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- Written by: Steel Rose
Following the demise of the cryptocurrency exchange platform FTX, many taxpayers are studying how they can harvest tax losses associated with their devalued crypto assets. To better assess those options, taxpayers should be mindful of the IRS's position for the tax provisions relating to losses in a January 10th Chief Counsel Advice (CCA). The CCA concluded that a taxpayer who owns cryptocurrencies that substantially declined in value may not deduct those losses on the basis that (i) the crypto asset is worthless or (ii) abandoned, in addition to a larger limitation that the deduction would be disallowed under the miscellaneous itemized deductions between the years 2018 through and including 2025.1
Very generally, losses are deductible if they are "sustained during the taxable year" and are "evidenced by closed and complete transactions, fixed by identifiable events."2 According to the CCA, a decline in the value of the cryptocurrency does not in and of itself qualify for a tax deduction; the taxpayer must dispose of the asset and relinquish control and dominion, either via sale or total abandonment. However, if a cryptocurrency is determined to be worthless and is no longer saleable, it may rise to an "identifiable event" that would allow a tax deduction. Whether an asset is "worthless" turns on facts and circumstances. A tax deduction based on "abandonment" of the property turns on proving whether the taxpayer has (i) shown an intention to abandon the property and (ii) has taken an affirmative act of abandonment. Intention alone does not suffice; the taxpayer must show an affirmative act. In the facts set out in the CCA, the taxpayer did not demonstrate the abandonment of the cryptocurrency. Even though the cryptocurrency was valued at less than a cent, the taxpayer continued to own it (ergo, did not sell or swap it for another coin). Additionally, the taxpayer never demonstrated an intention coupled with an affirmative action to abandon the cryptocurrency, thereby failing to meet the requirement of abandonment for the loss to be allowed. 3
Consider the following example. On Day A, Justin purchases X Coin at $100 on Y Exchange. On Day Z, X Coin drops in value to $1. Justin is very upset that his investment went sour. He leaves X Coin on Y Exchange at its current value of $1 and proceeds to file his income tax return for the relevant year, taking a loss-at-cost basis on his return ($99). Justin will likely have to revise the return upon an IRS audit because he neither (i) relinquished control nor (ii) abandoned his property (X Coin). Furthermore, X Coin continues to be available on Y Exchange, albeit at a much lower price point (ergo, $1), thereby losing the argument that X Coin is now worthless.
The importance of the CCA is to remind taxpayers that the IRS is paying close attention to taxpayer return positions, specifically as it relates to crypto losses, and to be mindful of potentially aggressive positions that are likely to be second-guessed. To read more click here.
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- Written by: Steel Rose
President Biden signed the Secure Act 2.0 after passage by both the House and Senate. That long-discussed package of changes to retirement savings rules aims to make it easier for Americans to build retirement savings and less costly to withdraw those savings.The new rules are part of a big, $1.7 trillion, so-called omnibus federal government spending package. The package is named after 2019 legislation called the Secure Act. It will also enable more workers to have workplace retirement plans and to have an income stream in retirement.
But the fine print in many of the new provisions tarnishes their luster. "Several don't take effect right away, sometimes for years," said certified public accountant Ed Slott, an IRA specialist in Rockville Centre, N.Y.
In addition, Secure Act 2.0 adds to the list of exemptions from penalties for early withdrawals from retirement savings. Among the new exceptions are loopholes for victims of domestic abuse, natural disasters and financial emergencies.
Those are intended to make it easier for workers to withdraw retirement savings early for reasons unrelated to retirement. "I get it — if people have an emergency, they want to get at their cash," Slott said. "But then when they get old and retire, what are they going to live on?"
Aid Based On Student Loans
Other new provisions of Secure Act 2.0 allow employers to make 401(k) matching contributions based on a worker's student loan payments.
Another new provision allows workers to open emergency savings accounts inside their 401(k) plans.
Further, new rules will let people make tax-free and penalty-free rollovers from 529 college savings plans to Roth IRAs, subject to certain limitations.
Also, for the first time, SEP and Simple IRAs will be able to accept Roth contributions, which are made with after-tax dollars.
RMDs Start Later
Here are five sets of new Secure Act 2.0 rules. We explain their key points. But each has fine-print limitations — their "yes-but" details. We explain those too.
Delay of starting age for required minimum distributions. RMDs are mandatory yearly withdrawals from most IRAs and 401(k) accounts. The starting age for RMDs used to be shortly after you turned 70-1/2. Then it was pushed back to age 72. Now Secure Act 2.0 delays the start of RMDs to age 73.
- Yes, but ... The age-73 starting age kicks in as of 2023. But that new, later starting age is only for people who turn 72 in 2023 or later. Other people still must start RMDs at 72.
- Yes, but ... The starting age for everyone gets further delayed to age 75. But that does not take effect until 2033.
- Yes, but ... Individuals who have already started RMDs cannot stop.
Lower Penalties
Lower penalty for missed RMDs. Under the old rules, if you fail to take an RMD on time, you face tax and a whopping penalty of 50% of the amount you were supposed to withdraw. Secure Act 2.0 replaces that 50% with a 25% penalty. The penalty is even lower, just 10%, if you correct your mistake after the fact.
- Yes, but ... Under the old rules, savers rarely paid the 50% penalty due to appeals and the IRS' awareness of the harshness of the size of that penalty, Slott says. But Slott wonders whether the IRS will still exercise as much leniency once the penalty has been trimmed.
IRA Catch-Up Contributions
Bigger IRA catch-up contributions. The annual cap on regular IRA contributions is $6,000 now, $6,500 in 2023. People who are age 50 or older can make catch-up contributions of up to $1,000 a year. Catch-up contributions have not been adjusted for inflation. But Secure Act 2.0's new rules will increase that $1,000 ceiling for inflation.
- Yes, but ... The cost-of-living adjustment does not start until 2024.
- Yes, but ... The inflation adjustments will be in $100 increments. So if inflation is, say, 8% in one year, the contribution cap will not rise $80. The ceiling will not increase until inflation cumulatively increases enough to allow at least a $100 boost.
Sky-High 401(k) Help
Bigger 401(k) and 403(b) catch-up contributions. Under the old rules, the cap on catch-up contributions is $6,500 in 2022 and $7,500 in 2023. Under the new rules the cap will become at least $11,250, adjusted for inflation. (A 403(b) plan is like a 401(k) plan but for public schools and charities.)
- Yes, but ... The new, higher contribution cap rule will not take effect until 2025.
- Yes, but ... Inflation adjustments start in 2026.
- Yes, but ... The new ceiling will only be for people who are age 60 to 63. To read more click here
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- Written by: Kaylyn McKenna
For business owners, the month of January is the time to prepare and send out tax information for employees and nonemployees that they paid during the prior tax year. One form you’ll need to be sending out soon (or receiving soon) is IRS form 1099-NEC. If that name doesn’t sound familiar, don’t worry. The IRS reintroduced the 1099-NEC form in 2020 to cover some forms of payments that were previously listed on form 1099-MISC. While 1099-NEC is newer, the information required on it should look familiar to you. Here’s what you need to know about the 1099-NEC form and how to fill it out and file it.
What is form 1099-NEC?
Business owners, as well as freelancers, are probably familiar with the 1099-MISC form. Previously, the 1099-MISC form was used to report income paid to independent contractors, vendors, and sole proprietors. However, form 1099-MISC has now been partially replaced by form 1099-NEC. The 1099-NEC is now used to report non-employee compensations. Think of 1099-NEC forms as the nonemployee equivalent to form W-2. If you paid non-employees for work related to your business in 2021, you may need to give them a 1099-NEC.
Per the IRS, you must generally report a payment as non-employee compensation if the following four conditions are met:
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You made the payment to someone who is not your employee.
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You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations).
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You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
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You made payments to the payee of at least $600 during the year.
Additionally, businesses are required to file a Form 1099-NEC if:
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They pay at least $10 in royalties to an individual.
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The business withheld any federal income tax under the backup withholding rules regardless of the number of payments for the year to the non-employee.
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They made cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish.
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They made payments of legal fees to an attorney.
Who is required to file Form 1099-NEC?
Any business that made nonemployee compensation payments totaling $600 or more to at least one payee or withheld federal income tax from a nonemployee’s payment in 2021 will need to file form 1099-NEC (one per payee).
If you worked with any self-employed individuals including freelance labor, independent consultants, sole proprietorships, or independent attorneys you will likely need to send them a form 1099-NEC if the payments meet the four conditions discussed above. If you are unsure of whether the payments that you made meet the conditions set out by the IRS for non-employee compensation, speak with a tax professional. It is always better to be safe than sorry when it comes to the IRS.
Is Form 1099-MISC still used?
While you now need to use form 1099-NEC for non-employee compensation, form 1099-MISC does still have some uses.
Form 1099-MISC, Miscellaneous Income, should be filed for each person in the course of your business to whom you have paid at least $600 in:
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Rents (box 1).
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Prizes and awards (box 3).
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Other income payments (box 3).
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Generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 3).
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Any fishing boat proceeds (box 5).
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Medical and health care payments (box 6).
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Crop insurance proceeds (box 9).
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Payments to an attorney (box 10).
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Section 409A deferrals (box 12).
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Nonqualified deferred compensation (box 14).
And just like form 1099-NEC, you will need to file Form 1099-MISC for each person that you have withheld any federal income tax under the backup withholding rules, even if they did not meet the $600 threshold.
Form 1099 NEC filing requirements
Payers need to file form 1099-NEC by January 31 of each year. Beginning in tax year 2021, there are no longer automatic 30-day extensions to file. Extensions can be requested if the business meets certain hardship conditions. You may e-file or submit the forms on paper via the mail.
You can find the latest version of form 1099-NEC on the official irs.gov site here. You will notice that the IRS publication PDF of the form has several copies. Here is the list of form 1099-NEC copies:
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Copy A: Federal Copy for the IRS
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Copy 1: State Tax Department Copy
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Copy B: Recipient Copy
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Copy C: Payer Copy
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Copy 2: State and Local Copies
If you are mailing these forms, always double-check that you are mailing the correct copy to the right recipient. While the different copies look almost the same, it is important to send the right version to the right destination.
What information needs to be included on Form 1099-NEC?
Form 1099-NEC is a fairly short form that resembles Form W-2. However, it does require a large amount of information. We’ll walk you through each box on the 1099-NEC so that you can ensure that you don’t overlook any important fields.
1. Payer’s name and address.
The payer is your business. List your business name and registered address for your business.
2. Payer’s TIN
This is the business’ Taxpayer Identification Number (TIN). A Taxpayer Identification Number is an identification number used by the Internal Revenue Service in the administration of tax laws. It is issued either by the Social Security Administration or by the IRS. It is a nine-digit number. You may also know this as your Employer Identification Number (EIN). If you do not know your TIN, refer back to previous employer tax documents or last year’s 1099s or W2 forms.
3. Recipient’s TIN
This is the independent contractor’s taxpayer identification number. In many cases, the recipient’s TIN will be their social security number. Typically independent contractors will have their social security number (SSN) or an Individual Taxpayer Identification Number (ITIN) listed as their TIN.
You can find each non-employee’s TIN on their W-9 form. When you first engage with a contractor or nonemployee, it is important to request that they fill out a W-9 form for your records. This form is the nonemployee equivalent to the W-4 form that you request employees to fill out upon hire.
4. Recipient’s name and address
Here you will include the recipient’s full legal name or registered business name and their address. This information can be found on Form W-9 as well.
5. Account number
This field only needs to be filled out if you gave the contractor a unique number for your records. If you did not, you may leave this box blank.
6. The total amount of non-employee compensation paid (Box 1)
Enter the total amount of nonemployee compensation paid. While this total typically comes from payments made to freelancers or contract labor it may also include:
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Commissions paid to nonemployee salespeople that are subject to repayment but not repaid during the year.
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Professional service fees, including fees paid to attorneys, accountants, designers, architects, contractors, or other professionals.
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Fees paid by one professional to another, including fee-splitting arrangements or referral fees.
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Oil and gas payments for a working interest, whether or not services are performed.
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Payments by attorneys to witnesses or experts in legal adjudication.
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Payment for services, including payments for parts or materials used to perform the services.
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Fish purchases made in cash .
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Expenses incurred for the use of an entertainment facility that you treat as compensation to a nonemployee.
The total amount listed in Box 1 should typically be $600 or above unless royalties or backup withholdings are involved.
By Kaylyn McKenna, posted on https://www.businessmanagementdaily.com. To read more click here.
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- Written by: Steel Rose
Harvesting tax losses to offset gains and income can help lower taxes.
- Investment losses can help you reduce taxes by offsetting gains or income.
- Even if you don't currently have any gains, there are benefits to harvesting losses now, since they can be used to offset income or future gains.
- If you have more capital losses than gains, you may be able to use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.
Sometimes an investment that has lost value can still do some good—or at least, not be quite so bad. The strategy that changes an investment that has lost money into a tax winner is called tax-loss harvesting.
Tax-loss harvesting may be able to help you reduce taxes now and in the future.
Tax-loss harvesting allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you.
"It helps clients get to their goals faster," says Christopher Fuse, asset allocation portfolio manager at Fidelity.
If you have a financial advisor, they may already be doing your tax-loss harvesting. If you're doing it yourself, it's always a good idea to consult a tax professional.
2 ways tax-loss harvesting can help manage taxes
An investment loss can be used for 2 different things:
- The losses can be used to offset investment gains
- The losses can offset $3,000 of income on a joint tax return in one year
Unused losses can be carried forward indefinitely
"Ugly market events, like in '07 to '09, can be an opportunity. Tax-loss harvesting is very episodic, when it's there, we look to take advantage. We put those additional losses into what we consider to be a 'tax savings account.' Your losses may insulate your taxable gains for several years," Fuse says.
That sounds great, right? But there are some important details to know as you see how tax-loss harvesting might help lower your tax bill.
Short-term versus long-term gains and losses
There are 2 types of gains and losses: short-term and long-term.
- Short-term capital gains and losses are those realized from the sale of investments that you have owned for 1 year or less.
- Long-term capital gains and losses are realized after selling investments held longer than 1 year.
The key difference between short- and long-term gains is the rate at which they are taxed.
Short-term capital gains are taxed at your marginal tax rate as ordinary income. The top marginal federal tax rate on ordinary income is 37%.
For those subject to the net investment income tax (NIIT), which is 3.8%, the effective rate can be as high as 40.8%. And with state and local income taxes added in, the rates can be even higher.
But for long-term capital gains, the capital-gains tax rate applies, and it's significantly lower.
When the 3.8% NIIT comes into play, the actual long-term capital-gains tax rate for high earners can be as much as 23.8%.1
Gains and losses in mutual funds
If you're a mutual fund investor, your short- and long-term gains may be in the form of mutual fund distributions. Keep a close eye on your funds' projected distribution dates for capital gains. Harvested losses can be used to offset these gains.
Short-term capital gains distributions from mutual funds are treated as ordinary income for tax purposes. Unlike short-term capital gains resulting from the sale of securities held directly, the investor cannot offset them with capital losses.
Find out more on Fidelity.com: Mutual funds and taxes
Harvest losses to maximize your tax savings
When looking for tax-loss selling candidates, consider investments that no longer fit your strategy, have poor prospects for future growth, or can be easily replaced by other investments that fill a similar role in your portfolio.
When you're looking for tax losses, focusing on short-term losses provides the greatest benefit because they are first used to offset short-term gains—and short-term gains are taxed at a higher marginal rate.
According to the tax code, short- and long-term losses must be used first to offset gains of the same type. But if your losses of one type exceed your gains of the same type, then you can apply the excess to the other type. For example, if you were to sell a long-term investment at a $15,000 loss but had only $5,000 in long-term gains for the year, you could apply the remaining $10,000 excess to any short-term gains.
If you have harvested short-term losses but have only unrealized long-term gains, you may want to consider realizing those gains in the future. The least effective use of harvested short-term losses would be to apply them to long-term capital gains. But, depending on the circumstances, that may still be preferable to paying the long-term capital gains tax.
Also, keep in mind that realizing a capital loss can be effective even if you didn't realize capital gains this year, thanks to the capital loss tax deduction and carryover provisions. The tax code allows joint filers to apply up to $3,000 a year in capital losses to reduce ordinary income, which is taxed at the same rate as short-term capital gains.
If you still have capital losses after applying them first to capital gains and then to ordinary income, you can carry them forward for use in future years.
Stay diversified, but beware of wash sales
After you have decided which investments to sell to realize losses, you'll have to determine what new investments, if any, to buy. Be careful, however, not to run afoul of the https://www.sec.gov/answers/wash.htm','You are now leaving Fidelity.com for a web site that is unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content.','', 'Link_1525723282856')">wash-sale ruleOpens in a new window.
The wash-sale rule states that your tax write-off will be disallowed if you buy the same security, a contract or option to buy the security, or a "substantially identical" security, within 30 days before or after the date you sold the loss-generating investment. People who receive stock or stock-like bonuses from their employer should also consider if their vesting date or employee stock purchase plan (ESPP) purchase date may fall within that 30-day window.
One way to avoid a wash sale on an individual stock, while still investing in the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry. To read more click here
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- Written by: Tim Wright
Network Alliance, Inc. (Network Alliance), a leading IT management solutions provider, has hired Byron K. Patrick, CPA.CITP, CGMA, MCSE, as Network Alliance’s Managing Director, CPA Practice. He will oversee Network Alliance’s strategic growth within the Accounting/CPA market.
Byron is co-founder and former CEO of Simplified Innovations, Inc., a Maryland-based technology outsourcing company. “I was very impressed with the spectrum of solutions that Network Alliance provides and the level of customer care and support,” he said. “The remote desktop and hosted Intuit QuickBooks solutions are vital for the Accounting/CPA market. I look forward to taking on this new role to educate the market on what we can deliver and how we can maximize their technology for growth.”
“Byron understands how companies in the Accounting/CPA market operate and their daily technology needs. We’ve always taken pride when our solutions meet client needs and always strive to keep their IT simple,” said Don Britton, Founder of Network Alliance. “We expect great things as he works to create long-term relationships with Accounting/CPA businesses and helps us be known as the go-to IT managed service provider for this market.”
Network Alliance chose Byron because of his experience in both the public accounting and IT spaces. Once a public practicing CPA, he combined his passion for technology with his experience in public accounting, establishing Simplified Innovations in 2008. He is a multi-year recipient of the CPA Practice Advisor’s Under-40 Award, an active member of the Maryland Association of CPAs (MACPA), and founding member of MACPA’s New/Young Professional Network (NYPN). Widely respected in the CPA world, Byron will continue his active involvement in CPA conferences, speaking engagements, associations, boards, and networking.
About Network Alliance, Inc.
For more than 19 years, Network Alliance, Inc. (Network Alliance) has been delivering high-quality, dependable, and cost-effective solutions for organizations’ IT management needs. Network Alliance provides a hosted desktop service for a complete IT solution for small and medium-sized businesses at a predictable monthly fee. This enables clients to access their desktop and business applications from any location or device connected to the Internet, eliminating costly downtime and maintaining the highest level of data security. A one-stop shop for IT solutions and services, Network Alliance’s expertise, reliability, and unmatched client services approach differentiate it from the competition. For more information on Network Alliance and its services, please visit www.networkalliance.com.