This is a published version of our weekly Forbes Tax Breaks newsletter. You can sign-up to get Tax Breaks in your inbox here.
I feel like this week’s version of the newsletter should come with some dramatic music or another way to signal that we’re almost there—Tax Day is just two days away!
With that in mind, we’ve got a bunch of helpful resources for you in our updated free Forbes tax guide.
But, of course, if you’ve made it this far in the season and still haven’t filed your tax return, you can file for an automatic extension (here’s how (☆))—no explanation required. There’s no shame in it, either: my tax preparer confirmed they’re filing our extension this weekend.
Filing for an extension offers another benefit—it allows you to file a superseding return instead of an amended return. Here’s how that works. Typically, you can’t correct a tax return without amending it. However, if you file a corrected return before the due date for filing the original one—including extensions—that tax return can replace your original return. It’s not likely to happen very often, but it’s a good idea to keep in your back pocket.
And while in some circles, it feels like everyone is talking taxes (okay, maybe just in mine), that’s not necessarily the case. Recent data from the Urban-Brookings Tax Policy Center shows the percentage of shareholders who are taxable has dwindled over time, leading to a decreasing tax base. And before you dismiss it as a blip, the data is extensive (from 1965 to 2022). Some of the findings? Foreign investors, retirement accounts, and other tax-exempt entities now dominate U.S. stock ownership. Understanding ownership—and taxability—can serve as a guide to future tax policy.
(We’ve already seen efforts in other capacities to understand who owns companies—see the Corporate Transparency Act—and to identify real estate ownership. Earlier this year, I reported on a new disclosure requirement (☆) for non-financed residential real estate sales to legal entities, trusts, and shell companies, while last year, I reported on how government agencies are grappling with restricting foreign-ownership of land.)
This comes on the heels of another trend: Increasing numbers of people are contemplating renouncing their U.S. citizenship. Those include “accidental Americans”—individuals born with U.S. citizenship but who may not live in the country and have firmly established lives elsewhere. Accidental Americans are still subject to U.S. tax and financial asset reporting laws but often do not understand their obligations.
As a parent, I can vouch for another group of folks who also may not understand their reporting obligations: college students. (☆) College students and their families can benefit from tax breaks, including credits to help pay for school and income exclusions from savings bonds and retirement accounts. My favorite tip about paying for college involves student loan interest—if someone else, like the student’s mom or dad, makes a student loan payment on the student’s behalf, the payment can be treated for federal income tax reasons as though the student made the payment.
Taxes can be anxiety-inducing at the best of times, but throw in a language barrier or other obstacle and taxpayers may struggle through tax season. If we want to boost compliance, we need to make it easy for taxpayers. We’re finally seeing some steps in that direction from the IRS (forms and pubs are now available in multiple languages, as well as accessible for the hearing and sight impaired) and from the private sector (TurboTax has made all of its products available in Spanish). Doing what we can to remove some of the burden for taxpayers to comply with a legal obligation feels like a no-brainer. (This story is also available in Spanish).
Finally, if you, like me, are missing basketball this weekend (congrats to Philly’s own Dawn Staley on her big win!), I recommend that you check out the Masters. The tourney is pretty amazing, even if you’re not a golfing fan. I started watching occasionally years ago, thanks to my father-in-law—and it happened to coincide with Tiger Woods’ rise. And because you knew there would be a tax angle, the Masters has lent its reputation to a tax rule. The section 280A exclusion, often called the Augusta Rule (☆) in a nod to the Masters, can help taxpayers avoid tax on income from short-term rentals and possibly save money. You don’t have to be a golfer, just a homeowner, to take advantage—and understanding the rules is your ace-in-the-hole (you were expecting a bad pun eventually, right?).
Thanks for allowing us into your inbox this season. I promise we’ll have more great content after tax season, too.
Thanks for reading!
—Kelly Phillips Erb (Senior Writer, Tax)
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Questions
I’ve received several questions about whether to report certain kinds of income and how it might impact the need to file a tax return. That can be an easy question when you simply receive wages or salary. But what happens when the assets are a little out of the ordinary? One reader asked:
My grandfather gifted me $10,000 and I need to know if I have to file taxes on it. Or do I not have to file taxes on it?
The good news is that most gifts and inheritances are tax-free to the recipient for federal income tax purposes.
Here’s the part that can confuse folks: the gift or inheritance retains the tax characteristics of the underlying asset.
For example, a cash gift of $10,000 is income tax-free to the recipient. For federal income tax purposes, there’s no need to report it or pay income tax on it.
However, an asset that carries income—like an IRA or savings bond with accrued interest—may result in a tax bill when you cash it out. That has less to do with the gift or inheritance than the nature of the asset (though some of those rules, as with IRAs, may be triggered upon the gift or inheritance). If you receive a gift or inheritance other than cash, I encourage you to check with a tax pro to find out what and when to report.
What if it’s not a gift or inheritance but income that you weren’t necessarily expecting all at once—like a capital gain? A reader asked:
I am unemployed and have an investment in crypto. I would like to sell about $45,000 of my long term capital gains which will put me in the 0% tax bracket where I will owe no taxes. I have no other income or reason to file. Is it a requirement by the IRS that I file a tax return next year for the long-term capital gains I made this year?
This is a great question. Many taxpayers believe that not having a Form W-2 in hand means that there is no filing requirement. That’s not true.
Whether you need to file a tax return depends on your filing status, age, and gross income. You can find a complete chart here, but for your question, if you’re single and under 65, the gross income threshold for filing a tax return in 2023 is $13,850 (that number will increase to $14,600 in 2024). Gross income typically means everything—including capital gains (some exceptions apply to Social Security). You’ll want to add up all of your income, including capital gains and any unemployment benefits you receive, and if it’s more than the filing threshold, you should file even if you don’t owe any tax.
I would note that crypto, in particular, is something the IRS is taking a serious look at these days. It’s super smart of you to take a proactive approach and start planning now. Good luck!
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Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.
PANAMA PAPERS ARE BACK IN THE NEWS
Long before the days of the Corporate Transparency Act—or CTA—the U.S. was scrambling to deal with the impact of the Panama Papers.
The Panama Papers were a collection of 11.5 million confidential documents leaked from the now-defunct Panamian law firm Mossack Fonseca that detailed the financial arrangements of the super wealthy, including those utilizing offshore entities.
At the time, it was easy to be smug about the lack of well-known American names in the Papers. But the Papers also revealed something of a surprise for many: in some parts of the world, the U.S. was considered a tax haven.
In the U.S., flexible entity structures, corporate tax breaks, and tax-favored capital gains can result in a relatively low tax burden, making it an attractive place to do business. In addition, states like Delaware and Nevada have tax structures and corporate laws that up the appeal globally. Don’t believe me?
Of the top tax havens—by number of companies—in the Panama Papers, Nevada ranked 8th, just above the countries of Hong Kong and the U.K.The release of the Panama Papers created controversy, and likely accelerated the appearance of the CTA (it was introduced in 2020). But the drama isn’t over yet—this week, 27 defendants tied to Mossack Fonseca, including the firm’s cofounders Jürgen Mossack and Ramón Fonseca Mora, officially went on trial to answer money laundering charges related to the Papers. All of the defendants have pleaded not guilty. (☆)
A DEEPER DIVE
The Tax Court tackled another conservation easement case recently. Conservation easements can be tricky, but typically, they allow you a tax break when you donate the right to use property to a qualified charity. The deduction is equal to the fair market value (FMV) of the property—often, what a willing buyer would pay a willing seller. But figuring that number can be difficult under the circumstances (there aren’t many buyers and sellers of easements), so the regulations provide that you can figure the difference between the FMV of the property before the easement is placed on it and the FMV of the property afterward. Those valuations are often disputed, as in the case of Savannah Shoals LLC, where New Shoals claimed a $23 million deduction, but the court ruled “the easement had a fair market value on the donation date of $480,000.” The taxpayers were also socked with a 40% penalty (ouch).
Court cases are, by their nature, adversarial, including when it comes to discovery (the legal term for gathering evidence from the other side). That makes sense because you typically want everything you can get from the other side while holding your cards close to the vest. The U.S. Tax Court doesn’t love these discovery disputes and has, as the result of a long-standing case, Branerton v. Comm’r, developed a process that requires all parties—the taxpayer and the government—to try to obtain discoverable information through informal means. But what happens when informal discovery breaks down, and a party fails to cooperate? That’s what the taxpayer alleges happened in Everest Granite, LLC. In that case, the IRS Chief Counsel failed to respond by the deadline, and the court issued an Order to Show Cause as to why summary judgment should not be granted in the taxpayer’s favor. The court ultimately didn’t grant summary judgment but did impose sanctions against the government for delaying the litigation.
IMPORTANT DATES
📅 April 13, 2024, 9 a.m. to 4 p.m. The IRS will open many Taxpayer Assistance Centers (TACs) nationwide on Saturday to offer in-person help without an appointment. Normally, TACs are open weekdays by appointment.
📅 April 15, 2024. Individual federal income tax returns are due (or file for an extension) for most taxpayers.*
📅 April 17, 2024. Individual federal income tax returns are due (or file for an extension) for taxpayers in Maine and Massachusetts.
📅 May 15, 2024. Information tax returns (series 990) are due (or file for an extension) for tax-exempt organizations with a tax year ending in December.
📅 May 17, 2024. Deadline for filing for refunds for tax year 2020. The IRS has announced that almost 940,000 people have unclaimed refunds for tax year 2020.
* The IRS has announced some relief for taxpayers Check the IRS’ natural disaster page for more information.
NOTEWORTHY
Former IRS-CI Chief Jim Lee has announced that he has joined Chainalysis as their Global Head of Capacity Building. Chainalysis—a blockchain forensics firm headquartered in New York—uses on-chain data to trace crypto transactions and identify scams, hacks, fraud, and illicit activity involving digital assets. According to Forbes, which named Chainalysis to its Fintech 50 list earlier this year, the company was valued at $8.6 billion as of May 2022.(☆)
Psychologist Daniel Kahneman passed away last month at age 90. Kahneman and his colleague, Amos Tversky (also a psychologist), were considered two of the most influential economics thinkers of the past half-century. The pair challenged the idea that rational people inevitably would act in a way that maximizes their income (for example, make retirement savings tax free and they will save more). Kahneman believed that human decision-making is a constant battle between the intuitive mind (thinking fast) and the analytical (thinking slow).
Mayer Brown announced that Sam Riesenberg has joined the firm as a partner in its Tax practice in London, where he will focus on providing advice in asset management and fund matters across the U.S., Europe, and the Middle East. He joins from KPMG’s Washington National Tax Practice.
Mazars, an audit, tax and advisory firm in the U.S., announced that Ryan McLaughlin has joined as an Audit Partner in the Long Island Office. McLaughlin has over 16 years of experience working in accounting, audit, and business advisory with private and publicly held clients.
Registration is open for the National Association of Enrolled Agents (NAEA) 2024 Capitol Hill Fly-In Day. Over three days, May 20-22, 2024, NAEA will meet with policymakers, IRS experts, and DC thought leaders about Congress and its implications for enrolled agents.
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TRIVIA
The revelations in the Panama Papers embarrassed a lot of politicians. Which one stepped down as a result?
A. Sigmundur David Gunnlaugsson of Iceland
B. Malcolm Turnbull of Australia
C. Silvio Berlusconi of Italy
D. Ali Abu al-Ragheb of Jordan
Find the answer at the bottom of this newsletter.
OUR TEAM
I hope you’ll get to know some of our staff and contributors. Since we’re focused on filing, I asked: The estimated average time burden for all taxpayers filing a Form 1040 or 1040-SR is 13 hours. What would you do if you had 13 hours free on your calendar?
Kelly Phillips Erb (Senior Writer, Tax): I’m behind in my baking. I’d love to have a whole day free to make some yummy bread—maybe even some croissants—and some cookies.
Robert W. Wood (Contributor, Tax): If I found 13 hours, I’d start with a nice long walk, and then some catching up on movies I have missed!
Amber Gray-Fenner (Contributor, Tax): 13 hours free? I’d do the usual: read, knit & watch old movies, work in the yard. I’m boring, but easily satisfied.
Virginia La Torre Jeker (Contributor, Tax): If I had 13 hours of free time, I would happily read The Complete Poems of Emily Dickinson. This is a three-volume edition put together in 1955 and was the first complete compilation of Dickinson’s works—1,775 poems.
Andrew Leahey (Contributor, Tax): 13 hours free on my calendar and I’m opting for at least a 3 hour nap. That leaves me with 10 to throw a thermos of coffee and some snacks in a backpack and disappear into the Pine Barrens for a hike.
KEY FIGURES
That’s the number of individual tax returns the IRS expects to be filed by the April 15, 2024, tax deadline.
TRIVIA ANSWER
The answer is (A) Sigmundur David Gunnlaugsson of Iceland.
While all those names appeared in the Panama Papers, it was Iceland’s Prime Minister Sigmundur David Gunnlaugsson who resigned after protests over reports that he had owned an offshore company in the British Virgin Islands with his wife. Gunnlaugsson failed to disclose his interest in the company called Wintris, Inc., when he entered parliament in 2009.
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