A critical date is approaching for many people who attained age 70½ in 2018. By Apr. 1, 2019, you must commence making required minimum distributions (RMDs) from your regular IRAs. Also, if you were a participant in a qualified retirement plan (e.g., 401(k) plan), you must begin taking distributions by Apr. 1 of the calendar year following the later of the year in which you: (a) reach age 70½, or (b) retire (except for 5% owners, who are subject to the same rules as IRA owners). Please call our office if you have any questions.
In an Information Release and Notice, IRS has expanded the estimated tax penalty waiver that it previously announced in Notice 2019-11 (see IRS provides penalty relief for underpayment of 2018 estimated individual taxes). The waiver now applies to taxpayers whose total withholding and estimated tax payments are 80% or more of their 2018 taxes-down from 85%. The notice also updates procedures for requesting the waiver and provides procedures for taxpayers who have already paid underpayment penalties but who now qualify for relief to request a refund.
The Tax Cuts and Jobs Act (TCJA) was a comprehensive tax overhaul that dramatically changed the rules governing the taxation of individuals for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. TCJA also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs.
Many of the TCJA’s changes impacted withholding. A Government Accountability Office (GAO) report estimated that nearly 30 million taxpayers could be underwithheld in 2018.
Initial relief. In response to expressions of concern by members of Congress and other groups about withholding difficulties, IRS provided in Notice 2019-11 that the estimated tax penalty under Code Sec. 6654 for the 2018 tax year was waived for individuals whose total withholding and estimated tax payments made by Jan. 15, 2019, equaled or exceed 85% of the tax shown on their 2018 returns.
This relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect an array of changes under the TCJA. A taxpayer who paid less than 85% was not eligible for the waiver, and his penalty was to be calculated using the usual 90% threshold.
Expanded relief. Notice 2019-25, which modifies and supersedes Notice 2019-11, increases the availability of the underpayment penalty waiver by expanding it to individuals whose total withholding and estimated tax payments equal or exceed 80% of the tax shown on their 2018 return. IRS notes that this waiver is in addition to any other exception that Code Sec. 6654 provides to the underpayment of estimated income tax, such as owing only a de minimis amount of estimated tax.
Notice 2019-11 also updates procedures for requesting the waiver, and provides procedures for taxpayers who have already paid underpayment penalties but who now qualify for relief to request a refund.
In a letter to Ranking Member of the Senate Finance Committee Ron Wyden (D-OR), dated February 25, 2019, J. Brady Howell, Senior Advisor, Treasury’s Office of Legislative Affairs responded to the statement that tens of millions of taxpayers will be underwithheld for 2018 and the suggestions that this was due to the Tax Cut & Jobs Act (TCJA). Howell said that the TCJA and IRS’s implementation of the law through the withholding tables and Form W-4 instructions would not cause tens of millions of taxpayers to be underwithheld. Rather, he said, tens of millions of taxpayers are underwithheld every year, due to taxpayers’ choices or the difficulties some taxpayers face in adjusting withholding to account for changes in their circumstances each year. And, recognizing that because the TCJA was new and some taxpayers would not have understood that they should check their withholding (despite the extensive IRS outreach efforts), Howell noted that IRS had provided taxpayer relief. Specifically, he noted that IRS recently announced that taxpayers would not be subject to the usual underpayment penalties as long as they timely paid at least 85% of the tax they owe. This would provide substantial relief to many taxpayers without creating large windfalls for taxpayers who would have been underwithheld in any event.
The recently enacted Tax Cuts and Jobs Act (TCJA) introduces two elections, one to defer gain from the sale of property that is reinvested in an investment in a Qualified Opportunity (QO) Fund and another to permanently exclude gain from the sale or exchange of the investment in the QO Fund. These elections can provide substantial tax benefits for taxpayers who can satisfy the detailed and quite complex set of rules.
Designation of a QO Zone. Under the TCJA, a state’s chief executive officer (CEO) (generally, a governor or the mayor of the District of Columbia) can designate certain census tracts that are low-income communities as Qualified Opportunity Zones (QO Zones). The state’s CEO has 90 days (plus, another 30 days under an extension) after the date of enactment to nominate a tract by notifying IRS in writing of the nomination. IRS then has to certify the nomination and designate the tract as a QO Zone within 30 days (plus, another 30 days under an extension) after receiving the notice. Thus, a designation has to occur before June 21, 2018 and will remain in effect for ten calendar years. Census tracts in Puerto Rico that are low-income communities are considered to be certified and designated as QO Zones effective on Dec. 22, 2017.
QO Funds. A QO Fund is an investment vehicle organized as a corporation or a partnership for the purpose of investing in a QO Zone. The QO Fund can’t invest in another QO Fund and has to hold at least 90% of its assets in QO Zone property (i.e., any QO Zone stock, any QO Zone partnership interest, and any QO Zone business property). A QO Zone property has to meet many requirements, including that substantially all of the entity’s business property is used in a QO Zone. A penalty can apply to the QO Fund if it fails to meet the 90% requirement.
Temporary gain deferral election. If a taxpayer invests gains from the sale or exchange of property with an unrelated person in a QO Fund within the 180-day period beginning on the date of the sale or exchange, the taxpayer can elect to defer the gain from the sale or exchange.
Recognition of deferred gain. The taxpayer defers the gain until the later of the date on which the investment is sold or exchanged, or Dec. 31, 2026. At that time, the taxpayer includes the excess of (1) the gain over the lesser of the amount of deferred gain or the fair market value of the investment as determined on that date over (2) the taxpayer’s basis in the investment.
Basis in the investment. A taxpayer’s basis in the investment is zero unless any of the following increases apply: (a) 10% of the deferred gain if the investment is held for five years, (b) 5% of the deferred gain if the investment is held for seven years; and (c) any deferred gain recognized at the end of the deferral period.
Permanent gain exclusion election. At the taxpayer’s election, a taxpayer can exclude any post-acquisition capital gains on an investment in a QO Fund if the investment in the QO Fund has been held for ten years.
When elections can’t be made. A taxpayer can’t make either election if there’s already an election in effect with respect to the same sale or exchange. Also, a taxpayer can’t make a temporary deferral election with respect to any sale or exchange after Dec. 31, 2026.
On February 28, Senate Finance Committee leaders introduced legislation to retroactively extend tax provisions that expired at the end of 2017 and 2018 and provide disaster tax relief benefits to individuals and businesses affected by major disasters occurring in 2018.
The measure, introduced by Senate Finance Committee Chairman Charles E. Grassley (R-IA), and Ranking Member Ron Wyden (D-OR), would extend some 29 expired tax provisions through the end of 2019 at their current levels. These temporary tax provisions are generally referred to as “extenders” because they are routinely extended by Congress on a one- or two-year basis. Twenty-six of these provisions expired at the end of 2017, and three others expired at the end of 2018.
While in the past many lawmakers have indicated that they would like to get rid of some of the extenders and make others permanent, their indecision has allowed a timely renewal to fall by the wayside. Co-sponsor of the bill Grassley commented, “Congress needs to get out of this bad habit of regular retroactive extensions of these tax provisions….The whole point of these federal tax incentives is to encourage certain behaviors, especially investments in alternative energies, energy efficiency and transportation.” Co-sponsor Wyden commented, “It’s past time to kick the addiction to short-term tax policies, but until Congress is able to break this cycle for good, taxpayers deserve certainty about what they’ll owe,” Wyden said.
However, some House members have shown less interest in quickly advancing a renewal of the tax provisions. House Ways and Means Chairman Richard E. Neal, D-Mass said he wants to take time to examine each provision and plans to hold hearings on tax extenders sometime in March.
The following provisions that expired at the end of 2017 would be extended through 2019:
…the nonbusiness energy property credit;
…the qualified fuel cell motor vehicle credit;
…the alternative fuel refueling property credit;
…the 2-wheeled plug-in electric vehicle credit;
…the second generation biofuel producer credit;
…the biodiesel and renewable diesel incentives;
…the credit for electricity produced from certain renewable resources;
…the production credit for Indian coal facilities;
…the railroad track maintenance credit;
…the energy efficient homes credit;
…the classification of certain race horses as 3-year property;
…the special allowance for second generation biofuel plant property;
…the energy efficient commercial buildings deduction;
…the election to expense advanced mine safety equipment;
…the extension of the special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities;
…the extension and clarification of excise tax credits relating to alternative fuels;
…the 7-year recovery period for motorsports entertainment complexes;
…the accelerated depreciation for business property on Indian reservation;
…the expensing rules for certain productions;
…the Indian employment credit;
…the mine rescue team training credit;
…the exclusion from gross income of discharge of qualified principal residence indebtedness;
…the treatment of mortgage insurance premiums as qualified residence interest;
…the deduction of qualified tuition and related expenses;
…the extension of empowerment zone tax incentives; and
…the American Samoa economic development credit.
The following provisions that expired at the end of 2018 would be extended through 2019:
…the temporary reduction in medical expense deduction floor;
…the extension of oil spill liability trust fund rate; and
…the black lung liability trust fund excise tax.
The disaster tax relief provisions in the bill include special rules allowing access to retirement funds, an employee retention credit, suspension of limits on deductions for certain charitable contributions, liberal rules for deductions for disaster-related personal casualty losses, and special rules for measurement of earned income for purposes of qualifying for tax credits.