Skip to main content

Category: Taxes

Inflation Reduction Act: What You Should Know

The Inflation Reduction Act, signed into law on August 16, 2022, includes health-care and energy-related provisions, a new corporate alternative minimum tax, and an excise tax on certain corporate stock buybacks. Additional funding is also provided to the IRS. Some significant provisions in the Act are discussed below.

Medicare

The legislation authorizes the Department of Health and Human Services to negotiate Medicare prices for certain high-priced, single-source drugs. However, only 10 of the most expensive drugs will be chosen initially, and the negotiated prices will not take effect until 2026. For each of the following years, more negotiated drugs will be added.

Starting in 2025, a $2,000 annual cap (adjusted for inflation) will apply to out-of-pocket costs for Medicare Part D prescription drugs.

Starting in 2023, deductibles will not apply to covered insulin products under Medicare Part D or under Part B for insulin furnished through durable medical equipment. Also, the applicable copayment amount for covered insulin products will be capped at $35 for a one-month supply.

Health Insurance

Starting in 2023, a high-deductible health plan can provide that the deductible does not apply to selected insulin products.

Affordable Care Act subsidies (scheduled to expire at the end of 2022) that improved affordability and reduced health insurance premiums have been extended through 2025. Indexing of percentage contribution rates used in determining a taxpayer’s required share of premiums is delayed until after 2025, preventing more significant premium increases. Additionally, those with household incomes higher than 400% of the federal poverty line remain eligible for the premium tax credit through 2025.

Energy-Related Tax Credits

Many current energy-related tax credits have been modified and extended, and a few new credits have been added. Many of the credits are available to businesses, and others are available to individuals. The following two credits are substantial revisions and extensions of an existing tax credit for electric vehicles.

Starting in 2023, a tax credit of up to $7,500 is available for the purchase of new clean electric vehicles meeting certain requirements. The credit is not available for vehicles with a manufacturer’s suggested retail price higher than $80,000 for sports utility vehicles and pickups, $55,000 for other vehicles. The credit is not available if the modified adjusted gross income (MAGI) of the purchaser exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). Starting in 2024, an individual can elect to transfer the credit to the dealer as payment for the vehicle.

Similarly, a tax credit of up to $4,000 is available for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000. The credit is not available if the purchaser’s MAGI exceeds $75,000 ($150,000 for joint filers and surviving spouses, $75,000 for heads of household). An individual can elect to transfer the credit to the dealer as payment for the vehicle.

Corporate Alternative Minimum Tax

For taxable years beginning after December 31, 2022, a new 15% alternative minimum tax (AMT) will apply to corporations (other than an S corporation, regulated investment company, or a real estate investment trust) with an average annual adjusted financial statement income in excess of $1 billion.

Adjusted financial statement income means the net income or loss of the taxpayer set forth in the corporation’s financial statement (often referred to as book income), with certain adjustments. If regular tax exceeds the tentative AMT, the excess amount can be carried forward as a credit against the AMT in future years.

Excise Tax on Repurchase of Stock

For corporate stock repurchases after December 31, 2022, a new 1% excise tax will be imposed on the value of a covered corporation’s stock repurchases during the taxable year.

A covered corporation means any domestic corporation whose stock is traded on an established securities market. However, the excise tax does not apply: (1) to a repurchase that is part of a nontaxable reorganization, (2) with respect to certain contributions of stock to an employer-sponsored retirement plan or employee stock ownership plan, (3) if the total value of stock repurchased during the year does not exceed $1 million, (4) to a repurchase by a securities dealer in the ordinary course of business, (5) to repurchases by a regulated investment company or a real estate investment trust, or (6) to the extent the repurchase is treated as a dividend for income tax purposes.

Increased Funding for the IRS

Substantial additional funds are provided to the IRS to help fund operations and business systems modernization and to improve enforcement of tax laws.

If you like to further discuss the provisions of the Inflation Reduction Act, contact an advisor at CapSouth Wealth Management.

To learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com or https://capsouthwm.com/what-we-do/ or call 800.929.1001. Click to Schedule a Discovery Call.

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. This material is from an unaffiliated, third-party and is used by permission. Any opinions expressed in the material are those of the author and/or contributors to the material; they are not necessarily the opinions of CapSouth. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results.

Tax News and Updates

By: P. Lewis Robinson, CPA

1. Due Date of 2020 Federal Income Tax Returns:

  • The Treasury Department and Internal Revenue Service announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021 to May 17, 2021. The IRS will be providing formal guidance in the coming days.
  • Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021 to May 17, 2021 without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest, and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17, 2021.
  • Individual taxpayers do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15, 2021 by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Filing Form 4868 gives taxpayers until October 15, 2021 to file their 2020 tax return but does not grant an extension of time to pay taxes due. Taxpayers should pay their federal income tax due by May 17, 2021 to avoid interest and penalties.
  • This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS by individuals whose income is not subject to income tax withholding, including self-employment income, interest, dividends, alimony or rental income. Most taxpayers automatically have taxes withheld from their paychecks and submitted to the IRS by their employer.

2. State tax returns:

  • The federal tax filing deadline postponement to May 17, 2021 only applies to individual federal income returns and tax payments (including tax on self-employment income); it does not apply to state tax payments or deposits or payments of any other type of federal tax. State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agencies for those details.

3. Up to $10,200 of 2020 unemployment compensation per worker may be tax-free:

  • Section 9042 of the American Rescue Plan includes another potential benefit for individuals who received unemployment compensation for all or part of 2020. More specifically, if a taxpayer’s AGI is less than $150,000, then up to $10,200 of unemployment compensation received in 2020 may be tax free.
  • There are, however, a number of important nuances to consider with respect to this provision, including the following:
  • It appears that the $150,000 AGI limit applies uniformly to all filing statuses.
  • It appears that the $150,000 AGI limit is a true cliff threshold: the American Rescue Plan appears to indicate that a taxpayer with $149,999 of AGI can exclude up to $10,200 of unemployment compensation from their gross income; however, if that taxpayer earns just a single dollar more and has $150,000 of AGI, the full amount of the unemployment compensation received in 2020 will be taxable.
  • It appears that, in the case of joint filers, each spouse can receive up to $10,200 of unemployment compensation tax-free, permitting up to $20,400 for the household (as long as the household remains below the $150,000 AGI limit).
  • The $150,000 AGI limit includes all unemployment compensation. Under this provision, determining a taxpayer’s actual AGI involves a bit of a circular calculation. That’s because, in order to determine whether the taxpayer is eligible to exclude up to $10,200 of 2020 unemployment compensation, that compensation must first be included in an initial AGI calculation!

4. Extension and expansion of the above-the-line charitable deduction 2021:

  • For 2021, there is a $300 above-the-line charitable deduction for single filers who do not itemize deductions.
  • For 2021, this above-the-line deduction increased to $600 for married couples filing jointly who do not itemize tax deductions.
  • As in 2020, this deduction applies only to qualified cash contributions and does not apply to cash contributions made to private foundations, donor advised funds or supporting organizations, or to split interest trusts like charitable remainder and lead trusts. It also does not apply to carry-over contributions.

5. Extension of the charitable contribution limitation:

  • The temporary suspension of the 60 percent charitable contribution deduction limitation has been extended into 2021 for qualified cash contributions.
  • In 2021, individual taxpayers who itemize tax deductions and who contribute cash to a public charity, or to a limited number of private foundations, may deduct up to 100 percent of their adjusted gross income after taking into account other contributions subject to charitable contribution limitations.
  • Individual taxpayers can continue to carry forward any excess charitable contributions for five years, but the enhanced 100 percent deduction limitation expires after 2021.

To learn more about CapSouth, visit our website at www.capsouthwm.com

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

RMD

RMDs are Back on Track for 2021

The year 2020 was one of the most eventful in recent times, and the changes to the rules that govern retirement accounts were no exception. One of those changes was the waiver of required minimum distributions (RMDs) for 2020. As a result of the waiver, you were not required to take RMDs from your IRA for 2020. But if you are of RMD age in 2021, you must resume RMDs for 2021 and continue for every year after. RMDs were waived for beneficiary IRAs as well and will need to resume in 2021 for certain beneficiaries. 

Reminder: RMDs do not apply to Roth IRA owners.  

RMDs- A Mild Refresher An RMD is a minimum amount that you must distribute (or withdraw) from your retirement account for any RMD year. You can always distribute more if you want to; however, a distribution of less than your RMD amount will result in you owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. For example, if your RMD for 2021 is $20,000 and your 2021 IRA distributions total only $12,000, you will owe the IRS an excess accumulation penalty of $4,000 [($20,000 – $12,000) x 50%]. If you are required to take an RMD for 2021, your IRA custodian will send you an RMD notice by January 31, 2021. This will include your calculated RMD amount or an offer to calculate the amount upon request. This requirement does not apply to Beneficiary IRAs. 

New RMD Age- A Reminder:  The Setting Every Community Up for Retirement Enhancement (SECURE) Act, a new law passed in 2019, increased the RMD beginning age for IRA owners from age 70 ½ to age 72. As a result of this change, any IRA owner who reached age 70 ½ by December 31, 2019 – those born June 30, 1949, or earlier – must begin taking RMDs for the year he or she reaches age 70 ½ and continue for every year thereafter (except for 2020- where RMDs are waived). IRA owners who reach age 70 ½ after December 31, 2019, must begin RMDs for the year they reach age 72. 

Who Must Take RMDs for 2021 Whether you must take an RMD from your IRA for 2021 depends on factors that include whether it is your own IRA and your age in 2021, or if it is a beneficiary IRA, and if so, when the IRA was inherited. 

RMDs for Your own IRAs For 2021, For 2021, you must take an RMD from your own (non-beneficiary) IRA if you were 70 ½ or older on December 31, 2019, as you would have already started your RMDs and are required to continue. You would also be required to take an RMD for 2021 if you were born at any time in 1949 or earlier, as this means that you would be at least age 72 on December 31, 2021.  If you were born in 1950 and after, you would not be subject to RMDs for 2021 because you would not have reached age 70 ½ by December 31, 2019 and you would be under age 72 as of December 31, 2021.

RMDs For Your Beneficiary IRAs – Including Beneficiary Roth IRAs 

For beneficiary IRAs, whether you must take an RMD for 2021 depends on several factors, which starts with when you inherited the IRA. 

  1. If you inherited the IRA before 2020: If you inherited the IRA before 2020- including a Roth IRA, you must take an RMD for 2021 if: 
  • Your beneficiary IRA must be distributed within five years (the 5-year rule), and the IRA was inherited in 2015. This is because 2020 was not counted due to the RMD waiver, making 2021 year 5 of the 5-year period. 
  1. 2016 
  1. 2017 
  1. 2018 
  1. 2019 
  1. 2021 

Under the 5-year rule, distributions are optional until the end of the 5th year that follows the year the IRA owner died, at which time the entire account must be distributed.  

  • Your distributions are taken under the life-expectancy rule. Under this option, you must take a beneficiary RMD for every year that follows the year in which the IRA owner died (except for 2020).  

Please note: If you are the surviving spouse of the IRA owner, exceptions could apply. For example, if the IRA owner would have reached age 70 ½ after 2021, you would not need to start RMDs until the year your spouse would have reached age 70 ½. Also, the owner rules above would apply if the spouse beneficiary elects to move the assets to his or her own IRA. 

  1. If you inherited the IRA in 2020: If you inherited the IRA in 2020- including a Roth IRA, you must take an RMD for 2021 if you are an eligible designated beneficiary, and you are taking distributions over your life expectancy. You are an eligible designated beneficiary if:
  1. You are the surviving spouse of the IRA owner. But, the owner rules above apply if you elect to treat the IRA as your own, instead of electing the beneficiary IRA option. 
  1. You are disabled 
  1. You are chronically ill 
  1. You are a minor, as defined under state law 
  1. You are none of the above, but you are not more than 10-years younger than the IRA owner.  

In other cases, distributions for 2021 are optional.  

Spouse beneficiary caveat: If you are the surviving spouse of the IRA owner and you elect to keep the funds in a beneficiary IRA, you would not need to take RMDs for 2021, if your spouse would reach age 72 in a later year. 

Professional Assistance Helps To Avoid Penalties  

The rules explained above are complicated and professional assistance is often needed to ensure that any caveats are properly applied, thus avoiding the risk of IRS penalties. For instance, consider that your IRA custodian is permitted to make assumptions that could cause your RMD calculations to be incorrect. Therefore, even though your IRA custodian will calculate RMDs for your IRAs, it is still practical to have a professional review those calculations. 

Additionally, you might need to take RMDs from accounts under employer plans such as 401(k) and 403(b) plans. If you have assets under an employer plan, contact the plan administrator or your HR department regarding their RMD policies to determine if they will automatically distribute your RMDs or if you are required to submit RMD instructions. If you plan to roll over amounts from these accounts, contact us for help with ensuring that RMD amounts are not included in any rollover.  

Please do not hesitate to contact us with questions about this and any other matters related to your IRAs and employer plan accounts.  To learn more about CapSouth Wealth Management, visit our website at www.capsouthwm.com

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

Help us keep you informed!

Let us do the work and keep you updated! Sign up for the CapSouth financial updates.

You have Successfully Subscribed!