Circulated biweekly to business clients since 1925
Reported from Washington, D.C. • kiplinger.com • Vol. 99, No. 19
View The Kiplinger Tax Letter Archive
Washington, September 12, 2024
| Highlights |
Tax To-do’s Oct. 15 deadline Gambling Wins and losses Tax Disputes Proving fraud Bankruptcy IRS tax liens Preparers PTIN refunds The Election Evolving tax plans |
Dear Client:
What’s going to happen with the estate tax? Now, the federal lifetime estate and gift tax exemption is $13,610,000, and the highest estate tax rate is 40%. However, after 2025, the $13,610,000 figure will drop, reverting to the 2017 amount, adjusted for inflation… $7 million or so…unless Congress chooses to act.
We don’t know what lawmakers will do.
But let’s look at some options out there.
The first one is keeping things as they are, meaning extending the current estate tax exemption and maintaining the top 40% tax rate. Donald Trump often says he wants to make permanent the tax cuts in the 2017 law, and we believe that promise would also include the higher lifetime estate and gift tax exemption. Whether Trump wants other additional easings to the estate tax remains to be seen.
The second is lowering the tax rate and/or raising the exemption amount. The authors of Project 2025, the blueprint spearheaded by the Heritage Foundation and designed for the next GOP administration, sets forth a federal estate tax rate of no higher than 20% and would make permanent the current estate tax exemption, adjusted for inflation. Some Republican lawmakers want a higher exemption amount.
Third is getting rid of the estate tax. A bill that draws strong GOP support in the House and the Senate, the Death Tax Repeal Act, calls for the repeal of the estate tax and the generation-skipping transfer tax. This is not a new idea.
Fourth is coming up with a middle-ground estate tax exemption figure, somewhere between the current $13,610,000 and the $7 million amounts.
Fifth is doing nothing. This would cause the higher estate tax exemption in the 2017 tax law to automatically lapse, reverting to about $7 million for 2026 deaths. The 40% top estate tax rate would remain in place, as it wasn’t changed in the 2017 law.
Sixth is lowering the exemption below 2017’s figure and/or hiking the tax rate.
An example is the American Housing and Economic Mobility Act of 2024, a bill introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO). The bill sets forth a slew of affordable housing proposals. It also calls for changes to estate and gift taxes to offset the cost of the provisions.
Among the key proposed estate and gift tax changes: Lower the exemption to $3.5 million, an amount last seen in 2009. Replace the current 40% estate tax rate with a series of progressive rates, ranging from 55% for estates over $3.5 million to 75% for estates of billionaires. Reduce the annual gift tax exclusion to $10,000 per donee.
Some online stories say that Kamala Harris endorses the bill’s estate tax plan.
But we’ve found no concrete evidence of this. So far, Harris has been mum on the campaign trail when it comes to estate taxes. President Joe Biden in 2020 might have supported a $3.5 million exemption, but he apparently changed course.
The Oct. 15 deadline is nearing for taking several important actions:
Filing returns of individuals and calendar-year C corps that are on extension, with the exception of tax returns for taxpayers in federally declared disaster areas, the due dates of which have been automatically extended by the Revenue Service.
Taking these retirement-related steps: Making a 2023 contribution to a Keogh plan that was established before Jan. 1, 2024. Setting up a SEP-IRA for your business and depositing funds for 2023. Plus withdrawing excess IRA payins.
Also, reporting foreign accounts for 2023 if you haven’t already done so. U.S. individuals must report overseas accounts if, in 2023, the total combined balance at any time in the accounts exceeded $10,000. There are penalties for nonreporting.
Reporting large gambling losses on Schedule C is an audit red flag.
Failing to report gambling winnings can also draw IRS attention. Casinos must file Form W-2G with IRS for each person who wins $1,200 or more in bingo or slots, $1,500 or more in keno, or over $5,000 from poker tournaments. IRS has an automated program that matches data on third-party information returns, such as the W-2G, with income and deduction amounts shown on individual returns. If there is a mismatch with a significant discrepancy, IRS will notify the taxpayer.
Let’s look at the tax rules for recreational and professional gamblers.
For recreational gamblers, whether you’re playing the slots, betting on sports, or buying lottery tickets, IRS wants a cut of your winnings but won’t subsidize losses. You report gambling winnings as other income on line 8b of Schedule 1 of the 1040. Itemizers deduct losses on Schedule A, line 16, to the extent of reported winnings. You can’t deduct the costs of lodging, meals and other gambling-related expenses.
Professional gamblers have different rules. Some gamblers can file Schedule C if their gambling activity is extensive enough to rise to the level of a trade or business. This is a difficult hill to climb, but if scaled, pro gamblers can deduct wagering losses to the extent of their winnings on Schedule C. The cost of their meals, lodging, etc., is included in gambling losses and not reported as separately deductible expenses.
People who spend a fair amount of time gambling should keep good records on the number of bets they place, the winnings they receive and losses they incur.
A woman who didn’t report all her gambling winnings ends up in Tax Court. She’s a software consultant who also liked to gamble, and at one time, was trying to develop a digital application to help casinos monitor slot machine play. She filed a Schedule C for five years, reporting a total of $526,171 in gross income, which she testified was gambling winnings, and $672,430 of cost of goods sold, which she said was gambling losses. On audit, IRS determined she had $74,000 more of winnings, and she agreed. She also conceded she wasn’t a professional gambler. She disputed the amount of gambling losses allowed by IRS. Like most people, the woman didn’t keep good records of her losses. She submitted win-loss statements from casinos to support some losses. The Court also looked at her bank statements and ATM withdrawals at casinos where she gambled. Although the total of her losses allowed by the Tax Court was less than what she reported, it was a higher amount than what IRS had determined during the audit (Kalk, TC Memo. 2024-82).
IRS criminal agents are cracking down on illegal sports betting. They’re probing illicit industry activities, such as money laundering and tax evasion. With the help of IRS’s Criminal Investigation division and people from other agencies, the government discovered the scheme in which the interpreter for Shohei Ohtani, the Los Angeles Dodgers’ phenom, had engaged in illegal gambling activity for years. Between 2020 and 2024, IRS’s CI division initiated more than 150 investigations into illegal gambling activity, with over 70 of the cases resulting in criminal sentencing. People who engage in sports betting must report winnings on their income tax returns.
Proving taxpayers acted fraudulently isn’t always an easy task for IRS. During an audit of a couple and related entities, an agent found evidence of unreported income and inflated expenses, plus income shifted between entities. The agent issued a deficiency notice over three years after the tax returns were filed. Absent fraud, IRS generally has three years from the return date to assess taxes. If fraud is proved, IRS has unlimited time. The Tax Court reviewed whether the couple had fraudulent intent, delving into each factor or badge of fraud. The Court then decided that the Service failed to prove by clear and convincing evidence that the taxpayers filed fraudulent returns. So the statute-of-limitations period had expired, and IRS’s determinations are time-barred (Hoyal, TC Memo. 2024-84).
A taxpayer gets a rare Tax Court victory on a collection dispute with IRS. The Service sent a notice of intent to levy to a couple who owed back taxes. The couple timely responded in writing, requesting a collection due-process hearing and checking the boxes for an installment agreement or an offer in compromise. After negotiations on payment alternatives broke down, IRS sent a collection notice to the couple, and they petitioned the Tax Court to challenge IRS’s determination. The court sent the case back to IRS’s collection appeals office for a redo, saying the administrative record showed shortcomings from IRS and the couple, which included shoddy IRS review and taxpayer delays (Keith, TC Memo. 2024-81).
Here’s an interesting case on the interplay of IRS tax liens and bankruptcy…
Specifically, where the lien covers both the unpaid taxes and penalties. IRS had a lien against a couple’s real estate that included $46,000 in unpaid taxes and $25,000 in penalties from 2009. The couple filed Chapter 7 bankruptcy in 2019, and a year later, the bankruptcy trustee sold the real estate, netting $38,000. The trustee wanted the proceeds allocated pro rata between the estate and IRS, based on the proportion of taxes and penalties. Under bankruptcy law, the Service is entitled only to the tax portion of the lien, not penalties. IRS claimed the proceeds should first be used to pay the taxes under a tax-first method. The trustee’s approach would give IRS $24,620 (($46,000/$71,000) x $38,000), while under IRS’s method, it would get the full $38,000. The bankruptcy and district courts sided with the trustee. An appeals court has now reversed those decisions, saying that IRS’s tax-first method is consistent with the federal bankruptcy statutes (U.S. v. Mackenzie, 9th Cir.).
A man who willfully failed to report foreign accounts gets a little good news from an appeals court. As a general rule, the fine for willful violations is steep: The larger of $100,000 or 50% of the highest balance in the account.
The penalty can be an excessive fine barred by the Eighth Amendment. According to the 11th Circuit appeals court, the penalty for willful nonreporting is punitive in nature and subject to review as an unconstitutional excessive fine. The court checked each unreported account for the balance amounts and penalties. It found that one account had a balance of less than $20,000 for each of three years, and IRS assessed a willfulness penalty of $100,000 per year. That is improper, the court decides. However, the $12.2 million in fines assessed by the Service for the man’s other accounts is constitutional (Schwarzbaum, 11th Cir.).
Donald Trump repeatedly touts his plan to make tipped income tax-free.
And some lawmakers have already introduced proposals in Congress. For example, a bill sponsored by Sen. Ted Cruz (R-TX) would let tipped workers claim an above-the-line income tax deduction for tips reported to them as income by their employer. Other bills would make tips tax-free for income and payroll taxes.
Kamala Harris has also endorsed Trump’s tax-free tips mantra, saying she would eliminate taxes on tips for service and hospitality workers. She doesn’t have details, but any proposal would likely include earnings limits.
Odds are you’ve heard talk of the Johnson Amendment this election season. The federal tax statute, which has continually been on the books for 70 years, bars churches, charities and other 501(c)(3) exempt organizations from participating or intervening in political campaigns, either for or against a candidate running for office.
Donald Trump repeatedly says he wants to do away with this prohibition. He will need the aid of Congress because the Johnson Amendment is statutory law.
Religious nonprofit groups are now challenging the statute in federal court, claiming that the Johnson Amendment is unconstitutional on several grounds. They allege that it violates the First Amendment’s language on free exercise of religion and free speech, the Fifth Amendment’s equal protection and due process clauses, and the Religious Freedom Restoration Act. They want the court to find it invalid.
It’ll be a while before IRS begins doling out partial PTIN refunds to preparers. In March 2023, a court said that IRS charged preparers excessive fees to obtain and renew their professional tax ID numbers for seven years, from 2011 through 2017. The district court ruled that although IRS had the authority to charge a PTIN fee, the amount was too high. At that time, the court ordered IRS to recalculate the fees consistent with the approach set forth in its opinion and to figure the correct refund to be paid. Since that time, IRS and the plaintiffs in the case have been wrangling over the amount IRS should refund preparers. But they are getting closer and will hopefully soon work out their disagreements. Both parties are getting pressure from the court to resolve this (Steele, D.C., D.C.).
IRS is raking in lots of money from high-income nonfilers and tax debtors. Earlier this year, the Revenue Service sent letters to over 125,000 people with incomes of more than $400,000 who hadn’t filed a federal income tax return since 2017. Per IRS, so far, nearly 21,000 of those nonfilers have now filed 1040s, leading to $172 million in additional taxes paid. In the fall of 2023, the agency launched an initiative, targeting individuals with more than $1 million in income and over $250,000 in tax debts. IRS has so far collected almost $1.1 billion from them.
This is a different election season than usual when it comes to taxes.
Until recently, neither Harris nor Trump had detailed, written tax plans. Instead, most of their proposals have come from what they say on the campaign trail, in interviews, in debates or on social media. They now have some written summaries.
So it’s no surprise that their tax proposals have been coming drip by drip…
Or can change on a dime. For example, just last week, Donald Trump said he would lower the 21% corporate income tax rate to 15% for companies that manufacture products in the U.S. And Kamala Harris, at a campaign rally last week, said she now supports a 28% top long-term capital gains tax rate for filers with taxable incomes of over $1 million…$500,000 for separate filers.
Though it can be frustrating writing about the candidates’ tax plans…
You can be confident that we will give you the most accurate information. And if something that we say changes later on, we will certainly let you know.
And remember, much of the candidates’ promises won’t come to fruition.
Tax changes aren’t fully in their control. They need the help of Congress.
Yours very truly,
Joy Taylor, Editor
September 12, 2024
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