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Adjust to Pandemic Rule Rollbacks

It’s hard to believe a little over a year ago the COVID 19 pandemic hit everyone. As things slowly turn back to normal, you need to be ready for the normalizing of the tax rules and adjusting to new ones. Here is how you can be prepared.

Required minimum distributions. If you are age 72 or older, you must once again plan to take the minimum required distribution from your retirement account in 2021. The one-year waiver of this required distribution is now over.

Penalty-free distributions from retirement accounts. While penalty-free distributions from retirement accounts is still available for those in presidentially declared disaster areas, the distribution benefit for pandemic related reasons is expiring. Remember, if you had to make withdrawals you will need to pay income tax on the distributions unless you repay the funds in a timely manner.

Unemployment taxation. Federal unemployment benefits continue to be extended through various federal spending programs. Late breaking rules make $10,200 of last year’s unemployment benefits tax-free on most federal tax returns. But that doesn’t mean you won’t be taxed on these benefits this year. If there are not withholdings from these payments, you may be required to send in estimated tax payments.

Businesses need to stay alert. While the original PPP loan program is now in forgiveness mode, there are new loans and active programs to help cover the cost of employees affected by the pandemic. The best course of action is to stay aware of ever-changing federal and state landscape.

Rules and benefit programs relating to the pandemic are not over. But as social distancing rules adjust, so too must you to the changing tax law landscape.

Thinking of Selling Your Home?- Hot housing market requires tax knowledge

With housing prices skyrocketing, more homeowners are considering cashing out to multiples over list price! Especially since one of the largest tax breaks available to most individuals is the ability to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. Making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know.

The rule’s basics

As long as you own and live in your home for two of the five years before selling your home, you qualify for this capital gain tax exclusion. In tax-speak you need to pass three hurdles:

  • Main home. This tax term defines what a main home is. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
  • Ownership test. You must own your home during two of the past five years.
  • Residence test. You must live in the home for two of the past five years.
  • Other nuances.
    • You can pass the ownership test and the residence test at different times.
    • You may only use the home gain exclusion once every two years.
    • You and your spouse can be treated jointly OR separately depending on circumstances.

When to pay attention

You have been in your home for a long time. The longer you live in your home, the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home.

You have old home gain deferrals. Prior to the current rules, home-gains could be rolled into the next home purchased. These old deferred gains reduce the cost of your current home and can result in a capital gains exposure.

Two homes into one. Newly married couples with two homes have potential tax liability as both individuals may pass the required tests on their own property but not on their new spouse’s property. Prior to selling these individual homes, you may wish to create a plan of action that reduces your tax exposure.

Selling a home after divorce. Property transferred as a result of a divorce is not deemed a sale of your home. However, if the ex-spouse that retains the home later sells the home, it may have an impact on the amount of gain exemption available.

You are helping an older family member. Special rules apply to the elderly who move out of a home and into assisted living and nursing homes. Prior to selling property, it is best to review options and their related tax implications.

You do not meet the five-year rule. In some cases you may be eligible for a partial gain exclusion if you are required to move for work, disability, or unforeseen circumstances.

Other situations. There are a number of other exceptions to the home gain exclusion rules. This includes foreclosure, debt forgiveness, inheritance, and partial ownership.

A final thought

The key to obtaining the full benefit of this tax exclusion is in retaining good records. You must be able to prove both the sales price of your home and the associated costs you are using to determine any gain on your property. Keep all sales records, purchase records, improvement costs, and other documents that support your home’s capital gain calculation.

Navigating the New 2021 Child Tax Credit- What you need to know

The Child Tax Credit is significantly different for 2021, but just for 2021…for now. Read on…

Yikes! You Have a Large Refund- Good news, that is sometimes not so good

For some reason, some believe it is better to receive than give when it comes to filing taxes. While that may help your savings account, it is not always a great idea. Here’s why.

Income the IRS Can't Touch

Yes Virginia, there is a Santa Claus. There is also a lot of income that the IRS does not tax. Here are a few of the more common types.

ALERT! 2020 Tax Date Delay AND Unemployment Income Now Tax Free- What you need to know

Individual tax filing due date: May 17, 2021 (was April 15, 2021)

Unemployment income: $10,200 per person not subject to federal tax (was taxable)

A surprise tax break for 2020 was passed into law in March of 2021. This late, late, late law change is creating havoc within the system. So much so that the individual tax filing due date AND payment of tax is delayed from April, 15 to May 17, 2021. Furthermore, unemployment income received by millions of taxpayers in 2020 may now be tax free! Here is what you need to know.


Unemployment compensation was received by millions of Americans during the pandemic. While it’s welcome income during a tough time if you’ve lost your job, it’s classified as taxable income to be reported on your tax return.

The recently passed American Rescue Plan now makes part of your unemployment benefits free from federal taxation. Specifically, the first $10,200 of 2020 unemployment compensation or as much as $20,400 if your spouse also received unemployment is now tax free. The benefit is for households with adjusted gross income under $150,000. Depending on your tax bracket, this tax break could mean $1,200 or more in taxes saved on your 2020 return.

The problem

The legislation which contains this tax break didn’t become law until March of 2021, three months after the end of the tax year and after millions of Americans already filed their 2020 tax return! And to make matters worse, the IRS has no time to figure out how this tax break will be reported on your 2020 tax return. And Congress also passed legislation that requires the IRS to send millions more economic recovery payments PLUS develop a system to be in place immediately to send monthly enhanced child tax credit payments to families starting in July!

The net result is an overwhelming of the Treasury Department and the IRS, who are already buried because of the pandemic and other prior programs passed into law.

The result

Tax filing delay. You now have until May 17, 2021 to file your 2020 individual tax return and pay the tax. This move from the traditional April 15 filing deadline DOES NOT impact first quarter estimated tax payments or extended filing due dates in September and October 2021.

Tax-free unemployment income. If you received unemployment compensation in 2020, here’s what you need to know:

  • If you’ve already filed your 2020 tax return: Wait for further instructions. Lawmakers are currently asking the IRS if it’s possible to automatically make adjustments and issue a refund if you’ve already filed your 2020 return. Issuing an automatic refund will avoid the need to file an amended tax return. So there is no need to call, we can only wait for clarification.
  • If you HAVE NOT filed your 2020 tax return: Filing your tax return will be delayed until guidance is received from the IRS and it is deployed into tax filing software. The IRS is changing one of its schedules and then providing the information to software companies. Once this guidance is received, delayed tax filings can proceed. In the meantime, DO NOT delay turning in your tax information as returns can still be prepared and be ready to be filed once IRS guidance is received.

While this legislation is creating chaos in preparing tax returns, rest assured every effort will be made to get your tax return filed as soon as possible. So, if you have not already done so, please continue to send in your information so your return can be filed as soon as is possible.

Tax Return Review Hints

Prior to e-filing your tax return, you will need to review it. Here are some suggestions to ensure everything looks right.

The Basics

  • Confirm the basics for you, your spouse and your dependents: Double check the name, address, Social Security Numbers and proper identification of dependents that are under age 17
  • Double check filing status.
  • Confirm your income amount. Start with the total income line. Does the amount seem reasonable? Next look at the individual areas that make up your income. Compare wages, interest, and investment income with your tax forms. This area is especially important if you own a small business.

Adjusted Gross Income

Most tax returns will not have many lines entered in this area, but some might need special attention:

  • Educators: look for your classroom expense deduction
  • Self-employed: look for your deductible self-employment tax
  • Contributors: check your HSA contributions and retirement plan contributions
  • Students: check possible student loan interest
  • Divorced: check for accuracy in any alimony or child support claims if they apply to you.

Taxes and Credits

  • Deductions: Mentally note whether you are taking the standard or itemized deduction approach. If standard: do the math. If itemized: review your Schedule A for accuracy.
  • Review the credits. Spend some time reviewing any other activity in this area of the 1040. If you see areas of entered credits, ensure you have a general understanding of what they are and why you qualify for them.

Any other entries in this section should be understandable. If in doubt, ask for clarification.

The Balance of the 1040

  • Confirm the accuracy of your withholding amounts, any estimated tax payments, and any refund carryovers.
  • If self-employed, double check the self-employment tax calculated here.
  • If taking the Earned Income Tax Credit, ensure a properly filled out EIC schedule is included with your tax return.
  • Review and confirm any other entries on the balance of the tax form
  • If due a refund, ensure your instructions are properly documented on your tax form,
  • Sign your tax return or your e-file approval and send the form to the correct address. Without a signature, your e-file cannot be submitted and your tax return is not deemed to be filed.

Important: If asking for a direct deposit of your refund, double check the account number. Errors in this area are hard to correct once your tax return is processed.

Other Forms and Schedules

Review the supporting schedules. Pay special attention to any missing schedules and new ones required for this year’s tax filings. As a final suggestion, pull out last year’s tax return and compare it with this year’s filing. Focus your questions and review on the areas with significant differences.

Defending Fair Market Value

Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.

Source: IRS Publication 561

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is a definition that is open to interpretation and if the IRS decides your FMV opinion is wrong, you are not only subject to more taxes, but also penalties to boot.

Here are some tips to help defend your FMV in case of an audit.

Understand when it is used

FMV is used whenever an item is bought, sold, or donated that has tax consequences. The most common examples are:

  • Buying or selling your home or other real estate
  • Buying or selling personal property
  • Buying or selling business property
  • Establishing values of other business assets like inventory
  • Valuing charitable donations of personal goods and property like automobiles
  • Valuing bartering of services
  • Valuing transfer of business ownership
  • Valuing the assets in an estate of a deceased taxpayer

Ideas to defend your FMV determination

To help defend your FMV determinations, consider the following:

Properly document donations. FMV of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in either good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.

Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile, but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it. So be careful if donating to places like Kars4Kids or your donation value could be limited!

Get an appraisal. If you sell a small business, a collection, artwork, or a capital asset, consider obtaining an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, getting a third-party appraisal can be a solid basis for defending any differences between your valuation and that of the IRS.

Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.

Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.

Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and the amount paid for the item.

With proper planning, establishing the fair market value of an item sold or donated can be done in a way that can be defended against a challenge from the IRS.

Review Your Social Security Earnings Report

Most of us go through life without being concerned with, or ever checking on, our Social Security records. We assume the money deducted each payday and an equal amount paid in by our employer is applied properly to this valuable retirement benefit.

Ignoring is problematic

The Social Security Administration (SSA) receives a vast amount of paperwork each year. They can and do make errors and omissions. Unfortunately, the only way these problems are caught is if YOU catch them. Waiting until retirement may be too late to correct an error made 10 to 20 years back. Common problems and their impact are:

Incorrect amounts. If the SSA does not receive a W-2 wage statement from an employer, you will not see credit for these earnings. Result: Your Social Security retirement check amount averages your life-time earnings. If you have earnings that are missing, your retirement check will be permanently lower!

Missing earnings. In addition receiving credit for earnings, you also need to work a certain number of quarters to be eligible for retirement benefits. These missing earnings reports reduce your number of working quarters. Mess up here and you may not qualify for benefits at all!

The three-year correction time limit. Per the SSA, an earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived. While there are exceptions for fraud and obvious clerical errors, why risk the hassle by not finding errors and fixing them when they happen?

Action to take

Thankfully, it is now easier to confirm the accuracy of your account as the SSA has an online tool that allows you to review your historic earnings statements online at

To use the tool, you will need to go through an online signup process that includes many safety measures to ensure your identity is protected.

If you see an error on your statement, you should immediately correct it. You can do this by contacting the SSA:



By mail:

Social Security Administration Office of Earnings Operations
PO Box 33026
Baltimore, MD 21290-3026

The message? Since you are receiving a new W-2 right now, make reviewing your Social Security retirement account part of your annual tax filing experience.

Understanding Tax Terms: AFRs

Your grandson needs a car, but cannot afford the payments. As a favor, you provide the $25,000 to purchase the car. You tell your grandson to pay you back when he can, but there is no loan document. The IRS sees this payment during an audit and asks you where your interest income is for this loan. Should this happen, you will quickly understand the meaning of AFRs.

AFRs Defined

AFRs stand for Applicable Federal Rates. They are minimum interest rates that the IRS applies to a transaction when no rate is stated or implied. In other words, you may have a transaction that the IRS believes has an interest income/expense element to it, but none has been claimed by you. These minimum interest rates are published each month by the IRS for three different loan terms: Short-term (0 to 3 years); Mid-term (4 to 9 years); and Long-term (over 9 years).

When does the AFR apply?

You may think that money you gave to a friend or that car sale to your cousin with repayment over time has no interest rate, but the IRS often sees it differently. If no interest rate is stated, the IRS will apply the applicable AFR and you could be in for a tax surprise. Here are some common examples when the AFR rates can come into play:

  • Loans to family and friends.
  • Buying anything over time. If you take possession of an item, but can pay for it over a length of time, imputed interest is involved.
  • Employee advances. This can include giving an employee the rights of stock ownership, but not expecting payment for the stock right away.

How to use the AFR knowledge to your advantage

  1. Create a loan document. Whenever you establish a transaction that has the expectation of repayment, write up a simple loan agreement. Not only will it clarify your repayment expectation, it also establishes the repayment terms. Ensure both parties sign and date the document.
  2. Establish a safe interest rate. Use the AFR tables to establish an audit-safe interest rate. Remember, AFRs are also used if the IRS believes your stated interest rate is too low.
  3. Leverage gift rules. Remember you (and your spouse) can each gift up to $15,000 to an individual. If you stay under this threshold, you could defend your money transfer as a non-interest bearing gift and not a loan.
  4. Caution with housing transactions. Banks are asking buyers to document where they receive their money for their down payment. If the money comes from you, it could establish a potential implied loan document that you might need to defend. If you plan to help with a down payment in the future, try to understand the bank’s look-back rules for this disclosure reporting and use this knowledge in conjunction with the IRS gift rules to avoid creating implied interest.

Should you wish to see the published AFR rates, they are available on the IRS website at AFRs.