Welcome to the Website of Zaher Fallahi, Tax Attorney, CPA. The partial materials contained herein below are for general informational purposes only and are not intended as tax or legal advice. For specific advice, seek tax advice from us or your tax advisor.
1. Individual Taxpayers’ Tax Rates
For tax year 2020, the top tax rate remains 37% for single taxpayers with incomes greater than $518,400, and $622,050 for married filing jointly (MFJ). The other rates are:
1-35% for taxable incomes over $207,350 ($414,700 for MFJ.
2-32% for taxable incomes over $163,300 ($326,600 for MFJ.
3-24% for taxable incomes over $85,525 ($171,050 for MFJ.
4-22% for taxable incomes over $40,125 ($80,250 for MFJ.
5-12% for taxable incomes over $9,875 ($19,750 for MFJ.
Income Tax Planning Tip: It may be tax-advantageous to accelerate other income such as year-end bonuses if you will have more income in 2021 or delay it if you will have less income in 2021. According to president-elect Biden, who will be taking over on January 20, 2021, taxpayers making $400,000 or less will not have to pay any higher taxes.
2. 0.9% Medicare Tax Hospital Insurance Tax
The employee’s share of the Federal Insurance Contributions Act (FICA) withholding from wages has increased from 1.45% to 2.35% on wages more than $250,000 for joint filers and $200,000 for married taxpayers filing separately. The extra tax is imposed on the combined salaries of the spouses for joint filers, including the self-employed individuals as well. No matching by employer.
Income Tax Planning Tip: It may be tax-advantageous to accelerate other income such as year-end bonuses if you will have more income in 2021 or delay it if you will have less income in 2021. Any tax-advantageous reclassification of income must be analyzed thoroughly to ensure its legality.
3. Net Investment Income Tax (NIIT)
Starting in 2013 a 3.8% Medicare tax is imposed on certain net investment income (NII) of individuals, estates, and trusts by the 26 USC § 1411 on the lesser of:
1.Taxpayer’s net investment income is the investment income reduced by applicable associated cost; interest, dividends, rents, annuities, royalties, and net capital gains from disposition of property not used in a trade or business, or
2. Modified Adjusted Gross Income (MAGI; adjusted for foreign earnings) that exceeds the threshold of $250,000 for married filing joint taxpayers or $200,000 for single taxpayers.
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. The NII is reduced by certain expenses properly allocable to the income.
Types of gains are included in Net Investment Income (NII)
To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items considered in computing the NII:
1- Gains from the sale of stocks, bonds, and mutual funds.
2- Capital gain distributions from mutual funds.
3- Gains from the sale of investment real estate, including gain from the sale of a 2nd home.
4- Gains from the sale of interests in partnerships and S corporations to the extent you were a passive owner.
What are some common types of income that are not NII?
Wages, unemployment compensation, operating income from a non-passive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, gain on the sale of a personal residence, and distributions from certain Qualified Plans.
Income Tax Planning Tip: Eliminating or minimizing the 3.8% tax may be done by deferring the NII or reducing the MAGI, or both. Disposition of commercial rental properties with prior suspended losses may release those losses and reduce your tax burden. This is an unchartered territory and requires sophisticated professional advice.
4. Capital Gains Tax Rates
Short-Term (held one year or less)
Capital Gains. Net short-term capital gains are taxed as ordinary income rates.
Long-Term (held over one year) Gains.
1- Capital gains are taxed at 0% if your taxable income is less than $78,750.
2- Capital gains are taxed at 15% if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately.
3- Capital gains are taxed at 20% to the extent that your taxable income exceeds the thresholds set for the 15%, except:
a. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
b. Capital gains from selling collectibles such as coins or art are taxed at a maximum 28% rate.
c. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
Income Tax Planning Tip: The 15% capital tax rate may vary based on your situation.
5. Wash Sale Rule IRC §1091
Under the “wash sale” rule that applies to the disposition of an asset when a loss is
recognized, the IRS does not permit taxpayers deduct the loss if they repurchase the same or identical investment during the 30-day period before or after the sale date. The doe does not apply to the taxpayer who is a dealer in stock or securities. The basis of the newly acquired stock or securities is increased by the amount that has been disallowed due to the wash sale rules. The disallowance defers the loss deduction until the new stock or securities are traded or sold.
Income Tax Planning Tip: Consider selling worthless stocks or losing stocks and repurchasing them 31 days later to avoid wash sale, if advisable. Remember the §§ 1202 and 1244 stocks explained below.
6. Section 1202, Qualified Small Business Stock (QSBS)
Under 26 US §1202, taxpayer excludes 75% of the gain recognized from the sale or exchange of QSBS that is held more than five years on a qualified stock acquired on or before September 27, 2010 and after February 17, 2009 and 100% on qualifying stock acquired after September 27, 2010, and before Jan. 1, 2014.
Income Tax Planning Tip: The stock must be issued by domestic C corporation, originally issued after August 10, 1993, with total gross assets of $50 million or less, at least 80% of the value of the corporation’s assets was used in the active conduct of qualified businesses, held by non-corporate taxpayer, held more than five years, etc. Application of this law may be complicated and require tax professional advice.
7. Section 1244 (small business) stock
The loss from the sale of a qualified corporation may be used against ordinary income like net operating loss (NOL) up to $50,000 for single filers and $100,000 for married filing jointly.
Income Tax Planning Tip: To qualify as §1244, stock must be issued by a domestic corporation, issued for money or other property. The total amount of money and other property received by the corporation for its stock as a contribution to capital and paid-in surplus generally may not exceed $1 million, etc. This loss is claimed on Form 4797, not Schedule D.
8. Cryptocurrencies and their Taxation
To date, The IRS issued the Notice 2014-21 (PDF) and Rev. Rul. 2019-24, providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information with Virtual currencies such as Bitcoin that have equivalent values and used as currency substitute, are referred to as “convertible” virtual currencies. For the federal tax purposes, cryptocurrencies are treated as “property’. Therefore, transactions involving cryptocurrencies are governed by the same tax principles applied to “property” contained in the IRS Publication 544, Sales and Other Dispositions of Assets. You may realize gain or loss when crypto is sold or exchanged.
Cryptocurrency Tax Tip: For tax purposes consider your cryptocurrencies as stocks and consult your tax advisor to determine your 2020 estimated taxes to avoid underpayment penalties. Cryptos and Their Taxation
9. IRS letters for the potential Cryptocurrency tax non-compliance
In 2019 the IRS sent out letters to more than 10,000 Cryptocurrency owners, informing them of potential Cryptocurrency tax non-compliance. July 26, 2019, IRS Commissioner Chuck Rettig indicated:
The IRS has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest, and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations. End of quote.
There are three variations of the IRS letter: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors. Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
Cryptocurrency Tax Tip: If you received such a letter, you are advised to consult a tax attorney with Cryptocurrency tax experience.
10. Cryptocurrency may be subject to FBAR filing
In response to my inquiry to the Bank Secrecy Act (BSA) Compliance Department, they have indicated to me that digital currency like Bitcoin would only be FBAR reportable if it is held in an account with a “financial institution” or someone acting as a “financial institution”. If digital currency is held in a “digital wallet”, not in a financial institution, it is not reportable on FBAR, because the digital wallet is not a foreign financial account.
Cryptocurrency Tax Tip: With respect to FBAR requirement “when in doubt, report it”. Foreign Assets Subject To FBAR
11. Cancellation of Debt (Forgiveness)
September 5, 2019 IRS update. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence up to $2 million for taxpayer married filing jointly and $1 million for married filing separately. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in foreclosure, qualify for this relief. This provision applies to debt forgiven in calendar years 2007 through 2017. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
Income Tax Planning Tip: Consult your advisor whether you are eligible.
12. State Income Tax, Local Taxes and Foreign Taxes
This category includes but is not limited to:
1- State income and local (California SDI) withheld from your compensation.
2- Estimated taxes you paid to state or local governments during the year
3- Prior year’s state or local income tax you paid during the year.
4- You can take either a deduction or a tax credit for foreign income taxes imposed on you by a foreign country or a United States possession.
5- State and Local Real Estate Taxes.
6- Deductible personal property taxes are those based only on the value of personal property such as a boat or car.
7- Under 2017 tax law, your deduction of state and local income, sales, and property taxes is limited to $10,000 ($5,000 if married filing separately). You may be subject to a limit on some of your other itemized deductions also.
8- Sales Tax. You can elect to deduct state and local general sales taxes instead of state and local income taxes, but you cannot deduct both.
Income Tax Planning Tip: You may want to pay California property tax in February 2021, if advised by your tax advisor.
13. Individual Retirement Account (IRA)
Traditional tax-deductible IRA contribution for 2020 is $6,000, and $7,000 for taxpayers 50 years or older. Contribution for a taxpayer married to one who is covered by a retirement plan at work, is phased out between Adjusted Gross Income (AGI) $196,000 and $206,000. The MAGI for married taxpayers who are active participants in another retirement plan, is phaseout between $104,000 and $124,000.
Income Tax Planning Tip: Contribution must be made on or before April 15, 2021.
14. Roth IRA Contribution
Non-tax-deductible Roth contribution is $6,000 and $7,000 for taxpayers 50 years or older, for married filing jointly with AGI less than $196,000. More than $206,000 AGI, no contribution allowed. For single and head of household filers with modified AGI between $124,000 and $139,000 in 2020 and, and for married filing separate with modified AGI between $0 and $10,000 for 2020.
Income Tax Planning Tip: Contribution must be made on or before April 15, 2021.
15. Roth IRA Conversion
If advantageous to your situation, and you are eligible, you may convert your
traditional IRA into a ROTH IRA. This may be more appropriate when the traditional IRA has declined in value and costs you less in taxes.
Income Tax Planning Tip: Consult a tax advisor.
16. Simplified Employee Pension Plan (SEP-IRA)
IRC § § 402(h) and 415 limit the amount of contributions made to an employee’s SEP-IRA to the lesser of $57,000 or 25% of the eligible employee’s compensation.
Income Tax Planning Tip: Contribution may be made until the filing of the tax returns, including extensions through October 15, 2021.
17. 401(K) Limit
The 2020 maximum employee contribution is $19,500.
Income Tax Planning Tip: Maximize your contribution and benefit from most employers’ matching policy.
18. Foreign Account Tax Compliance Act (FATCA), IRS Form 8938
Under the requirements of Sections 1471 through 1474 of the IRC, commonly known as Foreign Account Tax compliance Act (FATCA), certain domestic corporations, partnerships, trust and individual U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 (there are other requirements for taxpayers residing outside U.S.) on the last day and tax year or $75,000 at any time during the tax year, must report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.
Income Tax Planning Tip: Include earnings from FATCA accounts in your 2020 estimated taxes. If you have never reported these accounts to the U.S. Treasury, consult a tax attorney with expertise in handling undisclosed foreign accounts: FBAR and OVDP.
19. Report of Bank & Financial Accounts (FBAR), Financial Crimes Enforcement Network (FinCen Form 114) must be e-filed
If you have a financial interest in, or signature authority over, a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding $10,000, the Bank Secrecy Act requires you e-file the FBAR report with the US Treasury Financial Crimes Enforcement Network (FinCen) by no later than October 15, 2020.
Income Tax Planning Tip: Include earnings from FBAR accounts in your 2020 estimated taxes. If you have never reported these accounts to the U.S. Treasury, see Offshore Voluntary Disclosure Program (OVDP)
20. Foreign Earned Income Exclusion, IRS Form 2555
If you are subject to the US taxes (U.S. citizen or a US resident alien) and live overseas, you are taxed on your worldwide income (the US and Eritrea are the only two countries with such tax law). However, if you qualify, you may exclude from income up to $107,600 for 2020. In addition, you can exclude or deduct certain foreign housing amounts.
Income Tax Planning Tip: Only earned income qualifies. Other incomes such as interest, dividends, capital gains, etc. do not qualify. Generally, you may not stay more than 35 days a year in the U.S. and must file timely tax returns to claim the exclusion. Ascertain your state conformity and filing status. Taxation of Americans Living Abroad
21. Documentation of charitable contribution
The substantiation requirements for monetary donations of less than $250 remain fairly informal under Sec. 170(f) (17): The donor should maintain a bank record of the contribution or written communication from the donee stating the name of the donee organization, as well as the date and dollar amount of the donation. For donations of $250 or more, Sec. 170(f)(8) requires that the donor must obtain a contemporaneous written acknowledgment, stating the amount of the contribution, whether the donee provided goods or services in consideration for the donation, in whole or in part, and a good-faith estimate of the value of any goods or services the organization provided. If goods or services received consist solely of intangible religious benefits, the contemporaneous documentation must contain a statement to that effect.
Income Tax Planning Tip: Obtain supporting documents at the time of making the contribution.
22. Residential Energy Efficient Property Credit
The residential energy efficient property credit allows for a tax credit equal to the applicable percent of the cost of qualified property (QP). QPs properties are (a) solar electric property, (b) solar water heaters, (c) geothermal heat pumps, (d) small wind turbines and (e) fuel cell property. Only fuel cell property is subject to a limitation, which is $500 regarding each ½ kilowatt of capacity of the qualified fuel cell property. This credit is scheduled to terminate for property placed in service after December 31, 2021. The applicable percentages are:
- If property was placed in service after December 31, 2016, and before January 1, 2020, 30%.
- If the property was placed in service after December 31, 2019, and before January 1, 2021, 26%.
- If the property was placed in service after December 31, 2020, and before January 1, 2022, 22%.
Income Tax Planning Tip: To be on the safe side, obtain documents proving eligibility from the manufacturer of these items.
23. Alternative Minimum Tax (AMT)
The 2020 AMT tax rate of 26% applies to amounts in excess of $113,400 for married filing jointly and $72,900 for single filers. The 28% rate applies to excess AMTI of $197,900 for all taxpayers ($98,950 for married couples filing separate returns)
Income Tax Planning Tip: Consult your tax advisor regarding AMT consequences to avoid falling into an AMT trap.
24. Litigation attorneys beware; some settlement awards may be taxable
Some plaintiffs and their lawyers assume that settlements awards are tax free. Not so, says Uncle Sam. Internal Revenue Code (IRC) § 61 states all income from whatever source (this includes lawsuit awards) is taxable, unless specifically excluded by another Code section. The 1996 IRC § 104(a)(2) states “on account of personal physical injuries or physical sickness.” Therefore, for damages to be excludable from income, the judgment or settlement must be derived from personal physical injuries or physical sickness.
Income Tax Planning Tip: The litigators should discuss the tax consequences of their potential awards and their settlement structure with a tax attorney before the case is settled (preferably, when the complaint is filed) to ensure that their clients will get a tax advantageous settlement and tax deductibility of the cost, if they qualify. The plaintiffs need to do their own tax planning and be aware of taxability of their awards and settlements to avoid unnecessary taxes.
25. Gift Tax
The 2020 life-time gift exclusion is $11,580,000. Any amount in excess of this threshold is taxed at 40%. The annual gift exclusion remains $15,000 per person per year.
Gift Tax Tip: The annual gift, including funding an Irrevocable Life Insurance Trust (ILIT) must be paid before January 1, 2021. Do not forget the “Crummey Powers”.
26. Inheritance Tax/Estate Tax and Planning
The 2020 life-time estate exclusion is $11,580. Any amount in excess of this threshold is taxed at 40 %. The estate portability by which the surviving spouse may use the Deceased Spouse’s Unused Exclusion amount is now available through an election made in a timely filed estate tax return for the decedent spouse.
Inheritance Tax Tip: There are talks about the threshold may be reduced to $3,500,000 under the Biden Administration. Speculations are that “step-up” at death may be repealed and replaced by carryover basis. Consult with your estate planning attorney whether an A-B trust is still suitable to your particular situation.
27. Foreign Gifts and Inheritances
If you received gifts or inheritances in excess of $100,000 during 2020, be sure to report it as “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” to the IRS. This report is due at the same time as your personal income tax returns but is not part of it and is mailed to a separate address.
Foreign Gift and Inheritance Tax Tip: Failure to file this form timely, may subject you up to 25% penalty on the whole amount of gift or inheritance.
28. Taxation of Non-Resident Alien (NRA)s
Statutorily, NRAs are taxed on income “Effectively Connected with a U.S. Trade or Business” (ECI), including rental income, which is made by an election made on the first year the property was placed in service. This means that the NRA is taxed at the net income generated for the property the same as a U.S. taxpayer.
Inheritance Tax Tip: Seek advice on NRA Estate Tax.
29. NRAs are taxed on the “sourced income”
Non-Resident Aliens are taxed based on the source of income. Examples: rents are taxed where the property is rented, dividends are taxed where the payor is located.
30. Foreign Provision; the Foreign Investment in Real Property Tax Act (FIRPTA)
The Foreign Investment in Real Property Tax Act (FIRPTA) requires a tax of 15% of the amount realized on the disposition of all U.S. real property. A buyer of U.S. real property interest from a foreign investor is considered the withholding agent and is obligated to find out if the seller is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report the sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F. The withholding agent must remit the withholding of tax to the IRS by the 20th day of the date of the transfer.
The transferor: You may be eligible for a lesser withholding in the following circumstances:
The disposition of the U.S. real property interest takes place under one of the non-recognition provisions of the Internal Revenue Code.
a). When the transferor’s maximum tax liability on the disposition is less than the amount otherwise required to be withheld.
b). The transferor or transferee wants to come under certain installment sale rules.
c). The transferor or transferee enters into an agreement with the IRS by posting a type of security (letter of credit, bond, etc.).
d). The transferor or transferee may enter a 12- month agreement with the IRS to obtain a “blanket withholding certificate” for multiple properties.
e). A non-standard application may be submitted for unique situations that do not fit into the above categories.
Note: Acquisition of the US Real Property by Foreign Persons from countries under the U.S. Economic Sanctions are subject to specific licensing requirements of the US Treasury Office of Foreign Assets Control (OFAC). Also, purchase of these properties from the foreign persons from citizens of those countries may be subject to the same laws. These countries include but are not limited to Cuba, Syria, North Korea, Iran, etc.
Income Tax Planning Tip: The transferee; ascertain the nationality of the transferor and withhold the required taxes. When representing a client with connection to sanctioned countries, seek advice from OFAC counsels.
31. Reasonable Compensation for Shareholders who work for the Corporation
When a stockholder works for her/his own corporation, s/he must be paid a reasonable amount of salary for the services performed. The Government Accountability Office (GAO) has reported many employment tax abuses with respect to S corporation shareholders who worked for the corporation, alleging unreasonably low compensation paid to these shareholders. The IRS has ascertained corporate income tax abuses by unreasonably excessive compensation of C corporation shareholders who worked in the corporation.
Income Tax Planning Tip: Pay the working shareholder reasonable salary before January 1, 2020 and incorporate any estimated taxes into W-2 form. Alternatively, if you discover this situation after January 1, 2021, convert some of the distribution into executive management fee and show as Schedule C income to have good-faith defense in case of an audit.
32. S Corporation or Limited Liability Company (LLC) losses
The amount of losses from an S corporation or an LLC you can deduct is limited to your basis (your capital adjusted for earnings, drawls, etc.) in each entity.
Income Tax Planning Tip: The above-mentioned losses are suspended and not deductible.
33. Section 179 Depreciation
Section 179 allows taxpayers to deduct the cost of certain property as an expense when the property is placed in service. For tax years beginning after 2017, the maximum Section 179 expense deduction is $1 million and is phased out to $2.5 million and indexed for inflation.
The Section 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property. The 2017 law amended the definition of qualified real property to mean qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. Revenue Procedure 2019-08 explains how taxpayers can elect to treat qualified real property as Section 179 property.
Income Tax Planning Tip: This law is often misinterpreted, seek tax advice.
34. Bonus Depreciation
The 100% additional first year depreciation deduction was created by the 2017 Law and allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business. It generally, applies to depreciable business assets with a recovery period of 20 years or less and certain other property, which includes (a) Machinery, (b) equipment, (c) computers, (d) appliances, (e) furniture (f) qualifying property (including used property) acquired and placed in service after September 27, 2017.
Income Tax Planning Tip: This law is fraught with nuances and you may seek tax advice.
35. Depreciation of Cars and Trucks
For passenger automobiles placed in service during calendar year 2020, the depreciation is limited to $18,100 for the 1st tax year; $16,100 for the 2nd year; $9,700 for the 3rd year; and $5,760 for each following year. No bonus depreciation is allowed for property acquired before Sept. 28, 2017 and placed in service after 2019.
Car and Truck Depreciation Tip: This is an area in which you may seek tax advice.
36. Credit Card Charges
All charges made to your credit cards before January 1, 2021 to pay business expenses may be deducted as 2020 deductible in 2020, although the payments may be made in 2021. In addition, checks written and dated in 2020, but cashed in 2021 regarding 2019 tax related items can be deducted in the 2020 tax year.
Income Tax Planning Tip: These deductions may be reflected in your 2020 estimated taxes.
37. SBA Paycheck Protection Program (PPP)
Small businesses that have received the PPP loans under the CARES Act, and will request for their forgiveness, should incorporate the amount of forgiveness in their “taxable income” and their impacts of their estimated taxes for the ultimate taxpayers’ 2020 taxes. The taxpayer may be C corporations or owners of flowthrough entities such as S corporations, LLCs, etc. Because the IRS has reiterated its original position that expenses paid by these forgiven loans will be tax deductible by the borrowers.
Income Tax Planning Tip: If the loan was in a C corporation’s name, the corporation will have additional income in the amount of the forgiven loan. If the loan was in an S corporation’s name or a partnership’s name, the shareholders’ or partners will have the extra income.
38. Estimated Taxes
You may prepare a list of the above items and include any additional income or loss from each in determination of the 2020 tax liabilities. In most cases, you must pay estimated taxes for 2020 if both of the following apply:
a). You expect to owe at least $1,000 in tax for 2020, after subtracting your withholding and refundable credits.
b). You expect your withholding and refundable credits to be less than the smaller of:
90% of the tax to be shown on your 2020 tax return, or 100% of the tax shown on your 2019 tax returns.
Income Tax Planning Tax Tip. The purpose of making timely estimated tax payments is to avoid underpayment and late payment penalties and interest. Small businesses should prepare monthly or quarterly financial statements and incorporate their annualized profit and losses in their tax planning.