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Category: Individual

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.

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

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.

Fraud Alert IRS Scams

 

In October 2015 the IRS released IRS Special Edition Tax Tip 2015-18, warning taxpayers of a growing trend in scammers pretending to be tax collectors from the IRS. Criminals will call taxpayers claiming the taxpayer owes a tax bill. They demand immediate payment and often threaten arrest if you do not make payment plans immediately.

 

It is important to note that they will change their tactics and the way they present their demand to try and throw people off. However, there are some common traits to their scams to look out for.

  1. They will demand immediate payment. They don’t want to give you time to think. If you do they are concerned that you will have second thoughts and realize it is a scam.
  2. They will typically try to use the appearance of authority to intimidate you. Often, they will call claiming to be an IRS agent, even offering a badge number.
  3. They will typically use fear to their advantage. The fear of owing the IRS money is enough to get people motivated to avoid being on the wrong side of the IRS. However, scammers have stepped up their game recently claiming that a warrant will be issued to local authorities to arrest you.

 

One way to avoid being a victim is to know how the IRS operates

  1. The IRS will not call and demand an immediate payment. The IRS will send you a bill in the mail.
  2. The IRS will not force you to pay without allowing you the right to appeal the amount you owe.
  3. The IRS will not require a specific form of payment for taxes. Scams often require payment by Western Union, gift card, or credit card.
  4. The IRS will not ask you for your credit card number over the phone.
  5. The IRS will not threaten to have the police come and arrest you.

 

What you can do

  1. Don’t give out any information, hang up immediately.
  2. You can report the incident to the IRS at their “IRS Impersonation Scam Reporting” webpage. Or you can call 800-366-4484.
  3. You can report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

 

Resources

  • If you think you do owe taxes you can contact the IRS at 800-829-1040. IRS workers can assist you concerning any taxes you may owe.
  • Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
  • For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

 

IRS Video

Equifax Data Breach

It is still early in the investigation and new information continues to come to light, but it is clear that almost half of all Americans have been impacted by Equifax’s data breach. In light of this, it is hard not to rush impulsively to do something like click on a link to sign up for credit monitoring.  Scammers are already calling or emailing people to say they are with Equifax in order to trick people in disclosing personal information that can be used by other criminals to commit identity theft or infect their computers with malicious software.  This is another risk related to the breach that consumers need to be aware of.

 

Though it will take further time for investigators to bring to light the complete ramifications, it is evident that the impact from this breach will last for decades.

No Easy Solutions

This is a long-term problem. Identity information was stolen in the breach, including names, addresses, and Social Security Numbers (SSNs), will be usable by hackers long after the breach has been forgotten.  10-years from now individuals who had access to the content stolen in the breach could use your SSN–unless you change it.

 

Change your SSN?  If only that were easier. The government generally does not want you to change your SSN number. In order to accomplish this you have to show that you have been a victim and continue to be disadvantaged by using the old SSN.

 

Another potential solution is to place a security freeze and fraud alert on your accounts.  A security freeze alerts potential creditors not to open new accounts.  If you open a new account in the future you will need to unfreeze the account.  This will take time and may delay new loans.  This can be very difficult if you are applying for a mortgage loan.  A fraud alert puts an alert on your account to take extra steps to verify your identity before issuing new credit.

 

 

Some security & privacy professionals think Equifax should pay for credit monitoring for everyone for life.  As mentioned, this information could be used in the distant future, long after their year of free monitoring is over.   Write your congressional members and demand lifelong protection from a lifelong threat.

 

3 Things You Can Do
  1. Sign in up for your own credit monitoring service.  Optionally you can do a credit freeze or fraud alert on your account.
  2. Don’t use Equifax’s free monitoring or their website.
  3. Don’t listen to anyone who calls you about Equifax data breach.  Also, watch out for emails, scammers will use fear to get you to click on a link to take you to a malicious website.

 

To freeze your credit or start a fraud alert call the three major credit reporting agencies.

Phone numbers:
  • Equifax — 1-800-349-9960
  • Experian — 1 888 397 3742
  • TransUnion — 1-888-909-8872
More Information and Sources

These websites will cover everything you need to know. You can start with the following:
State of California Department of Justice, Information Sheet, How to “Freeze” Your Credit Files
Federal Trade Commission, Consumer Information, The Equifax Data Breach: What to Do
Consumer Financial Protection Bureau, blog, Identity theft protection following the Equifax data breach, By Kristin Dohn – SEP 09, 2017
Federal Trade Commission, IdentityTheft.gov website
Social Security Administration, Frequently Asked Questions, Can I change my Social Security number?
Federal Trade Commission, Consumer Information, Equifax isn’t calling
CNN Money, Why Millennials should be really worried about the Equifax breach, by Danielle Wiener-Bronner, 15 SEP 2017
Equifax hack: What’s the worst that can happen? If you’re not worried about the Equifax hack, you should be. by David Goldman, 11 SEP 2017

Real Estate Wealth, Inheritance Planning that Works

This seminar covers estate planning and how you can limit taxes, avoid probate, and maximize inheritance by utilizing Revocable Living Trusts, Family LLC/LLP, Spousal Limited Access Trusts, Charitable Remainder Trusts, and Irrevocable Life Insurance Trusts.

IRA Tax Planning, De-fusing the tax time bomb

This seminar covers retirement and estate planning and how you can limit taxes, avoid probate, and maximize inheritance by utilizing reverse mortgages, conduit trusts, and investments.  What should you do with your required minimum distributions?  What strategies can you use for beneficiary designations?