Year-end Tax Tip Time: Capital losses. The news waterfall has slowed to a trickle between the holidays, but tax planning is in high gear. We'll take advantage of the breathing space to head our roundups for the rest of the year with a little year-end tax planning help. You're welcome.
Today we start out with loss harvesting. If you have capital gain income so far this year, you can still offset it with capital losses. Some basics:
– You have to take the loss in a taxable account. A loss in an IRA or 401(k) plan doesn’t offset your taxable gains.
– Normally the “trade date” is the effective date for tax purposes, so you can sell a stock as late as December 31 this year and still deduct the loss on your 2021 1040.
– If you have a loss on a short sale, the tax law treats it as closing on the settlement date, not the trade date, so you can’t wait to the last minute to close a short sale to get a deduction.
– You don’t need to overdo it. You can deduct your capital losses only to the extent of your capital gains, plus $3000. But if you do overdo it, individual capital losses carry forward indefinitely.
– Harvesting losses helps taxpayers subject to the Net Investment Income Tax to the extent it helps for regular taxes.
– Watch out for the wash sale rules. If you buy the same stock within the 30 days preceding or following the sale of a loss stock, your loss is disallowed. This is true even if you sell from a taxable account and buy in an IRA, according to the IRS.
There might be reasons to sit on capital losses, though, even if you have capital gains to offset this year. For example, if you expect much larger income in 2022, the losses might be more valuable then. Same if you think Congress might still raise taxes in 2022. You should consult your tax advisor with questions.
Major storm relief, later tax deadlines for Alabama, Arkansas - Kay Bell, Don't Mess With Taxes:
The IRS today announced that affected Arkansas individual and business taxpayers in five counties now have until May 16, 2022, to file returns and make payments for various tax situations.
But they are not alone.
The IRS also announced today that residents and business owners in two Alabama counties get similar tax relief and a new Feb. 28, 2022, deadline. The Alabama tax move is in connection with severe storms and flooding in those areas that began on Oct. 6.
The new May 16, 2022, deadline applies to the filing of 2021 individual income tax returns and paying any tax due that would have been on April 18, 2022.
Top Federal Tax Cases Of 2021 - David van den Berg, Law360 Tax Authority ($). "In 2021, the U.S. Supreme Court declined to review an IRS summons seeking the identities of a law firm's clients, while federal courts rebuffed constitutional challenges to passport revocations and issued other noteworthy tax-related rulings."
The cases that might affect the most taxpayers involve donor advised funds:
In February, a California federal magistrate judge found a couple failed to come close to proving the Fidelity Investments Charitable Gift Fund breached a standard of care in liquidating the couple's $100 million stock donation. The couple argued the organization made false promises to get them to donate their stock and sold all of it in three hours on the last trading day in 2017, hurting the stock price and cutting their tax deduction.
The cases were a positive development for donor-advised funds as a business, even if they suggest that donors have a problematic understanding of their interest in the funds, said Philip Hackney of the University of Pittsburgh School of Law.
While a donor-advised fund can listen to the donor's advice, they don't have to take if. If they did, the donor wouldn't get that charitable deduction.
Top State And Local Tax Cases Of 2021 - Jaqueline McCool, Law360 Tax Authority ($). "With the U.S. Supreme Court declining to hear New Hampshire's tax complaint over Massachusetts' regulation imposing income tax on remote workers during the coronavirus pandemic, taxation of remote work likely will fuel future litigation."
Related: Telecommuting Workers in Refuge States Complicate State Taxes.
The IRS’s Renewed Focus on Abusive Trust Arrangements - Matthew Roberts, Freeman Law:
Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements. Furthermore, in appropriate circumstances, taxpayers and/or the promoters of these trust arrangements may be subject to civil and/or criminal penalties.
Generally, in these promoter-type trust cases, a promoter charges the taxpayer—from $5,000 to $75,000—for the use of trust documents and other resources. In exchange for the service fee, the promoter generally assures the taxpayer that entering into the trust arrangement will significantly reduce or eliminate federal income taxes. And the promoter may use either a “domestic package” or a “foreign package”—i.e., a purely domestic or purely foreign trust.
I have had sophisticated clients seriously ask why I can't come up with some trust scheme to make their taxes go away "like the big guys do." It doesn't work that way.
Is the TCJA Here to Stay? - John Buhl, TaxVox. "But with the 21 percent corporate rate and top individual rate of 37 percent seemingly untouchable—and Biden’s $400,000 pledge looming large—it appears more likely than ever that most of the TCJA’s tax cuts will stay put, at least until 2025."
FinCEN Adopts Immediately Effective Final Rule Omitting the Regulations Statement of the 2004 Willful Penalty Prior to the 2004 Statutory Amendment - Jack Townsend, Federal Tax Crimes. "Readers may recall that the FBAR willful penalty, as amended in 2004, provides a maximum penalty of the greater of $100,000 or 50% of the amount in the account on the reporting date."
Tax Court Rejects Taxpayer's Claim for Relief Under Section 66(c) on S Corp Income - Parker Tax Publishing. "The Tax Court held that a taxpayer did not qualify for tax relief under Code Sec. 66(c) with respect to income from an S corporation she co-owned with her husband because the income tax liability from which she was seeking relief was attributable to her status as a shareholder. In rejecting the taxpayer's assertion that she did not receive a Schedule K-1 and was therefore unaware of the S corporation income, the court noted that she had reported such income for the three prior years, signed several checks for the S corporation, and signed a divorce decree that referenced the S corporation."
The craziest expenses of 2021 - Michael Cohn, Accounting Today. "With the promise of a company car, a new hire visited a dealership and charged a new ride to his corporate card."
Get Busy! Today is Still Need To Do Day, according to Nationaltoday.com. "The Christmas rush is over, and you should be feeling calm. So what’s that subtle itch deep inside you? That one that’s tugging at you, haunting you, reminding you that despite all the holiday successes, you still never fixed that leaky faucet like you said you would. Lucky for you, the year’s not over yet, and there is in fact a day tailor-made for you. On December 29, don’t forget to take advantage of Still Need To Do Day, when folks across the country will use what remaining time they have in the year to make some final checks on their year-long 'to do' list. In the downtime between opening presents and banging pots and pans, consider what you can get done in 24 hours this December 29."
Things like harvesting your capital losses.