The Tax Cuts and Jobs Act (TCJA) is hurting some children receiving military survivor benefits. The Congressional Research Service (CRS) has issued a new report suggesting ways to fix that. The TCJA changed the calculation of “kiddie tax” on certain military survivor benefits. Retired service members and dependents of servicemembers who die while in active service can elect to provide their families with up to 55% of their pension after their death. The tax on these payments generally increased under the TCJA. The CRS suggests legislative options to prevent a child’s benefits from being taxed at rates higher than they used to be. Read the report here.
The IRS is reminding business taxpayers and the self-employed that an important change is coming that will affect the way it issues employer identification numbers (EINs). Beginning 5/13/19, only individuals with tax identification numbers (either a Social Security number or an individual taxpayer identification number) can request an EIN. The IRS states that this new requirement “will provide greater security to the EIN process by requiring an individual to be the responsible party and will also improve transparency.” An EIN is a 9-digit number assigned to sole proprietors, corporations, partnerships, estates, trusts and other entities for tax-filing and reporting purposes.
As part of National Small Business Week (May 5-11), the IRS issued a reminder about a change in backup withholding. Under the Tax Cuts and Jobs Act, the backup withholding tax rate dropped from 28% to 24%, effective 1/1/18. Backup withholding applies in various situations, including when a taxpayer fails to supply a correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number, but in some cases, it can be an employer identification number, individual taxpayer identification number or adoption taxpayer identification number. Backup withholding also applies when a taxpayer underreported interest or dividend income on a federal tax return.
May 5 to 11 is “Hurricane Preparedness Week” and the IRS is encouraging taxpayers “to be prepared for the unexpected.” If you could be affected by a hurricane or other natural disaster, make an emergency plan and update it annually. Store key documents in a safe waterproof place, including bank statements, tax returns and insurance policies. Take photos to document the valuable contents of your home or business so you can help prove the fair market value of items when filing insurance claims. (IR-2019-8)
The IRS sets out rules for tax-exempt trusts claiming a Section 199A deduction. On its website, the tax agency has issued instructions for computing the qualified business income (QBI) deduction for tax-exempt trusts with unrelated business income. Noncorporate taxpayers may claim an income tax deduction for their QBI in tax years 2018 to 2025. The deduction is generally 20% of a taxpayer’s QBI from a partnership, S corporation or sole proprietorship. Taxpayers with taxable income that exceeds a threshold amount are subject to limitations based on W-2 wages paid by the business and the unadjusted basis in the business’s acquired qualified property.
The “Gold Star Family Tax Relief Act,” recently introduced in the U.S. House, would fix a consequence of the Tax Cuts and Jobs Act. The law resulted in the heavy taxation of military survivor benefits received by children of U.S. service members who died while serving. It modified the “kiddie tax” so that the earned income of a child is taxed at the rates for single individuals. And the net unearned income of a child is taxed according to the brackets (10% to 37%) that apply to trusts and estates. If passed, the bill would provide that, for purposes of the kiddie tax for tax years after 2017, survivor benefits would be included in a Gold Star child’s gross income as earned income.
The IRS is expanding its retirement plan determination letter program. In Revenue Procedure 2019-20, the IRS has provided for a limited expansion of the determination letter program with respect to individually designed retirement plans. The IRS also provides for 1) a limited extension of the remedial amendment period (which provides the circumstances when plan sponsors may submit determination letter applications to the IRS) and 2) special sanction structures that apply to certain plan document failures discovered by the IRS during the review of a plan submitted for a determination letter. (IR-2019-84)
The IRS reform bill has stalled in the Senate. The fate of a bipartisan bill to reform the IRS, the “Taxpayer First Act of 2019,” is uncertain after several Senate Democrats expressed concerns following a media report that private tax preparation companies have prevented low-income taxpayers from accessing their Free File programs. The bill had sailed through the House by unanimous consent on 4/9/19. Senate Democrats are also interested in adding provisions regulating tax return preparers. The bill is intended to modernize the IRS, improve taxpayer services and strengthen taxpayer protections.
A bill designed to strengthen Americans’ long-term financial security moves a step closer to passage. In April the bipartisan “Setting Every Community Up for Retirement Enhancement (SECURE) Act” was unanimously approved in the U.S. House Ways and Means Committee. Next, it moves to the U.S. House, for a vote by Memorial Day. If ultimately passed, among other things this bill would expand opportunities for Americans to increase their savings, modify safe harbor rules and repeal the maximum age for traditional IRA contributions. Here’s the bill to amend the Internal Revenue Code of 1986 to encourage retirement savings, and for other purposes.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.