Month: July 2021

Did you take a coronavirus distribution (CVD) of up to a combined limit of $100,000 from one or more of your traditional IRAs in 2020? 

You can recontribute the CVD amount(s) back into one or more traditional IRAs within three years of the withdrawal date(s). You treat each withdrawal and later recontribution within the three-year window as a federal-income-tax-free IRA rollover transaction. That’s the tax advantage.

The non-tax advantage is that there are no restrictions on how you can use CVD funds. You can use the money to pay bills and recontribute later—within the three-year window—when your financial situation permits. You can help out your adult kids now and recontribute later. Whatever. 

Key point. The favorable tax treatment applies equally to CVDs taken from garden-variety traditional IRAs, SEP-IRAs, SIMPLE-IRAs, and employer retirement plans that allowed CVDs.

Unfortunately, you must put up with some potentially awkward interim tax consequences before you arrive at the tax-free-rollover-equivalent outcome. The interim tax consequences can diminish the cash-management advantages of the CVD deal, and they require filing amended returns to gain federal-income-tax-free treatment. 

You always have the option of simply keeping all or part of your CVD money. You’ll have taxable income from the CVD amount that you don’t recontribute.

Good news. Regardless of what you choose to do with your CVD, you won’t owe the dreaded 10 percent early withdrawal penalty tax that generally applies to traditional IRA withdrawals taken before age 59 1/2. CVDs are completely exempt from the penalty tax. 

The same is true for the SIMPLE-IRA. IRS Notice 2020-50 clarifies that CVDs taken from a SIMPLE-IRA are exempt from the 25 percent early distribution penalty tax that generally applies to SIMPLE-IRA withdrawals taken before age 59 1/2. 

More good news. When you recontribute a CVD amount within the three-year window, it’s deemed to be a direct trustee-to-trustee transfer that’s exempt from the one-IRA-rollover-per-year limitation.

Bad news. According to IRS Notice 2020-50, beneficiaries of inherited IRAs can receive CVDs as long as

• they are eligible individuals,
• they can follow the three-year ratable inclusion rule to report taxable income from CVDs, and
• their CVDs are exempt from the 10 percent early distribution penalty tax.

But only an IRA CVD that is otherwise eligible for tax-free rollover treatment can be recontributed. Therefore, CVDs received by beneficiaries of inherited IRAs (other than the surviving spouse of the IRA owner) cannot be recontributed. So, no tax-free-rollover-equivalent deal for those folks. Sorry.

If you have questions about your CVDs, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 17, 2021

The tax law can jump up and bite you in unexpected places. One example of that is the nanny tax. 

Do you have a household employee such as a nanny, a caregiver for an elderly relative who moved in with you during the pandemic, or a live-in housekeeper? 

You may have hired somebody to help out during difficult circumstances caused by the COVID-19 mess. 

Maybe that was a temporary arrangement, or maybe it has turned into a permanent one. In either case, the dreaded nanny tax issue may be in play.

The nanny tax refers to your duty to withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and also to deposit the employer’s share of those taxes.

First, let’s clarify who can potentially count as a household employee. According to IRS Publication 926, Household Employer’s Tax Guide, household employees are individuals who do household work—such as performing as a nanny, caretaker, private nurse, babysitter, housekeeper, maid, driver, or butler. Household work includes only performing services in or around your private home. 

According to IRS Publication 926, a person who does household work is your employee if you control not only what work is done but also how the work is done. So, if a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee. 

It doesn’t matter whether the work is full time or part time, or whether you hired the worker through an agency. But if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee. 

Yard care workers, pool service guys, maids, and the like who provide services to the general public and just show up at your place periodically to go about their business are not your employees. 

For 2021, the FICA tax issue arises only if you pay a household employee $2,300 or more during the year.

The nanny tax rules are complicated, and complying with them can be a time-consuming nuisance.

If you would like to discuss the nanny tax, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 8, 2021

The Work Opportunity Tax Credit rewards your good deeds. 

And now, because of new legislation, the rules are in place for longer than usual. 

If you need to hire workers in your business, this dollar-for-dollar reducer of your taxes is one to know about.

Suppose your business hires a member of a targeted group. In that case, you can claim the potentially lucrative federal Work Opportunity Tax Credit (WOTC) for some of the wages paid to the individual.

Overview of the Credit

The credit generally equals 40 percent of qualified first-year wages paid to an eligible employee, up to a maximum wage amount of $6,000. That translates into a maximum credit of $2,400 (40 percent x $6,000).

Of course, some employees don’t work out. The tax code recognizes that and reduces the credit rate to 25 percent of qualified first-year wages for an employee who completes at least 120 but fewer than 400 hours of service. That translates into a maximum credit of $1,500 (25 percent x $6,000).

Eligible Employees

To be an eligible employee, your new hire must be certified as a member of a targeted group by the applicable State Workforce Agency (SWA). You, as the employer, can either 

• obtain the certification by the day the employee begins work, or
• complete a pre-screening notice, using IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit), by the day you offer a job to a prospective employee. Then submit Form 8850 to the SWA (not to the IRS) within 28 days after the employee begins work.

Click here for links to the names, addresses, phone and fax numbers, and email addresses of the WOTC coordinators for each of the SWAs.

A simplified certification process is available for qualified unemployed veterans.

You can claim the WOTC only if you hire a member of a targeted group. Targeted groups include the following:

• Qualified IV-A recipients
• Qualified veterans
• Qualified ex-felons
• Designated community residents
• Vocational rehabilitation referrals
• Qualified summer youth employees
• Qualified supplemental nutrition assistance benefits recipients
• Qualified SSI recipients (anyone who is certified by the designated local agency as receiving Supplemental Security Income benefits under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date)
• Long-term family assistance recipients
• Qualified long-term unemployment recipients

Exceptions to the General Rule on Credits

There’s a higher limit of $12,000 for first-year wages paid to a qualified veteran who is entitled to compensation for a service-connected disability and was discharged or released from the military within the past year. That translates into a maximum credit of $4,800 (40 percent x $12,000).

There’s an even higher limit of $14,000 for first-year wages paid to a qualified veteran who was unemployed for at least six months in the prior year. That translates into a maximum credit of $5,600 (40 percent x $14,000).

If a qualified veteran both has a service-connected disability and was unemployed for at least six months in the prior year, the limit for first-year wages is $24,000. That translates into a maximum credit of $9,600 (40 percent x $24,000). Wow!

The WOTC for a long-term family assistance recipient equals 40 percent of qualified first-year wages, up to a maximum wage amount of $10,000. That translates into a maximum credit of $4,000 (40 percent x $10,000). 

In addition, for long-term family assistance recipients, the WOTC can be claimed for 50 percent of qualified second-year wages, up to a maximum wage amount of $10,000. That translates into a maximum second-year credit of $5,000 (50 percent x $10,000) and a maximum combined credit for the two years of $9,000 ($4,000 + $5,000). Another wow!

The WOTC for a qualified summer youth employee (a 16-year-old or 17-year-old who lives in an empowerment zone) equals 40 percent of first-year wages paid during any 90-day period between May 1 and September 15, up to a maximum wage amount of $3,000. That translates into a maximum credit of $1,200 (40 percent x $3,000).

If you would like my help with the WOTC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 2, 2021