MISLEADING INFORMATION

The income tax filing season begins on February 1^st - at least it has for me each year for 49 years.  The 2021 tax filing season begins on February 1st.  

Bloggers and journalists are falsely indicating that the tax filing season begins on February 12^th.

February 12^th is the date that the IRS will begin accepting and processing paper and electronic tax returns.  Period.  This is later than usual due mostly to late enacted tax legislation.

Taxpayers should not put off contacting their tax professionals with 2020 tax information if they have truly received everything needed to properly prepare the return. 

Time is a precious commodity for tax pros from February 1 through April 15.  Do not make their job more difficult by waiting until February 12 if you are not missing for any forms or information.

TTFN

“BAIT” AND SWITCH

I am trying to understand the legitimacy of the new “NJ BAIT”.

 

As explained on the “Business Alternative Income Tax” (BAIT) FAQ page of the NJ Division of Taxation website –

 

“For New Jersey tax purposes, income and losses of a pass-through entity are passed through to its members. However, for taxable years beginning on or after January 1, 2020, pass-through entities may elect to pay a Pass-Through Business Alternative Income Tax due on the sum of each of the member’s share of distributive proceeds. The member(s) may then claim a tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.”

 

The website of an accounting firm I found in a search tells us –

 

“The significance of this election is that the business taxes paid by an eligible entity can be deducted in determining federal income that passes-through to the owners, resulting in less federal tax paid by the owners on their share of the PTE income.”  

 

I assume the entity’s BAIT payment is claimed as a state income tax deduction on the federal Form 1065 or 1120-S, reducing the net taxable income passed-through to the partner or shareholder.

 

But what is actually happening?  The pass-through entity is making a payment of state income tax, calculated on the income of the entity, on behalf of the partner or shareholder.  The income of the entity, before any deduction for the BAIT, is still passed-through to the individual partners or shareholders on the NJK-1 and reported on Line 21 or 22 of the NJ-1040.  The partners’ or shareholders’ individual NJGIT liability is calculated based on this income. 

 

The BAIT payment allocated to the partner or shareholder is in effect an estimated tax payment of NJGIT.  If the actual tax cost of the pass-through income is more than the BAIT payment the partner or shareholder pays the additional tax.  If the tax cost is less than the allocated BAIT payment the partner or shareholder gets a refund or reduces the balance due.  

 

The BAIT payment made by the entity is not an expense of the entity but a payment made on behalf of the partner or shareholder.  It is not an expense of the entity, but a distribution of partner capital or shareholder PTI made to the State of New Jersey.

 

It appears to me that this is just a scam to allow New Jersey taxpayers to legally cheat on their federal income tax return.  The GOP Tax Act limited the itemized deduction for State and Local Taxes (SALT) to $10,000.  The BAIT is a way to “work around” this limitation so taxpayers could deduct a portion of their NJ state income tax, calculated on their NJ state individual income tax return, somewhere else on the federal return.

 

I certainly understand what New Jersey is trying to do.  I personally oppose the SALT limit – but for a unique reason (see my post “Defending the Deductions for Taxes and Mortgage Interest”).   But what about “substance over form”?  You can call it a “credit” and not an estimated tax payment, but if it walks like a duck  . . .

 

To be an actual legitimate entity-level state income tax should not the election be to pay BAIT on the entity’s net taxable income in lieu of passing the entity’s income to its partners or shareholders?  The entity would elect to not pass through its income to partners or shareholders.  An entity electing BAIT would not issue a NJK-1 to its partners or shareholders, and the partners or shareholders would not report any income from the entity on Form NJ-1040 Lines 21 or 22.  Since the individual partner or shareholder is not paying NJGIT on the income of the entity there would be no BAIT credit on the NJ-1040.   

 

So, what do you think?

TTFN

Over the past 4 years I have aggressively and consistently warned that the greatest threat to the safety, security and future of America, American values and American democracy was not ISIS, Russia or China - but Trump.

It gives me no pleasure to say “I told you so”.

WHAT’S NEW FOR THE 2020 NEW JERSEY STATE TAX RETURN

 

There are very few changes to the 2020 NJ-1040.  There are three (3) new lines, and other lines have been somewhat revised so that the 2020 return has a total of 78 lines instead of 76.

The three new lines are –

Line 36 – to enter the Organ/Bone Marrow Donation Deduction.  NJ taxpayers who donated organs or bone marrow in 2020 can deduct up to $10,000 in unreimbursed “out-of-pocket” expenses for related travel, lodging, and lost wages.

Line 48 – to enter a “Credit for Employer of Organ/Bone Marrow Donor” for self-employed employers who provided paid time off to an employee who missed work to donate an organ or bone marrow.

Line 63 – to enter the new “Pass-Through Business Alternative Income Tax Credit”.  The amount to be reported here is taken from a new Schedule PTE-K-1 provided by a pass-through entity – i.e. a partnership or a sub-S corporation – or a Schedule K-1 provided by an estate or trust.

As per new tax law –

1) The final phase-in of the increased Pension and Other Retirement Income Exclusion takes effect - the maximum deduction is $75,00 for Single or Head of Household, $100,000 for Married/CU Couple Filing Joint Return, and $50,000 for Married/CU Couple Filing Separate Return.  Unfortunately, the “Total Income” (NJ-1040 Line 27) limitation remains $100,000 – so as little of $1.00 in additional income can cause a NJ taxpayer to pay hundreds or more in NJ state income tax.

2) The 2020 NJ Earned Income Tax Credit (EITC) is increased to 40% of the 2020 federal credit.  And NJ residents who were not eligible for a federal EITC are eligible for an NJ EITC of $215 if they met the following requirements during 2020 -

· did not have a qualifying child; and

· were age 21 to 24 on the last day of the tax year; and

· met all federal EIC requirements except the minimum age requirement. 

3) The 2020 maximum employee contributions to the unemployment, disability and family leave programs, used to calculate any excess contributions based on more than one employer on Form NJ-2450, are much higher than in past years –

Unemployment = $150.03

Disability = $350.74

Family Leave = $215.84 

4) A new tax rate of 10.75% applies to net taxable income over $1 million. 

Go here to download 2020 NJ state individual income tax forms, schedules and instructions.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

A bit late – but here is the first BUZZ of 2021!

* I was truly surprised when I received my $600 economic stimulus payment in the mail on January 4^th!   .
 
Check out this “IRS Statement about Second Economic Impact Payments”.
 
* I forgot to include the following “extender” extension in my December post on the 1040 components of the second economic stimulus package.  The totally ridiculous IRS Section 163(h) deduction of qualified mortgage insurance premiums as mortgage interest, which never should have been allowed in the first place, is extended for 2021.
 
* Good advice in Russ Fox’s annual January post “It’s Time to Start Your 2021 Mileage Log” at TAXABLE TALK – if you haven’t already done so.  
 
Of course, keep in mind that employees can no longer deduct un-reimbursed employee business expenses on Schedule A.  So, if you are an employee a mileage log may be important in terms of getting reimbursed by your employer it will not provide you with a federal tax deduction.  FYI, NY state continues to allow employee business expenses in excess of 2% of AGI as an itemized deduction on the state income tax return.
 
* Erica York of THE TAX FOUNDATION suggests “Three New Year’s Resolutions for Tax Policymakers”.
 
All three are good resolutions – and obviously all three will be totally ignored by tax policymakers.
 
* Hey – did you see my new free monthly online newsletter BOBSERVATIONS yet?  Why not?  Click here.
 
* For NJ senior and disabled homeowners – “Deadline to Apply for the Senior Freeze Property Tax Reimbursement Extended Again” -
 
“New Jersey property owners who are eligible for the Senior Freeze property tax reimbursement program will have an additional month to apply for the relief program, with the application deadline now being extended until February 1, 2021.”
 
* Ashlea Ebeling tells us about the “Healthcare And Childcare FSA Fix For 2021, Finally” at FORBES.COM.

 

THE LAST WORD

Clearly yesterday's chaos at the Capital was the direct result of Trump's words and deeds.

But every single Trump supporter, defender and enabler must share equal responsibility for the treasonous attack on the Capital.

Pearl Harbor was an attack on America.

9/11 was an attack on America.

The storming of the Capital was an attack on America.

There is no difference between these three actions.

After yesterday any American who continues to support and defend Trump is clearly a traitor to America and American democracy.

There has NEVER been an intelligent, acceptable or rational reason to support, defend and enable Trump.

TTFN

WHAT’S NEW ON THE 2020 FORM 1040 (AND 1040-SR)?

 

Here is what is new on the 2020 federal income tax return.

While the 2020 Form 1040 is still not a full 8½ x 11 page – I have absolutely no clue why it is not – it is a little bigger and has larger print.

A new question is included after entering name(s), Social Security number(s) and address – “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”.  All my clients, and I expect the majority of taxpayers, will answer “no”.

Page one has 15 lines – up from the 11 on last year’s return.  Much of the increase represents a replacement of what was previously an “a”, “b” and “c” designation with a number.  The line for “Adjustments to income” has an “a” for carryover from Schedule 1 and a “b” for the new “above the line” deduction for up to $300 of charitable contributions for non-itemizers.

Page 2 continues with Lines 16 through 38 (the 2019 form had only 24 lines) – again most of the additional lines are replacements of letters with numbers.  Estimated tax payments are now reported separately on Page 2 and no longer on Schedule 3.  The category for “Federal income tax withheld” is broken down into 3 items – Form(s) W-2, Forms(s) 1099 and Other forms.  And there is a new line for the refundable “Recovery Rebate Credit”.

The 2020 Form 1040-SR has similar changes.  Page 1 ends at Adjusted Gross Income (the 2019 version ended at “Taxable Income), and the “Standard Deduction Chart” that had been at the bottom of Page 1 is expanded and is now on a new Page 3.

Except for the change to Schedule 3 mentioned above, the 2020 Schedules 1, 2 and 3 appear to be the same as 2019.

There is one major tax law change that is not specifically reflected in the Form 1040 or 1040-SR but is included in the instructions.  According to the instructions for Schedule A Line 19 – “You no longer need to be younger than age 70½ to make a deduction for your contributions to an IRA.” 

As a result of the SECURE Act you can make contributions to a traditional IRA account as long as you have qualified “compensation” – taxable salaries and wages, net earnings from self-employment as a sole proprietor or a partner, nontaxable combat pay, taxable alimony, and nontaxable difficulty of care payments – regardless of your age.  You have until April 15, 2021 to make a contribution to an IRA for tax year 2020.

I will post on changes to the 2020 New Jersey and New York individual income tax returns when the forms are available.

TTFN

STARTING THE YEAR OFF RIGHT

 

Here are some "year-beginning" tax tips:

1) Resolve to become more informed on federal and state tax laws.

It is impossible to know the right moves to make in your daily financial life without a basic knowledge of the tax implications of your actions. Learn what items you can, and cannot, deduct on your tax return, including the special items that are unique to your trade or profession, and the rules governing any special situations that apply to you, and keep up-to-date on federal and state tax law changes. Even if you use a tax professional to prepare your return, the more informed you are on tax matters, the more prepared you will be when you go to your annual tax appointment. One way to stay on top of things, tax-wise, is to become a regular visitor to THE WANDERING TAX PRO.

2) Set up a good system for maintaining tax records and receipts.

Remember that some deductions require special recordkeeping or additional information, such as business meals and entertainment, business use of "listed property" such as automobiles, cell phones and computers, gambling losses, and charitable donations (see tomorrow’s posting). Your tax professional can help you in this area.

I have created a 2021 INCOME TAX ORGANIZER to help you keep track of all your income and deductions, and gather and organize the information you will need to provide to your professional tax preparer in 2022.

The Organizer, which comes in an expandable binder, contains -

* detailed text covering what is taxable and deductible and what information and documentation you will need to properly prepared your 2021 tax return,

* forms, schedules and worksheets for compiling and identifying the needed information, and

* pockets for you to keep statements, bills, receipts, and other documentation during the year by category.  

For complete information on what is in the organizer and how to order it go here. 

3) If you are planning to make a contribution to a traditional or ROTH IRA, a Coverdell Education Savings Account, a Section 529 College Savings Plan, or a Health Savings Account for 2021 do it now. 

By making your contribution on the first available day of each year you will have substantially more in the account by the time you are ready to retire, or when you need the money to pay for education or medical bills, than if you wait till the last minute.

If you make a ROTH contribution today, and later discover that you are not eligible for a ROTH, or, for whatever reason, decide you would rather have the funds in a traditional IRA, you can "recharacterize" your contribution.

TTFN