Year-End Preparation for Taxes
- Refund Factors – The IRS attempts to issue most refunds within 21 days. Some refunds will take longer because there are security issues, errors in filing or a claim for the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). If you have been a victim of identity theft in the past, there may be added review of your return. You should be able to learn about any refund delay with the “Where’s My Refund” tool on irs.gov.
- Year-end Bonus or Holiday Pay – Many taxpayers benefit from financial gains toward the end of the year. These may include a bonus from your employer, extra holiday pay, stock dividends or mutual fund distributions. If you anticipate a substantial gain or added income, it may be wise to consider increasing your withholding or making an estimated tax payment. The Tax Withholding Estimator on irs.gov may be helpful. You may use IRS Direct Pay or the Treasury Department Electronic Federal Tax Payment System (EFTPS) to make an estimated tax payment.
- Prior Debt – Tax refunds are issued by the Treasury’s Bureau of Fiscal Service (BFS). Before issuing a refund, BFS reviews the Treasury Offset Program files. If you have a prior federal or state tax bill or spousal support or child support due, your refund may be reduced. BFS is required to send you a letter of explanation if your refund is reduced.
- Planning to eFile – Most government payments are now sent electronically to banks. Approximately 98% of Social Security and veterans benefit payments are made through electronic fund transfers (EFT). If you eFile and request a direct deposit to your bank account, your refund will be promptly processed. You will need to enter your bank account and routing number to receive a direct deposit refund. For security reasons, only three or fewer refunds may be transferred to one bank account.
The first part of December is always a good time to review your end-of-year tax planning. You may want to visit with a tax advisor about the best plan for your situation. With a good plan, you can rest easy and enjoy the holiday season.
No Clawback in Final Estate and Gift Tax Regulations
In T.D. 9884, the IRS published final regulations for the calculation of gift and estate taxes. The final regulations included four examples with specific rules for calculating estate tax for decedents who made large lifetime gifts and pass away after 2025.
The estate planning community was concerned that there might be a “clawback” of the transfer tax for taxpayers who made large gifts. The Tax Cuts and Jobs Act doubled the basic exclusion amount (BEA) from $5,000,000 to $10,000,000, but in 2026 the BEA reverts to $5,000,000 (plus indexed increases).
Commentators thought that individuals who use their full BEA and pass away in 2026 could face a substantial estate tax problem. However, the final regulations generally permit the use of the greater of the BEA at death or the BEA in the year of the gift.
The IRS stated, “The final regulations adopt the special rule provided in the proposed regulations in cases where the portion of the credit against the estate tax that is based on the BEA is less than the sum of the credit amounts attributable to the BEA allowable in computing gift tax payable within the meaning of Section 2001(b)(2). In that case, the rule provides that the portion of the credit against the net tentative estate tax that is attributable to the BEA is based on the greater of those two credit amounts. The rule thus would ensure that the estate of a decedent is not inappropriately taxed with respect to gifts that were sheltered from gift tax by the increased BEA when made.”
Other important provisions discuss inflation adjustments, deceased spouse unused exemption (DSUE), basic exclusion amount calculations and generation skipping transfer (GST) tax.
- Inflation Adjustments –The IRS intends to permit the use of the inflation adjusted BEA. The examples show the inflation-adjusted BEA amounts in the various calculations.
- DSUE –When the first spouse passes away, the executor may elect marital portability and allocate the DSUE amount to the survivor. The IRS permits the reported DSUE amount to be combined with the second estate’s BEA to calculate the applicable exclusion amount (AEA).
- BEA Computations –The IRS specified a four-step calculation method for gifts. The DSUE is allocated and then the BEA. Third, the AEA is based upon the BEA and the DSUE. Fourth, the BEA for the calendar period of the gift is applied. Example 4 in Reg. 20.2010(c)(2)(iv) illustrates this calculation.
- GST Tax –While the IRS did not publish GST tax examples, it stated, “There is nothing in the statute that would indicate that the sunset of the increased BEA would have any impact on allocations of the GST exemption available during the increased BEA period. However, this request is beyond the scope of this project.”
Editor’s Note: The final regulations are effective after November 25, 2019. Executors may elect to apply the AEA calculation rules to estates with decedents who died between December 31, 2017 and November 26, 2019.
AICPA Requests Guidelines on Separate Share UBI
On November 19, the American Institute of Certified Public Accountants (AICPA) Tax Executive Committee Chair Christopher Hesse sent a letter to the IRS with suggestions for the Sec. 512(a)(6) rules on separate trades or businesses.
The Tax Cuts and Jobs Act included Sec. 512(a)(6). This provision requires nonprofits to calculate separately the unrelated business income (UBI) tax for business entities. The effect of this provision is that losses in one business may not offset gains in another.
The AICPA letter focuses on four areas – a de minimus exception, determination of separate trade or business status, investment activities and net operating losses (NOLs).
- De Minimus Exception – AICPA suggests an exception for nonprofits with less than $100,000 of gross UBI. Smaller nonprofits could continue to aggregate all entities.
- Determining Separate Trades or Business – Nonprofits should be able to use the North American Industry Classification System (NAICS) codes or any reasonable method to classify separate business entities.
- Investments – Nonprofits should be able to aggregate all investments into a single business entity. They should also include partnerships that receive 95% passive income under Sec. 4943(d)(3).
- Net Operating Losses (NOLs) – There should be an exception to permit aggregation of unrelated debt-financed income. Regulations should be drafted to explain allocation of charitable gifts and capital gains and losses for consolidated groups.
Applicable Federal Rate of 2.0% for December — Rev. Rul. 2019-26; 2019-49 IRB 1 (19 Nov 2019)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2019. The AFR under Section 7520 for the month of December is 2.0%. The rates for November of 2.0% or October of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.