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Tag: TAX

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.