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rules, the IRS may impose a penalty equal to 25% (decreased from 50% by SECURE 2.0) of the amount that should have been withdrawn (or the difference between the required amount and a lesser amount actually withdrawn).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.