Self-employment Income from Short-term Rentals

IRC Sec. 1401(a) imposes a tax on an individual’s Net Earnings Self-employment (NESE). However, under IRC Sec. 1402(a)(1) , “net rental income” generally isn’t included in NESE, unless (1) the income is received by a “real estate dealer,” or (2) the rent includes substantial services provided to the occupant for the occupants’ convenience. In a Chief Counsel Advice (CCA), two examples were given differentiating the level of owner participation for inclusion as NESE. In the first example, the Chief Counsel considered the level of services noting that the occupants were not required to maintain the space in a condition for occupancy, and the substantial services provided by the owner were substantial and therefore their rental income was included in NESE. In the second example, the owner provided a room and bathroom and the taxpayer only cleaned in between renters so income was not included as NESE.

Advance Child Tax Credit Information Letters

The IRS will issue information letters to Advance Child Tax Credit (ACTC) recipients. To help taxpayers reconcile and receive all of the Child Tax Credits (CTC) to which they are entitled, the IRS will send Letter 6419 (2021 Advance CTC). The letter will include the total amount of ACTC payments taxpayers received in 2021 and the number of qualifying children used to calculate the advance payments. Taxpayers should keep this and any other IRS letters about ACTC payments with their tax records. Families who received advance payments will need to file a 2021 tax return and compare the CTC payments they received in 2021 with the amount of the CTC they can properly claim on their 2021 tax return. People who received the advance CTC payments can also check the amount of their payment using the CTC update portal available on www.IRS.gov.

2022 Tax Filing Season Opens January 24

The IRS announced that the nation’s tax season will start on Monday, 1/24/22, when the tax agency will begin accepting and processing 2021 tax year returns. The January 24 start date for individual tax return filers allows the IRS time to perform programming and testing that is critical to ensuring IRS systems run smoothly. Updated programming helps ensure that eligible people can claim the proper amount of the Child Tax Credit (CTC) after comparing their 2021 advance credits and claim any remaining stimulus money as a Recovery Rebate Credit when they file their 2021 tax return.

RMD Alert

In an Employee Plans News Alert, the IRS has reminded taxpayers who are at least 70½ years old and have a retirement account of their responsibility to withdraw minimum amounts annually, noting waivers and other rule changes that have resulted from legislation over the past two years.

Required minimum distributions. The IRS pointed out that required minimum distributions (RMDs) apply to IRAs and other retirement accounts for each year after the account owner has reached age 72. The RMD threshold is 70½ for individuals who reached that age before January 1, 2020.

For taxpayers with retirement plans provided by an employer, RMDs can be delayed if the account holder continues working and is not at least a 5% owner of that employer, according to the IRS release.

However, under IRS rules, taxpayers who meet the age criteria are required to make annual withdrawals from traditional IRAs as well as from simplified employee pension plans (SEPs), savings incentive match plans for employees (SIMPLE) and salary reduction simplified employee pension (SARSEP) plans, even if they continue working.

Note: Taxpayers are not required to take RMDs from ROTH IRAs.

Changes to RMD rules. The News Alert also noted changes to the RMD rules introduced by the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law in March 2020, and the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect in December 2019.

These changes include an RMD waiver for 2020 for holders of IRAs and workplace retirement plan accounts, including individuals who turned age 70½ in 2019 and had their first and second RMDs due in 2020, or had their first RMD due on April 1, 2021, for the 2020 tax year.

No RMD waiver for 2021. The News Alert emphasized that the waiver of RMDs for 2020 under the CARES Act wasn’t extended to RMDs for 2021. “IRA account holders and participants in retirement plans are subject to RMDs for 2021,” the document stated.

For taxpayers who reached 70½ in 2019, RMDs due in 2020 were waived. But these taxpayers must take a 2021 RMD by December 31, 2021. The amount of the RMD is based on their account balance as of December 31, 2020.

Taxpayers who turned 72 in 2021, but hadn’t reached 70½ in 2019, their 2021 RMD must be taken by April 1, 2022. Again the RMD amount is based on account balances as of December 31, 2020. These taxpayers’ 2022 RMD will be due by December 31, 2022, based on account balances as of December 31, 2021.

Other changes outlined in the release pertain to still-employed holders of retirement plans and delays of RMDs as well as to IRA beneficiaries, who must follow special distribution rules from the IRS. It noted that the SECURE Act changed how and when beneficiaries must take distributions from an account whose owner died after 2019, whereas the CARES Act excuses beneficiaries from taking RMDs for or during 2020.

Schumer wants BBB bill completed by Christmas

Senate Majority Leader Charles Schumer, D-N.Y. says he wants the approximate $1.7 billion infrastructure bill, the Build Back Better Act (H.R. 5326), completed by Christmas but setbacks in the Senate’s December legislative agenda and resistance from Sen. Joe Manchin, D-W.VA. could easily push action beyond that date and possibly into 2022. Some Senators are already saying they expect to be in session over Christmas.

The Democratic leader privately said he wants the bill on the Senate floor the week of Dec. 13 but acknowledged that Manchin’s resistance to the overall cost of the bill and the Senate Parliamentarian’s review of the legislative text could delay that plan. In addition, the Senate is not moving as fast as expected on a must pass Defense bill and is facing a vote this week on a Continuing Resolution (CR) to keep the federal government funded after Dec. 3 when current funding runs out. House Majority Leader Steny Hoyer, D-MD. said on Nov. 30 that a CR could be on the House floor as early as Dec. 1. Both parties have said they do not want a federal government shutdown.

Adding to Democratic woes is the need to address the debt limit which Treasury has said will need to be increased by a Dec. 15 deadline. Schumer and Senate Minority Leader Mitch McConnell, R-Ky. continue to discuss the debt limit but have not reached an agreement on when and how it will be set.

Happy Thanksgiving

Sending good wishes to you this Thanksgiving! Good food that fills your table, good health as you work hard, and good times with family and friends. May you have all the best delights in life. Happy Thanksgiving!

Don’t forget to enjoy some football!   Go Buckeyes!

 

House passes Build Back Better Bill

House lawmakers on Nov. 19 approved the $1.7 trillion Build Back Better Act (H.R. 5376) along partisan lines by a margin of 220-213, sending the measure to the Senate where it is certain to undergo changes.

Senate Democratic Leader Charles Schumer, D-N.Y. said after House passage of the massive social spending bill that the Senate would immediately take up the measure. “We will act as quickly as possible to get this bill to President Biden’s desk and deliver help for middle-class families,” said Schumer.

After review by the Senate Parliamentarian the chamber will need to hold a vote to proceed to the measure. Sen. Joe Manchin, D-WVa., who has consistently questioned the cost of the legislation, has not said how he will vote on the motion to proceed. Assuming the bill moves forward, the Senate could take months wrangling over the particulars of the bill before sending it back to the House despite Schumer’s claim that it will be finished before Christmas.

The bill extends the enhanced child tax credit (CTC) for one year, establishes universal and free preschool, paid leave and includes $550 billion of investments in clean energy and other climate change initiatives. There are also a slew of tax provisions including: a surtax of 5% on personal income above $10 million, and 3% on income above $25 million; a 15% minimum tax on corporate profits of large corporations with over $1 billion in profits, a 1% tax on stock buybacks, and a 50% minimum tax on foreign profits of U.S. corporations.

Build Back Better summary

ARM Announces New Shareholder

ARM is pleased to announce, effective 01/01/2022, Chelsea Williams will be promoted to Shareholder.

For this honor, we asked Chelsea to put down a few words about what this promotion means to her:

It was recently announced I would become a shareholder at ARM CPA as of 1/1/2022. I was asked by a teammate what this moment means to me. I thought to myself, “How could I possibly put into words everything that is going through my head?” The truth is… I can’t. No amount of words could ever fully express the gratitude and appreciation I have for the people at ARM.

Twelve years ago, ARM took a chance on a Capital University intern from Grove City, Ohio. Listed as prior work experiences included only blacktop seal coating, banquet server, and cabinet warehouse manufacturer. Neither the company nor I could have ever predicted I would become a shareholder in the firm one day. This originally was not a realistic goal of mine, but after a few years with the company it was, without a doubt, where I wanted to be. Nothing worth having comes easy or free. But it is a blessing to be able to work with people every day that I consider family.

I wouldn’t be the person, or in the position, I am today without my family. My family has and always will be my #1 priority. I was the lucky girl who got to marry the man she had a crush on in high school. My husband pushes me to be better and expect more out of myself. We have a smart and outgoing daughter who would take on the world at age six if we let her. My parents are amazing. They taught me that hard work, dedication, and a work ethic without excuses will prevail. Additionally, I have had both sides of grandparents, aunts, and uncles who have always been actively involved in my life. My brother grew up having to deal with my competitive nature. We teased each other to no end. However, he knows that he will always be my best friend.

I am extremely grateful for this opportunity. My presence, actions, and attitude will represent the name and brand that the leaders have blazed before me. I am excited for the chance to be a part of the legacy.

– Chelsea L. Williams CPA

 

Tax Implications of Selling Virtual Currency

Cryptocurrency is not backed by any government. Therefore, it is subject to less regulation than traditional currencies. As a consequence of this, many cryptocurrency investors have a belief that they have found a loophole to avoid paying taxes. However, this is not correct. Virtual currency exchanges, whether a gain or a loss, must be reported to the IRS and is taxed in a similar manner as traditional stocks.

Cryptocurrency is considered property for federal income tax purposes, meaning the IRS treats it as a capital asset. Because of this, the taxes generated as a result of a virtual currency sale are the same as a realized gain or loss on the sale or exchange of a capital asset. When a capital asset is purchased, the cost basis in the capital asset is equal to the cost to obtain the capital asset. When the capital asset is sold, the net sales proceeds are compared to the original basis to determine whether the result is a capital loss or a capital gain.

When buying and selling cryptocurrency, comparing net proceeds to the cost basis isn’t the only step. The length of time the asset is held is used to determine the type of capital gain or loss recognized.

Assets bought and subsequently sold within one year should recognize a short-term capital gain or loss. Short-term gains and losses are subject to the same tax rates as ordinary income.

Assets bought and subsequently sold after one year should recognize a long-term capital gain or loss. Typically, long-term capital gain rates are more favorable than short-term capital gain rates. There are currently three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate entirely depends on your income.

2021 Rates:

  • Single Status:
    • 0%: $0 – $40,400
    • 15%: $40,401 – $445,850
    • 20%: $445,851+
  • Married Filing Jointly Status:
    • 0%: $0 – $80,800
    • 15%: $80,801 – $501,600
    • 20%: $501,601+

Tax Implications of Selling Physical Gold or Silver

Physical holdings in precious metals are capital assets. The IRS specifically categorizes gold and other precious metals as collectibles. Holdings in these metals, regardless of their form are subject to capital gains tax. However, the capital gains tax is only owed after the sale of such holdings.

While many financial securities are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed a little differently. Short-term gains on precious metals are taxed using ordinary income rates that apply to other income, such as wages. Physical holdings sold after one year are subject to a capital gains tax equal to your marginal tax rate, up to a maximum of 28%. Even though the 28 percent collectibles capital gains tax rate is higher than the long-term capital gains tax rates for traditional capital assets, it is still a more favorable rate than short-term gains. This is especially true for higher income earning individuals that fall into the in the 32%, 35%, and 37% tax brackets as these individuals would still only have to pay 28% on their physical precious metals sales.

Tax liabilities on the sale of precious metals are not due at the time of sale. Instead, sales of physical precious metals need to be reported on Schedule D of Form 1040 on your tax return. However, sales of certain types of metal require Form 1099-B to be submitted to the IRS at the time of the sale.

The amount of tax owed on the sale of precious metals depends on the cost basis of the metals themselves. If you purchase the metals yourself, then the cost basis is equal to the amount paid for the metal. It’s also important to note that the IRS allows certain additions to the basis, such as the cost of appraisals.

If the precious metals are received via inheritance, then the cost basis is equal to the market value on the date of death of the person from whom you inherited the metals.

If the precious metals are received as a gift, the cost basis is the lesser of:

  1. The market value of the precious metals on the date that the gifter purchased them, or;
  2. The market value on the day that the precious metals were gifted.