Federal Tax Posts

Divorcing or separating taxpayers need to be aware of how the breakup of a marriage may affect their 2019 tax returns. The tax treatment of alimony and separation payments changed for divorce and separation agreements that occurred (or, in some cases, were modified) after 2018. Prior to the Tax Cuts and Jobs Act, alimony was deductible from the gross income of the payer and had to be included in the gross income of the recipient. This remains true for agreements executed no later than 2018. But for agreements executed after 2018, these payments aren’t deductible from the payer’s gross income, and aren’t includable in the recipient’s gross income. Here’s more: https://bit.ly/30OHHl4 

The IRS has concluded that an S corporation’s employee stock compensation plan didn’t create a second class of stock. In a Private Letter Ruling (PLR), the tax agency determined that, in this case, the transfer and repurchase restrictions on the plan’s shares were disregarded when determining whether the shares awarded under the plan had identical rights to other stock issued by the S corporation. Under the U.S. tax code, a domestic corporation may elect to be taxed as an S corporation. To qualify for this election, the corporation must, among other things, have only one class of stock. (PLR 201918013)

In an Action on Decision (AOD), the IRS has acquiesced in a U.S. Tax Court decision involving deductibility of pregame meals at away city hotels by the Boston Bruins hockey team. This means the IRS will follow the court’s decision in cases when “facts are substantially identical.” In a 2017 case, the court ruled the team owner could deduct 100% of the meal costs as a “de minimis” fringe benefit. But the AOD may not mean much to many businesses. Under the Tax Cuts and Jobs Act, employers can now deduct only 50% of such costs. After 2025, no deduction is allowed.

A taxpayer who tried to challenge the constitutionality of the Tax Cuts and Jobs Act (TCJA) lost in court. He alleged that the TCJA violated the 14th Amendment because it creates “gross inequality” in taxation. A U.S. District Court concluded that the taxpayer didn’t have standing to challenge the unfairness of the TCJA, so the court didn’t have jurisdiction to hear the case. The court rejected the taxpayer’s argument that he had standing as an individual taxpayer and represented the majority of taxpayers injured by the law. (Kerven, DC NY, 2/12/19)

Millions of dollars in retirement savings become unclaimed property each year, according to a new Government Accountability Office (GAO) report (https://bit.ly/2V6uotr). It says that federal action is needed to clarify the tax treatment of unclaimed 401(k) plans and individual retirement accounts transferred to states. According to the GAO, the IRS and Labor Dept. have issued guidance on making such transfers to states. But the IRS hasn’t “ensured” that the retirement savings owners claim from states can be rolled over into other tax-deferred retirement accounts.

If you call the IRS, be prepared to identify yourself. Tax-related identity theft is on the rise. That’s why the IRS says its call center professionals take great care to ensure they discuss personal information only with taxpayers (or authorized representatives). Before calling the IRS, have this information ready: your Social Security number or individual taxpayer identification number; filing status; your prior year tax return; a copy of the return in question; and IRS letters or notices you’ve received. For details: https://bit.ly/2tovHbk 

A White House press release announced that President Trump has signed an executive order (EO) aimed at strengthening retirement security. The goal of the EO is to help ensure that American workers are financially prepared to retire. This includes, among other things, expanding access to multiple employer retirement plan options and improving the effectiveness and cost of required communications. The EO also calls for examining life expectancy and distribution tables to see if they should be updated to reflect current mortality data.

The IRS’s determination that a taxpayer had unreported wage and IRA distribution income was upheld. For two years, he’d filed a tax return on time that reported zero income and zero liability. However, he’d received wages from his job as an engineer and also distributions from an IRA. The taxpayer didn’t dispute that he’d received payments, but rather made frivolous arguments that the payments weren’t taxable income and that he wasn’t subject to tax. He also owed the 10% additional tax for taking early withdrawals from a retirement plan. (TC Memo 2018-138)

The House Ways and Means Committee has provided additional details on what to expect in its “Tax Reform 2.0” proposed legislation. In addition to making permanent individual and small business tax cuts, the proposals would create a savings tool called a Universal Savings Account; allow the money in Section 529 education accounts to pay for home school costs and student debt; and allow taxpayers to access their retirement accounts on a penalty-free basis when they expand their families via birth or adoption.

IRS: The proposed regulations targeting SALT limitation workarounds don’t affect the deductibility of business payments. The IRS has clarified that businesses that make business-related payments to charities or government entities for which the taxpayers receive state or local tax (SALT) credits can continue to deduct the payments as business expenses. The deductibility of these payments isn’t affected by the proposed regs that target state-implemented “workarounds” in response to the new limitation under the Tax Cuts and Jobs Act on individual SALT deductions.

U.S. House Republicans plan to vote soon on “Tax Cuts 2.0.” They plan to introduce a bill sometime next week, according to House Speaker Paul Ryan. The proposed legislation reportedly would make permanent the $1.1 trillion in temporary cuts for individuals and small businesses that are set to expire in 2025. It’s also expected to include provisions involving retirement and education savings and new business start-up costs. But some reports indicate that it might be politically tricky to hold a vote in advance of the November midterm elections.

The IRS is reminding taxpayers that an important deadline is approaching. Taxpayers have until 9/28/18 to apply for the Offshore Voluntary Disclosure Program, a form of tax amnesty. Taxpayers with unreported foreign accounts can avoid criminal charges and pay reduced civil penalties by voluntarily disclosing the accounts to the IRS. After the 9/28/18 deadline, the IRS will maintain a pathway so that taxpayers who may have committed related criminal acts can come into compliance. Contact us as soon as possible if you have an unreported foreign account

Taxpayers often must provide IRS tax forms to lenders, colleges and other third parties for nontax purposes. To better protect taxpayer data, the IRS has announced a new format for online individual tax transcripts that will redact personally identifiable information from the Form 1040 series. The changes will begin on Sept. 23. Financial entries will remain visible, which will give taxpayers and third parties the data they need for tax preparation or income verification. A customer file number will be created instead of using a taxpayer’s Social Security number.

Damages that a taxpayer receives in a settlement for physical injury or illness can generally be excluded from taxable income. In a new case, a settlement payment was received by a taxpayer for employment discrimination, so the U.S. Tax Court ruled it must be included in income. The court rejected the taxpayer’s argument that the employment discrimination led to a later physical injury. In addition, it noted that, when the Veterans Administration agreed to pay the settlement, there was no mention of any physical injury suffered by the taxpayer. (TC Memo 2018-127)

In Notice 2018-68, the IRS has provided guidance with respect to executive compensation changes made by the Tax Cuts and Jobs Act. The changes include how the tax code limits the deduction for remuneration paid to certain executives by publicly held corporations, for tax years beginning after 12/31/17. Specifically, the Notice discusses the amended definition of covered employees and the operation of a grandfather rule. The deduction by a publicly held corporation for covered employee remuneration is disallowed to the extent it exceeds $1,000,000 in a tax year.