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Podcast: Tax Updates with Jennifer Marshall

In her first solo podcast, BMT senior vice president and director of tax services Jennifer Marshall reports on updates provided by the Internal Revenue Service (IRS) for the 2019 tax year. Jen discusses tax form updates, IRS-highlighted compliance audit programs, state and local tax credits, and the Tax Cuts and Jobs Act.


Opening:                             Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s Jennifer Marshall, senior vice president and director of tax services at BMT.

Jen Marshall:                      Hello. Today I’m going to cover some of the 2019 tax changes that we’ve seen, some of the updates, those things that have been issued by the internal revenue service for this year. I plan on reviewing some items. There may be an opportunity potentially to file for a refund. I want to go over some of the tax form updates and also some of the areas that have been highlighted by the IRS as compliance audit programs. Those areas where they’re going to start really coming down on. Folks. I also want to go over today the very heated topic from the tax and the tax cuts and jobs act. That was technically the 2017 but enacted for the beginning of 2018 the state and local tax credits that we saw a lot of the higher tax States enact. In response to that. Because the IRS has issued some final regulations.

Jen Marshall:                      There’s been a lot of impact for that in in 2019. To start off though, I’d actually like to go over some of the relief that the IRS ultimately came out and issued for individuals as a result of the act that went into place. The IRS had gone through and have lowered the withholding tables. So what a lot of taxpayers saw happened to them was that throughout 2018, they had a lot of lot less withholding happened from wages. And ultimately when folks went to go prepare or have their 2018 returns prepared, a lot of them found that they were underpaid and were actually subject to underpayment penalties with the IRS. So it wasn’t the middle of August the IRS announced they were going to have automatic refund of penalties paid for folks if they had at least 80% of the tax that was paid in or had been with help.

Jen Marshall:                      So previously the IRS had gone ahead and was providing relief at, if you had 85% paid in and in prior years, the normal is that you’re required to have at least 90% paid in to avoid that penalty. So if you were part of those affected taxpayers, you would have received a CP 21 notice from the IRS and a refund check would have been issued for anyone that was in that situation where they had at least 80% of those that were paid in. So in addition, if you were one of those folks that filed your 2018 tax return on extension, they did issue form 2210 which is the form that calculates the penalty that actually had a box added to it that you could check to request that automatic waiver for you so that you wouldn’t be subject to that penalty. The government accountability office, the GAO actually estimated there were nearly 30 million people that were under withheld for 2018 as a result of the changes that were enacted by the new app.

Jen Marshall:                      So it was actually in response. Also on August 6th, the IRS released did release an updated withholding calculator. It is available on the IRS website. I do encourage folks to utilize that or as you’re working if you’re working with an accountant they should be able to guide you. But if you’re a little more self-sufficient I do highly recommend the withholding calculator that the IRS has on the website. It’s actually been updated again since then, but it, it has become more sophisticated over the years. They would benefit anyone also that has self employment taxes. If you’re a small business owner filing a schedule C as well. The IRS also says now too that it is also mobile phone friendly. If you would like to look at your withholding, your current withholding situation from your phone, you’re now able to do that. So nice to start off and see some penalty relief that we did see in 2019 from the IRS.

Jen Marshall:                      So to switch things over some of the areas of compliance at the IRS is really cracking down on is cryptocurrency. I know this is a hot topic in all of the updates that I see and the trends for the tax industry. When you talk about Bitcoin, it, you know, has very much been a gray area. Folks don’t necessarily know how to report it or you know, those businesses that are involved in it if they’re meeting the correct information reporting that allows the IRS to match it. And so as a result of that, in 2018 the IRS back then actually launched a virtual currency compliance program and then in 2019 they started issuing notices back in July to taxpayers where they had, where the IRS had received information that they were unable to match to taxpayer returns for unreported crypto currency transactions. And I think it was over 10,000 notices that went out over the summer.

Jen Marshall:                      So if you’re seeing that you should always talk with your, your tax advisor, they’ll be able to guide you in how the crypto currency transactions need to be handled. Pursuant to the IRS instructions moving on, there are also new forms that we saw for 2019. One of those new forms is specifically for senior citizens. It is available for any taxpayer that is aged 65 or over. It’s very similar to the previous form, 1040-EZ. But if you remember the 1040-EZ , there were a lot of restrictions on who could use the 1040-EZ when you weren’t able to use it. If you were filing head of household, you couldn’t use it. If you were claiming dependents, there was also $100,000 income thresholds, anything over that you couldn’t use it. And you also couldn’t use it if you had interest income that was over $1,500.

Jen Marshall:                      So the good news is this new form that is available for the senior citizens doesn’t have any of those restrictions. Now, much like the newly introduced 1040 that we signed 2018 basically that return without all of those additional schedules that were introduced. I mean let’s face it, most of us are using software or we’re using a tax prepare. So I don’t know how much time it’ll save folks. Generally speaking, it would I think help those senior citizens who are still self preparing a return by pencil and paper filing and those cases it would provide a shorter return if you don’t meet all of those additional schedules that as I mentioned were introduced with the 2018 tax returns. So in addition to that form, there is also a new 1099 information reporting form. It is 1099 NEC which stands for non-employee compensation and that has always been reported in box seven on the 1099 Miscellaneous form.

Jen Marshall:                      Basically you would receive that or you would be issuing those if you are a had independent contractors, you were paying more than $600 on an annual basis. You would be issuing a 1099 Misc. To that independent contractor and then filing those forms with the IRS. What happens is that the IRS wants to be able to match income as quickly as possible, as early in tax season as they can. Really as a matter of fraud prevention, the quicker that they can match income and as returns are filed and there are red flags that are tripped, they’re able to identify more fraudulent returns. So in order to escalate that process, they put a new filing deadline in place. So any 1099 myths that had income that was reported in box seven now had to be filed by January 31st, which put a huge burden on those that have to complete and file these information returns with the IRS and had previously you had until the end of March, March 31st to get those filed with the IRS.

Jen Marshall:                      So recognizing what a burden that had become for those filing those information returns. They’re going to pull out what had previously been reported in box seven on form 1099 Misc. And it will now be reported on this new 1099 NEC form. It does not apply for payments made in 2019. It will apply to payments starting January 1st of 2020. So it doesn’t provide any relief for this filing period. We’ll still have to file those 1099 misc. Forms by January 31st if you’re reporting any amount in box seven. And I mean the downfall of that too is you could be reporting amounts outside of box seven such as rents or royalties things such as that, that, but if you had an amount in box seven then you are subject to that earlier filing date, but we will see that relief in 2020.

Jen Marshall:                      So I want to switch gears a little bit here and talk about the charitable donation reduction for all of these state and local tax credits. We saw introduced in 2018 the backstory here is with the new tax cuts and jobs act, we saw of course the $10,000 cap that was placed on taxes as an itemized deduction. So for those individuals that had real estate taxes and income taxes for state and local that were in higher tax rates, States drastically saw a reduction in their itemized deductions. With that, the introduction of that $10,000 cap. So of course then we saw a lot of news coverage. I’m going on about how the States were reacting to sort of get around that federal limitation. So what we saw with high tax States such as New York, New Jersey and Connecticut, was that they introduced a charitable deduction or rather a charitable credit that they would provide to taxpayers in exchange for credits for the state tax paid.

Jen Marshall:                      So for example, they would allow for $1,000 donation to say a state I’m charitable scholarship fund or program that was in place. You would be given a $700 credit that you could use to offset your state taxes. So the idea there being that you would have this thousand-dollar charitable deduction that you could use on the federal side that would sort of hedge your limitation on being able to deduct your higher state taxes that we’re now capped. So what the IRS did was they came out in 2019 and said, Hey, you know, they issued new regs that are really have really blocked all of these state tax, these charitable contributions, these States enacted as sort of a work around and does have a downside. I mean a lot of these States had these plans in place, these charitable donations to scholarship funds and charitable activity that been going on in the States for years, you know, are definitely negatively impacted by this.

Jen Marshall:                      So the upside is that the credits still provide a benefit for their state taxes, you know, and will allow the continuing funding of those programs. And it is important to note too that the original state liability that you had, say for instance with New York is still deductible as a state income tax. But of course it’s still subject to that $10,000 limitation on the federal side. And in the earlier example too, I did want to illustrate, so if you had made $1,000 donation, you received a $700 credit. The IRS is part of these new regulations is so allowing for a $300 itemized deduction as a charitable contribution. Of course the difference between what was donated and the benefit that you received for those state taxes. So we did see some of the States such as New York did come back and enact their own, you know, sort of response to these new regulations.

Jen Marshall:                      I know New York went ahead and made retroactive, so there is an opportunity to file if you file in the state of New York, you can amend your New York state income tax return for those amounts that you were blocked from deducting on the federal side for itemized deductions. You’re now able to take as a subtraction on your New York return. So that may offer some refund potential for some individuals that are filing in New York. Moving that aside, I did want to go over, there is some new relief that the IRS did introduce that was in September of 2019 and these are relief procedures for certain expatriated individuals. So those people that had given up their us citizenship, they’re providing them opportunities to, for you to meet your tax return filing obligations and is also providing relief for some of those back taxes that you would owe.

Jen Marshall:                      So of course it’s limited. There are restrictions around those who will be able to see that relief in order to qualify. It will apply to those individuals who haven’t filed a us tax returns. As a us citizen, you have to owe a limited amount of back taxes and you cannot have your net worth or net assets have to be less than 2 million. So if ultimately the IRS minds that your noncompliance was considered non willful they are allowing you then to pay the U S taxes and to cap them. So in order to do that, you would be required to file all of the outstanding us tax returns for your expatriation year and then the five years prior and that’s where it would be kept. However, in order to qualify the total tax liability for those six years, the first year, and then the five prior years and not exceed 25,000.

Jen Marshall:                      So I’m not sure how many folks are captured in this, but there is some relief that is available. And it would apply to anyone who gave up their us citizenship anytime after March 18th of 2010. Moving on, actually the last topic I want to go over which came out fairly recently is that the IRS has now updated the RMD or the required minimum distribution tables for IRA for individual retirement account. So if you are age 70 and a half or older, you are familiar with having to take what they refer to as the RMD every year from the minimum amount you’re required to pull out of your IRA, which is of course fully taxable then. And that calculation is based on life expectancy tables. And it’s those tables that have now just recently been updated. They had actually had not been revised since 2002 but now they have been updated to reflect the higher lifespan that we see in the most recent mortality data that is available and these new tables will then allow for folks to take a lower distribution amount if they are so inclined.

Jen Marshall:                      It will allow for the IRA to have a longer lifespan as those distributions will be spread over more years. I do want to note, however, the new tables aren’t effective for 2019 nor are they effective for 2020 the new tables won’t be effective until the calculation of your 2021 distributions and then going forward. So I’m going to wrap it up for now. I’d like to thank everyone for listening. I hope you’ve enjoyed going over some of the 2019 tax highlights and changes that we’ve seen issued by the IRS over this past year. It’s really hard to say what we’ll see for the 2020 paths year. I anticipate the outcome of the 2020 November election will really be a deciding factor on whether we see this enacted. 2017 tax cuts and jobs act survive to December 31st of 2025 that is the date when 23 provisions of that act are actually set to expire. So in closing, I’d like to leave you with a cute quote that I read many moons ago. The tax code is enormous. It’s now larger than Bible but with none of the good news. Thank you.

Closing:                                This has been a production of Bryn Mawr Trust. Copyright 2019 visit us online at slash wealth. The views expressed herein are those of Bryn Mawr Trust as of the day recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through brim, our bank corporation and its various affiliates and subsidiaries which do not provide legal tax or accounting advice. Please consult your legal tax or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not. Bank deposits are not FDIC insured, are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states. Any third party trademarks and products for services related thereto mentioned in this podcast are for discussion purposes only. Third-Party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third-Party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third-party trademark owners that would render this trademark disclaimer, not relevant.