Giving Charitable Gifts With Strings Attached

Tax rules for quid pro quo contributions

If you make a donation to a charity, you may get something back in return. What are the tax consequences for itemizers? It depends on the fair market value (FMV) of the benefit you receive. The IRS has provided guidelines for these “quid pro quo contributions.”

Background: A quid pro quo contribution occurs when an individual makes a charitable donation that is partly for goods or services. The amount attributable to the FMV of the goods or services is nondeductible. For example, if you give a charity $100 in exchange for a concert ticket worth $40, your deduction is limited to $60.

Note that you must obtain a written disclosure statement for amounts above $75, even if the deductible amount is less than $75, as in our example above. The disclosure agreement must include the pertinent information about the donation and the FMV of the benefit received in return.

However, a disclosure statement is not required if you receive items of “insubstantial value” from a charity, like a coffee mug with the charity’s logo, or an intangible religious benefit.

The charitable organization can use any reasonable method to estimate the FMV of goods or services it provided to a donor, as long as it is applied in good faith. It may estimate the FMV of goods or services that generally are not commercially available by using the FMV of similar or comparable goods or services. Goods or services may be similar or comparable even if they do not have the unique qualities of the goods or services being valued.

The IRS offers the following three examples involving quid pro contributions.

Example 1: A charity provides a one-hour tennis lesson with a tennis professional for the first $500 payment it receives. The tennis professional provides one-hour lessons on a commercial basis for $100. A good faith estimate of the lesson’s FMV is $100.

Example 2: For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. A good faith estimate of the FMV of this right can be made by using the cost of renting a hotel ballroom with a capacity, amenities and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500.

Example 3: If a donor pays $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. The artist does not provide tours on a commercial basis. Tours of the museum normally are free to the public. A good faith estimate of the FMV of the evening museum tour is $0 even though the artist conducts it.

The usual rules for charitable contributions still apply. Thus, you can deduct amounts only if you itemize.

Caution: Other situations may be more complicated. If you have any questions, contact your professional tax advisor.

Who Says You Can’t Fight City Hall?

Appealing for property tax reduction

It seems like the cost of everything from college tuition to a cup of coffee keeps going up. Case in point: Property taxes for homeowners have been steadily rising throughout much of the country. But you do not necessarily have to accept the status quo if you were just informed of a tax hike.

Idea in action: Consider an appeal of your property tax assessment if you think you are on firm ground. If you prevail, you can lower the amount you must fork over to the local taxing authority.

However, do not dawdle. Depending on your location, you may have only 30 days after receiving your current tax bill to initiate an appeal. Keeping that in mind, here are several practical suggestions for strengthening your case.

• Verify the dimensions. Carefully check the property tax notice to see if it accurately states your home’s dimensions and features. If it lists more square footage or rooms than you actually have, you may be able to have the value reduced.
• Identify key factors. In some cases, assessors do not even look at your property. They may simply compare descriptions of your home with others nearby that seem to be comparable on their face. But your home may be overvalued due to extenuating issues that set it apart. For example, it could back up to or be near a highway or train track or be in a flood zone.
• Present the comps. This may be the best way you can show that your home is overvalued. Find assessment numbers on homes similar to yours based on aspects such as size, age and of course, location, location, location. The information is available at your local assessor’s office or online. If yours stands out as being high, this is your proof.
• Cut to the chase. Once you have determined that your assessment seems high, contact your assessor’s office and arrange a meeting, if possible. Bring all relevant information, including photos, data on comps, maps, etc.
• Seek an appeal. Do not immediately throw in the towel if you cannot arrange a meeting or it results in no change. You can still lodge a formal appeal with the local assessment board. Before your appeal, sit in on another public hearing. You will get a sense of what works best and what does not.
• Consider a professional. If you do not have the time or inclination to pursue everything on your own, you might hire a property tax consultant or attorney to do the grunt work. Fees may be charged by contingency (e.g., 25-50% of the amount saved in the first year) or by a flat or hourly rate.

This may be a hassle, but it could save you significant amounts of money over an extended period of time.

Silver tax lining: If you itemize deductions, you can generally write off home property taxes as part of the deduction for state and local tax (SALT) payments, up to an annual limit. Currently, the SALT cap is $10,000 per year.

Breaking Down Tax Barriers at Work 

Special deduction for qualified expenses

 If you are a small business owner, you may be familiar with the disabled access credit (DAC). Under the DAC rules, a qualified business can claim a credit of up to $5,000 for expenses incurred to meet requirements established by the Americans with Disabilities Act (ADA). For instance, the credit is available for removing barriers that hinder access by disabled individuals.

But that is not the only tax break on the books for removing barriers in the workplace. A small business may also qualify for a special deduction that is separate and apart from the DAC.

Background: The tax law permits a business of any size to deduct up to $15,000 of the costs of removing architectural and transportation barriers for the benefit of disabled people and the elderly. Normally, these costs must be capitalized. In addition, you can add any excess above the $15,000 threshold to your basis for depreciation deduction purposes.

To qualify for the deduction, the barrier removal must meet certain standards under guidelines created by ADA regulations. A few examples of expenses that qualify for the deduction are as follows:

• Providing accessible parking spaces, ramps and curb cuts;
• Installing phones, water fountains and restrooms that are accessible to persons in wheelchairs;
• Hanging signage and symbols of accessibility; and
• Widening walkways to at least 48 inches wide.

However, the deduction cannot be claimed or expenses incurred for new construction, a complete renovation of a facility or public transportation vehicle or for the normal replacement of depreciable property.

The deduction is generally claimed on the tax return for the tax year in which the qualified expenses were paid or incurred. Maintain detailed records to support the deduction. If your business fails to claim the deduction by its tax return due date, it has six months to file an amended return for the year (plus any extensions) to do so.

Be aware that a qualified small business can claim both the DAC and the architectural barrier removal deduction in the same tax year if the requirements for each tax break are met. However, in that case the deduction is limited to the difference between the total expenses and the amount of the credit claimed. For example, if a business incurs $10,000 in expenses qualifying for both the deduction and a $4,000 credit, the deduction is reduced to $6,000.

Final words: The deduction is irrevocable once it is claimed on a return. Consult with your professional tax advisor if you have any further questions.

Five Steps Toward Financial Security

Improve your future outlook

Is the financial road ahead paved with gold or filled with potholes that can wreck your plans—or somewhere in between? Although there are a number of variables, you probably have more control over the eventual outcome than you might think. In particular, the moves you make or fail to make now can have a major impact on your financial future. Here are five important considerations.

1. Maximize your retirement plans. Typically, you should plan on replacing at least 75% of your pre-retirement income when you are no longer working. Where will that income come from in retirement? Most people rely on amounts built up in qualified retirement plans to supplement investment earnings and Social Security benefits. Generally, contributions to such plans like a 401(k) can grow and compound on a tax-deferred basis until distributions are made. In addition, you may benefit from Roth or traditional IRAs, or a combination of the two, to help feather your nest egg.
2. Review your investment mix. Diversification and asset allocation are often the cornerstones of a financial plan. Review your portfolio to see if you have the proper mix of investments appropriate for your stage of life, your tolerance for risk and your objectives. Frequently, an investor in their middle age will concentrate heavily on the equities markets. Then, as retirement looms, the investor will shift to a more conservative allocation between stocks, bonds and short-term investments to minimize the impact of volatility.
3. Set your priorities. It is more than likely that you have to juggle several financial goals at the same time. For instance, you may be doling out money for a child’s college education while scrimping and saving for retirement. Establish an order that makes the most sense for your personal situation. Once you have, determine if you are still on track to meet the main objectives and react accordingly. This may require you to cut down on luxuries or change your lifestyle slightly—say, skipping an exotic vacation to contribute more for retirement—but it is generally worthwhile in the long run.
4. Create a “rainy day fund.” This advice is often dispensed by financial professionals but is seldom heeded. What would you (or your spouse, if married) do if you unexpectedly lost your job or had to deplete your funds for an emergency? The conventional wisdom is to secure enough in the way of assets to sustain your current lifestyle for a period of at least three to six months. The idea is to give yourself enough flexibility to cope with unforeseen emergencies without giving up on your goals or taking on crushing debt.
5. Evaluate your insurance needs. Finally, do not forget about obtaining sufficient protection to sustain your family through middle age and a lengthy retirement. This may cover the gamut from life insurance, health insurance, disability income insurance and long-term care insurance. By taking out insurance policies commensurate with your needs, you can avoid a financial disaster at a reasonable cost.

Remove Clutter at Work

The reality TV show “Hoarders” is about compulsive hoarders at home. But that is not the only place where things can pile up.

Small business owners often keep obsolete or unusable equipment or inventory that takes up valuable space. It might also cost the business more in insurance and inefficiency. Rule of thumb: If you have not used it in three years, you probably do not need it. Sell it, dump it or give it away.

If you cannot bear to part with the items, have another employee make the decisions for you. Note: You may be entitled to tax deductions for inventory or equipment still carried on the books.

 Facts and Figures

Timely points of particular interest

 IRS Collections—The IRS is filling its coffers with payments from the upper crust. As part of continuing compliance efforts under the Inflation Reduction Act (IRA), the agency announced that is has collected more than $1 billion in overdue taxes from high-income taxpayers since last fall. The collection efforts targeted individuals who earn more than $1 million a year and owed the IRS more than $250,000 each.

Consumer Alert—The IRS is warning taxpayers about inaccurate tax advice that has been circulating on social media sites. In brief, promoters encourage false claims for a  “Self Employment Tax Credit” with payments of up to $32,000. This credit is supposedly available to self-employed individuals and workers in the gig economy, but it does not exist. Lesson to be learned: Rely on tax professionals for tax advice.

New RMD Regs—The IRS also released new final regulations on required minimum distributions (RMDs) from qualified retirement plans and IRAs. The new regs address issues raised by recent legislation. Notably, the IRS says that beneficiaries of inherited accounts must continue to take annual RMDs even though they technically now have ten years to empty out an account. We will have more details in the next issue.

Supreme Court Rules on Business Valuation

COLI included in taxable estate

The U.S. Supreme Court has just handed down its decision on the estate tax consequences of a business valuation involving corporate-owned life insurance (COLI). This new ruling, which has drawn criticism from some tax commentators, could have a major tax impact in the future (Connelly, U.S. S. Ct. No. 23-146, 6/6/24).

Background: The value of a business interest is included in a deceased owner’s taxable estate. Generally, the valuation is performed by an expert who typically takes into account numerous factors, including (but not limited to) the following:

• Appraisal of assets
• Dividend-paying history
• Earnings history
• Financial prospects
• Goodwill and reputation
• Location
• Management skills
• Value of similar businesses

Frequently, business owners will draft a buy-sell agreement to facilitate the transfer of the business interest upon an owner’s death or retirement. The buy-sell agreement establishes a price for the sale of the business interest. This may take the form of an entity purchase by the business, a cross-purchase where a co-owner acquires the business or a hybrid. The payment is often funded by life insurance.

Of course, any estate liability may be partially or wholly sheltered by the estate tax exemption. The exemption for 2024 is $13.61 million (scheduled to revert to $5 million, plus inflation indexing, in 2026).

Facts of the new case: Two brothers were the sole owners of a building supply company, a closely-held corporation, in Missouri. To keep the business going upon the death of either one, they created a buy-sell agreement allowing the survivor to purchase the deceased owner’s shares. If the survivor declined, the corporation would redeem the shares by using COLI proceeds from a $3.5 million policy purchased on the life of each brother.

After one brother died, the surviving brother declined to purchase the shares, so the corporation used $3 million from the COLI to purchase the deceased brother’s interest. The corporation reported the value of the shares at $3 million. But the IRS said that the value of the COLI should be added to a $2.3 million value of the deceased brother’s interest in the business, for a total of $5.3 million. This triggered an additional estate tax liability of almost $900,000. The Eighth Circuit Court agreed with the IRS.

Now the Supreme Court has upheld the Eight Circuit’s decision. It reasoned that the obligation of the corporation to redeem the shares represented value to a hypothetical buyer.

As a result, the value of business interests may be increased for estate tax purposes. Accordingly, business owners may take steps to reduce estate tax exposure. Consider these four practical suggestions.

1. Review buy-sell agreements with respect to estate tax complications, It may be preferable to use a cross-purchase agreement where life insurance proceeds directly purchase shares without being included in the business.
2. Evaluate life insurance policies to accommodate the transfer of a business interest.
3. Set aside funds to cover potential tax liability arising from share redemptions or corporate obligations.
4. Keep good records of buy-sell agreements and other transactions to support your position if the IRS ever challenges a valuation claim.

Last, but not least: Obtain expert advice. Your professional tax advisors can provide the necessary guidance.

DOL Issues New Final Fiduciary Rule

Offers retirement planning protections  

The Department of Labor (DOL) recently released a new final rule that is designed to provide greater protection to individuals who seek retirement planning advice from fiduciaries. This new rule updates definitions included in the Employee Retirement Income Security Act (ERISA) and accompanying rulings. It takes effect on September 23, 2024.

 Background: ERISA affords protections to investors who use fiduciaries to provide retirement planning advice. Fiduciaries must observe certain minimum standards. Under the new final rule, someone is treated as an investment advice fiduciary if they provide a recommendation in either of these two situations.

1. The person directly or indirectly (e.g., through an affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor that it—

• Is based on review of the retirement investor’s particular needs or individual circumstances;
• Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances; and
• May be relied upon by the retirement investor as intended to advance their best interests.

2. The person represents or acknowledges that they are acting as a fiduciary under ERISA with respect to the recommendation. The recommendation also must be provided for a fee or other compensation.

Significantly, among other changes, the new final rule addresses a longstanding exception for “one-time advice” that has not kept up with other changes in the retirement planning arena.

How it works: For almost 50 years, a financial services provider was treated as an investment advice fiduciary only if the advice was provided on a regular basis relating to a mutual agreement, arrangement or understanding that it would serve as the basis for investment decisions. This effectively excluded advice doled out on a one-time basis such as recommendations regarding rollovers to IRAs upon retirement.

Thus, ERISA protections were often not available to investors at certain times when they were needed the most. The new final rule closes this loophole. It provides protections when a recommendation comes from an investment advisor holding themselves out to represent the investor’s best interests even if it is a one-shot deal.

The new final rule also “levels the playing field” by replacing the quagmire of rules setting varying standards depending on the products that are recommended. The amendments under the final rule establish more uniform standards. Fiduciaries must provide advice that is prudent, honest and free from overcharges.

In addition, the changes under the new final rule are generally consistent with other guidelines and regulations reflecting conduct that is in the investor’s best interests.

Finally, the determination of what constitutes a recommendation will turn on the facts and circumstances of the situation and whether it could be viewed as a call to action. “Hire me” communications and generalized information—including information about industry trends, performance history and detailed descriptions of services—should not subject the investment professional to being an investment advice fiduciary. The more that the communication is targeted to a specific customer or group, the greater the likelihood that it will be viewed as a communication by a fiduciary

Conclusion: This brief article only hits some of the highlights of the new final rule. More details are available upon request.

Follow Directions for Car Deductions

Twists and turns in tax rules

Generally, if you itemize deductions on your return, you can deduct charitable contributions of property in addition to cash donations made to qualified organizations. For instance, you might gift a car or other vehicle that will be used to further the charity’s tax-exempt function. In fact, some charities specialize in vehicle donations.

However, the tax rules in this area can be tricky. If you are not careful, you could wind up with a deduction for an amount that is much less than the car’s fair market value (FMV).

Starting point: Under prior law, all you had to do was to arrange for the charity to receive the car, drop it off and then claim a deduction based on the FMV for the make and model listed in a car-buying guide. But the IRS suspected that some donors were being overly aggressive in their valuations, so Congress clamped down on the rules for vehicle donations.

Currently, if you use a guide to establish the vehicle’s FMV—such as the Kelley Blue Book (KBB), CarMax or Edmunds—the deduction may be reduced if the charity then sells the vehicle. For example, if the FMV of a car is $5,000 in the KBB when you donate it and the charity subsequently sells it for $3,000, your deduction is limited to $3,000. If the charity sells the car for $500 or less, the deduction is equal to the lesser of $500 or the FMV.

The charity must provide you with a written substantiation of the deduction value within 30 days of your contribution or, if it sells the vehicle, within 30 days of the sale. Save this documentation as proof in case the IRS ever challenges the deduction amount. If you have not heard from the charity within 30 days of a vehicle donation, contact them immediately to obtain the written statement.

The current rules have reduced the deduction for vehicle donations in many cases.  One consolation: If the charity “materially improves” the vehicle for its own use—say, it installs a backup camera—you can still deduct the vehicle’s FMV. Depending on your situation, you might search for a charitable organization that is willing to fix up the vehicle for its own use.

Other special rules apply to charitable donations of property. For 2024, your deduction usually cannot exceed 30% of your adjusted gross income (AGI). Any excess above 30% of AGI may be carried over for up to five years.

End of the road: Make sure you maximize the charitable deduction for a vehicle donation. Contact your professional advisor before you hand over the keys.

Five Steps for a Workplace Return

Set guidelines for business premises

The “return to the office” (RTO) is not a sequel to the classic TV show. It is, however, an apt description of the latest trend in the workplace. According to deskbird.com, a workplace management site, 90% of employers with office space will have returned on-site by the end of 2024. Some companies are mandating physical attendance while others are being more flexible.

What is the best approach for your company? Of course, it depends on your circumstances, but be mindful of sensitivities of employees who have found that remote work helps accommodate their lifestyles. Following are five ideas for paving the way.

1. Keep an open mind. An employer does not necessarily have to reinstate a traditional five-day, 9-to-5 work schedule. In fact, many employers are opting to use “hybrid” schedules where employees come to the office part of the time and work remotely the rest of the week. Another trend is to cut down the workweek from five days to four. For instance, employees may physically be on-site two days a week, work from home two other days and take Fridays off completely.
2. Modify the office space. Returning to the office does not automatically mean the same exact office, either. Your firm may relocate to smaller digs if it will not maintain the same full-time staff on-site. This can save the company money on rent or other expenses relating to business operations. Alternatively, you may restructure office space to better suit your current needs. One popular technique is to use shared workstations rather than having permanent cubicles with desks for most full-time employees.
3. Create a better work environment. Although employees may prefer to work from home, many will concede that being in the same physical location encourages collaboration. Have employees work together in “teams” to increase production and achieve optimal results. An RTO should also foster communication between supervisors and staffers as well as among all workers. At the same time, do not repeat past mistakes of holding unnecessary meetings. Put the time in the office to its best use.
4. Upgrade the technology. The world did not stop turning for the pandemic. Investigate the latest advances that can help your business operate more smoothly and efficiently. In particular, consider technology that enhances the collaborative efforts of employees. For example, you might consider changes in the means of communications between off-site and on-site workers. You may not be limited to simple Zoom calls anymore. Also, shore up cybersecurity protection to protect against hacks and other intrusions.
5. Do not forget about safety. Naturally, some employees will be hesitant about returning to the office due to safety concerns. Develop policies for measures such as physical distancing and mask–wearing when appropriate. Revisit sick leave policies so that employees don’t feel pressured to come to the office when they are under the weather.  Be sensitive to any special needs or situations involving your employees. Encourage them to provide input on how to make the workplace safer. Finally, stay flexible enough to be able to cope with changing conditions.

Reminder: This is not your grandparent’s, or even your parent’s, workplace anymore. Bring your company into the present and plan for the future when you workers come back to the office.

Home on the High Seas

Did you take out a loan to buy a boat? You may be able to benefit from a unique tax break.

Generally, interest paid on your main home and one other qualified residence is deductible by itemizers as mortgage interest, subject to certain limits. For these purposes, the IRS defines a “residence” as “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”

In other words, if your boat has a galley, sleeping quarters and a head, you should qualify. But you cannot deduct loan interest by simply throwing a sleeping bag or cot on the deck.

Facts and Figures

Timely points of particular interest

Scam Targets–As part of its continuing efforts to protect the senior community, the IRS has issued a warning about the rising threat of impersonation scams. Typically, con artists target older adults by pretending to be government officials, aiming to steal their sensitive personal information and money. Similarly, by posing as representatives from the IRS or another government agency, the fraudsters may use fear and deceit to exploit their victims. Remain vigilant.

No Frivolity—Here is a simple suggestion about making frivolous tax arguments in court: Do not do it! This includes claims that wages are not subject to income tax, that paying tax and filing tax returns with the IRS is strictly voluntary or that the imposition of federal income tax is unconstitutional. If you proceed to Tax Court with a frivolous case, you run the risk of civil or criminal penalties or both. Furthermore, you still owe the initial tax liability plus interest and other penalties.

 

FTC Bans Noncompetes Nationwide

New final rule affects most agreements

The Federal Trade Commission (FTC) has issued a new final rule—570 pages long—that bans most past and future noncompete agreements. But we may not have heard the last word yet on this “final” rule.

Background: Briefly stated, an employer may require a noncompete to be signed as a condition of employment or upon “separation from service” (e.g., quitting, being fired or retiring). The noncompete will generally limit employment activities in the same field for a designated period of time. To be legally enforceable, the agreement must be “reasonable” under the facts and circumstances.

A noncompete agreement may also be part and parcel of a sale of a business interest by its founder or other owner. Typically, the buyer will not want the seller to be able to launch a new business venture that could poach clients or customers.

The use of noncompetes is common. It is estimated that about 30 million American workers—roughly one out of every five—are currently subject to a noncompete agreement or clause.

New rule: The FTC is imposing a nationwide ban on noncompete agreements because they may unfairly discourage competition. This prohibition, which received bipartisan support in Congress, is now scheduled to take effect on September 4, 2024.

The FTC first issued a proposed rule on noncompetes in 2023. The overwhelming majority of the public comments—25,000 out of 26,000—favored the proposed change. Despite the disparity, opposition from a segment of the business community remains strong.

Once the final rule takes effect, most existing noncompetes will no longer be enforceable, but agreements signed by “senior executives” may still be enforced. A senior executive is someone who earns mores than $151,164 a year and is in a “policy-making position.” This includes workers who have final authority to make policy decisions that control significant aspects of the business.

In addition, there are several other limited exceptions to the ban, including the following:

• It does not apply in connection with the bona fide sale of an ownership interest in a business entity or of all or substantially all the entity’s operating assets.
• It does not apply where a cause of action related to a noncompete accrued prior to the effective date.
• It is not an unfair method of competition for a person to enforce, or attempt to enforce, a noncompete when they have a good-faith basis for believing that the final rule is inapplicable.

Employers must notify employees with existing agreements about the ban. However, a provision in the proposed rule requiring a formal legal rescission has been eliminated. The final rule provides some model language for employers to follow.

Note that employers still have other options at their disposal. They can continue to rely on trade secret laws and nondisclosure agreements (NDAs) to protect their proprietary information.

Final thoughts: Certain business groups have threatened to challenge the legality of the final rule. One lawsuit has already been initiated by the U.S. Chamber of Commerce in a Texas federal court. Also, business groups are still lobbying lawmakers. We will keep you posed on any major developments.

Latch Onto the Childcare Credit

Tax break for summertime costs

If you have young children and you have a job, you probably have to make arrangements for your kids while you work. Although they may attend pre-school or elementary school, the summer can pose even greater challenges—often at a high cost.

 Silver tax lining: At least you may be able to qualify for the dependent care credit (commonly called the “childcare credit”). Generally, the credit is available for childcare costs incurred during the summer, as well as the rest of the year.

Although recent tax law enhancements to the credit have expired, you can still generally reduce your federal income tax bill by up to $1,200 in 2024.

Basic ground rules: To qualify for the credit, you must incur expenses of caring for a child under age 13 (or another qualifying individual) so you can be gainfully employed. A married couple is treated as being “gainfully employed” if one spouse works full‑time and the other works either full-time or part-time or is a full‑time student. In either event, a married couple must file a joint return to claim the credit.

Currently, the applicable credit percentage is 35% of the qualified expenses for parents with an adjusted gross income (AGI) of $15,000 or less. The percentage is reduced by 1% for each $2,000 that your AGI increases until it bottoms out at 20%. Thus, the credit is effectively 20% for those with an AGI above $43,000.

The credit is available for the first $3,000 of qualified expenses for one child and $6,000 for two or more children. This results in a maximum credit of $600 for one child and $1,200 for two or more children if you have more than $43,000 in AGI.

The list of qualified expenses includes traditional costs like babysitters, day care centers and nursery schools. But it might cover more than you think during the summer months. For instance, childcare costs incurred at a municipal pool, rec center or country club may qualify for the credit. So can the cost of sending a child to a day camp where they participate in recreational activities like swimming, boating or hiking. However, the cost of an overnight camp does not qualify for the credit.

This includes camps run by the Boy Scouts, Girl Scouts or other organizations. The day camp can even be a “specialty camp” emphasizing a particular skill or pursuit. For instance, you might enroll your science progeny in an academic camp or send the next John McEnroe or Serena Williams to a tennis camp. The full cost of attending the specialty camp is eligible for the credit, but you cannot add on expenses for special equipment, uniforms or supplies.

Scout it out: Remember to obtain all the information needed for claiming the credit on your personal tax return, including the day camp’s name, address and taxpayer identification number. This information is needed for your 2024 return. Also, you may be entitled to state income tax benefits. Your professional tax advisor can provide more details.

Pros and Cons of Living Trusts

Consider estate planning technique

 Although a revocable living trust can be valuable supplement to a will, this estate planning device is not necessarily for everyone.

Basic premise: Typically, you transfer assets to a trust and name someone to act as the trustee. Assuming you become the “initial beneficiary,” you are entitled to receive income from the trust for the rest of your life. You also designate the “secondary beneficiaries” of the trust at the outset. This can be your spouse or your children—or both.

After your death, the assets are distributed to the secondary beneficiaries or the trust continues, depending upon your instructions. While you are alive, you have the power to (1) sell the trust assets and keep the proceeds, (2) amend the terms of the trust (e.g., change the secondary beneficiaries) and (3) revoke it entirely. The trust becomes irrevocable upon your death.

Potential Advantages

A living trust may provide the following benefits.

• Property transferred by a will is subject to probate. This may become costly for your family. Conversely, property passing by a trust does not have to go through the probate process. It is generally less expensive to wind up the trust’s affairs.
• Probate can be time-consuming. It may take months or even longer before the executor of your will is free to distribute assets. However, a trustee of a living trust does not have to wait for court approval. The trust assets can be distributed almost immediately after death.
• If, for some reason, you are no longer physically or mentally able to manage your affairs, a living trust offers protection. You have a trustee of your choice who is able to manage your assets so your family does not have to get embroiled in lengthy court proceedings to have a guardian or conservator appointed.
• A living trust can also help alleviate financial concerns of the parents of a disabled or incompetent child. The parents can rely on the trust to provide a steady stream of income when they are no longer around to care for the child.

Potential Disadvantages

On the other hand, there are several possible drawbacks to living trusts.

• You may be able to avoid probate for certain assets without setting up a trust (e.g., by acquiring property jointly with your spouse). Furthermore, it is likely that some of your assets will have to be probated anyway.
• Depending on your situation, the cost and complexities of probate may not be overly burdensome in your state (assuming you have a legally-enforceable will in place).
• If you retain the right to revoke the trust, the assets will be included in your taxable estate, even if you never make the revocation. The same is true if you keep the right to income from the trust or the right to use its assets.
• A living trust does not save income taxes either, if you retain control over the trust. During your lifetime, the income from the trust is taxed directly to you, whether or not you actually receive it.

In summary: Rely on your professional advisors. After analyzing your situation, you can make an informed decision about this estate planning technique.

IRS Airs Its Dirty Dozen Tax Scams

New list for 2024 warns taxpayers

The IRS recently issued its list of the “Dirty Dozen” tax scams to watch out for in 2024. Here is a brief overview.

• Phishing/smishing: Scam artists often “phish” for sensitive information by inviting you to click on a link designed to look like it originates from an authentic source, like the IRS. Or they may email you and threaten legal action. Smishing is a comparable version that uses texting.
• Employee retention credits: The IRS has been warning taxpayers about promoters making fraudulent employee retention (ERC) claims all year. This credit is only available for qualified businesses that retained workers during the pandemic.
• Online accounts: Someone may offer to help you create an online account with the IRS for free. What is the catch? They need your personal information—including your Social Security number (SSN)—to set up the account. Then they use the info illegally.
• Fuel credit claims: A fuel tax may apply to taxpayers engaged in certain agricultural and transportation activities. However, they may be fooled into thinking that they qualify for refunds if they pay fees to a promoter, much to their dismay.
• Offer-in-compromise mills: Under the Offers in Compromise (OIC) program, taxpayers who owe tax may be able to negotiate a deal with the IRS. But OIC “mills” can charge taxpayers who do not qualify for a settlement and/or charge exorbitant fees.
• Fraudulent charities: In the wake of a natural disaster, a scam artist may contact you for donations that are not funneled to a legitimate charitable cause. Similarly, they may promote tax deductions in cases where the organization is not tax-exempt.
• Ghost tax return preparers: The vast majority of tax practitioners are reputable. But some “imposters” falsify returns, charge sky-high fees or steal your refunds. Not surprisingly, these ghosts quickly “vanish” into thin air.
• Social media sites: Are you active on social media sites like TikTok, Facebook, Instagram or X? Do not follow tax advice from these online sources. The information may be inaccurate, misleading or flat-out illegal.
• Spearphishing: Spearphishing is a phishing scam targeting specific individuals or businesses. For example, the con artist may pretend to be a client or representative from a bona fide organization. Then they steal your information and file a fraudulent individual or business tax return under your name.
• Fraudulent art deductions: Normally, you can deduct artwork donated to charity if you otherwise qualify. But watch out for promoters who try to sell you art at a discount. They will claim you can donate it and deduct a higher amount.
• Abusive tax avoidance schemes: These schemes can take many forms ranging from syndicated conservation easements to micro-captive insurance arrangements. Be wary of “something that sounds too good to be true.”
• International schemes: Finally, the IRS points to scams involving cash funds and digital assets hidden offshore, Maltese retirement accounts and foreign captive insurance.

Do your best to stay vigilant. Do not hesitate to ask questions or seek guidance from your trusted professional advisors.

Two “Extra” Gift Tax Breaks

Under the annual gift tax exclusion, you can give each recipient up to $18,000 in 2024 without paying any gift tax. But there are two additional gift tax strategies you might use.

1. Medical expenses: No gift tax is imposed on amounts paid for another person’s medical expenses. Pay the bills directly to the health care provider.
2. Education expenses: No gift tax is imposed on amounts used to pay tuition and related fees on behalf of another person. Pay the educational institution directly.

Neither type of gift reduces the annual gift tax exclusion or lifetime gift tax exemption.

Coordinate all your lifetime gifts.

Facts and Figures

Timely points of particular interest

 Home Energy Credits—The IRS is reminding taxpayers that they may qualify for either or both of two tax credits for energy-saving improvements made to their home this summer: (1) the Energy Efficient Home Improvement Credit or (2) the Residential Clean Energy Credit. Each credit is equal to 30% of the cost up to certain annual maximums. The eligible expenses range from insulation to solar energy panels. Good recordkeeping in this area is essential.

 IRS Releases Data—According to the new “Data Book” for the IRS’ 2023 fiscal year, the agency issued $659 million in refunds, up 2.7% from 2022. It also examined 0.44% of individual returns and 0.74% of the corporate returns that were filed for 2013-2021. Notably, the IRS website experienced more than 880.9 million visits in 2023, including more than 303.1 million “Where’s My Refund?” inquiries. For more Data Book information, visit www.irs.gov/statistics/soi-tax-stats-irs-data-book.

 

 

 

 

IRS Delays New Rules for Inherited IRAs

New Notice extends prior waivers

The IRS has just extended tax relief to certain non-spouse beneficiaries of inherited IRAs in new Notice 2024-35. This ruling relates to the crackdown on so-called “stretch IRAs” included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a precursor to the recent SECURE 2.0 law.

Under the new Notice, required minimum distributions (RMDs) from inherited IRAs may be postponed for another year.

Background: In the usual course of events, you must start taking RMDs from IRAs after you have reached the required beginning date (RBD) of April 1 of the year following the year you attain age 73 (increased from age 72 by SECURE 2.0 after the initial SECURE Act boosted it from 70½). The amount of the annual RMD is based on life expectancy tables and the value of the account on the last day of the previous year. For example, a 2024 RMD is based on your account balance as of December 31, 2023.

If you do not comply with these rules, the IRS may impose a penalty equal to 25% (decreased from 50% by SECURE 2.0) of the amount that should have been withdrawn (or the difference between the required amount and a lesser amount actually withdrawn). The penalty, which is reduced to 10% for errors fixed in a timely fashion, is added to the regular income tax due on the RMD.

Comparable rules apply when someone inherits an IRA from a person who has already reached their RBD. However, in the past, taxpayers who had inherited IRAs could stretch out RMD payments by basing the amounts on their own life expectancies. Thus, by using these stretch IRAs, tax deferral could continue for decades and result in more accumulated savings.

New rules: Under the SECURE Act, these IRA beneficiaries (other than surviving spouses and minor children) are generally required to empty out the account over a ten-year period, effectively eliminating stretch IRAs (except for beneficiaries inheriting before 2020). In 2022, the IRS issued proposed regulations that required beneficiaries to take RMDs in years one through nine if the original account owner died after reaching their own RBD.

But the latest rule changes led to considerable confusion among taxpayers and tax professionals alike. In particular, it was not clear if RMDs must be spread out over the applicable period of time. Recognizing the problems, the IRS subsequently waived the requirement for non-spouse beneficiaries who would normally be required to take RMDs from inherited IRAs for 2020 through 2023.

Now, in new Notice 2024-35, the IRS establishes that taxpayers in this situation will not be penalized for failing to take RMDs from inherited accounts for 2024. The IRS says it will soon issue final regulations clarifying the rules.

Practical advice: Take a deep breath. The latest delay gives non-spouse beneficiaries more time to plan for IRA distributions. Depending on your situation, you may decide to take 2024 RMDs anyway if it will lower your overall tax bill. Consult with your tax professional.

 Is Bonus Depreciation Going Away?

Current rules for business tax break

 The first-year bonus depreciation deduction is still around…for the time being. However, the Tax Cuts and Jobs Act (TCJA), which enhanced the bonus depreciation tax break, also phases it out over time. So your business only receives a partial deduction for qualified property placed in service in 2024.

Fortunately, there may be a way to help pick up most—if not all—of the slack. Let us take a closer look.

Background: Prior to the TCJA, a business could claim a first-year bonus depreciation deduction equal to 50% of the cost of new qualified property placed in service. The deduction may be added onto the amount expensed under Section 179 (more on this later).

Bonus depreciation was, and still is, available for property like computers, vehicles, off-the-shelf software, machinery and equipment, office furniture and other depreciable property with a cost recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). But only new property qualified for the deduction.

In addition, a business was able to claim 50% bonus depreciation for “qualified improvement property” (QIP) of a building. The definition of QIP excludes costs for the enlargement of a building, elevators and escalators and a building’s internal structural framework.

On the plus side, the TCJA doubled first-year bonus depreciation to 100% for qualified property placed in service after September 27, 2017 and before January 1, 2023. It also expanded the definition of qualified property eligible for bonus depreciation to include used, not just new, property.

Initially, the deduction for QIP was inadvertently left out of the TCJA. However, subsequent legislation fixed this temporary glitch for QIP with a cost recovery period of 15 years. Under current law, QIP also qualifies for first-year bonus depreciation.

On the minus side, the TCJA phases out the first-year bonus depreciation deduction over the following years:

• 80% in 2023;
• 60% in 2024;
• 40% in 2025; and
• 20% in 2026.

 After 2026, zero bonus depreciation is allowed, absent any further action by Congress.

However, the same property that is eligible for bonus depreciation may also qualify for Section 179 expensing. For 2024, a business can expense—in other words, currently deduct—up to the lesser of $1.22 million or the amount of its taxable income (subject to a phase-out limit of $3.05 million). So bonus depreciation may never come into play for qualified property placed in service in 2024. If either limit for Section 179 applies, the remaining cost is eligible for 60% bonus depreciation and then MACRS deductions.

There are other special considerations for owners of pass-through entities like S corporations, partnerships and limited liability companies (LLCs). Notably, the bonus depreciation deduction reduces qualified business income (QBI). In turn, this lowers the QBI deduction. Therefore, if you are entitled to a QBI deduction, consider the potential tax impact of bonus depreciation.

Finally, bonus depreciation could be extended or modified, depending on the outcome of the elections in November.

Practical advice: Do not make any hasty decisions. Before you commit to acquiring qualified property for your business, discuss all the ramifications with your professional tax advisor.

Skirting Around the Wash Sale Rule

When to use “double up” strategy

 Whether you have a taxable gain or loss on the sale of securities depends on your “basis” in the stock (usually, your cost) and the price at which you sell your shares. However, the tax rules for certain security sales can be tricky. In particular, you should pay close attention to the “wash sale rule.”

How it works: Normally, you can use capital losses to offset your capital gains, plus up to $3,000 of ordinary income. However, under the wash sale rule, you are not permitted to deduct a loss from the sale of securities if you buy “substantially identical” securities within 30 days of the sale. So you get no tax benefit from the loss on your 2024 return. It does not matter if the purchase takes place before or after the date of the sale.

When are securities considered to be substantially identical? One example is shares of common stock in the same corporation. On the other hand, bonds that are issued by different obligors are not considered to be substantially identical. Whether the wash sale rule affects bonds from the same issuer depends on a number of factors, such as interest rates, face amounts, issue dates, maturity dates, etc.

Be aware that there is a way you can realize a current loss under the wash sale rule without waiting 31 days to repurchase the stock. This strategy commonly is referred to as “doubling up.”

 Example: You bought 100 shares of Gadget Corp. stock at $50 a share and now it is selling at $40 a share. But you believe the price of the stock is about to rebound. Instead of selling the original block of shares, which would produce a $1,000 loss, you double up by buying 100 more shares of Gadget Corp. stock at $40. Then you wait more than 30 days and sell the first 100 shares at $42.

Result: By doubling up, you have realized a deductible loss of $800. What’s more, you are now holding shares in Gadget Corp. with a basis of $40. If you decide to sell the shares at $42, you will realize a capital gain of $200. Currently, long-term capital gains for securities owned longer than one year are taxed are taxed at a maximum rate of 15% (20% for high-income investors).

If you had simply sold the initial shares at $42 and reacquired the new shares without waiting more than 30 days, you would not be able to deduct your $800 loss.

At least there is a silver tax lining if you are forced to forfeit a tax loss due to the wash sale rule. The amount of the loss is added to your basis in the new stock. Thus, when you sell the new stock in the future, a smaller amount of gain will be subject to tax. If the stock is sold at a loss, you can deduct a larger amount as a loss.

Final points: Remember that the tax law is subject to change. Also, consider all the relevant economic ramifications—not just taxes—in your investment decisions.

COBRA Protection for Departing Employees

Continuation of health insurance coverage

 Health insurance is one of the most important fringe benefits to many employees. How would you afford to pay for quality coverage if you were to lose your job? Fortunately, there is some measure of relief under the long-standing Consolidated Omnibus Budget Reconciliation Act—commonly known as COBRA, for short. Frequently, your employer may be required to offer continued coverage to a departing employee, but at a price.

Do not confuse COBRA with the Affordable Care Act (ACA) or the Health Insurance Portability and Accountability Act (HIPAA). These other laws are completely separate.

Background: Enacted way back in 1986, COBRA applies to private employers with 20 or more employees in the preceding calendar year. In addition, some states have enacted comparable laws for employers with fewer than 20 employees.

Generally, COBRA coverage is also extended to a covered employee’s spouse, dependent children and even an ex-spouse, if their coverage would be lost due to a qualifying event. To be eligible, the covered employee must have been currently enrolled in the employer’s health plan (or were when they worked there) and the plan must still be an active one.

Although employers are required to notify employees of their COBRA rights and to offer continued coverage, the entire health insurance cost may be shifted to the departing employee (plus a 2% administrative fee). Continuation of health insurance coverage may be required for one of the following events.

• Termination of the employee’s employment for any reason other than gross misconduct;
• Reduction in the number of hours of employment;
• The covered employee becomes entitled to Medicare;
• Divorce or legal separation of the spouse from the covered employee;
• Death of the covered employee; or
• Loss of dependent child status under the plan.

COBRA requires continuation coverage to be extended for as long as 18 or 36 months. The length of time depends on the type of qualifying event creating the COBRA rights. Note: A plan may provide for a longer period of coverage than the maximum period required by law.

When the qualifying event is the covered employee’s termination of employment or a reduction in hours of employment, the employee is entitled to 18 months of coverage. However, if the qualifying event is termination of employment or reduction of the employee’s hours AND the employee became entitled to Medicare less than 18 months before the qualifying event, COBRA coverage for a spouse and dependents can last for 36 months after the time the employee is eligible for Medicare. For certain other qualifying events, coverage must be provided for the maximum 36-month period.

Finally, if a qualified beneficiary is disabled and meets certain other requirements, qualified beneficiary receiving continuation coverage may be entitled to coverage for 29 months.

Reminder: A departing employee is not required to adopt continued health insurance coverage under COBRA. Investigate the possibilities for your situation.

A Star Is Born

Is someone in your family trying to make it in show biz or other performing arts?

Under a special exception in the tax law, that person may deduct qualified expenses if they—

• Perform services in the performing arts as an employee for at least two employers.
• Receive at least $200 each from any two of these employers.
• Have performing arts business expenses above 10% of the gross income from those activities.
• Have an adjusted gross income (AGI) of $16,000 or less before deducting the business expenses.

Also, if the individual is married, they must file a joint tax return.

Facts and Figures

Timely points of particular interest

 Filing Deadlines—The April 15 filing deadline for 2023 returns has passed. However, U.S. citizens residing abroad have until June 17, 2024, to file their returns, including those with dual citizenship. Also, if you applied for an extension on your 2023 return, you have until October 15, 2024, to file (although a good faith estimate of your tax liability had to be paid by April 15).

Mail Call—The IRS is going after some tax-evasive heavy hitters. It recently announced that it has sent out warning notices to taxpayers with incomes above $400,000 who have not filed a federal income tax return since 2017. The IRS used W-2s, 1099s and other third-party reporting forms to compile the list of offenders. The agency has estimated that more than 125,000 taxpayers will receive these notices in the mail.

 

Plug In New Electric Vehicle Credits

Changes taking effect over two years

The popularity of electric vehicles (EVs) continues to grow. According to the Energy Information Administration, it is estimated that EVs will have comprised 16.3% of all U.S. new car purchases in 2023 (up from 12.5% in 2022). Hybrid, plug-in hybrid and battery-electric vehicles reached 17.9% of all new light-duty vehicle sales in the second half of the year.

If you bought one of these vehicles last year, you may be in line for a big tax credit on your 2023 tax return, based on changes in the Inflation Reduction Act (IRA). However, be aware of new “stop” and “go” signals for EVs acquired in 2024.

Starting point: The tax law authorizes a tax credit for EVs, including plug-in hybrids, that meet certain energy consumption standards. The maximum credit is $7,500, regardless of cost. The credit is claimed on the tax return for the year in which you purchase the vehicle. Furthermore, you must meet other technical requirements, including a limit on the gross vehicle weight rating (GVWR).

In addition, be aware that the credit is nonrefundable. Finally, the credit is only available to vehicle owners. Lessees do not qualify for a tax break.

 Notably, the IRA includes the following key provisions relating to tax credits for EVs.

• Single filers cannot claim the credit with modified adjusted gross income (MAGI) above $150,000 or above $300,000 for joint filers.

• The credit is not available for most passenger vehicles that cost more than $55,000. The limit is $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks.

• For the full credit, the vehicle must be powered by batteries whose materials are sourced from the U.S. or its free trade partners and must be assembled in North America.

• Previously, the credit was eliminated for EVs of manufacturers with EV sales of 200,000 or more vehicles. But this ban no longer applies to vehicles purchased after 2022.

Note that the recent legislation also provides a credit of up to $4,000 to purchasers of used vehicles under a separate set of rules. For example, the credit is available to single filers with MAGI of no more than $75,000 or no more than $150,000 for joint filers. But the vehicle cannot cost more than $25,000, it must be at least two years old and you can only claim the credit once every three years.

What about new EVs purchased in 2024? Availability of the credit is being winnowed by the manufacturing rules. At this writing, only 18 EVs qualify for the credit in 2024, according to the U.S. Department of Energy.

That is the bad news. The good news: Instead of waiting until you file your 2024 return to claim the credit, you can obtain a rebate at the point of sale.

To participate in the program, dealers must register through an online system that allows them to verify the vehicle’s eligibility. But you remain responsible for meeting the income requirements. If you surpass the threshold, you will have to “pay the IRS back” on your tax return.

Finish line: If you have any more questions, your professional tax advisors can steer you in the right direction.

Last Call for IRA Contributions

When to claim deductions

Time is running out on a tax planning technique that can reduce 2023 tax return liability. If a taxpayer qualifies, they can deduct their contributions to a traditional IRA, but the rules are tricky.

Background: The maximum amount you can contribute to a traditional IRA for the 2023 tax year is the lesser of 100% of earned income or $6,500 or $7,500 if you are age 50 or older. You have until the filing due date for 2023 returns—April 15, 2024—to make a contribution. However, if you obtain a filing extension, this does not extend the time for making a contribution for the 2023 tax year.

For starters, contributions are tax-deductible, but the deduction is phased out if the individual (or spouse, if married) actively participates in an employer’s qualified retirement plan, like a 401(k) plan, AND their modified adjusted income (MAGI) exceeds the annual threshold. The figures for 2023 are as follows. (These thresholds are also increasing for 2024.)

• The phase-out range for single filers who are active plan participants is between $73,000 and $83,000 of MAGI and between $116,000 and $136,000 for joint filers.

• If one spouse of a couple is an active participant in a plan, the phase-out range is between $218,000 and $228,000 of MAGI.

For example, a 40-year-old single filer who has a MAGI of $78,000 for 2023 and participates in an employer’s 401(k) plan can deduct 50% of a $6,500 contribution, or $3,250. These IRA contributions are deducted ”above the line” so they reduce adjusted gross income (AGI) for other tax purposes.

Best of all, contributions made to an IRA can continue to compound without any current tax erosion until withdrawals are made. This may supplement a qualified retirement plan.

Caveat: This tax break is available if the individual has “earned income” such as compensation from a job. If they only have investment income, they cannot deduct their contributions to an IRA.

Note, however, that a couple can contribute to a spousal IRA if just one spouse works. For example, if one spouse has wages of $100,000, they can effectively double the annual contribution to $13,000. Accordingly, the maximum for a spousal IRA where both spouses are age 50 or over is $14,000.

What about Roth IRA contributions? Similar rules apply. For instance, the contribution limits for Roth IRAs are the same as they are for traditional IRAs. Alternatively, you can combine traditional and Roth IRA contributions up to the total limit of $6,500 for 2023 or $ 7,500 if you are age 50 or older.

However, contributions to Roth IRAs are never tax-deductible, although future payouts are completely exempt from tax if the Roth has been in existence for at least five years and you are age 59½ or older. In contrast, the portion of a traditional IRA distribution representing deductible contributions and earnings is taxable at ordinary income rates.

Practical approach: Consult with your professional advisors regarding your personal situation.

How to Thwart a Family Feud

Planning ahead for an estate

Even close-knit families may be torn apart after the death of a parent, especially if the will is contested in court. Even worse, this sort of rift might easily have been avoided with advance planning.

Hypothetical example: Mrs. Smith, a widow, has three children: the oldest, Adam, is an entrepreneur; the middle child, Barbara, is a psychologist; and the youngest child, Cheryl, just began teaching at an elementary school. While Adam and Barbara are each married, well‑settled and prosperous, Cheryl still lives at home.

Naturally, Mrs. Smith loves all her chil­dren, but she would like to provide some extra money for her youngest, who is not as likely to earn as much during her life as her siblings. Also, Cheryl might have to help care for Mrs. Smith as she gets older.

However, if Mrs. Smith amends her will to leave more than one‑third of her estate to Cheryl, the other two children may feel slighted. And since Cheryl lives at home, they might also suspect undue influence. To avoid a family dispute, here are three possibilities for Mrs. Smith to consider.

1. She can establish a trust through her will (called a “testamentary” trust). Mrs. Smith may keep all three children as equal beneficiaries and appoint a neu­tral party as trustee (e.g., a close friend or professional advisor). Once the trustee understands Mrs. Smith’s intentions, they may be given absolute discretion to direct the money to where it is needed the most.

Hopefully, Adam and Barbara will understand when Cheryl receives an additional benefit. (They do not need the extra money anyway.) And they are less likely to contest the will under these conditions.

2. Mrs. Smith can begin a program of life­time gifts. For 2024, she can give each recipient up to $18,000 without paying any gift tax. Frequently, wills are contested because the decedent is not alive to explain what they wanted. If Mrs. Smith gives away property while she is alive, her intentions are obvious.

It is doubtful that Adam and Barbara will contest the validity of a lifetime gift to Cheryl. And, if they do, they run the risk of being written out of the will altogether.

3. Mrs. Smith might state in her will that anyone who contests it will be disinherited. (The statement is called an “in terro­rem” clause in legal terminology.) This type of clause gen­erally is enforced by the courts to discourage litigation.

Note: It is usually best to provide something—no matter how little—for everyone in the immediate family. In any event, Mrs. Smith should mention the names of all of her children, even if only to say that she is leaving them nothing. Otherwise, the children may wind up in court anyway. Reason: One child may claim that an omission shows incompetency at the time the will was executed.

In summary: Of course, this is a highly sensitive area for most families, but do not procrastinate. Talk things over with your children now to preserve family harmony in the future.

Cleaning Up Nanny Tax Obligations

Liability for household workers

If you have someone who helps around the house while you (and your spouse, if you are married) work, you may be surprised to learn that the IRS effectively treats you as an “employer” for tax purposes. That means you must meet certain tax responsibilities relating to the worker under the “nanny tax.”

Do not be fooled by the name. The nanny tax is not limited to the super-rich and famous who employ an around-the-clock au pair at their beck and call. It can also apply to families of all incomes who employ a part-time household worker or someone who simply helps out with the kids after school.

Details: The tax law requires you to pay employment taxes if the wages paid to a household employee exceed an annual threshold. This threshold, which is relatively low, is $2,700 for 2024 (up from $2,600 in 2023). The nanny tax collectively incorporates the following three taxes.

1. FICA tax: FICA is comprised of the 6.2% Social Security tax and the 1.45% Medicare tax. Both the employer and the employee must pay the total 7.65% FICA tax. For 2024, the Social Security portion is owed on a wage base of $168,600 (up from $160,200 in 2023) while the Medicare portion applies to all wages.

Say you pay a housekeeper $200 a week with two weeks off for a total of $10,000 a year. The FICA tax that you and the worker each owe is $765 ($620 Social Security tax + $145 Medicare tax). You must withhold the worker’s share.

2. FUTA tax: An employer must also pay a 6% federal unemployment tax on the first $7,000 in wages, but this amount is generally reduced by a 5.4% credit if required amounts have been paid to the state. In this case, the effective tax rate is 0.6%.

3. State unemployment and disability taxes: Typically, an employer is also responsible for its share of these state taxes and for withholding the proper amount on behalf of an employee. If the taxes are not withheld, the employer must pay them.

Be aware that the nanny tax may apply to a wide variety of household employees, including nannies, babysitters, private nurses, caretakers, cleaning people, yard workers and other domestic workers if you have requisite control over the work relationship. If you pay an agency directly, however, the agency is treated as the employer of the worker and is responsible for these taxes.

On the other hand, if the worker controls how and when the work is performed and works for several households, they may be considered to be a self-employed individual. This often occurs when the worker offers services to the general public and provides the tools and supplies needed for the job. Self-employed individuals are responsible for the own employment taxes.

Finally, the nanny tax is not imposed on amounts paid to a spouse; a child under age 21, a parent (unless certain special conditions apply) or an employee who is under age 18 at any time during the year unless providing household services is the employee’s principal occupation.

What about you? Consult with your professional tax advisor concerning your personal situation.

Tackle NIL Income Issues

Is your child a star athlete in college? They may be fortunate enough to benefit from payments relating to their “name, image and likeness” (NIL).

Although the tax law in this area is still evolving, the IRS generally treats student-athletes who receive NIL income as self-employed individuals. Thus, they must report their annual business income, but may be entitled to deduct qualified expenses.

Huddle with your professional tax advisor for more details.

Facts and Figures

Timely points of particular interest

 Place Your Bets—Do you engage in online betting? If you are a winner, you must report the cash rewards as taxable income, whether you are betting on sports events, participating in Fantasy league contests or playing casino games. However, if you can substantiate losses from gambling activities, they are deductible up to the amount of your winnings. Caveat: Gambling losses may be deducted only in a tax year in which you itemize deductions.

Business Vehicles—The IRS has released the new depreciation limits for vehicles used for business driving. If you place a passenger car into service in 2024, the first-year dollar cap is $20,400, including the “bonus depreciation” tax break, based on 100% business use. The figures drop down to $19,800 in the second year and $11,900 in the third year.  For each succeeding year, the limit is $7,160. Bigger deductions are available for heavy-duty vehicles.