On July 28, 2021, the Internal Revenue Service announced it is continuing to distribute refunds for previously taxed unemployment compensation. The American Rescue Plan Act of 2021 excluded up to $10,200 of 2020 unemployment compensation payments from taxable income. The exclusion applies for individuals and married couples with modified adjusted gross incomes under $150,000.
The latest round of payments will bring the total distributions to 8.7 million refunds with total value over $10 billion.
The IRS has been reprogramming its software to provide the refunds with no action required by taxpayers. As the process continues, the IRS steadily recalculates more complex tax returns. The payments for the latest 1.5 million taxpayers were an average of $1,686 each.
The IRS published an explanation of the individuals who need to file an amended return and those who do not.
- Should File Amended Return — Individuals who have not submitted Schedule 8812 to claim an Additional Child Tax Credit and are now eligible should refile. Others with qualifying dependents who did not submit Schedule EIC to claim the Earned Income Tax Credit and are now eligible for other credits or deductions not covered below should also refile.
- Do Not Need to Refile — If you have already filed and did not claim the unemployment exclusion, the IRS will recalculate your tax return and issue a refund. Similarly, if you qualify for other credits such as the Recovery Rebate Credit, the Earned Income Credit (with no qualifying dependents) or the Advance Premium Tax Credit, the IRS software should calculate the correct amount of refund.
IRS letters to taxpayers receiving a refund will generally be sent within 30 days of the adjustment. The letter explains the IRS calculation and the amount of the refund.
"SECURE Act 2.0" Will Increase Retirement Savings
The Senate Finance Committee held a hearing on July 28 to discuss the proposed Securing a Strong Retirement Act. The House Ways and Means Committee passed a similar bill in May on a voice vote. The Senate is assembling its version of the bill, which is expected to follow the House bill in most respects.
Senate Finance Committee Chair Ron Wyden (D–OR) is a strong supporter of the new bill. He stated, "Before anybody ever heard of COVID–19, it was already far too difficult for Americans to save for a dignified retirement. According to the National Institute on Retirement Security, as of 2018, more than 100 million working–age Americans had no pension or any retirement assets."
The new retirement bill is generally referred to as "SECURE Act 2.0" and includes many provisions to enhance retirement security.
- New Retirement Plans — Employers would automatically enroll employees and increase employer contributions each year.
- Required Minimum Distributions (RMD) — The SECURE Act increased the RMD age from 70½ to 72. Over a period of years, the new bill increases the RMD age to 75.
- Savers Credit — The savers credit for low–income households would be increased.
- Small Business Retirement Plans — There will be enhanced tax credits to encourage small businesses to create retirement plans.
- Catch up Contributions — Workers age 50 and above would have increased amounts of catch up contributions. Catch-up contributions may be increased from $6,500 in 2021 to $10,000 per year.
The new retirement bill has an estimated cost of $27 billion over a decade. The bill pays for its cost by requiring individuals to pay tax on catch-up contributions and permitting a Roth election for some employer contributions. The "Rothification" provisions increase taxes paid over the next decade but will eventually result in lower taxes as employees make tax–free withdrawals from their Roth accounts.
Both Chairman Wyden and Ranking Member Mike Crapo (R–ID) supported the new retirement bill. Crapo stated, "First and foremost, Congress should enact policies that encourage workers to save so they can enjoy a secure retirement. One survey conducted by the Department of Labor found that while 71% of civilian workers had access to retirement benefits, the participation rate for that same group was only 55%."
Some organizations applauded the Congressional efforts to pass a new retirement bill. The American Retirement Association stated, "Far too many Americans still lack access to a retirement plan at work and thus lack an equitable opportunity to achieve a comfortable retirement. This retirement plan coverage gap, and the corresponding lack of retirement savings, is particularly pronounced in the Black and Latinx communities."
The American Association of Retired Persons (AARP) also supported the legislation. It stated that the AARP "looks forward to working with the Congress to harmonize and update any final bill (the Retirement Security and Savings Act, S. 1770, and the Securing a Strong Retirement Act, H.R. 2954). Among other changes, the bills extend greater coverage to more part-time workers and automatically enroll workers in new employer retirement savings plans once they have been in business for three years and employ more than 10 employees. As previously noted, automatic payroll deduction is a proven method of increasing coverage and participation."
The philanthropic community hopes that the House bill's provision to permit IRA charitable rollovers from retirement plans into a charitable remainder unitrust, charitable remainder annuity trust or charitable gift annuity will be included in the final legislation. The House proposed permitting a $50,000 one-time IRA rollover to life-income gift models. If this is enacted, it will be a major benefit for charitable gift annuities.
Excess Benefits Excise Tax Applicable
In Gloria Ononuju v. Commissioner;
No. 22401-18; T.C. Memo. 2021-94, the Tax Court held Section 4958 excess benefits tax to be applicable to the spouse of a doctor who founded a tax–exempt medical clinic. While she was subject to the tax and additions, the court also granted permission to correct the transactions and abate the tax.
In 1998, Dr. Chidozie Ononuju and his wife Gloria founded American Medical Missionary Care, Inc. (AMMC). In December 2000, the Internal Revenue Service recognized AMMC as tax exempt under Section 501(c)(3). Dr. Ononuju was founder and President of AMMC. His spouse Gloria was a director and listed as secretary and treasurer in annual reports. AMMC provided 2013 compensation of $21,000 to both individuals. They reported $42,000 in compensation on a jointly filed Form 1040.
The 2014 AMMC IRS Form 990 stated that both individuals had received zero "reportable compensation from the organization." They did not report any additional compensation amounts on IRS Form 1040 for 2014.
During 2014, AMMC issued checks to Gloria for $115,000 and paid $15,000 to Blue Cross Blue Shield of Michigan for health insurance for their family. The Michigan Board of Medicine revoked the medical license of Dr. Ononuju in 2014 and he departed from the United States in 2017.
The IRS examined the 2013 and 2014 AMMC Forms 990. It determined that Dr. Ononuju had received payments of $658,168 and Gloria had received $115,000. The IRS noted that Gloria had not filed Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42, and assessed a first-tier excise tax of $32,500 and a second–tier excise tax of $260,000 under Sections 4958(a)-(b).
Section 4958(c)(1)(A) states that an excess benefit transaction is "any transaction in which an economic benefit is provided by an applicable tax–exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit."
An applicable tax–exempt organization includes AMMC because it operated under Section 501(c)(3). Under Reg. 53.4958–3, Gloria was a disqualified person because she was one of the "voting members of the qualified of the governing body, presidents, chief executive officers, chief operating officers, treasurers and chief financial officers." In addition, Gloria was a disqualified person because she was a family member. Family members of disqualified persons (such as Dr. Ononuju) are also within the prohibited category.
The excess benefit transaction under Section 4958(c)(1)(A) applies unless the organization has written substantiation that the benefit is compensation. The benefit must be reported on IRS Form W–2 or Form 1040 by the recipient. Gloria received $115,000 but did not report it as compensation. She stated that she had received the funds for "distribution to needy people," but there was no credible evidence to indicate that the distribution to those in need had occurred.
The lack of records indicates the likely use of the funds was to cover living expenses. However, the $15,000 paid by AMMC to Blue Cross Blue Shield would be a deductible expense and therefore excluded from the excess benefit transaction.
While the first- and second-tier taxes were applicable, Gloria does retain the option to correct the transaction within the taxable period. The correction period extends until the decision of the Tax Court becomes final following any appeal.
The IRS also assessed additions to tax under Section 6651(a)(1) for failure to timely pay the tax due. The additions may be avoided if the taxpayer can demonstrate that the failure was due to "reasonable cause and not due to willful neglect." The Tax Court determined that Gloria had failed to show reasonable cause and therefore the penalties were applicable.
Applicable Federal Rate of 1.2% for August -- Rev. Rul. 2021-14; 2021-31 IRB 1 (15 July 2021)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2021. The AFR under Section 7520 for the month of August is 1.2%. The rates for July of 1.2% or June of 1.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.