Month: February 2022

Taxable income has consequences.

• It causes income taxes. 
• And it causes you to pay either more or less for Medicare. 
• It boils down to this: there’s always a need to reduce your taxable income.

The monthly premium for the current year depends on your modified adjusted gross income (MAGI) as reported on your Form 1040 two years earlier. For Medicare, MAGI means the adjusted gross income (AGI) number shown on your Form 1040 plus any tax-exempt interest income. 

Your 2022 Part B premiums will depend on your 2020 MAGI, as reported on your 2020 Form 1040. 

Your 2023 premiums will depend on your 2021 MAGI, as reported on your yet-to-be-filed 2021 Form 1040. That means that things you do or don’t do on that 2021 return can impact your 2023 premiums. This is especially true if you’re self-employed or an owner of a pass-through business entity (LLC, partnership, or S corporation).  

For 2022, most individuals will pay the base Part B premium of $170.10 per covered person ($2,041.20 if you pay premiums for the full year). But higher-income individuals must pay a surcharge on top of the base premium for Part B coverage, as shown in the table below:

Your 2021 Form 1040 can reflect decisions that affect your 2021 MAGI and, in turn, your 2023 Medicare health insurance premiums. If you’re self-employed or an owner of a pass-through business entity, you have more ways to reduce your MAGI. For instance:

• Until the due date for your 2021 Form 1040 (October 17, 2022, if you get an extension), you as a self-employed individual can make a bigger or smaller deductible contribution to your self-employed retirement account for your 2021 tax year. Your choice will impact your 2021 MAGI and, in turn, your 2023 Medicare health insurance premiums. 
• You as an owner of a pass-through business entity (along with the other owners, if applicable) can make other choices that will impact your 2021 MAGI, such as choosing to maximize or minimize depreciation deductions for the entity. Those choices will impact each owner’s 2021 MAGI and, in turn, his or her 2023 Medicare health insurance premiums.

Key point. Sure, 2021 is over. But because your tax return has not yet been filed, you can choose from the possibilities listed above for reducing your taxable income, which also reduces your Medicare MAGI. 

If you would like to discuss how to reduce your Medicare premiums, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 28, 2022

When you think of the reverse mortgage, you may not think of using it as a tax planning tool. 

If you are house rich but cash poor, the reverse mortgage can 

• give you the cash you desire, and
• save you a boatload of both income and estate taxes when used in the right circumstances.

With a reverse mortgage, you as the borrower don’t make payments to the lender to pay down the mortgage principal over time. Instead, the reverse happens: the lender makes payments to you, and the mortgage principal gets bigger over time. 

You can receive reverse mortgage proceeds as a lump sum, in installments over a period of months or years, or as line-of-credit withdrawals. After you pass away or permanently move out, you or your heirs sell the property and use the net proceeds to pay off the reverse mortgage balance, including accrued interest. 

So, with a reverse mortgage, you can keep control of your home while converting some of the equity into much-needed cash.

In contrast, if you sell your residence to raise cash, it could involve an unwanted relocation to a new house and trigger a taxable gain far in excess of the federal home sale gain exclusion break—up to $500,000 for joint-filing couples and up to $250,000 for unmarried individuals. 

The combined federal and state income tax hit from selling could easily reach into the hundreds of thousands of dollars. 

For instance, the current maximum federal income tax rate on the taxable portion of a big home sale gain is 23.8 percent—20 percent for the “regular” maximum federal capital gains rate plus another 3.8 percent for the net investment income tax. And that’s just what you have to pay the feds.

With the reverse mortgage, you can avoid paying income taxes on the sale. And perhaps even better yet, you can avoid estate taxes. 

The federal income tax basis of an appreciated capital gain asset owned by a deceased individual, including a personal residence, is stepped up to fair market value as of the date of the owner’s death or (if the estate executor chooses) the alternate valuation date six months later. 

When the value of an asset eligible for this favorable treatment stays about the same between the date of death and the date of sale by your heirs, there will be little or no taxable gain to report to the IRS—because the sale proceeds are fully offset (or nearly so) by the stepped-up basis. Good!

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

• By Leon Clinton
• February 26, 2022

Here’s a client story that I believe you will find of interest.

Facts

Henry and Heide own an S corporation 50-50. For more than five years, the corporation has operated a successful $10 million-a-year restaurant. 

Henry, Heide, and Harry formed a new S corporation that started a new restaurant in June 2021. The ownership is 35 percent for Henry, 35 percent for Heide, and 30 percent for Harry. 

During the four months of June through September of 2021, the new restaurant had gross receipts of $300,000. During the quarter ending December 31, 2021, the restaurant had gross receipts of $800,000. So for it’s seven months of operation it has $1.1 million in gross receipts.

Question

Will the new S corporation’s restaurant qualify for the start-up employee retention credit (ERC) of up to $50,000 for the fourth quarter? 

Answer

Yes. Here’s why.

The new restaurant is a new business that started after February 15, 2020, with a new set of owners and its own set of books. It clearly qualifies as a new business—the first step to qualifying as a recovery start-up business.

The second step is for average annual gross receipts to not exceed $1 million—using tax law’s calculation which in this case excludes the fourth quarter. 

The tax code calculated average annual gross receipts for 2021 that precede the calendar quarter for which the restaurant determines the credit are $900,000 and therefore do not exceed $1,000,000. Here’s how you make the calculation: $300,000 x 12 ÷ 4 = $900,000. Also, note that you apply the gross receipts test to the four-month period of existence because that’s how long the new restaurant had been in existence before the last quarter of 2021.

You don’t have to aggregate the new restaurant with the existing restaurant because the two S corporations fail the single employer test. 

Under the single employer test, corporate taxpayers that are members of a controlled group of corporations are treated as a single employer. A brother-sister controlled group of corporations is two or more corporations where

1. five or fewer persons who are individuals, estates, or trusts own at least 80 percent of the total voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of each corporation; and 
2. the same five or fewer persons, taking into account ownership only to the extent that it is identical with respect to each corporation, own more than 50 percent of the total voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of each corporation.

Because Henry and Heide each have 35 percent ownership in the new corporation and they have 50 percent each in the existing corporation, the corporations are not a controlled group.

Key point. Had Henry and Heide formed the new corporation 50-50 (no third-party Harry), they would have had to aggregate the two corporations. The aggregation would make them exceed the $1 million in gross receipts and would have denied them any ERC for a recovery start-up business. 

A Sad Deal

The requirement to aggregate along with the $1 million in receipts limit means that few new businesses will qualify for the recovery start-up business ERC.

From a compliance and clarity standpoint, it’s sad that the IRS in Notice 2021-49 did not address the aggregation rule other than with a mention in an afterthought manner on page 11. We all would have liked an example or two.

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

• By Leon Clinton
• February 8, 2022