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Author: Chris Hunt

I MISSED THE MEMO ON THE PROP 19 THING – WHERE DOES THAT LEAVE ME NOW ??

AKA Prop 19, “ The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire and Naturals Disasters Act”.
By ARLENE K MOSE CPA – MAZE & ASSOCIATES

Just in case you missed it, the property tax situation in California was dramatically altered by the recent passage of California Property 19.

It was February 16, 2021, when the world was reporting millions of COVID-19 cases. It was also California’s second-deadliest month of the pandemic. And right in the middle of all that, Proposition 19 became operative.

BASE YEAR VALUE TRANSFERS (Effective April 1, 2021)

Prop 19 is great news for people over age 55, disabled, or victims of natural disasters . They can now transfer their primary residence’s property tax base to a newly purchased or constructed replacement residence of any value, ANYWHERE in the state. Prior to Prop 19, there was a limit of one transfer, only within certain counties and to homes of the same or lesser value.

There are criteria. First, you or your spouse must be age 55 or older when the original residence is sold. Second, the replacement residence must be purchased within two years either before or after the sale of the current residence. Third, one of the transactions must occur on or after April 1, 2021. [If prior to April 1, 2021, you may file for the exclusion under Proposition 60/90 base year transfer rules; however, you are not eligible for the exclusion under the new Proposition 19 rules]

The application for the transferred tax basis can be applied for once the sale and purchase have been completed and you occupy the replacement residence as your primary residence. The claim must be filed with the local County Assessor’s office where the replacement primary residence is located.
There is generally a non-refundable processing fee. Keep in mind that this will have no impact on the any Mello-Roos assessments. These are calculated separately.

Example #1-Market Value of Replacement Residence is less that Market Value of Original Home (i.e., you downsized)

Original Home
Tax base Value: $300,000
Market Value/Sales Price $900,000

Replacement Home
Purchase Price/Mkt value $700,000
Tax base Value: $300,000

Example #2 – Market Value of Replacement Residence is MORE than the Market Value of Original Home (i.e., you made a mint on your home and bought something more expensive)

Original Home
Tax base Value: $300,000
Market Value/Sales Price $900,000

Replacement Home
Purchase Price/Mkt value $1,400,000
Tax base Value: $800,000 (what ???)

The replacement home tax base is calculated as follows:

New Market Value of $1,400,000 – less old market value of $900,00 = an increase of $500,000. Increase of $500,000 + original tax base of $300,000 = $800,000 new property tax base.

Estimated property taxes 1.25% w/ Prop 19 = $10,000.
Estimated property taxes 1.25% without Prop 19 = $17,500
You can test your numbers here: www.prop19calculator.com

PARENT TO CHILD EXCLUSION ON INHERITED PROPERTY (Effective Feb 16, 2021)

Up until February 15, 2021, a personal residence transferred by inheritance or gift WAS excluded from property tax reassessment. Children inherited the property AND the “low” property tax bill. This was the famous Proposition 13 value which has been California law for over 40 years.
Proposition 19 is not good news for those inheriting property from their parents. ALL property transfers to children will be reassessed with the one limited exception for the transfer of a primary residence.
Prop 19 states that if a home is not used as the child’s personal residence within one year, it will be reassessed at market value. There is NEW three-part test for inherited property under Prop 19.

  1. The property must have been your parent’s primary residence at the time of transfer or death.
  2. The child must then live in the property and make it their primary residence, within one year of the transfer or death
  3. If the home’s fair market value at time of death is over $1 mill, then there will be an increased property tax bill for anything above the old basis + plus the $1,000,000.

The phrase “primary” residence is very important. There is no benefit for 2nd homes, investment property, commercial property, or rental property. They will all be fully reassessed at fair market value at the date of death. Property held in a revocable trust will do nothing to prevent reassessment.


Tax Base Value of Inherited Primary Residence (retained as a primary residence)
Tax base Value: $300,000
Market Value/Sales Price: $1,500,000

Step 1 – Calculate the exclusion amount:
The original $300,000 + plus the statutory $1,000,000 = $1,300,000 excluded.

Step 2 – Calculate the additional assessment amount (if over $1 mill):
The current Market Value $1,500,000 – less the exclusion of $1,300,000 = $200,000 additional assessment.

Step 3 – Calculate the new tax base:
Original base of $300,000 + plus the additional assessment $200,000 = $500,000.

Tax Base Value of Inherited Primary Residence (beneficiaries convert to rental)
The phrase “primary” residence is very important. If you live in the property for three years and then move out and rent to someone else, your property taxes will change to reflect the removal of the “primary residence” exclusion.
For the three years the property was your family home, your taxable value was $500,000 adjusted by the inflation factor. When you convert to a rental, you no longer qualified for the homeowners’ exemption. Your new tax value will be $1,500,000 adjusted for the inflation factor for each year you owned the property.

Tax Base Value of Inherited Primary Residence (beneficiaries sell parent’s home)
Taxable Value: $300,000
Market Value/Sales Price $1,500,000

Assume you inherited your parent’s family home in July of 2021. The property does not benefit from any type of exclusion because you will not be moving into it. The property will be reassessed at the current market value $1,500,000 effective as of the date of inheritance. If the property is sold in November of 2021, you will be assessed additional property taxes for this 5-month period (Jul-Nov)
$1,500,000 x 1.02% tax rate = $15,300 annually / 12 mos. * 5 mos. = $ 6,375
Trustees beware. Any beneficiary selling an inherited home WILL have an increase in the property tax assessment. It is likely that this additional assessment could come months after you thought every was completed. Remember to hold back adequate funds to pay a late property tax assessment.
So by now you are squirming to get avoid Proposition 19. There are many considerations to address when thinking about transfers such as Family Limited Partnerships, changing title to “joint tenancy” or merely gifting. You should proceed with caution. UNLESS individuals have the same proportionate interest in the new legal entity, you could trigger a reassessment. There are also times when an outright transfer could violate the “due on sale clause” of the current loan. Also, gifting the home would give up access to the “step-up” basis which would otherwise help you avoid a capital gains tax post date of death.
It’s advisable to get expert legal advice on how to proceed and how to ensure proper documentation and substantiation is filed with the county assessor in a timely manner.
The BOE prepared a simple chart showing the differences between current law and the new law going into effect under Prop 19 if you click www.//boe.ca.gov/prop 19//
A list of the 58 California County Assessors are available on the Board of Equalization website at: https://www.boe.ca.gov/proptaxes/countycontacts.htm.

GOVERNMENT INDUSTRY ALERT

The CalCPA Governmental Accounting & Auditing Committee and California Committee on Municipal Accounting (CCMA) Local Government Industry Alert on accounting for the Coronavirus State and Local Fiscal Recovery Funds is HERE.  You will also see this same document posted in CalCPA, CalCities and CSMFO alerts soon.

Some of the information in this Alert contradicts what you heard from Amy in the Single Audit 2021 presentation and others previously, because the group that authored this Alert received additional clarification from the State on the topic, which is why we wanted to share it with you ASAP.  The biggest change is that there is no accounting difference between entities that are considered entitlement cities vs non-entitlement units.

Please let us know if you have any questions.

CLICK HERE TO VIEW PDF

Advance Child Tax Credits: Spend it, save it, opt out?

By Arlene K. Mose, CPA/MS Taxation

Maze & Associates Accounting Corporation

The child tax credit is for any individual who claims a child as a dependent on their tax return. It reduces the tax liability by $2,000 and if the credit exceeds the tax owed, the excess is refunded up to $1,400 per qualifying child.

If you don’t have children, you don’t need to read any further. This article doesn’t apply to you. If you do have children, you’ll be glad to know that the Child Tax Credit is bigger and better than ever for 2021.

In an effort to combat the pandemic, the credit was increased and also “advanced”. Extra money is always great, but the question to spend it, save it, or opt out of the payments all together all depends upon whether or not you qualify. Unlike last year’s stimulus funds, if you earn too much, these “advances” will need to be repaid.

The Increase: For children ages 5 and under the credit was increased to $3,600 ($2,000 + increase of $1,600). For children ages 6 through 17, the credit was increased to $3,000 ($2,000 + increase of $1,000). Once your child turns 18, he or she will no longer be eligible for any credit.

The Advance: The credit was also “advanced”. Congress directed the IRS to pay out HALF of the new credit in six monthly payments starting July 15, running through December 2021. These advance payments will be direct deposit, paper check, or debit card. Half of the credit is “advanced”, and the other half will be received upon filing a 2021 tax return, assuming one qualifies.

If you qualify for the new $3,000 child tax credit, you could get six $250 payments between July and December (which is ½ for a total of $1,500) and then claim the remaining $1,500 on your 2021 tax return.

The amounts can add up fast. Three children under age 5 is $3,600 per child x 3 = $10,800. Half of that is $5,400; paid out over 6 months is an extra $900 per month. Who wants to face the possibility of paying that back.

The Qualification: It’s all based on income. Most taxpayers can probably ballpark their 2021 earnings. If your modified “Adjusted Gross Income” is less than $150,000 married filing jointly, $112,500 as head of household, or $75,000 as a single filer, you can probably spend it.

As your income increases, the credit phases out. It could eventually reach zero. Keep in mind that job changes, investment income, stock and business losses will still impact your 2021 income. Flow thru income from Schedule K-1 entities such as S-Corporations and partnership aren’t even reported until after the 2021 year-end. Maybe a flow thru loss will qualify you. Maybe not. If you aren’t sure, you just might want to save it.

The Calculation: Your accountant will need to reconcile what you actually got paid versus what you should have been paid. They will also need to calculate the TWO different phase-out calculations. Both of these will impact upper-income taxpayers.

The 1st phase-out tier reduces just the increase of $1,000 or $1,600 depending upon the age of the child. This credit gets reduced if your modified AGI exceeds $150,000 if married filing jointly, $112,500 if head of household; or $75,000 if you are a single filer or are married and filing a separate return.
The 2nd phase-out tier reduces the original $2,000 Child Tax Credit. When AGI exceeds $400,000 married filing jointly or $200,000 for all others, the $2,000 per-child credit is reduced by $50 for each $1,000 (or fraction thereof) over those thresholds.
For example: A married couple has one child who is seven. The new enhanced credit for a seven-year-old is $3,000 (the old credit of $2,000, plus the $1,000 extra for children 6 through 17). Their modified AGI is $415,000. Because of their high income, they don’t qualify for the extra $1,000 credit. Now we need to deal with the $2,000 credit. Since their AGI is $15,000 over the $400,000 threshold, their credit is reduced again by $750 ($50 for ea.$1,000 x 15). Their final credit will be $2,000 less the $750, for a credit of $1,250.

Shared custody arrangements for children under age 17 make things complicated. The Child Tax Credit always follows the child. Parent #1 claimed their child on their 2020 tax return and received advance payments for the year 2021. However, when the 2021 tax return is filed, Parent #1 will not report a dependent child. Parent #1 will need to pay back the advance payments. Parent #2 will claim the child and be entitled to the full Child Tax Credit for 2021, assuming they qualify.

Opting Out: By now you have probably decided you don’t even want the money. It obviously too late to opt out of the payments already made, but you can log into the IRS portal and unroll for future payments. If you file married jointly, BOTH YOU AND SPOUSE will want to opt out of your payments. If you do not, the spouse who did not unenroll will receive half of the qualified payment. You will need an existing IRS.gov account, or an “ID.me” account (which is the IRS’s new authorization system). Check the IRS website for Child Tax Credit Update Portal.

Keep in mind that the other general rules for child-tax-credit eligibility continue to apply. The child still must be a U.S. citizen, national or resident alien. You must report the child’s name, date of birth and SSN on the return. You also must claim him or her as a dependent on your 2021 tax return, must be related to you and generally live with you for at least six months during the year.

In preparing for next tax season, please make sure to retain the IRS Letter 6419 which will be sent out in January of 2022. This letter will tell you the total amount of the advance Child Tax Credit payments that were disbursed to you during 2021. You will need this to prepare your return.

2021 Tax Season and COVID

To our valued Clients:

As we can all attest to, 2020 presented serious and unique challenges not only to our business but to our entire mental framework for how we viewed our operations. Maze & Associates has always prided itself as a professional CPA firm who put their clients first, but never at the expense of their employees. 2020 proved that the line of health and well-being between professional staff and clients is and always will be invariably intertwined.
Unfortunately, as we move into tax season 2021 we still find ourselves in the same situation as that of 2020, with varying levels of proximity limiting regulations designed to keep the population of our state safe. While many of us do not agree with the government’s response to the COVID pandemic, we are essentially powerless to go against required protocol.

At the time of this writing, Contra Costa County remains in the purple tier. Under these guidelines we are not allowed to have any non-employees in our office space, except for a brief time span such as dropping-off your tax information or picking-up your returns. Thus, meeting with clients this tax season will not be possible.

This deeply pains all of us, as we miss meeting with our clients in person. There is something that cannot be replicated with virtual or phone conferences. To be able to provide professional advice and feel the warmth in the thank you or the telling of a joke and sharing a hearty laugh is just not the same over the phone lines.

We know better times are coming. Please know we do not take this decision lightly. Also, please believe we will explore every avenue possible to ensure your experience with Maze & Associates is pleasant.

We are a local small business who hire local people to provide professional service to other local individuals and small businesses. That will never change. Please bear with us as we combat another tax season in which we cannot provide our normal in person interaction that you have come to expect of us.

Maze & Associates

Expanded Small Business Loans

Paycheck Protection Program (PPP) https://www.sba.gov/funding-programs/loans/paycheck-protection-program-ppp

UPDATE: SBA has reached the spending limit for the first CARES ACT. Many banks are still accepting applications in hopes for additional funding to be approved.

  • Funds are provided int the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent & utilities
  • At least 75% of the forgiven amount must have been used for payroll. Loan payments will also be deferred for 6 months
  • Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.
  • Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease
  • All Small businesses eligible
    • 500 or fewer employees – including non-profits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships and independent contractors are eligible
    • Also certain businesses with more than 500 employees may also qualify
  • Small businesses are eligible to borrow up to 250% of their average monthly payroll expenses up to a total of $10,000
  • The amount is intended to cover 8 weeks of payroll expenses and any additional amounts of making payments towards debt obligations
  • The 8 week period may be applied between February 15, 2020 and June 30, 2020. Seasonal business expenses will be measured using a 12 week period beginning February 15,2019 or March, 1 2019

Economic Injury Disaster Loans and Loan Advance https://www.sba.gov/disaster-assistance/coronavirus-covid-19

  • Up to $2 million in assistance
  • These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%
    • If you already have an EIDL loan for payroll it is possible to refinance to a PPP loan above.
  • The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay
  • The loan advance can provide economic relief of up to $10,000 within three days of a successful application. This loan advance will not have to be repaid

SBA Debt Relief Program

  • The SBA will also pay the principal and interest of new 7(a) loans issued prior to September 27, 2020.
  • The SBA will pay the principal and interest of current 7(a) loans for a period of six months.

SBA Express Bridge Loans

  • Allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork. 
  • Can be used to bridge the gap while applying for a direct SBA Economic Injury Disaster loan
  • Up to $25,000
  • Fast Turnaround
  • Will be repaid in full or in part by proceeds from the EIDL loan
  • To apply contact your local SBA office https://www.sba.gov/local-assistance/find/?type=SBA%20District%20Office&pageNumber=1

COVID-19 and Taxes

Here is a broad look at some of the key provisions recently passed & FAQs about the tax deadline extension.

Has the 2020 tax filing deadline been extended?

Per IRS Notice IR-2020-58, the IRS has extended the FILING deadline.

                                   Tax Day is now July 15:

The tax balance due payment date has also been replaced with July 15th regardless of the amount you owe.  You also have until July 15th to pay your tax bill without interest or penalty.   No additional forms or extension requests are needed.

The revised due date applies to: 

  • Individuals
  • Corporations
  • Trusts
  • Estates
  • Partnerships
  • Associations

What about my estimates?

This is what your 2020 estimate schedule could look like: 

                         FEDERAL                                         CALIFORNIA

Qtr 1                           due 7/15/2020                                   due 7/15/2020

Qtr 2                           due 6/15/2020                                   due 7/15/2020

Qtr 3                           due 9/15/2020                                   no 3rd quarter due

Qtr 4                           due 1/15/2021                                   due 1/15/2020

If I don’t have it together by July 15th, what happens?

Just like the old days, you or your CPA will need to request an additional extension. If you can’t pay by July 15th, you should consider a payment plan.  Keep in mind that interest and penalties will start accruing on outstanding balances starting July 16, 2020.

What about my IRA and H.SA Contributions, are they extended?

Yes, the IRS confirmed that July 15, 2020 will also be the deadline to make 2019 contributions to IRAs and health savings accounts (H.S.As).  Deadlines associated with contributions to workplace savings plans are not affected.

Should I wait to file my taxes in 2020? 

No, if you can file your return, there is no reason to wait for the deadline. In fact, if you are expecting a refund, you should file as early as possible. The sooner your return is accepted, the sooner you will receive your money. 

Will my refund be delayed because of coronavirus? 

So far, refunds are still being processed normally. If you are expecting a refund, you should file your 2019 return as soon as possible. There is no reason to wait.  Filing now will help ensure that you see your funds without any kind of delay.  The IRS website boasts that most refunds are issued within 21 days.

If you need to trace your refund, please use the IRS website “Where’s My Refund?” .

What about California returns? 

Everything for California has now been postponed until July 15, 2020. This includes:

  • All individual and business returns for 2019
  • All individual and business return tax balance due for 2019
  • All 2020 Quarter 1 and Quarter 2 estimate payments
  • All 2020 LLC Taxes and Fees

The California State Controller has stated taxpayers will continue to get their refunds timely.

What about other tax stuff ?

  • Property tax collectors state-wide have said they WILL NOT waive the property tax deadline. You might be able to apply for hardship waiver, but it’s a case by case basis. The Contra Costa Tax Collector posted a friendly reminder that secured property taxes are due no later than Friday, April 10, 2020.
  • Social Security offices are closed to the public. You may still conduct some business by phone or online.
  • If you have lost your job or can’t work because of a COVID-19, you can apply for disability insurance with the California Employment Development Department. Gov. Gavin Newsom waived the waiting period, so you can apply immediately.  Website:  www.edd.ca.gov
  • Federal student loan payments have been deferred for 60 days without penalty.
  • There is a temporary waiver of early penalty for certain withdrawals from a qualified retirement plan if made for coronavirus-related purposes. Furthermore, the distribution is taxed over three years.
  • The bill also waives the required minimum distribution rules for calendar year 2020 for certain defined contribution plans and IRAs.  Individuals are usually required to take mandatory distribution starting at age 72, but such distributions are NOT required during 2020.  This provision is effective for calendar years beginning AFTER Dec 31, 2019.

Talk to your local bank and credit card company. Some are allowing for auto loan deferments, credit card deferred payments, refund of overdraft charges and hardship programs for mortgage customers.

Ransomware Risk Assessment

At Maze & Associates we strive to help our clients make the world more cyber-secure through prudent planning and awareness, arming our clients with the right tools to help mitigate and respond to potential threats in an ever-changing landscape of enterprise security.

Local governments are at high risk for ransomware attack, and the Federal Government and government associations recommend immediate action. A recent report from the Cybersecurity and Infrastructure Security Agency (CISA) states that the cost for recovery tops $5 billion in 2019 year to date. The department of Homeland Security, CISA, MS-ISAC, NGA & NASCIO recommend immediate action to safeguard against ransomware attacks.

In order to help clients effectively combat the current growing cyber-threats, we have updated our readiness checklist to version 1.2 to include newly released recommendations, enabling a higher-level awareness of your organization’s ransomware preparedness.

CLICK HERE TO ORDER YOUR FREE RANSOMWARE PREPAREDNESS CHECKLIST

Maze Live 2018 – Cyber Security Update for Local Governments

2018 update on cybersecurity for local governments. This year marks the rise of the new threat to Local Government from nation states and the new risks to local governments. Costs for suffering cyber-attacks can be crippling to local governments. In addition, 93% of incidents are directly related to the human vulnerability. Most importantly strengthening the human firewall is a must to reduce risk. A strong cybersecurity awareness program is necessary.

One update since I did this talk. This week it was reported the cost for the City of Atlanta’s ransomware incident is now at $17 million up from $2.6 reported in April.