 402(c)(8)(B), other than a defined benefit plan. Therefore, a Code Sec. 401(a) qualified defined contribution plan, a Code Sec. 403(a) annuity plan, a Code Sec. 403(b) annuity contract, a governmental Code Sec. 457(b) plan, or an IRA is eligible to permit a qualified birth or adoption distribution. Eligible adoptees include any individual who has not attained age 18 or is physically or mentally incapable of self support as defined in Code Sec. 72(m)(7), but does not include an individual who is a child of the taxpayer’s spouse. Each parent can receive a qualified distribution up to $5,000 with respect to the same adoptee, and can receive multiple distributions if they have multiple births (ex. Twins or triplets).

Eligible retirement plans are not required to permit distributions for qualified birth or adoption distributions, but if they do not, individuals can still take the distribution and treat it as a qualified birth or adoption distribution on their federal tax return. Plans must accept recontribution of the distribution, if the following apply:

(a) the plan permits qualified birth or adoption distributions;

(b) the individual received a qualified birth or adoption distribution from that plan; and

(c) the individual is eligible to make a rollover contribution to that plan at the time the individual wishes to recontribute the qualified birth or adoption distribution to the plan.

Qualified birth or adoption distributions are not treated as eligible rollover distributions for purposes of the direct rollover rules, Code Sec. 402(f) notice requirements, and the mandatory withholding rules.

Difficulty of Care Payments
Code Sec. 408(o) provides that designated nondeductible contributions may be made on behalf of an individual to an IRA. A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income.

The notice clarifies that difficulty of care payments received by an employee from a person other than his or her employer are not included as compensation. If an employer does not make difficulty of care payments, then the plan does not need to amend the plan to include the payments in the plan’s definition of compensation. However, if the employer begins to make difficulty of care payments, the plan must be amended.

Participation Rights Expanded for Part-Time Employees
Prior to the SECURE Act, employers that maintained a 401(k) plan were not required to offer it to part-time employees who work less than 1,000 hours per year. The rules require only that employers offer the plan to any employee who has both attained age 21 and has completed at least one year of service. A "year of service" is defined as a 12-month period during which the employee has worked at least 1,000 hours. Someone who works a bare 1,000 hours would be averaging 19.2 hours per week.

Under the SECURE Act, employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional track to 401(k) participation. Employees must be able to satisfy participation requirements by completing either:

• the existing one year of service requirement, working at least 1,000-hours, or
• the new three consecutive 12-month periods of service requirement working at least 500 hours in each period.

The three-consecutive-years-of-service track is not available for an employee unless the employee reaches age 21 by the close of the last of the 12-month periods.

For purposes of determining vesting rights to employer contributions for 500-hour track employees, each 12-month period for which the employee has at least 500 hours of service is treated as a year of service. For purposes of the break-in-service rules, a 1-year break in service includes a year in which the employee has not completed at least 500 hours of service.

These amendments apply to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021, are not taken into account. The IRS guidance clarifies that this exception does not extend to the special vesting rules.

Plan Amendments
The deadlines to amend a retirement plan for provisions of the SECURE Act, the regulations thereunder, or Act Sec. 104 of the Miners Act are as follows. Note these amendment deadlines apply to both required and discretionary plan amendments.

• Qualified plans. For a qualified plan that is not a governmental plan or an applicable collectively bargained plan, the deadline is the last day of the first plan year beginning on or after January 1, 2022. The plan amendment deadline for a qualified governmental plan or for an applicable collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
  
• Section 403(b) plans. The deadline for a Code Sec. 403(b) plan that is not maintained by a public school is the last day of the first plan year beginning on or after January 1, 2022. The deadline is for a plan maintained by a public school is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
  
• Code Sec. 457(b) governmental plans. The deadline is the later of (i) the last day of the first plan year beginning on or after January 1, 2024, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
  
• IRAs. The deadline to amend the trust governing an IRA is December 31, 2022, or such later date as the Secretary prescribes in guidance. In the case of a deemed IRA, the deadline is the deadline applicable to the plan under which the deemed IRA is established.

Reduction in Minimum Age for In-Service Distributions
A qualified pension plan cannot make distributions to an employee who is still in-service (that is, working for the employer) prior to a certain age. The Miners Act lowered the minimum age from age 62 to age 59 1/2. Similarly, the Miners Act changed the rule for an eligible government deferred compensation plans under Code Sec. 457(b), reducing the minimum age to the calendar year the participant turns age 70 1/2 to age 59 1/2. These amendments apply to plan years beginning after December 31, 2019.

IRS guidance clarifies that neither a qualified plan nor a Code Sec. 457(b) governmental plan is required to provide for in-service distributions due to changes in the Miners Act. For example, a qualified plan that provides for in-service distributions commencing at age 62 is not required to be amended to provide for in-service distributions commencing at age 59 1/2. Also, the guidance clarifies that a change in the in-service distribution minimum age does not necessarily affect the plan’s existing normal retirement age.

Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.

Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.

The final regulations retain the basic approach and structure of the 2018 proposed regulations ( NPRM REG-112607-19), with certain revisions. The final regulations generally provide rules addressing the following:

• the determination of a taxpayer’s aggregate group for purposes of determining gross receipts and the base erosion percentage;
• an election to waive deductions for purposes of the BEAT;
• the application of the BEAT to partnerships; and
• the anti-abuse rule provided in Reg. §1.59A-9(b)(4) with respect to certain basis step-up transactions.

Determination of Taxpayer’s Aggregate Group
The final regulations provide guidance regarding how a taxpayer determines its aggregate group. Specifically, rules are provided for the calculation of gross receipts and the base erosion percentage when either the taxpayer or a member of the taxpayer’s aggregate group has a short tax year. The final regulations generally retain the rule in the 2018 proposed regulations that permits the use of a reasonable approach to determine whether a taxpayer’s aggregate group meets the gross receipts test and base erosion percentage test with respect to a short tax year of the taxpayer. The final rules provide examples of methods that may or may not constitute a reasonable approach.

In addition, the final regulations provide guidance on how the gross receipts and the base erosion percentage of an aggregate group are determined when members join or leave a taxpayer’s aggregate group, such as through a sale of the stock of a member to a third party. Clarification is provided regarding the close of the tax year rule for determining gross receipts and base erosion percentage. The final rules also address concerns regarding over-and under-counting of gross receipts of aggregate group members with different tax years.

Finally, guidance is provided on the application of the aggregate group rules to predecessors and successors.

Election to Waive Allowable Deductions
The final regulations address the election to waive allowable deduction and more specifically:

• when a taxpayer is eligible to make the BEAT waiver election;
• the effect of the BEAT waiver election on the base erosion percentage (whether deductions
• waived pursuant to the BEAT waiver election should be included in the denominator of the base erosion percentage);
• a reduction of waived deductions during audit or on an amended return;
• a waiver of life and non-life reinsurance premiums;
• procedures for making the BEAT waiver election;
• the application of the BEAT waiver election to partnerships;
• the application of the BEAT waiver election to consolidated groups; and
• the interaction of the BEAT waiver election with other regulations.

Application of the BEAT to Partnerships
The final regulations expand the ECI exception to apply to certain partnership transactions. The regulations also clarify the treatment of curative allocations and the partnership anti-abuse rule for derivatives.

Anti-abuse Rules of Reg. §1.59A-9 for Basis Step-up Transactions
The anti-abuse rule of Reg. §1.59A-9 is revised to address concerns about the breadth of this rule and its potential to create a "cliff effect," whereby a minimal amount of pre-transaction basis step-up could disqualify an entire transaction that would have otherwise qualified for the specified nonrecognition transaction exception.

Possible Future Guidance Concerning the QDP Reporting Requirements
The IRS is currently studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(iv), and the QDP reporting requirements in Reg. §1.59A-6 and Reg. §1.6038A-2(b)(7)(ix) and considering whether future guidance may be appropriate.

Applicability Date
The final regulations generally apply to tax years beginning on or after the date they are published in Federal Register. Certain rules apply to tax years ending on or after December 2, 2019. However, taxpayers may apply these final regulations in their entirety for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply these regulations in their entirety for all subsequent tax years. Alternatively, taxpayers may apply only Reg. §§1.59A-3(c)(5) and (6) for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply them in their entirety for all subsequent tax years. Taxpayers may also rely on Proposed Reg. §§1.59A-2(c)(2)(ii) and (c)(4) through (c)(6), and 1.59A-3(c)(5) and (c)(6) in their entirety for tax years beginning after December 31, 2017, and before the date of publication of these final regulations in the Federal Register.