This is the first of two articles – this first one is more individual-focused; the next will be focused on entrepreneurs (including sole practitioners/independent contractors) and small-business. In that article, I will discuss Pass-Through Entity Tax (PTET) and ways to manage the generous but short-lived Qualified Business Income Deductions (QBID).
But first, let’s look back before we look forward.
In most of my recent interactions with others, the term “lost years” is becoming a part of our conversation. I must say, the first time I heard it, I was a little taken aback. Why would we define them as lost years?
Despite the added responsibilities, I must say that in the past two years I’ve learned more about the beauty and fragility of our being, i.e., human beings, than all my years combined. I have learned that we need each other more than we can ever fathom. We also need a space for solitude, yet as Amanda Gorman expressed in her poem, The Hill We Climb: “… we’ve learned that quiet isn’t always peace.” Learning to wisely balance/manage time with others and time with self can be enriching to our overall well-being.
The years 2020 and 2021 are not lost years. Sadly, we have lost so many of our loved ones during these years and have seen the health of others deteriorate from the lingering side effects of COVID-19. Yet, even in the chaos, some among us have been transformed. Time did an article titled, “Even if You Feel Like This Was a Lost Year, That Might Not Be True.” In the article, the writer looked back at 2020 and wrote how some survivors of trauma, “found that after time, a significant portion of them report feeling renewed. They have a sense of fresh possibilities in life, an openness to following new pathways.” (You can read the entire article here.)
Moving Along to Taxes
You may have heard this echoed from other tax practitioners — this was one of the longest tax seasons! Most of us, including myself, felt like tax season started in January 2020 and didn’t end until the end of April 2022. Think about it — the IRS was given the task of administering most of the pandemic monetary distributions, and as we all know, whatever sits on the IRS’s shoulders falls into the laps of tax practitioners.
In this article, I will share some big moves made by individuals and their impact:
1. Primary Home Sales: One of my indirect mentors noted that of his 40+ years in business, he saw the most home sales in 2021. For primary home sales – under Code §121, the IRS allows an individual taxpayer to exclude up to $250,000 of profit/gain on a home sale (and up to $500,000 if jointly owned) when certain rules are met. While there are multiple complexities to these rules and some decisions may lead to losing all or part of the exemption, in its simple form these rules are:
a. They must have owned the home for at least two of the last five years;
b. They must have used the home as their principal residence for two of the last five years; and
c. They must have not excluded a gain on a home sale in the last two years.
2. Retirement Withdrawal and its Future Tax Effect: In 2020, a large number of individuals took money from their retirement savings and chose to have the taxes due on the withdrawal taxed over a 3-year period. While the tax impact was minimal for most in 2020 – the impact on the portion allocated for 2021 has propelled some individuals into a higher tax bracket. If you would like to cushion the tax impact for the 2022 allocation, consider replenishing your retirement savings by making tax-deferred contributions.
3. Residency Audits: People who moved during the pandemic appear to be returning “home.” If you are one of the many individuals who claimed to have moved from a state (which was your primary residence before the pandemic) with a personal income tax obligation to a state with no personal income tax obligation, and are considering moving back home, be mindful that this will likely trigger a residency audit. Residency audits are quite complex, and the burden of proof often lies with the taxpayer, which means you are guilty until proven innocent. Having adequate documentation can be crucial to defending your case. Each case is unique, and one size doesn’t fit all in a residency audit. Don’t go it alone.
4. Growth of Personal Savings During the Pandemic: Though most among us have lost a sizeable portion of our income in the last two years, many of us have saved more than in previous years. One notable factor was we spent much less on the “nice to haves,” since we were isolated and had no one to impress. Sincerely, I say this — most of our spending is often to impress others. Another factor that impacted our savings positively was that we eliminated many of those valueless subscriptions that are automatically billed and paid.
5. Amateur/Rookie Investors (Stepping Into the Role of Investment Manager): Many among us used the time at home testing the various waters as investors and have profited from these trades/sales. However, a vast number of individuals did not set aside money to pay the tax liability on those gains. I have received 1099-B brokerage statements this year with over 200 pages. These statements entail short-term gains and “wash” sales. (A wash sale is triggered when an investor sells or trades a security at a loss, and within 30 days buys another similar security.) Short-term gains do not get favorable capital gain treatment, and wash sale losses are not allowable.
6. The Will: Yes, you read correctly. At the time I drafted this article, I asked Google’s search engine — What is a Will? Over 14 million responses were generated, telling me that a Will matters. A Will is simply a legal document that states how you want your belongings to be handled and cared for after you pass away. A common misunderstanding about a Will is that if one does not have “heirs” then it is not necessary, but this is not true. If this is your thinking, consider this — many of us have resorted to animals for companionship and friendship and may have placed a higher value on our relationships with them than those with human beings. In our Will, we can choose who and how our companions are to be cared for after we have passed.
Another reason I believe a Will is a necessary document is that it is a written document that expresses how you would like your remains to be handled. This is a selfless act of kindness. The grieving process is overwhelming to our loved ones, but when we make certain preparations in advance, we demonstrate how much we care for them. While a Will may not protect us from family grievances and bickering, in a Will we can state how we would like our ‘remains’ to be handled and who among our heirs should receive what.
If you would like to work with someone sensitive and caring in these matters, please reach out to me.
In closing, as I looked back at the past two years — for me, they were years of gains. Through 2020 and 2021, I have certainly attended the most wakes/funerals when compared to the last 10 years, yet I feel I have grown more within — more unmasked — less inhibited — more vulnerable and am much freer. I’m sincerely grateful for the meaningful and genuine conversations that were part of this experience. I’m equally grateful for the opportunity to serve others in this privileged capacity, and humbled when I reminisce on the ebbs and flows of this role.
Thank you for allowing me access to you – at times that access may only be a peephole. Other times it could be a window, while still others it is an open door. Whatever level of access you provide, I am equally grateful for each. I am reminded of a scripture that depicts the loving nature of our Creator as he stands at our doors and knocks, saying:
“Here I am — I stand at the door and knock. If anyone hears my voice and opens the door, I will come in and eat with that person, and they with me.”
May we resolve to let him in and allow him access to our lives. We can start with a small peephole. Only God knows how He will use this access to transform us for His goodness, but He will.
The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.