Strategies for Qualifying for Medicaid in Pennsylvania When you Exceed the Financial Eligibility Limits

November 13, 2022 by Leave a Comment

Medicaid is a state and federal funded program which provides nursing home (institutional) as well as home and community-based services. It is a low-income program which has very specific asset and income requirements limits for eligibility. The limits can be found using this link https://www.medicaidplanningassistance.org/medicaid-eligibility-pennsylvania.  For those who do not meet these asset and income limit requirements, there are other ways to qualify for Medicaid benefits.

Medically Needy Pathway

A person can still qualify for Medicaid services even if they are over the income limit if they have high medical bills. In Pennsylvania this is known as the medically needy only assistance program. It is sometimes called the “spenddown” program which is used to cover medical and nursing home bills. Currently the medically needy income limit is $425 and $442 for married couples.

Pennsylvania has a 6 month “spend down” period, so once a couple has paid their excess income down to the Medicaid eligibility limit, they will qualify for benefits for the remainder of the period. It is important to understand that the asset limit for Medicaid qualification via this program is different than the normal asset thresholds.

The asset limit for the medically needy pathway program is $2,400.00 for single individuals and $3,200.00 for married couples.  A person can “spend down” their assets on non-countable purchases such as home modifications like wheelchair ramps or stairlifts and by pre-paying funeral and burial expenses, as well as paying off other debts.

The Importance of Medicaid Planning- How you can still qualify for Medicaid Benefits

Most individuals considering Medicaid are over income or over asset limits but still can’t afford their cost of care. These individuals should consider working with a Medicaid planning attorney who can deploy any of the following asset and income planning strategies:

  • Irrevocable funeral trust
    • These are trusts set up for the purpose of paying for the Medicaid applicant’s funeral in advance. 
  • Spousal asset transfer
    • When only one spouse of a couple is applying for nursing home Medicaid or a Home and Community Based Services (HCBS) Medicaid Waiver, the spousal asset transfer ensures the community spouse doesn’t become impoverished. 
  • Annuities
    •  This planning technique turns countable assets into non-countable income for the non-applicant spouse. An annuity is a lump sum of money that is paid to an insurance company, which in turn, will pay the healthy spouse a monthly payment.
  • Spend down excess assets
    • Spend down option include home modifications and improvements, such as adding a chair lift or putting on a new roof, purchasing medical devices that are uncovered by insurance, like dentures, and paying off one’s mortgage or credit card debt. 
  • Life Estate deeds
    • This is a life estate deed and the Medicaid recipient still has ownership over his or her home as long as he or she is living
  • Medicaid asset protection trust
    • A Medicaid asset protection trust (MAPT) is a type of irrevocable (irreversible) trust that protects assets from being counted towards Medicaid’s asset limit. These trusts also preserve assets for family and other loved ones as inheritance. Assets, which may include one’s home, are put into a trust and are no longer considered owned by the person who created the trust (the Medicaid applicant). While there is no limit as to the value of the assets that can be placed in this type of trust, they are still subject to the 5 year “look back” results in a penalty period of Medicaid ineligibility,

Income Planning Strategies

  • Spousal income transfers
  •  The non-applicant spouse is permitted a sufficient amount of monthly income to allow him or her to continue living at home. This is called the Minimum Monthly Maintenance Needs Allowance, or MMMNA, and allows applicant spouses to transfer their income to their non-applicant spouses.
  • In 2022, the applicant spouse may transfer up to a maximum of $3,435 a month in income to the non-applicant spouse.
  • Qualified income trusts/Miller trusts

For individuals who are not married or whose non-applicant spouse’s income exceeds the MMMNA, Qualified Income Trusts (QIT) offer another, slightly more complicated technique for helping the applicant to meet the Medicaid income limit.

  • Income over the limit is allocated into a qualified irrevocable income or Miller Trust, and is generally used to pay one’s medical bills and care.  It is very important to understand however that the remaining money becomes the property of the state after the Medicaid applicant passes. 

If you have any questions about implementing any of these strategies, please call Gregory J. Spadea at 610-521-0604.

Filed Under: Medicaid

Understanding why Emotional Distress Damages Are Taxable but Physical Sickness Damages Are Not

November 6, 2022 by Leave a Comment

The general rule for compensatory damages for personal physical injuries is that they are tax free under Section 104 of the Internal Revenue Code. Yet exactly what is physical is not so clear.  For example, if you make claims for emotional distress, your damages are taxable. If you claim the defendant caused you to become physically sick, those can be tax free. If emotional distress causes you to be physically sick, that is taxable. The order of events and how you describe them matters to the IRS.  If you are physically sick or physically injured, and your sickness or injury produces emotional distress, those emotional distress damages should be tax free. Much of this seems artificial, but wording is very important. Some of the distinctions come from a footnote in the legislative history to the tax code adding the ‘physical’ requirement. It says “emotional distress” includes physical symptoms, such as insomnia, headaches, and stomach disorders, which may result from such emotional distress.  All compensatory damages flowing from a physical injury or physical sickness are excludable from income.  For example, in Domeny v. Commissioner, Ms. Domeny suffered from multiple sclerosis (MS). Her MS got worse because of workplace problems, including an embezzling employer. As her symptoms worsened, her physician determined that she was too ill to work. Her employer terminated her, causing another spike in her MS symptoms. She settled her employment case and claimed some of the money as tax free. The IRS disagreed, but Ms. Domeny won in Tax Court. Her health and physical condition clearly worsened because of her employer’s actions, so portions of her settlement were tax free. 

Tired young businessman working at home using lap top and looking Anxious

In Parkinson v. Commissioner, a man suffered a heart attack while at work. He reduced his hours, took medical leave, and never returned. He sued in state court for intentional infliction and invasion of privacy. His complaint alleged that the employer’s misconduct caused him to suffer a disabling heart attack at work, rendering him unable to work. He settled and claimed that one payment was tax free. When the IRS disagreed, he went to Tax Court. He argued the payment was for physical injuries and physical sickness brought on by extreme emotional distress. The IRS said that it was just a taxable emotional distress recovery.

The Tax Court said damages received on account of emotional distress attributable to physical injury or physical sickness are tax free. The court distinguished between a “symptom” and a “sign.” The court called a symptom a “subjective evidence of disease of a patient’s condition.” In contrast, a “sign” is evidence perceptible to the examining physician. The Tax Court said the IRS was wrong to argue that one can never have physical injury or physical sickness in a claim for emotional distress. The court said intentional infliction of emotional distress can result in bodily harm. Notably, the settlement agreement in Parkinson was not specific about the nature of the payment or its tax treatment. And it did not say anything about tax reporting. There was little evidence that medical testimony linked Parkinson’s condition to the actions of the employer. Still, Parkinson beat the IRS. Damages for physical symptoms of emotional distress such as headaches, insomnia, and stomachaches might be taxable. Yet physical symptoms of emotional distress have a limit. For example, ulcers, shingles, aneurysms, and strokes may all be an outgrowth of stress. It seems difficult to regard them all as ‘mere symptoms of emotional distress.’ Extreme emotional distress can produce a heart attack, which is not a symptom of emotional distress. The Tax Court in Parkinson agreed.  Medical records and settlement agreement language can significantly help.

To exclude a payment from income on account of physical sickness, you need evidence of making the claim that the defendant caused or exacerbated his condition. In addition, you need to show the defendant was aware of the claim, and at least considered it in making payment. To prove physical sickness, you need evidence of medical care, and evidence that you actually claimed the defendant caused or exacerbated his condition.

The more medical evidence the better. Moreover, if there is a scant record of medical expenses in the litigation, consider what you can collect at settlement time. A declaration from the plaintiff will help for the file. A declaration from a treating physician or an expert physician is appropriate, as is one from the plaintiff’s attorney. Prepare what you can at the time of settlement or, at the latest, before you file your tax return. Do as much as you can contemporaneously.

Whenever possible, settlement agreements should be specific about the tax treatment of your damage award. The IRS is likely to view everything as income unless you can prove otherwise. Try to be explicit in the settlement agreement about the amount you will receive as wages or other taxable and what form they will be reported on.  You do not want to be surprised by receiving a W-2 or a 1099 the following January of the year after the settlement.

 If you have any questions, feel free to call Gregory Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC provides year round tax planning and tax return preparation.

Filed Under: Personal Injury, Tax Law

2022 Year End Tax Planning Letter for Business Clients

October 31, 2022 by Leave a Comment

2022 Year End Tax Planning Letter for Business Clients

As the year draws to a close, it’s important that we meet to discuss any year-end strategies that might help lower your business’s taxable income for 2022.

The most significant tax law changes during the year took place in August when the 2022 Inflation Reduction Act (2022 IRA) was signed into law. While the new law did not change tax rates for most businesses, it does extend some expiring business tax credits while also introducing some new tax credits that may benefit your business. It also provided a hefty increase in IRS funding to bolster taxpayer services and enforcement of the tax code.

The following are some strategies we should consider for reducing your business’s taxes for 2022.

Section 179 Expensing and Depreciation Deductions

The two business tax deductions that present the best opportunities for reducing your business’s taxable income are the Section 179 deduction, where your business can elect to deduct the entire cost of certain property acquired and placed in service during the year, and the bonus depreciation deduction, where 100 percent of the cost of business property may be expensed. Under the Section 179 expensing option, your business can immediately expense the cost of up to $1,080,000 of “Section 179” property placed in service in 2022. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during 2022 exceeds $2,700,000.

The bonus depreciation rules apply to all businesses unless the business specifically elects out of these rules. An election out might be preferable where a business expects a tax loss for the year and the bonus depreciation would just increase that loss or where it might be advantageous to push depreciation deductions into future years. For example, if the owner of a pass-thru entity to whom these deductions would flow expects to be in a higher tax bracket in future years, such deductions might be of more use in those future years. When applying both the Section 179 deduction and the bonus depreciation deduction to an asset, the Section 179 deduction applies first.

If you need a vehicle for your business, purchasing a sport utility vehicle weighing more than 6,000 pounds, can trigger a bigger deduction than if a smaller vehicle is purchased. This is because vehicles that weigh 6,000 pounds or less are considered listed property and the related first-year deduction is limited to $19,200 for cars, trucks and vans acquired and placed in service in 2022. For vehicles weighing more than 6,000 pounds, however, up to $27,000 of the cost of the vehicle can be immediately expensed.

It’s worth noting that if you leased a passenger automobile in 2022 with a value of more than $56,000, the deduction available for that lease expense is reduced. In such cases, you must include in gross income an amount determined by a formula the IRS issues each year.

Qualified Business Income Deduction

If you are conducting your business as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction can significantly help reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily-defined amount (i.e., the threshold amount). For any tax year beginning in 2022, the threshold amount is $340,100 for married filing joint returns and $170,050 for all other returns.

Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income. However, the QBI deduction does not apply to a “specified service trade or business,” which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.

Rental Real Estate

If you have any rental real estate activities, it’s important to determine if the activity will be considered a passive activity by the IRS. Generally, losses from passive activities are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent you actively participates in the rental real estate activities. This deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately). Additionally, you may be eligible for a qualified business income deduction if certain criteria are met, such as the rental activity qualifying as a Section 162 trade or business.

Substantiation of Vehicle-Related Deductions

In audits, the IRS tends to focus on deductions taken for vehicle expenses. If not properly substantiated, such deductions are disallowed. Thus, if vehicles are used in any part of your business or business-related activities, your tax records with respect to each vehicle should include the following:

(1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);

(2) the amount of mileage for each business or investment use and the total miles for the tax period;

(3) the date of the expenditure; and

(4) the business purpose for the expenditure.

The IRS will consider the following as adequate substantiation for such expenses: (1) records such as a notebook, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Its important to note that records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Employee Benefits

One area I would like to discuss with you are the tax and other advantages your business could reap by offering a retirement plan and/or other fringe benefits to employees. By offering such benefits, your business has a better chance of attracting and retaining talented workers which, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and your business may be eligible for a tax credit for setting up a qualified plan if you don’t already have one.

If you haven’t already done so, you might consider the establishment of a flexible spending arrangement (FSA). An FSA allows employees to be reimbursed for medical expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Some of the benefits of providing an FSA for employees include contributions made by the business being excluded from the employee’s gross income, reimbursements to the employee are tax free if used for qualified medical expenses, the FSA can be used to pay qualified medical expenses even if the employer or employee haven’t yet placed the funds in the account, and up to $570 of funds in the FSA can be carried over to subsequent years indefinitely.

Another popular employee benefit your business might consider is a high deductible health plan paired with a health savings account (HSA). The benefits to your business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA, and there is no use-it-or-lose-it limit like there is for most flexible spending arrangements (FSAs). Thus, the funds can grow tax free and be used in retirement.

Pass-Thru Entity Considerations

If you are operating a business through a pass-thru entity such as a partnership or S corporation, your basis in the entity must be high enough to allow for any loss deduction, if you have one for the year. In such a situation, we should consider the options available for increasing your basis in such entity.

If you are an S corporation shareholder it’s important to ensure that you and other shareholders involved in running the business are paid an amount that is commensurate with the work being done. The IRS scrutinizes S corporations which distribute profits instead of paying compensation subject to employment taxes. Failing to pay arm’s length salaries can lead to tax deficiencies, interest, and penalties. The key to establishing reasonable compensation is showing that the compensation paid for the type of work an owner-employee does for the S corporation is similar to what other entities would pay for similar work. An S corporation needs to adequately document the factors that support the salary an S corporation owner is being paid.

Also, because there are stringent requirements for who may be an S corporation shareholder, if the number of shareholders have changed or increased during the year, we should review the residency or citizenship status of the S corporation’s shareholders and S corporation stock beneficiaries (including contingent and residuary beneficiaries).

Energy Efficient Commercial Building Deduction

If your business owns a commercial building, a deduction is available for an amount equal to the cost of energy efficient commercial building property placed in service during the tax year. The maximum deduction with respect to any building for any tax year is the excess (if any) of (1) the product of $1.88, and the square footage of the building, over (2) the aggregate amount of the deductions for all prior tax years.

New and Modified Tax Credits

The 2022 IRA modified tax credits for electric vehicles (EVs) and fuel cell vehicles. The law also enacted new tax credits for used and commercial clean vehicles. Multiple factors determine whether an EV purchased in 2022 qualifies for federal tax credits. Many EVs purchased before August 16, 2022, qualify for a tax credit of up to $7,500 (with smaller amounts available for certain makes and models). Vehicles manufactured by Tesla or General Motors purchased in 2022 are not eligible for tax credits, as Tesla and GM have exceeded the 200,000 vehicle threshold that limits the number of tax credits that can be claimed for vehicles made by a manufacturer.

For vehicles purchased after August 16, 2022, only vehicles for which final assembly occurred in North America qualify. The U.S. Department of Energy has released a list of model year 2022 and 2023 vehicles with final assembly in North America.

EV purchasers who ordered a vehicle before August 16, 2022, and take delivery of their vehicle at a later date may be able to claim tax credits for vehicles not assembled in North America if they had a written binding contract to purchase the vehicle. Most of the changes to the clean vehicle tax credit are effective starting in 2023, with the exception of the final assembly in North America requirement, mentioned above. Beginning in 2023, EVs qualify only if the vehicle’s battery meets certain conditions. The maximum potential credit is the sum of two amounts: the critical mineral amount and the battery component amount.

The 2022 IRA also introduced a new credit for qualified commercial electric vehicles placed into service by the taxpayer after 2022. The amount of credit is 30 percent of the cost of the vehicle, up to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.

The energy investment tax credit (ITC) was also extended by the 2022 IRA and could reduce your business’s federal tax liability by a percentage of the cost of a solar system installed during the tax year. Solar systems placed in service in 2022 or later, and that began construction before 2033, are eligible for a 30 percent ITC or a production tax credit based on a kilowatt-hour formula if they meet certain labor requirements or are under 1 megawatt in size.

Research and Development Deductions and Credits

Finally, the provision allowing a deduction for research and development (R&D) expenses expired at the end of 2021. Such expenditures must now be amortized over five years. However, under the 2022 IRA, businesses that engage in certain types of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit. Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (i.e., a business with less than $5 million in gross receipts and that is under five years old) to apply up to $250,000 of the research credit toward its social security payroll tax liability. The 2022 IRA expanded the amount available for the credit from $250,000 to $500,000 for tax years beginning after 2022.

It’s worth noting that there is a slim chance that the R&D expensing provision that terminated at the end of 2021 may be restored. There have been ongoing discussions between Republicans and Democrats about a potential last minute end-of-year tax deal regarding a reinstatement of the R&D credit, which expired at the end of 2021 and which businesses are anxious to see reinstated, in exchange for an enhanced child tax credit that is similar to the 2021 enhanced child tax credit enacted as part of the American Rescue Plan Act of 2021. Because it is unclear what, if any, tax legislation may be passed before the end of the year, our year-end planning will have to be based on existing law.

As you can see, there is much to consider before we prepare your 2022 business tax return and calculate any estimated tax payments that might be due in 2023. Please call Gregory J. Spadea at 610-521-0604 so we can set a time to review potential strategies for reducing your business’s 2022 taxable income and tax liability.

Filed Under: Tax Planning

2022 Year End Tax Planning for Individuals

October 30, 2022 by Leave a Comment

2022 Year End Tax Planning for Individuals

The following are some of the tax breaks from which you may benefit, as well as the strategies we can employ to help minimize your taxable income and resulting federal tax liability for 2022.

Filing Status

Your tax return filing status can impact the amount of taxes you pay. For example, if you qualify for head-of-household (HOH) filing status, you are entitled to a higher standard deduction and more favorable tax rates. To qualify as HOH, you must be unmarried or considered unmarried and provide a home for certain other persons. If you are in such a situation, we need to review whether you qualify for HOH filing status.

Income, Deductions, and Credits

Standard Deduction versus Itemized Deductions. The Tax Cuts and Jobs Act of 2017 (TCJA) substantially increased the standard deduction amounts, thus making itemized deductions less attractive for many individuals. For 2022, the standard deduction amounts are: $12,950 (single); $19,400 (head of household); $25,900 (married filing jointly); and $12,950 (married filing separately). If the total of your itemized deductions in 2022 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2022 and taking the standard deduction in 2023 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses (discussed below), and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.

Medical Expenses, Health Savings Accounts, and Flexible Savings Accounts. For 2022, your medical expenses are deductible as an itemized deduction to the extent they exceed 7.5 percent of your adjusted gross income. To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation. Deductible expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Depending on what your taxable income is expected to be in 2022 and 2023, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2022 or defer them until 2023. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.

You may also want to consider health saving accounts (HSAs) if you don’t already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans (HDHPs). If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. These contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2022, the annual contribution limits are $3,650 for an individual with self-only coverage and $7,300 for an individual with family coverage.

In addition, if you are not already doing so and your employer offers a Flexible Spending Account (FSA), consider setting aside some of your earnings tax free in such an account so you can pay medical and dental bills with pre-tax money. Since you don’t pay taxes on this money, you’ll save an amount equal to the taxes you would have paid on the money you set aside. FSA funds can be used to pay deductibles and copayments, but not for insurance premiums. You can also spend FSA funds on prescription medications, as well as over-the-counter medicines, generally with a doctor’s prescription. Reimbursements for insulin are allowed without a prescription. And finally, FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.

Charitable Contributions. The tax benefits of making charitable contributions and taking an itemized deduction for such contributions were tamped down as a result of the increase in the standard deduction in the TCJA. More people are forgoing itemized deductions as their standard deduction is more favorable.

If you are itemizing deductions, you can maximize the tax benefit of making a charitable contribution by donating appreciated assets, such as stock, instead of cash. Doing so generally allows you to deduct the fair market value of the asset while also avoiding the capital gains tax that would otherwise be due if you sold the asset. For example, if you own stock with a fair market value of $1,000 that was purchased for $250 and your capital gains tax rate is 15 percent, the capital gains tax you would owe is $113 ($750 gain x 15%). If you donate that stock instead of selling it, and are in the 24 percent tax bracket, your ordinary income deduction is worth $240 ($1,000 FMV x 24% tax rate). You also save the $113 in capital gains tax that you would otherwise pay if you sold the stock; that amount goes to the charity. Thus, the after-tax cost of the gift of appreciated stock is $647 ($1,000 – $240 – $113) compared to the after tax cost of a donation of $1,000 cash which would be $760 ($1,000 – $240). However, it’s important to also keep in mind that tax deductions for contributions of appreciated long-term capital gain property may be limited to a certain percentage of your adjusted gross income depending on the amount of the deduction.

In addition, if you have an individual retirement account and are 70 1/2 years old and older, you are eligible to make a charitable contribution directly from your IRA. This is more advantageous than taking a distribution and making a donation to the charity that may or may not be deductible as an itemized deduction. If your itemized deductions, including the contribution, are less than your standard deduction, then you receive no tax benefit from making the donation in this manner. By making the donation directly from your IRA to a charity, you eliminate having the IRA distribution included in your income. This in turn reduces your adjusted gross income (AGI). And because various tax-related items, such as the medical expense deduction or the taxability of social security income or the 3.8 percent net investment income tax, are calculated based on your AGI, a reduced AGI can potentially increase your medical expense deduction, reduce the tax on social security income, and reduce any net investment income tax.

Expenses Incurred While Working from Home. Although more people are working from home these days, related expenses are not deductible if you are an employee. TCJA eliminated the deductibility of such expenses when it suspended the deduction for miscellaneous itemized expenses that was available before 2018. However, if you are self-employed and worked from home during the year, tax deductions are still available. Thus, if you have been working from home as an independent contractor, we should discuss what expenses you have incurred that might reduce your taxable income.

Mortgage Interest Deduction. If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., your mortgage) could be limited. The mortgage interest deduction on mortgages of more than $750,000 obtained after December 14, 2017, is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately). If you have a mortgage on a principle residence acquired before December 15, 2017, the limitation applies to mortgages of $1,000,000 ($500,000 in the case of married taxpayers filing separately) or less. However, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.

Interest on Home Equity Indebtedness. You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal expenses, such as credit card debt, is not.

Sale of a Home. If you sold your home this year, up to $250,000 ($500,000 for married filing jointly) of the gain on the sale is excludible from income. However, this amount is reduced if part of your home was rented out or used for business purposes. Generally, a loss on the sale of a home is not deductible. But again, if you rented part of your home or otherwise used it for business, the loss attributable to that portion of the home is deductible.

Discharge of Qualified Principal Residence Indebtedness: If you had any qualified principal residence indebtedness which was discharged in 2022, it is not includible in gross income.

Deductions for Mortgage Insurance Premiums: You may be entitled to treat amounts paid during the year for any qualified mortgage insurance as deductible qualified residence interest if the insurance was obtained in connection with acquisition debt for a qualified residence.

Deductions for Excess Business Losses. Taxpayers other than corporations can deduct excess farm losses and excess business losses through 2028. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain plus a threshold amount. The threshold amount for 2022 is $270,000 or $540,000 for joint returns.

Qualified Business Income Passthrough Tax Break. Under the qualified business income tax break, a 20 percent deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below a certain threshold ($340,100 for joint filers; $170,050 for other taxpayers) are simpler and more permissive than the rules that apply to individuals with income above those thresholds.

Child Tax Credit. The enhanced child tax credit (CTC) that was available last year was not renewed. Thus, for 2022, for each child under age 17, a CTC of up to $2,000 credit is available, depending on your modified adjusted income. In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children. Where the credit exceeds the maximum amount of tax due, it may be refundable. The maximum amount refundable for 2022 is $1,500 per qualifying child. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relatives. The amount of the credit is reduced for taxpayers with modified adjusted gross income over $200,000 ($400,000 for married filing jointly) and eliminated in full for taxpayers with modified adjusted gross income over $240,000 ($440,000 for married filing jointly).

Earned Income Credit. The earned income tax credit (EITC) is determined by multiplying your earned income for the year (but only up to a maximum amount of earned income) by a credit percentage that varies depending on whether you have any qualifying children and, if so, the number of qualifying children. The EITC is also subject to a limitation based on your adjusted gross income. For 2022, the maximum amount of the EITC is (1) $560 for a taxpayer with no qualifying children, (2) $3,733 for a taxpayer with one qualifying child, (3) $6,164 for a taxpayer with two qualifying children, and (4) $6,935 for a taxpayer with three or more qualifying children. In addition, the EITC cannot be claimed if your investment income (including interest, dividends, capital gain net income, and net rental income) exceeds $10,300 for 2022.

Dependent Care Credit: If you incurred expenses to care for a child or another dependent so that you can work, you may be eligible for the child and dependent care credit. This credit is available to individuals who, in order to work or to look for work, have to pay for child care services for dependents under age 13. The credit is also available for amounts paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care. The credit is not available for amounts paid to a dependent or a taxpayer under age 19. The amount of the credit is a specified percentage of your total employment-related expenses – generally, 35 percent reduced (but not below 20 percent) by one percentage point for each $2,000 by which your adjusted gross income for the tax year exceeds $15,000. Employment-related expenses incurred during any tax year which may be taken into account cannot exceed $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.

Premium Tax Credit. A health insurance subsidy is available in the form of a premium assistance tax credit for eligible individuals and families who purchase health insurance through the Health Insurance Marketplace, also known as the “Exchange.” The provision is the result of the Patient Protection and Affordable Care Act (PPACA). This credit is refundable and payable in advance directly to the insurer on the Exchange. In the past, individuals with incomes exceeding 400 percent of the poverty level were not eligible for these subsidies. However, as a result of the American Rescue Plan (ARP) Act, the cap was eliminated for tax years beginning in 2021 or 2022 and therefore, anyone can qualify for the subsidy. In addition, the percentage of your income paid for a health insurance under a PPACA plan is limited to 8.5 percent of income. Thus, if you buy your own health insurance directly through an Exchange, you can receive increased tax credits to reduce your premiums.

Education-Related Deductions and Credits. Certain education-related tax deductions, credits, and exclusions from income may be available for 2022. For example, tax-free distributions from a qualified tuition program, also referred to as a Section 529 plan, of up to $10,000 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, i.e. kindergarten through grade 12. It also includes expenses for fees, books, supplies, and equipment required for the participation in certain apprenticeship programs and qualified education loan repayments in limited amounts. A special rule allows tax-free distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.

Depending on your modified adjusted gross income for the year, you may also qualify for: (1) an American Opportunity Tax Credit of up to $2,500 per year for each eligible student; (2) a Lifetime Learning credit up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution; (3) an exclusion from income for education savings bond interest received; and (4) a deduction for student loan interest.

If you qualified for student loan forgiveness under the plan announced by the Biden administration earlier this year, the forgiven amount will generally be excludible from your income for federal tax purposes. However, you may be liable for state or local income taxes as a result of the discharge.

Clean Energy Credits. For 2022, the clean energy tax credits available include (1) residential energy property credits (the nonbusiness energy property credit and the residential clean energy property credit) and (2) vehicle-related credits (the qualified plug-in electric drive motor vehicle credit and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act, generally beginning after December 31, 2022. However, as described in more detail below, a change to the credit for purchasing an electric vehicle, requiring the final assembly of the vehicle in the United States, takes effect on August 17, 2022.

For years before 2023, the nonbusiness energy property credit (renamed the energy efficient home improvement credit by the Inflation Reduction Act) is a credit for: (1) 10 percent of the cost of qualified energy efficiency improvements installed during the year; and (2) the amount of the residential energy property expenditures paid or incurred during the year. Qualified energy efficiency improvements include the following qualifying products: (1) energy-efficient exterior windows, doors and skylights; (2) roofs (metal and asphalt) and roof products; and (3) insulation. Residential energy property expenditures generally include: (1) energy-efficient heating and air conditioning systems, and (2) water heaters (natural gas, propane, or oil). There is a lifetime limit of $500 on the total amount of nonbusiness energy property credits that may be claimed. In addition, the amount of the credit taken with respect to windows is limited to $200. The following additional limitations also apply to the nonbusiness energy property credit: (1) $300 for any item of energy-efficient building property; (2) $150 for any furnace or hot water boiler; and (3) $50 for any advanced main air circulating fan.

Beginning in 2023, this credit is increased to 30 percent of the costs of all qualified energy efficiency improvements and residential energy property expenditures made during the year. In addition, the lifetime credit limitation is replaced with an annual limit of $1,200. The annual limits for specific types of qualifying improvements are (1) $250 for any exterior door ($500 total for all exterior doors), (2) $600 for exterior windows and skylights, (3) $600 for other qualified energy property (including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers), and (4) a higher $2,000 annual limit for heat pumps and heat pump water heaters, biomass stoves, and boilers. The Inflation Reduction Act also added a credit of up to $150 per year for home energy audits. Roofs no longer qualify for the credit beginning in 2023.

The residential clean energy credit by the Inflation Reduction Act) equals 30 percent of the cost of certain qualified property installed on or used in connection with your home. For 2022, qualifying properties are: (1) solar electric property, (2) solar water heaters, (3) fuel cell property, (4) small wind turbines, (5) geothermal heat pumps, and (6) biomass fuel property. Biomass fuel property expenditures no long qualify after December 31, 2022. However, battery storage technology expenditures qualify beginning in 2023.

The qualified plug-in electric drive motor vehicle credit may be available if you acquired a qualified electric vehicle and placed it in service this year. For 2022, the amount of the credit is $2,500, plus an amount based on the battery capacity of the vehicle if the vehicle draws propulsion energy from a battery with at least 5 kilowatt hours of capacity. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States. For instance, Tesla and GM vehicles purchased in 2022 are not eligible for tax credits since those manufacturers have exceeded the 200,000 vehicle threshold.

The Inflation Reduction Act significantly modified the electric vehicle credit. After August 16, 2022, the credit is generally available only for qualifying electric vehicles for which final assembly occurred in North America. However, under a transition rule, if you entered a written binding contract to purchase an electric vehicle on or before August 16, 2022, but took possession of the vehicle after that date, you would not be subject to the final assembly requirement. The Inflation Reduction Act also increased the amount of this credit, effective after December 31, 2022. Beginning in 2023, the total credit amount is $7,500, consisting of $3,750 for vehicles meeting a critical minerals requirement and $3,750 for vehicles a battery component requirement. In addition, price limits apply depending on the vehicle type ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles). The credit is also not available to taxpayers with adjusted gross income over $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (single). Other requirements apply beginning after 2023.

The alternative fuel vehicle refueling property credit is a credit for 30 percent of the cost of purchasing qualified alternative fuel vehicle refueling property. This credit initially expired at the end of 2021 but was extended through 2032 by the Inflation Reduction Act. The amount of the credit is limited to a certain dollar amount, which depends on whether the property is used for business or personal purposes. The amount of the credit for business-use property (i.e., depreciable property) is limited to $30,000. The amount of the credit for personal-use property (i.e., non-depreciable property) is limited to $1,000.

Beginning next year, the credit allowed with respect to any single item of qualified alternative fuel vehicle refueling property placed in service during the tax year cannot exceed (1) $100,000 in the case of depreciable property, and (2) $1,000 in any other case. In addition, the definition of qualifying property is expanded to include bidirectional charging equipment and the credit can also be claimed for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads.

Retirement Planning

If you can afford to do so, investing the maximum amount allowable in a qualified retirement plan will yield a large tax benefit. If your employer has a 401(k) plan and you are under age 50, you can defer up to $20,500 of income into that plan for 2022. Catch-up contributions of $6,500 are allowed if you are 50 or over. If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2022 is $14,000. That amount increases to $17,000 if you are 50 or older. The maximum IRA deductible contribution for 2022 is $6,000 and that amount increases to $7,000 if you are 50 or over.

Life Events

Life events can have a significant impact on your tax liability. For example, if you are eligible to use head of household or surviving spouse filing status for 2022 but will change to a filing tax status of single for 2023, your tax rate will go up. If you married or divorced during the year and changed your name, you need to notify the Social Security Administration (SSA). Similarly, the SSA should be notified if you have a dependent whose name has been changed. A mismatch between the name shown on the tax return and the SSA records can cause problems in the processing of tax returns and may even delay tax refunds. Let me know if you have been impacted by a life event, such as a birth or death in your family, the loss of a job or a change in jobs, or a retirement during the year. All of these can affect you tax situation.

Please call Gregory J. Spadea to discuss your 2022 tax return and determine if any estimated tax payment may be due before year end at 610-521-0604.

Filed Under: Tax Planning

The 2022 Inflation Reduction Act

September 20, 2022 by Leave a Comment

The 2022 Inflation Reduction Act (the Act) includes numerous tax provisions – most notably an array of new tax credits relating to energy efficient homes, businesses, and vehicles. It also provides several new healthcare and prescription drug benefits for individuals, including a $2,000 Medicare out-of-pocket cap for prescription drugs, a $35 Medicare monthly insulin cap, and a three-year extension of the expanded Affordable Care Act health insurance subsidy.

The following is a summary of the Act’s key provisions that may affect you.

Extension and Modification of Plug-In Electric Vehicle Tax Credit (Renamed Clean Vehicle Credit)

While favorable changes to the credits for “clean” vehicles, including a new credit for used vehicles, are a significant part of the legislation, there is also a new requirement that a certain percentage of vehicle components be manufactured or assembled in North America and a provision that vehicles with battery components that were manufactured or assembled by certain foreign entities will not qualify. The Act also imposes new income limits on who can claim the credit as well as price limits based on vehicle type.

Currently, buyers of qualifying plug-in electric vehicles (EVs) are eligible for a nonrefundable tax credit of up to $7,500. The tax credit phases out once a vehicle manufacturer has sold 200,000 qualifying vehicles. Also, through 2021, a tax credit of up to $8,000 was allowed for fuel cell vehicles (the base credit amount was $4,000, with up to an additional $4,000 available based on fuel economy). Heavier fuel cell vehicles qualified for up to a $40,000 credit.

The Act modifies the tax credit for plug-in EVs, allowing certain clean vehicles to qualify and eliminating the current per manufacturer limit. The credit is renamed the clean vehicle credit and the modified credit is $3,750 for any vehicle meeting a critical-minerals requirement, and $3,750 for any vehicle meeting a battery-components requirement. The maximum credit per vehicle is $7,500. Clean vehicles include plug-in EVs with a battery capacity of at least 7 kilowatt hours and fuel cell vehicles. Qualifying vehicles include those that had their final assembly occur in North America. Sellers are required to provide taxpayer and vehicle information to the Treasury Department for tax credit eligible vehicles. Only vehicles made by qualified manufacturers, who have written agreements with, and provide periodic reports to, the Treasury Department qualify.

For vehicles placed in service after 2023, qualifying vehicles do not include any vehicle with battery components that were manufactured or assembled by certain foreign entities. For vehicles placed in service after 2024, qualifying vehicles do not include any vehicle in which applicable critical minerals in the vehicle’s battery are from certain foreign entities. Taxpayers must include the vehicle identification number (VIN) on their tax return to claim a tax credit.

To receive the $3,750 critical-minerals portion of the credit, the vehicle’s battery must contain a threshold percentage (in value) of critical minerals that were extracted or processed in a country with which the United States has a free trade agreement or recycled in North America. The threshold percentage is 40 percent through 2023, increasing to 50 percent in 2024, 60 percent in 2025, 70 percent in 2026, and 80 percent after 2026.

To receive the $3,750 battery-components portion of the credit, the percentage of the battery’s components manufactured or assembled in North America must also meet certain threshold amounts. For vehicles placed in service through 2023, the percentage is 50 percent. The percentage increases to 60 percent for 2024 and 2025, 70 percent for 2026, 80 percent for 2027, 90 percent for 2028, and 100 percent after 2028.

Certain higher-income taxpayers are not eligible for the credit. Specifically, no credit is allowed if the current year or preceding year’s modified adjusted gross income (AGI) exceeds $300,000 for married taxpayers ($225,000 in the case of head of household filers; $150,000 in the case of other filers).

Credits are only allowed for vehicles that have a manufacturer’s suggested retail price of no more than $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles. Taxpayers are only allowed to claim the credit for one vehicle per year. Starting in 2024, taxpayers purchasing eligible vehicles can elect to transfer the tax credit to the dealer, so long as the dealer meets certain requirements. This provision does not apply to vehicles acquired after December 31, 2032.

Credit for Previously-Owned Clean Vehicles

The Act creates a new tax credit for buyers of previously owned qualified clean (plug-in electric and fuel cell) vehicles. The maximum credit is $4,000 and is limited to 30 percent of the vehicle purchase price. No credit is allowed for taxpayers above certain modified AGI thresholds. Married taxpayers filing a joint return cannot claim the credit if their modified AGI is above $150,000 ($112,500 in the case of head of household filers; $75,000 in the case of other filers). The taxpayer’s modified AGI is the lesser of modified AGI in the tax year or prior year.

Credits are only allowed for vehicles with a sale price of $25,000 or less with a model year that is at least two years earlier than the calendar year in which the vehicle is sold. This credit can only be claimed for vehicles sold by a dealer and on the first transfer of a qualifying vehicle. Taxpayers can only claim this credit once every three years and must include the VIN on their tax return to claim a tax credit.

Starting in 2024, taxpayers purchasing eligible vehicles can elect to transfer the tax credit to the dealer, so long as the dealer meets certain registration, disclosure, and other requirements. The credit does not apply to vehicles acquired after December 31, 2032.

Extension, Increase, and Modifications of the Nonbusiness Energy Property Tax Credit (Renamed as the Energy Efficient Home Improvement Credit)

For years before 2022, a 10 percent tax credit, subject to a $500 per taxpayer lifetime limit, was available for qualified energy-efficiency improvements and expenditures for residential energy property on an individual’s primary residence.

The Act extends the credit through 2032. In addition, beginning in 2023, the Act modifies and expands the credit, by:

  • increasing the credit rate to 30 percent and increasing the annual per-taxpayer limit from $600 to $1,200, with a $600 per-item limit;
  • for geothermal and air source heat pumps and biomass stoves, there is an annual credit limit of $2,000, and limits for expenditures on windows and doors are also increased, while biomass stoves are now eligible for tax credits;
  • allowing a 30 percent credit, of up to $150, for home energy audits.

Restoration of 30 Percent Residential Energy Efficient Tax Credit (Renamed the Residential Clean Energy Credit)

A tax credit is currently provided for the purchase of solar electric property, solar water heating property, fuel cells, geothermal heat pump property, small wind energy property, and qualified biomass fuel property. Initially, the credit rate was 30 percent through 2019. It was then reduced to 26 percent through 2022, and was scheduled to be reduced to 22 percent in 2023 before expiring at the end of that year.

The Act extends the credit through December 31, 2034, restoring the 30 percent credit rate, beginning in 2023 through 2032, and then reducing the credit rate to 26 percent in 2033 and 22 percent in 2034. Qualified battery storage technology is also added to the list of eligible property.

Alternative Fuel Refueling Property Credit

Through 2021, taxpayers were allowed a tax credit for the cost of any qualified alternative fuel vehicle refueling property installed at a taxpayer’s principal residence. The credit was equal to 30 percent of these costs, limited to $30,000 for businesses at each separate location with qualifying property, and $1,000 for residences. The Act extends this credit through December 31, 2032, and makes certain additional modifications.

Please let me know if you have questions or would like to meet to discuss the ramifications of the Act’s various tax credit provisions or any of the Act’s other provisions.

Extension of Health Insurance Subsidy

A health insurance subsidy is available through a premium assistance credit for eligible individuals and families who purchase health insurance through Exchanges offered under the Patient Protection and Affordable Care Act (PPACA). The premium assistance credit is refundable and payable in advance directly to the insurer on the Exchange. Individuals with incomes exceeding 400 percent of the poverty level ($54,360 for a one-person household in 2022) are normally not eligible for these subsidies. However, legislation passed in 2021 eliminated this limitation for 2021 and 2022 so that anyone can qualify for the subsidy. That legislation also limited the percentage of a person’s income paid for health insurance under a PPACA plan to 8.5 percent of income. The Act extends these provisions through 2025.

Prescription Drug and Vaccine Cost Improvements

The Act –

  • eliminates beneficiary cost-sharing above the annual out-of-pocket spending threshold under the Medicare prescription drug benefit beginning in 2024;
  • caps Medicare annual out-of-pocket spending for prescription drugs at $2,000 beginning in 2025 (with annual adjustments thereafter);
  • establishes a program, beginning in 2025, under which drug manufacturers provide discounts to beneficiaries who have incurred costs above the annual deductible;
  • eliminates cost-sharing under the Medicare prescription drug benefit for adult vaccines that are recommended by the Advisory Committee on Immunization Practices, and requires coverage, without cost-sharing, of such vaccines under Medicaid and the Children’s Health Insurance Program (CHIP); and
  • caps cost-sharing under the Medicare prescription drug benefit for a month’s supply of covered insulin products at (1) for 2023 through 2025, $35; and (2) beginning in 2026, either $35, 25 percent of the government’s negotiated price, or 25 percent of the plan’s negotiated price, whichever is less.

Feel Free to Call

If you would like to talk about how you might be able to take advantage of the Act’s energy incentives or have questions about any of its provisions, please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC provides year round tax and estate planning to individuals and small businesses.

Filed Under: Federal Tax, Tax Law

Why I Can Not Disinherit My Spouse in Pennsylvania

February 7, 2022 by Leave a Comment

Although Pennsylvania generally allows deceased spouse (Testator) to give their property to anyone they wish, this right is limited by a law referred to as an elective share which is designed to protect surviving spouses from being disinherited.   Before any property is distributed, the spouse is entitled to a family exemption of $3,500 from the estate.  A spouse can then inherit anything left to her in her deceased spouse’s will. However, if the decedent disinherited her (left her out of the will), she is still entitled to inherit and claim her “elective share.” Section 2203 of the Pennsylvania Code sets the elective share at one-third of the decedent’s estate. If the spouse was left out of the will or was left less than one-third of the estate, she has the right to request her elective share from the orphan’s court in the county the estate was probated in.  The Elective share will only be paid if the surviving spouse claims it within six months of the Testators death the date of probate whichever is later.  The disinherited spouse must notify the Orphans’ Court and the Executor or Administrator of her intention to claim an elective share, in writing.

When determining how to pay the elective share the Orphans’ Court will attempt to honor the Testator’s will as much as possible. For instance, if the will makes a specific gift and there are sufficient assets to pay the elective share without using the specific gift, the beneficiary of the specific gift will likely receive that item.  If there is not enough probate property to satisfy the full amount of the elective share, all of the remaining probate property is subject to the claim and any  gifts or bequests will be reduced proportionately to pay the remaining balance.

The elective share is equal to one-third of the combined value of the following types of property:

1. Property passing by the Testator’s will.

2. Annuity rights transferred by the deceased spouse.

3. Property transferred within one year of the spouse’s death, to the extent that its value exceeds $3,000.

a. receive income from the property.
b. use the property.
c. take back the transferred property.
d. regain ownership by a right of survivorship.
e. transfer the property by acting alone.

4. Property the deceased spouse transferred during the marriage, but retained the right to:

In addition the disinherited spouse would receive any jointly owned property with the Testator.

Please call Gregory Spadea at 610-521-0604 if you need assistance in claiming the elective share or have any other estate questions.

Filed Under: Estate Planning

How to Apply for a Pardon in Pennsylvania

February 1, 2022 by Leave a Comment

The only way to get a felony or misdemeanor conviction expunged from your record in Pennsylvania is to get a pardon from the Governor.  Before you start filling out your application, you must obtain the following documents from the Court of Common Pleas in the county where you were convicted:

  1. Criminal Complaint
  2. Affidavit of Probable Cause
  3. Criminal Information/Indictment
  4. Final Plea or Verdict
  5. Sentencing Order
  6. Proof of Payment of Financial Obligations such as fines, costs, restitution, supervision fees. If you have an outstanding balance, provide a receipt showing your current balance and the date of your last payment.
Pennsylvania State Capitol Architecture Building Panorama
Pennsylvania State Capitol Architecture Building Panorama

You can download an application from our website resource page or hire our firm to help you complete it and represent you at the hearing.  Once you send in the application to the Board of Pardons office and is complete and accurate the Board will send you a letter confirming the filing of the application.  Staff from the Pennsylvania Board of Probation and Parole conduct investigations for the Board of Pardons. They will report all criminal history and driving violations found.  They will also conduct a telephone interview or an in-person interview in your home to provide the Board with your present personal status.

The following is a list of items you will need to gather in advance of the meeting with the investigating staff:

  • Residence: rental agreement, mortgage statements, rent receipts, etc. as applicable;
  • Marital Status and Family Composition: marriage decrees, divorce decrees, birth and or death certificates, etc. as applicable;
  • Employment: pay stubs, W2’s, evidence of income to include alimony, unemployment, VA benefits, etc. as applicable;
  • Resources: investment statements, life insurance policies, checking and savings account statements, total family income, value of all property to include vehicles, vacation property, rental property; etc. as applicable;
  • Liabilities and Indebtedness: loan statements, mortgage statements, installment (credit card) statements, delinquency on any utilities, etc. as applicable;
  • Membership in Organizations and/or other Civic Organizations: membership cards for any volunteer, civic, church related organizations, etc. as applicable;
  • Religious interests: interests and activities of the Applicant, as applicable;
  • Mobility and Travel: addresses and dates of residences for the past ten years;
  • Employment History: record of jobs held for the past ten years as shown by W2’s, pay stubs, etc. as applicable;
  • Educational History: history of education as shown by diplomas, certificates, transcripts, etc. as applicable;
  • Military Service: branch of service, dates of entry and discharge, type of discharge, rank attained as shown by a DD-214; as applicable;
  • Community Reputation and Reference: names and contact information of at least 3-5 references to be contacted by the investigating Agent, or letters of support.

Please Note:  Before submitting your application, please be sure that you are willing to make yourself available to the parole staff. The Board has determined the interview and verification of the information provided as requirements and you must adhere to them.  Failure to make yourself available to parole staff either by telephone or the in-person interview and/or to provide the requested information will result in your application being administratively withdrawn.
If you do not reside in Pennsylvania, parole staff’s standard procedure is to send you a worksheet to complete followed up by a telephone interview to confirm the information contained in the worksheet.

You should expect a delay from the time your application is filed until you are interviewed.  This will ensure that the information regarding your present personal status is current and accurate when it is reviewed by the Board.

Department of Corrections – This agency is responsible for preparing a report for incarcerated individuals only.

District Attorney/President Judge – The District Attorney and President Judge in the county where the crimes occurred are given a chance to provide an opinion on the merits of every application. In cases involving more than one jurisdiction, a copy of the application will also go to the appropriate District Attorney and President Judge in that county.

Once all of the necessary reports have been received, the Board Secretary and staff will send to each Board Member in advance an applicant’s file to be reviewed for a hearing. The Board will grant a hearing if two (2) of the five Board members approve. Hearings for lifers or prisoners serving time for crimes of violence may only be granted upon approval of three (3) Board members. Attempted crimes of violence are included in this and offenses committed while in visible possession of a firearm, for which sentencing was imposed, will also require a three (3) member vote. If the required number of votes are not obtained, the process has ended and the applicant will not receive a pardon/commutation.

If a hearing is granted, a calendar is prepared, listing each application to be heard at the specified public session and the following individuals/agencies will be notified of the time and place of the hearing:

1.  Applicant/Representative

2.  Board of Probation and Parole

3.  Department of Corrections (If incarcerated)

4.  District Attorney, President Judge

5.  Victim(s) or Victim(s) Next of Kin

6.  Newspaper in the county where an applicant committed the crime(s) for which he/she is seeking clemency. At least one week prior to the public hearing, notice must be published stating the applicant’s name, the crimes(s) with respect to which the applicant has applied for clemency, clemency type, the institution, if any, in which the applicant is confined and the time and place of the hearing at which the application will be heard. Newspaper publication is required for every application to be heard by the Board.

The Hearing:

Hearings are held in the Supreme Court Courtroom in Harrisburg. The Board meets on a regular basis, as determined by the Board. On the scheduled day, the Board convenes at 9:00 A.M. for morning sessions or 1:00 P.M. for afternoon sessions. The Board’s secretary will call the session to order and the Board’s chairman will present opening remarks. Following the opening remarks, the first case, as listed on the calendar, is called to present their case. No more than fifteen minutes is allowed for each applicant’s presentation. Each case is called in consecutive order with each informal presentation adhering to the following format:

Applicant’s and  Supportive speakers’ presentation.

Victim’s or victim’s next of kin’s presentation or anyone who would like to speak in opposition of the application.

The Results:

Following the public hearing session, the Board meets in Executive Session. The Board reconvenes to vote in public. If a majority of the Board vote in favor of an application, the Board recommends favorable action to the Governor. If less than a majority of the Board vote in favor, the result is a denial by the Board and the application is not forwarded to the Governor. Life or Death sentence cases require a unanimous vote by the Board to be recommended to the Governor. The Governor, at his discretion, may approve or disapprove any favorable recommendation submitted by the Board. When the Secretary of the Board has received the Governor’s action, all interested parties will be notified of the decision.

Post Result Actions:

Reconsideration – A request for reconsideration of any decision may be made to the Board. The applicant must show a change in circumstances since the application was filed, or other compelling reasons, sufficient to justify reconsideration. Dissatisfaction with the Board’s decision is not grounds to request reconsideration.

Reapplication – An application may not be filed before the expiration of 12 months from a final adverse decision on any prior application. If an application receives two consecutive adverse decisions, an application may not be filed before the expiration of 24 months from the last adverse decision.

Filed Under: Uncategorized

Gregory J. Spadea, Esq., Named an ACCREDITED ESTATE PLANNER® Designee

December 26, 2021 by Leave a Comment

Gregory J. Spadea, Esq., Named an ACCREDITED ESTATE PLANNER® Designee by the National Association of Estate Planners & Councils on June 1, 2021

Ridley Park, PA – Gregory J. Spadea, Esq. is newly certified as an Accredited Estate Planner® (AEP®) designee by the National Association of Estate Planners & Councils (NAEPC). His office is the law Offices of Spadea & Associates, LLC located in Ridley Park, PA 19078.

Gregory J. Spadea is a former IRS Agent and Pennsylvania Certified Public Accountant. Mr. Spadea has over 25 years of tax and estate planning experience. Mr. Spadea graduated from Widener University School of Law, and started the Law Firm Spadea & Associates, LLC in June 2001. The law firm focuses on estate and tax planning, estate administration. Mr. Spadea probates estates and drafts wills, trusts, powers of attorney and health care directives. The firm also helps clients with Medicaid planning, business succession, entity formation and corporate governance issues.

The Accredited Estate Planner® (AEP®) designation is a graduate level, multi-disciplinary specialization in estate planning, obtained in addition to already recognized professional credentials within the various disciplines of estate planning. The AEP® designation is available to actively practicing attorneys (JD) and Certified Public Accountants (CPA); or those currently designated as a Chartered Life Underwriter® (CLU®); Chartered Financial Consultant® (ChFC®); Certified Financial Planner (CFP®); Chartered Financial Analyst (CFA); Certified Private Wealth Advisor® (CPWA®); Chartered Advisor in Philanthropy® (CAP®); Certified Specialist in Planned Giving (CSPG); or Certified Trust & Financial Advisor (CTFA).

It is awarded by the National Association of Estate Planners & Councils to recognize estate planning professionals who meet stringent requirements of experience, knowledge, education, professional reputation, and character. An AEP® designee must embrace the team concept of estate planning and adhere to the NAEPC Code of Ethics, as well as participate in an annual renewal and recertification process.

NAEPC is a national organization of professional estate planners and affiliated local estate planning councils dedicated to the cultivation of excellence in estate planning. NAEPC fosters the multi-disciplinary approach to estate planning by serving estate planning councils and their credentialed members and delivering exceptional resources and unsurpassed education.

For more information or to schedule an appointment with Gregory J. Spadea, Esq., AEP®, please call 610- 521-0604 or email Gregory@SpadeaLawfirm.com.

Filed Under: Estate Planning Tagged With:

Four Reasons To File an Extension for your 2020 1040 Income Tax Return

May 17, 2021 by Leave a Comment
Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
  1. The most important reason to file an extension is that if you do not file one by the May 17, deadline, you might face a failure-to-file penalty if you owe money. Without a valid extension, a late filed return is subject to a 5% penalty per month on any unpaid balance. This penalty tops out after 5 months or 25% of your tax. The exception to this failure to pay penalty is if you file an extension and you pay at least 90% of your actual tax liability by May 17, then you will not be assessed the failure-to-pay penalty if the remaining balance is paid by the extended due date which is October 15. By having 90% of your tax liability paid in, filing an extension gives you several extra months to come up with the remaining 10% balance owed to the government at a relatively low interest rate of 3%.
  2. A second reason to file an extension is if you do not pay all the tax due by the due date, you could face a failure-to-pay penalty. The failure-to-pay penalty is ½ of 1% of your unpaid taxes for each month the taxes are not paid after the due date which is 6% per annum. This penalty is assessed on any taxes not paid by May 17 if the outstanding amount is more than 10% of the total tax due. It can increase to up to 25% of the unpaid taxes. The failure-to-file penalty is generally more than the failure-to-pay penalty. So, if you cannot pay all the taxes you owe, you should still file an extension to avoid the failure to pay penalty. Keep in mind that if both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty.
  3. The third reason is if you do not pay all the tax due by May 17, interest will be due on any amount not paid. Currently the interest rate on underpayments is 3% per year. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
  4. The fourth reason to file an extension is even if you expect a refund, filing a valid extension permits you to defer funding a self-employed retirement plan (SEP IRA). Note than this does not apply to a regular IRA, Roth IRA or Coverdell Education Savings Account. It also enables self-employed individuals to even delay opening a SEP IRA as late as the extended due date as a well as funding it. One strategy we often implement for our self-employed individual clients is to pay all taxes deemed due with an extension and then funding the retirement later by the extended due date of October 15.

Keep in mind you will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect. Extensions until May 17 are automatic in 2021, or until June 15 for those affected by winter storms in Texas, Louisiana, and Oklahoma. The IRS might provide administrative relief and waive the penalties if you qualify under its First Time Penalty Abatement policy. To qualify, you must not have had any penalties in the prior three tax years. You must also have filed your current year’s tax return on time and paid any tax you might owe. As mentioned above, the IRS might waive the late-payment penalty if you can show there is a reasonable and justifiable reason for not paying on time.

There is a simple way to extend the filing deadline, just file an extension using form 4868, and make sure it is postmarked by May 17. It is only one page and does not even require a signature. If our firm filed your return 2019 1040 return and we did not hear from you, we will automatically file the extension for you. If you have any questions or need help preparing your taxes call Gregory J. Spadea at 610-521-0604.

Filed Under: Federal Tax

2021 American Rescue Plan Act

May 2, 2021 by Leave a Comment

The American Rescue Plan Act (the Act) approved by Congress on March 9, 2021 not only extends the current $300 weekly federal unemployment assistance through September 6, with the potential for some of those payments to be excluded from taxable income, it also includes substantial increases in child tax and earned income credits, $1,400 rebates for a large segment of the population, expanded dependent care assistance, an extension of refundable payroll tax credits for employers paying emergency sick and family leave to employees affected by COVID-19 and similar special payroll tax credits for self-employed individuals, an exclusion from income for certain student loan forgiveness, an additional year under which noncorporate taxpayers can take deductions for excess farm and business losses, an extension of the paycheck protection program (PPP) to certain entities not previously included in the program, and tax-free restaurant revitalization and economic injury disaster loan (EIDL) grants.

Specifically, the Act:

  • Provides $1,400 rebate checks for individuals ($2,800 in the case of joint returns and $1,400 for dependents) to be phased out for individuals with adjusted gross income of $75,000 – $80,000 ($150,000 – $160,000 for married filing jointly and $112,500 – $120,000 for head of household);
  • Extends the time period for which individuals are eligible for additional federal unemployment assistance of $300 so that instead of such assistance expiring on March 14, 2021, it does not expire until September 6, 2021;
  • Provides that up to $10,200 ($20,400 for joint return filers) of unemployment assistance received in 2020 may be exempt from tax depending on the individual’s income for the year;
  • For 2021, increases the child tax credit amount, increases the age at which a child qualifies for the credit; increases the refundable amount of the child tax credit, provides a program for distributing the credit monthly, and provides for payments to be made to “mirror code” territory for the cost of such territory’s child tax credit;
  • For 2021, nearly triples the amount of the earned income tax credit (EITC) available for workers without qualifying children, expands the eligible age range for individuals who qualify for the EITC, increases the amount of investment income an individual can have before being ineligible for the EITC, allows the credit in the case of certain separated spouses, modifies the disqualified investment income test, provides a special rule for calculating the EITC, and provides payments to U.S. possessions for the cost of their EITC;
  • For 2021, enhances the child and dependent care tax credit by making it refundable, increases expenses eligible for the credit, increases the maximum rate of the credit, increases the applicable percentage of expenses eligible for the credit; and increases the exclusion from income for employer-provided dependent care assistance;
  • Allows taxpayers other than corporations to deduct excess farm losses and excess business losses through 2027, instead of through 2026;
  • Extends the refundable payroll tax credit for paid sick time and paid family leave payroll tax credits for both employers and self-employed individuals through September 30, 2021;
  • Expands the paid family leave credit to allow employers to claim the credit for leave provided to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization, resets the ten-day limitation on the maximum number of days for which an employer can claim the paid sick leave credit with respect to wages paid to an employee, and increases the value of the credits by the amount equal to the OASDI and HI employer-share tax imposed on qualified paid family and medical leave wages for purposes of this credit;
  • Extends the employee retention credit to January 1, 2022;
  • Temporarily expands the premium tax credit provided under Code Sec. 36B, modifies the applicable percentages used to determine the taxpayer’s annual required share of premiums, and provides a special rule allowing a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 to be treated as an applicable taxpayer;
  • Repeals the election to allocate interest, etc. on a worldwide basis;
  • Excludes from income the receipt of EIDL grants;
  • Excludes from income the receipt Restaurant Revitalization Grants;
  • Lowers the threshold for Code Sec. 6050W reporting for third party settlement organizations;
  • Modifies the tax treatment of student loans forgiven in 2021 through 2025 to provide that certain discharges are not includible in income;
  • Expands the limitation on the deductibility of certain executive compensation; and
  • Extends access to PPP loans to certain nonprofit entities as well as internet publishing organizations.

2021 Recovery Rebates to Individuals

Section 9601 of the Act adds Code Sec. 6428B to provide a refundable tax credit in the amount of $1,400 per eligible individual.

Eligible Individuals: An eligible individual is any individual other than (1) a nonresident alien, (2) a dependent of another taxpayer, and (3) an estate or trust. The credit is $1,400 per taxpayer ($2,800 in the case of a joint return) and $1,400 per dependent of the taxpayer for the tax year. For purposes of the recovery rebate, the term “dependent” has the same meaning given the term by Code Sec. 152 and thus can include a qualifying relative. The credit begins phasing out starting at $75,000 of adjusted gross income (AGI) for an individual ($112,500 for heads of household and $150,000 in the case of a joint return or surviving spouse) and is completely phased out where an individual’s AGI is $80,000 ($120,000 for heads of household and $160,000 in the case of a joint return or surviving spouse).

Advanced Payment Based on 2019 or 2020 Tax Returns: The provision also provides for the Department of Treasury to issue advance payments based on the information on 2019 tax returns or 2020 tax returns if the taxpayer has filed a tax return for 2020. If an advance payment is issued to a taxpayer based on the 2019 return, and the taxpayer files his or her 2020 tax return before the earlier of (1) 90 days after the 2020 calendar year filing deadline, or (2) September 1, 2021, the taxpayer will receive an additional payment equal to the excess (if any) of the amount to which the individual is entitled based on the 2020 return over the amount of the payment made based on the 2019 return. The “2020 calendar year filing deadline” means the date specified in Code Sec. 6072(a) with respect to returns for calendar year 2020 (i.e., April 15, 2021), determined after taking into account any period disregarded under Code Sec. 7508A if such disregard applies to substantially all returns for calendar year 2020. Solely for purposes of advance payments, a tax return is not treated as filed until the return has been processed by the IRS.

Valid Identification Numbers Generally Required: A taxpayer is not eligible for the recovery rebate unless the taxpayer includes a valid identification number on the tax return for the tax year. A valid identification number means a social security number (SSN) or, in the case of a dependent who is adopted or placed for adoption, the dependent’s adoption taxpayer identification number. For married taxpayers filing jointly, where the social security number of only one spouse is included on the tax return for the tax year, the payment amount is reduced to $1,400, in addition to $1,400 per dependent with a valid identification number. However, a special rule applies to members of the armed forces. For married taxpayers filing jointly, the payment amount is $2,800 if at least one spouse was a member of the armed forces at any time during the tax year and at least one spouse includes his or her SSN on the joint return for the tax year. Any individual who was deceased before January 1, 2021, is treated as if his or her SSN was not included on the return for the tax year. In the case of a joint return where only one spouse is deceased before January 1, 2021, where the deceased spouse was a member of the armed forces, and the deceased spouse’s SSN is included on the tax return for the tax year, the SSN of one (and only one) spouse is treated as included on the return for the tax year for purposes of determining the rebate amount. No payment will be made with respect to any dependent of the taxpayer if the taxpayer (both spouses in the case of a joint return) was deceased before January 1, 2021.

Returns Not Filed for Either 2019 or 2020: Individuals who do not file returns for either 2019 or 2020 (i.e., nonfilers) will receive advance payments on the basis of information available to the Treasury Department, and the payment amount may be determined with respect to such individual without regard to the AGI phaseouts. Payments may be made to a nonfiler’s representative payee or fiduciary for a federal benefit program and the entire amount of the payment will be used only for the benefit of the nonfiler. Payments to nonfilers may not be made by reloading any previously issued prepaid debit cards.

No Administrative Offset: Advance payments are generally not subject to administrative offset for past due federal or state debts. In addition, the payments are protected from bank garnishment or levy by private creditors or debt collectors. Additionally, the provision instructs the Treasury Department to make payments to the United States territories that relate to each territory’s cost of providing the credits.

Extension of Unemployment Assistance; Exclusion of 2020 Benefits

Section 9011 and Section 9013 of the Act extends the pandemic unemployment assistance and the federal pandemic unemployment compensation, originally enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), so that eligible individuals will receive, or continue to receive, $300 per week of unemployment payments. These payments were scheduled to end on March 14, 2021, but will now be available through September 6, 2021.

Section 9042 of the Act provides that up to $10,200 ($20,400 for joint return filers if both receive unemployment) of 2020 unemployment assistance may be exempt from tax if the taxpayer’s adjusted gross income is less than $150,000. Section 9042 does not provide a phaseout range, so taxpayers with income above the cut-off by any amount will lose the exclusion entirely.

____

Expansion of Child Tax Credit for 2021

Section 9611 of the Act adds Code Sec. 24(i), which significantly expands the child tax credit available to qualifying individuals by:

  • increasing the credit from $2,000 to $3,000 or, for children under 6, to $3,600;
  • increasing from 16 years old to 17 years old the age of a child for which the credit is available; and
  • increasing the refundable amount of the credit so that it equals the entire credit amount, rather than having the taxpayer calculate the refundable amount based on an earned income formula.

Eligibility for Child Tax Credit: The refundable credit applies to a taxpayer (in the case of a joint return, either spouse) that has a principal place of abode in the United States for more than one-half of the tax year or is a bona fide resident of Puerto Rico for such tax year.

Phaseout of Child Tax Credit: As under current law, the 2021 child tax credit is phased out if a taxpayer’s modified adjusted gross income exceeds certain thresholds. For 2020, the credit is phased out for a taxpayer with modified adjusted gross income in excess of $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. The $2,000 child tax credit otherwise allowable for 2020 must be reduced by $50 for each $1,000, or fraction thereof, by which the taxpayer’s modified adjusted gross income exceeds such threshold amounts. For 2021, however, special phase-out rules apply to the excess credit available for 2021 (i.e., either the $1,000 excess credit or, for children under 6, the $1,600 excess credit). Under these modified phase-out rules, the modified adjusted gross income threshold is reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case. This special phase-out reduction is limited to the lesser of the applicable credit increase amount (i.e., either $1,000 or $1,600) or 5 percent of the applicable phase-out threshold range.

Monthly Payments of Child Tax Credit: Section 9611 of the Act adds Code Sec. 7527A which provides a special program under which individuals with refundable child tax credits can receive advance payments equal to one-twelfth of the annual advance amount, thus potentially receiving up to $300 per month for children under 6 and $250 per month for children 6 years and older. However, these payments would only be made from July 2021 through December 2021. In essence, the taxpayer would receive one-half of the total child tax credit in the last six months of 2021 and the other half of the credit after filing his or her tax return.

The “annual advance amount” is the amount (if any) which is estimated as being equal to the amount which would be treated as allowed as a child tax credit if (i) the taxpayer meets the requirement of living in the United States for more than one-half of the tax year or being a bona fide resident of Puerto Rico for such tax year; (ii) the taxpayer has modified adjusted gross income for such tax year that is equal to the taxpayer’s modified adjusted gross income for 2019 or, if no return was filed for 2019, then modified adjusted gross income for 2018 (i.e., the reference tax year); (iii) the only children of the taxpayer for such tax year are qualifying children properly claimed on the taxpayer’s return of tax for the reference tax year, and (iv) the ages of such children (and the status of such children as qualifying children) are determined for such tax year by taking into account the passage of time since the reference tax year. If the annual advance amount is modified, the Secretary of Treasury may adjust the amount of any monthly payment made after the date of such modification to properly take into account the amount by which any monthly payment made before such date was greater than or less than the amount that such payment would have been on the basis of the annual advance amount as so modified.

Excess Advance Payments: If the aggregate amount of advance payments exceeds the amount of the credit allowed for 2021, the excess increases the taxpayer’s tax liability for 2021. However, a safe harbor based on the taxpayer’s modified adjusted gross income may apply to reduce this amount. Under this safe harbor, in the case of a taxpayer whose modified adjusted gross income for the tax year does not exceed 200 percent of the applicable income threshold, the amount of the increase in tax due to the excess advance payments is reduced (but not below zero) by the safe harbor amount. The applicable income threshold is $60,000 in the case of a joint return or surviving spouse, $50,000 in the case of a head of household, and $40,000 in any other case. The safe harbor amount is the product of $2,000 multiplied by the excess (if any) of the number of qualified children taken into account in determining the annual advance amount with respect to months beginning in such tax year, over the number of qualified children taken into account in determining the credit allowed for the tax year.

If information contained in the taxpayer’s tax return for the reference tax year does not establish the status of the taxpayer as being eligible for the child tax credit, the Secretary of Treasury may infer such status (or the lack thereof) from other information sources. A child will not be taken into account in determining the annual advance amount if the death of such child is known to the Secretary of Treasury as of the beginning of 2021.

On-Line Portal: The Secretary of Treasury must establish an online portal which (i) allows taxpayers to elect not to receive the payments on a monthly basis, and (ii) allows taxpayers to provide information relevant to determining the amount of an advance payment, such as a change in the number of qualifying children or a change in the taxpayer’s marital status.

Notice of Payments: Generally, by January 31, 2022, the Secretary of Treasury must provide to any taxpayer to whom child tax credits were made during 2021 written notice which includes the taxpayer’s taxpayer identity, the aggregate amount of such payments made, and such other information as may be appropriate.

Exception from Offset: The advance child tax credit payments are generally excepted from reduction or offset, including where the taxpayer owes federal taxes that would otherwise be subject to levy or collection.

Application of Child Tax Credit in Possessions: Section 9612 of the Act instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s child tax credit. This amount is determined by Treasury based on information provided by the territorial governments. Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the child tax credit directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children. For American Samoa, which does not have a mirror code, the Treasury Department is instructed to make payments in an amount estimated as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.

Increase in Earned Income Credit for 2021

Section 9621 of the Act adds Code Sec. 32(n), which expands the universe of individuals eligible for the earned income tax credit (EITC) in 2021 while also increasing the amount of the credit available. Among other changes, the Act:

  • nearly triples the amount of the EITC available for workers without qualifying children;
  • expands the eligible age range for individuals who qualify for the EITC, and
  • increases the amount of investment income an individual can have before being ineligible for the EITC.

Special Rules for 2021 for Individuals without Qualifying Children: Code Sec. 32(n) expands the eligibility and the amount of the EITC for taxpayers with no qualifying children (i.e., “childless EITC”) for 2021. In particular, under Code Sec. 32(n)(1), the applicable minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated. The applicable minimum age in the case of a specified student (other than a qualified former foster youth or a qualified homeless youth) is 24, while the applicable minimum age in the case of a qualified former foster youth or a qualified homeless youth is 18. A “specified student” is, with respect to any tax year, an individual who is an eligible student (as defined in Code Sec. 25A(b)(3)) during at least five calendar months during the tax year. The term “qualified homeless youth” means, with respect to any tax year, an individual who (i) is certified by a local educational agency or a financial aid administrator during such tax year as being either an unaccompanied youth who is a homeless child or youth, or as unaccompanied, at risk of homelessness, and self-supporting, and (ii) provides consent for local educational agencies and financial aid administrators to disclose to the Treasury Secretary information related to the status of such individual as a qualified homeless youth. Code Sec. 32(n)(2) eliminates, for 2021, the age 65 cut-off for being eligible for the credit.

Code Sec. 32(n)(3) increases the childless EITC amount by (i) increasing the credit percentage and phase-out percentage from 7.65 to 15.3 percent, (ii) increasing the income at which the maximum credit amount is reached from $4,220 to $9,820, and (iii) increasing the income at which the phase out begins from $5,280 to $11,610 for non-joint filers. Under these parameters, the maximum EITC for 2021 for a childless individual is increased from $543 to $1,502.

Eligibility for Childless EITC Where Children Do Not Meet Identification Requirements: Section 9622 of the Act repeals Code Sec. 32(c)(1)(F), which prohibited an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she could not claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children). Accordingly, for tax years beginning after December 31, 2020, individuals who do not claim the EITC with respect to qualifying children due to a failure to meet the identification requirements can now claim the childless EITC.

Credit Allowed in Case of Certain Separated Spouses: Section 9623 of the Act amends Code Sec. 32(d) to allow, for tax years beginning after December 31, 2020, a married but separated individual to be treated as not married for purposes of the EITC if a joint return is not filed. Thus, the EITC may be claimed by the individual on a separate return. This rule only applies if the taxpayer lives with a qualifying child for more than one-half of the tax year and either does not have the same principal place of abode as his or her spouse for the last six months of the year, or has a separation decree, instrument, or agreement and doesn’t live with his or her spouse by the end of the tax year. This change aligns the EITC eligibility requirements with present-day family law practice.

Modification of Disqualified Investment Income Test: Section 9624 of the Act amends Code Sec. 32(i) and increases the limitation on disqualified investment income for purposes of claiming the EITC from $3,650 (2020) to $10,000. This change is applicable for tax years beginning after December 31, 2020.

Application of EITC in Possessions of the United States: Section 9625 of the Act adds new Code Sec. 7530, which instructs the Treasury Department to make payments to the territories that relate to the cost of each territory’s EITC. In the case of Puerto Rico, which has an EITC, the payment is structured as a matching payment, wherein the Treasury Department will provide a match of up to three times the current cost of the Puerto Rico EITC, if Puerto Rico chooses to expand its current EITC. The other territories receive cost reimbursements of 75 percent of their EITC expenditures.

Use of Prior Year Income for Determining 2021 EITC: Section 9626 of the Act allows taxpayers in 2021, for purposes of computing the EITC, to substitute their 2019 earned income for their 2021 earned income, if 2021 earned income is less than 2019 earned income.

Increase in Dependent Care Assistance Tax Benefits for 2021

Section 9631 of the Act adds Code Sec. 21(g), which provides a number of favorable changes to tax benefits relating to dependent care assistance, including the following:

  • making the child and dependent care tax credit (CDCTC) refundable;
  • increasing the amount of expenses eligible for the CDCTC;
  • increasing the maximum rate of the CDCTC;
  • increasing the applicable percentage of expenses eligible for the CDCTC; and
  • increasing the exclusion from income for employer-provided dependent care assistance.

Refundable Credit: Generally, a taxpayer is allowed a nonrefundable CDCTC for up to 35 percent of the expenses paid to someone to care for a child or dependent so that the taxpayer can work or look for work. Under Code Sec. 21(g)(1), the dependent care credit is refundable for 2021 if the taxpayer has a principal place of abode in the United States for more than one-half of the tax year.

Increased Dollar Limit on Creditable Expenses: Code Sec. 21(g)(2) increases the amount of child and dependent care expenses that are eligible for the credit to $8,000 for one qualifying individual and $16,000 for two or more qualifying individuals.

Increase in Maximum Credit Rate, Applicable Percentage, and Phase-out Thresholds: For 2020, the CDCTC is an amount equal to the applicable percentage of the employment-related expenses paid by an individual during the tax year, with the applicable percentage being 35 percent reduced (but not below 20 percent) by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the tax year exceeds $15,000. For 2021, Code Sec. 21(g)(3) increases the maximum credit rate from 35 to 50 percent and amends the phase-out thresholds so they begin at $125,000 instead of $15,000. At $125,000, the credit percentage begins to phase out, and plateaus at 20 percent. This 20-percent credit rate phases out for taxpayers whose adjusted gross income is in excess of $400,000, such that taxpayers with income in excess of $500,000 are not eligible for the credit.

Increase in Exclusion for Employer-Provided Dependent Care Assistance: Section 9632 of the Act increases the exclusion for employer-provided dependent care assistance from $5,000 to $10,500 (from $2,500 to $5,250 in the case of a separate return filed by a married individual) for 2021.

Tax Treatment of Targeted Economic Injury Disaster Loans (EIDL) Advances: Section 9672 of the Act provides that amounts received from the Administrator of the Small Business Administration in the form of a 14 targeted EIDL advance under Section 331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act in Pub. L. 116-260 is not included in the gross income of the person that receives such amounts. Further, no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied, by reason of the exclusion of such amounts from gross income. In the case of a partnership or S corporation that receives such amounts, any amount excluded from income under this provision will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to issue rules for determining a partner’s distributive share of any amounts excluded from income for purposes of Code Sec. 705.

Tax Treatment of Restaurant Revitalization Grants: Section 5003 of the Act establishes a Restaurant Revitalization Fund in order to provide restaurants and similar businesses with grants to cover expenses incurred as a direct result of, or during, the COVID-19 pandemic. Under Section 9673 of the Act, restaurant revitalization grants are not includable in gross income, and no deduction will be denied, no tax attribute reduced, and no basis increase denied, by reason of the exclusion from gross income for a restaurant revitalization grant. In the case of a partnership or S corporation that receives a restaurant revitalization grant, any amount excluded from income by will be treated as tax-exempt income for purposes of Code Sec. 705 and Code Sec. 1366. The IRS is directed to provide rules for determining a partner’s distributive share of any amount of restaurant revitalization grant excluded from income under Section 9673 for purposes of Code Sec. 705.

Modification of Exceptions for Reporting of Third Party Network Transactions: Section 9674 amends Code Sec. 6050W, which currently provides that a payment settlement entity must provide a Form 1099-K for transactions of sellers who exceed $20,000 in gross receipts when collected in over 200 transactions. The provision would amend Code Sec. 6050W to provide that sales in excess of $600 would trigger the Form 1099-K filing requirement.

Modification of Treatment of Student Loan Forgiveness in 2021 – 2025:

Section 9675 of the Act excludes certain discharges of student loan debt occurring in years 2021 through 2025 from gross income.

Exclusion of Debt Forgiveness from Income: Under new Code Sec. 108(f)(5), gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge (in whole or in part) after December 31, 2020, and before January 1, 2026, of:

  • any loan provided expressly for post-secondary educational expenses, regardless of whether provided through the educational institution or directly to the borrower, if the loan was made, insured, or guaranteed by the United States or agency thereof, a state, territory, or possession of the United States, or the District of Columbia, or an eligible educational institution as defined in Code Sec. 25A;
  • any private education loan as defined in Section 140(a)(7) of the Truth in Lending Act;
  • any loan made by any educational organization described in Code Sec. 170(b)(1)(A)(ii) if it was made (i) under an agreement with any entity described in (1) above or any private education lender (as defined in Section 140(a) of the Truth in Lending Act) under which the funds from which loan was made were provided to the educational organization, or (ii) under a program designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a); or
  • any loan made by an educational organization described in Code Sec. 170(b)(1)(A)(ii) or by an organization exempt from tax under Code Sec. 501(a) to refinance a loan to an individual to assist the individual in attending any such educational organization, but only if the refinancing loan is made under a program of the refinancing organization which is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs, and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or an organization described in Code Sec. 501(c)(3) and exempt from tax under Code Sec. 501(a).

Exception to Debt Forgiveness: The exclusion provided under Code Sec. 108(f)(5) does not apply to the discharge of a loan made by an educational organization or a private education lender (as defined in Section 140(a)(7) of the Truth in Lending Act) if the discharge is on account of services performed for either such organization or for such private education lender.

Expansion of Limitation on Deductibility of Certain Executive Compensation: Section 9708 of the Act adds a provision in Code Sec. 162(m) which increases the number of highly compensated employees for which a compensation deduction is limited, to be effective for tax years beginning after 2026.

If you have any questions or need help with your taxes, please call Gregory J. Spadea at 610-521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year round.

Filed Under: Federal Tax

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