IRS Waives Required Minimum Distributions (RMD) from Retirement Accounts for 2020

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which became law on May 27, 2020, waives the requirement that taxpayers take required minimum distributions (“RMDs”) for 2020 from IRAs. According to Notice 2020-51 recently issued by the IRS, taxpayers who already took 2020 RMDs may be able to return them to their IRA accounts and avoid paying income tax on the distributions. The timing, however, is critical.

RMDs are minimum annual distributions that the IRS requires taxpayers to begin taking from their qualified retirement accounts after they turn a specified age. Previously that age was 70½, which was changed to age 72 by the SECURE Act enacted on December 20, 2019. Normally, taxpayers must begin taking RMDs by April 1 of the year following the year in which they reach the specified age. The CARES Act waives this requirement for 2020, including 2020 RMDs and 2019 RMDs that were required to be taken by April 1, 2020.

However, the CARES Act created three issues surrounding RMDs:

  1. Under current tax law, IRA owners are generally allowed to withdraw funds from an IRA account for up to 60 days without incurring tax liability. As long as the funds are returned to that account or rolled over to another qualified retirement account within 60 days, the IRA owner pays no tax and no early withdrawal penalty. As indicated above. the CARES Act, which waives required RMDs for 2020, became law at the end of March 2020. By that time, many people had already taken their RMDs for 2020 and were outside the 60-day rollover window. The CARES Act did extend the 60-day rollover window to July 15, 2020 for RMDs taken on February 1st or later. However, it did not apply to RMDs taken in January. Those distributions had no relief under the CARES Act.
  2. Under current tax law, you may only roll over only one IRA distribution in a 12-month period. For taxpayers who already conducted one rollover within the past 12 months, they were prohibited by law from subsequently rolling their RMDs back to the account where it came from or into another qualified retirement account. The CARES Act provided no relief for these taxpayers.
  3. Under current tax law, taxpayers who have inherited IRA accounts other than surviving spouses are prohibited from engaging in any rollovers. For such persons who had not yet taken their 2020 RMDs, the CARES Act eliminated the need to take them. However, for any such person who had already taken his or her 2020 RMD, the CARES Act provided no relief to allow that person to roll those funds back into the IRA account.

IRS Notice 2020-51 states that you now have until August 31, 2020 to rollover all previously distributed 2020 RMDs. This includes RMDs taken in January 2020. It also states that the rollover or repayment of RMDs will not be treated as a rollover for purposes of the one rollover per 12-month period rule. The notice also allows for the rollover of 2020 RMDs withdrawn from any inherited IRA account.

This is good news for those individuals who took RMDs and would like to put them back. By putting them back, you can reduce your current year taxable income and allow the funds to grow tax-deferred for an additional year. However, you need to act by the August 31, 2020 deadline.

If you have any questions about required minimum distributions, call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year-round.

Understanding The Tax Rules Relating to Personal Use of Vacation Homes

Understanding the Tax Rules Relating to Personal Use of Vacation Homes

There are three basic rules for treating expenses and income in connection with vacation homes. It all depends on the number of days the home is rented versus the days that it is used for personal purposes.

1) When the personal use of the vacation home exceeds the greater of 14 days or 10% of the days it is actually rented all the expenses are only deductible to the extent of rental income. For example repairs, utilities, insurance, depreciation, and so on are deductible only to the extent of gross income less mortgage interest and property taxes attributable to rental use. However, you cannot claim a loss on the rental, while net income in excess of expenses is taxable.

Gregory Speadea Attorney TAx Lawyer article on Vacation Home

2) When the vacation home is rented out for less than 15 days during the year, there are no tax ramifications. In other words, you don’t recognize rental income or deduct rental expenses.

For example, say you rent a beach house in Ocean City. You and your family use the beach house most of the summer. Then you rent out the place the two weeks after Labor Day. In effect, all of the rental income is tax-free.

Note: You still can claim those itemized deductions you would be entitled to if you did not receive any rental income. This includes mortgage interest limited to all mortgages up to $1,000,000, used to buy, construct, or improve your first home and second home for tax years prior to 2018. Beginning in 2018, this mortgage limit is lowered to $750,000. In addition, for tax years beginning in 2018 there is a $10,000 deduction limit for state and local income taxes and real property taxes.

3) When your personal use of the home does not exceed the greater of 14 days or 10% of the days the vacation home is rented out, the above limits do not apply. All expenses attributable to the rental are deductible – even if you show a loss. However the amount of the loss may be limited by the passive loss rules.

What constitutes a “personal use day” for these purposes? Any day that the home is used by an owner of the family (or family member), someone who pays less than a fair market rental or someone who uses the home under a barter or exchange agreement-even if a fair rental is paid. The amount of time spent at the vacation home doesn’t matter. For instance, if you use the home for just one hour, the whole day is considered a personal use day.

However, a day will not count as a personal day if you spend the time cleaning up or fixing up the place. And that’s true if even if the rest of the family comes along just for the ride.

How do the passive loss rules affect things? In general, losses from so-called passive activities can only be used to offset income from passive activities. The rental activity of your vacation home, by its very nature, will be considered a passive activity.

But there’s still a way to get around the rules. If you “actively participate” in the rental activity, you can use up to $25,000 of loss to offset non-passive income, such as wages and portfolio income. The $25,000 offset is available in full if your adjusted gross income (AGI) is below $100,000. It is phased out until it completely disappears for an AGI above $150,000.

What constitutes active participation? The requirement can be satisfied by regular, continuous and substantial involvement in the rental activity. Examples: participation in management decisions such as approving new tenants, scheduling or supervising repairs, deciding on rental terms, etc. In order to qualify under this exception, you must own at least a 10% interest in the property. Please refer to my blog Understanding What A Real Estate Professional is Under the Passive Activity Loss Rules.

Remember the passive activity loss rules do not come into play at all if your personal use exceeds the 14 days or 10% of the days rented because you cannot deduct the rental loss. If you have any questions contact Gregory J. Spadea at 610-521-0604.

The Landlord Tenant Eviction Process in Pennsylvania

When a landlord has a tenant who fails to pay rent, a landlord must file an eviction complaint at the local magisterial district court where the property is located.  Once a complaint is filed along with a copy of the lease, a hearing is scheduled in two to three weeks.  It is very important for the landlord to sue for both back rent and possession.  The reason is if the tenant appeals he has to post the lesser of the rent in arrears or three months rent.  

The hearing is very straight forward. The landlord testifies that the tenant has failed to pay rent and a judgment is entered in the landlord’s favor for the amount of rent owed plus court costs and the court will grant the landlord possession.  The landlord can also be awarded attorney fees if they are in the lease.  However, the landlord must have a valid rental license covering the period that he or she is requesting back rent.   

After the magistrate judge enters a judgment and awards a landlord possession, the tenant has the right to file an appeal to the possession portion of the judgment within ten days. After the tenth day, the tenant can still appeal the money portion of the judgment within thirty days of the judgment, but the tenant can no longer appeal the award of possession.  A tenant would file an appeal with the Court of Common Pleas in the county, where the rental property is physically located.  When a tenant files an appeal, they ask the court to enter a Rule to Show Cause, which would require a landlord to file a civil complaint in the court within twenty days. An appeal is conducted de novo, which means a new hearing is required at the Court of Common Pleas and usually takes 9 months for the hearing to be scheduled in Delaware County.

If the tenant does not file an appeal within ten days of the judgment date and the tenant remains in possession of the property, the landlord must then file an Order of Possession with the district court on the eleventh day after the judgement date. The Constable will then call the Landlord in one to weeks after he files for the Order for Possession to arrange to meet him at the property, so  the Constable can remove the tenant from the property and the landlord can change the locks. 

When an appeal is filed by a tenant, the tenant is required to post with the court the judgment in the amount of rent in arrears or three months rent, whichever is less.  If the tenant posts the rent with the court, the tenant will be granted a supersedeas, which means that the Constable cannot move forward with the actual eviction process while the appeal is pending. Furthermore, the tenant must deliver the notice of appeal to the magisterial district court to be granted the supersedeas and serve a copy upon the landlord.

In order to obtain the posted rent after a tenant files an appeal, a landlord must file an application with the Court of Common Pleas so the rent posted by the tenant can be released from escrow.

If a tenant is claiming they are indigent, the tenant can submit an affidavit stating they do not have the financial ability to post with the court the lesser of three months rent or the actual rent in arrears and the court would permit the appeal to proceed.  If the tenant files this affidavit and has not paid rent in the month the appeal is filed, the tenant is merely required to pay one-third  of their monthly rent payment at the time of appeal. The remaining two-thirds must then be posted within twenty days of the appeal.  The tenant must then continue to pay rent every thirty days after filing the appeal with the court.  When a tenant fails to post rent with the court, the landlord can terminate the superseadas by filing to terminate the tenant’s appeal with the Court of Common Pleas.  If you are a landlord and need help evicting a tenant or getting possession, feel free to call Gregory J. Spadea at 610-521-0604.

When To Issue or Not Issue IRS Form 1099

I strongly encourage our business clients, nonprofit organizations and landlords to issue 1099 forms which are required by law. The reason is IRS Form 1099 provides the means of reporting very specific types of income from non-employment related sources that might not be reported elsewhere. If you paid someone for services (other than employees) you must issue them a 1099 by January 31 of the following year. Business income tax returns including IRS Forms 1120S and 1040, Schedule C include a question asking if Forms 1099 were filed as required and by signing your return, you are certifying that your response is true.

I recommend to all my clients to review all disbursements made from January 1, through December 31, summarizing all payments for services to unincorporated individuals and businesses where the accumulated total is $600 or more.  If you pay a Limited Liability Company (LLC) that is taxed like a corporation you still have to issue a 1099 to that LLC.  Make sure you have the correct name, employer identification or social security number and address of everyone you pay before you pay them.

Beyond having to possibly face an IRS or State audit, if you fail to file the correct information by the deadline, fail to include all the required information on a return, or if you include incorrect information, you can be subjected to an array of steep penalties if you cannot show reasonable cause.  If the payee fails to furnish his or her taxpayer identification number (TIN), they are subject to backup withholding at a 28% rate. If you do not collect and pay backup withholding from affected payees as required, you may become liable for any uncollected amount.

Closeup of overlapping Form 1099G Certain Government Payouts and W-2 forms.

Here are a few additional tips of when you do not have to issue 1099’s:

1. Do not send a 1099-MISC to an employee since that is what a W-2 is for.  Remember that someone that performs services for you is either an employee or an independent contractor, but not both.  

2. Do not send a 1099 to someone you’ve paid by credit card, debit card or by services like PayPal. Such payments will be reported on a 1099K that they will receive from their merchant services provider

3. Do not use Form 1099-MISC to report employee business expense reimbursements. Report payments made to employees under a non-accountable plan as wages on Form W-2. 

4. If you pay a non-U.S. citizen who works remotely via the Internet from another country, you do not need to file a 1099 for that person. However, if the foreign worker performs any work inside the United States, you would need to file the 1099. For that purpose, you should have that foreign worker fill out, sign and return to you Form W-8BEN.

5. Do not issue 1099’s to corporations.

If you need help issuing 1099’s or have any questions, please contact Gregory J. Spadea at 610- 521-0604.  The Law Offices of Spadea & Associates, LLC prepares tax returns year round.   

3 Rules To Follow If You Are Stopped For DUI or DWI in Pennsylvania

Drunk Driver being pulled over by police.

Even people with high alcohol tolerances can drink too much and find themselves in a situation where police stop their car for suspicion of driving under the influence (DUI) or Driving While Intoxicated (DWI). In these situations it is important that a person remember three basic rules: (1) don’t refuse a Breathalyzer Test, (2) don’t answer any questions even if the officer threatens to arrest you, and (3) tell the police officer about any physical limitations and injuries which would affect your balance or movement.

  1. Don’t refuse a Breathalyzer Test

    In Pennsylvania, everyone who drives a car on the road has given police implied consent to conduct a Breathalyzer Test. If you refuse the breathalyzer, Pennsylvania Department of Transportation (PENDOT) can still suspend your driver’s license for 12 to 18 months even if you’re not convicted in criminal court. The reason is because driving is a privilege in Pennsylvania and PENDOT can impose a suspension through its administrative powers which are separate from criminal proceedings. Therefore even if your attorney wins your DUI case, PENDOT can still suspend your driver’s license.

    If you take the Breathalyzer Test you will not only avoid a potential civil penalty from PENDOT but it can also improve your criminal case. A good attorney can dispute the results of a Breathalyzer because there are a number of issues can affect a BAC reading.

  2. Don’t Answer Any Questions

    If you are stopped for suspicion of DUI, police more than likely are going to arrest you no matter what you tell them. A typical question from a police officer is “have you had anything to drink tonight?” People will tell the officer they are coming from a friend’s house and just had one drink. However they are better off telling the officer that they aren’t going to answer any questions but that he is free to give a Breathalyzer Test or a Field Sobriety Test. Police officers are trained in the law and understand that everyone has the constitutional right to remain silent. Most police officers will respect this right and simply continue with the traffic stop by giving you a field sobriety test or taking you into custody.

    Keep in mind you could be arrested for a DUI even if you are not driving. If you have actual, physical control of a vehicle while under the influence, then that can be enough for an officer to arrest you. In Pennsylvania, the terms “operating” and “actual physical control” are basically the same. They generally mean that the driver is in the vehicle and could make it move, even if the driver is not trying to move the care when the officer finds him. Therefore, telling the officer why you were sleeping in the car while the radio and the heat are on will not help your case.

    Answering questions will never improve your DUI case because the officer is probably asking the question because he either smells alcohol on your breath or observed your car swerving or violating some traffic law. This is what gave the officer probable cause or reasonable suspicion to stop your car in the first place. If you answer a question it will only hurt your DUI case because you’ve given the police more circumstantial and possible direct evidence of your intoxication. A statement like “I only had a little to drink,” or “I am coming from a party,” can persuade a judge that the police officer had probable cause to arrest you. It’s always better to remain silent and simply cooperate with the police officer with regards to field sobriety tests, Breathalyzer Tests, and blood tests, but never make any verbal or written statements.

  3. Tell the Police Officer about any Physical Limitations You’ve Had in the Past

    A standard field sobriety test requires that a person perform certain movements so that a police officer can assess a person’s motor skills. These tests, however, are often difficult to perform even for a person who has not consumed any alcohol. There are three standard field sobriety tests – (1) the walk and turn, (2) the one leg stand test, and (3) the Horizontal Gaze Nystagmus (HGN) test.

    1. The first two tests require you to walk on a straight line or balance on one foot. If you’ve had any type of surgery, played sports, or have any knee or leg injuries this will affect your ability to perform these tests correctly. Telling the officer that you’ve had an injury in the past will put the police, the prosecution, and the court on notice that the results of the field sobriety test may not be a fair indication of your intoxication. This will also allow your criminal defense lawyer to argue that the police didn’t have probable cause to arrest you based on the results of the field sobriety test.

      With regards to the HGN Test, police officers are trained in the law but there is a great deal of case law which says that they can’t fairly use the results of the HGN Test to determine a person’s impairment. HGN is the involuntary jerking of the eyes and there is a strong argument that only a medical professional can accurately assess the real results of this test.

      If you are stopped for DUI it’s important to keep these three rules in mind because it will not only protect your rights but put your attorney in the best position to successfully defend your case. If you have questions call Gregory J. Spadea at 610-521-0604.

Seasons Greetings and Happy New Year!

Seasons Greetings and Happy New Year!

Happy Thanksgiving

Happy Thanksgiving

How Much Can I Deduct For a Business Car or Truck in 2014 under IRC Section 179

Lot full of cars

To encourage businesses to buy equipment as well as cars and trucks Congress passed Internal Revenue Code (IRC) Section 179. For passenger vehicles, trucks, and vans (with a gross weight of less than 6,000 pounds), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as 50% Bonus Depreciation is limited to $11,060 for cars and $11,160 for trucks and vans. If the automobile cost $20,000 and is used 100% for business the business would get an IRC Section 179 deduction of $11,060 and a regular depreciation deduction of $1,788 (20% of the $8,490.00 difference). If the vehicle is used less than 100% for business both the Section 179 deduction and regular depreciation deduction are reduced proportionately based on the actual business use percentage.

SUV’s, trucks and vans with a gross vehicle weight rating above 6,000 lbs. but no more than 14,000 lbs. qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31. In addition the business can deduct 50% of the remaining cost over $25,000 as bonus depreciation. However, the 50% bonus depreciation break will expire on December 31, 2014 unless Congress extends it.

For example, a new heavy SUV used 100% for business that costs $52,000 and qualifies for Section 179 could be written-off in 2013 as follows:

First Year Section 179 Deduction:                        $25,000
Bonus Depreciation (50% of remaining balance):  13,500
Regular Depreciation (20% of remaining balance):  2,700
Total First-Year Write-Off:                                     $41,200

However, businesses that experience net operating losses cannot claim an IRC Section 179 deduction that would create or increase an overall business tax loss. However they may take the 50% bonus depreciation deduction, and carry the remaining net operating loss forward were it can be used in future years.

If you have any questions or need help with your taxes or business deductions call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604. Spadea & Associates, LLC prepares business and individual tax returns year round.

What Every Residential Landlord Should Know In Pennsylvania

Due Diligence in Screening Prospective Tenants
You should have the prospective tenants fill out a rental application and sign consents so you can request their credit report. Ensure the prospective tenants have stable employment and check their references by calling their current landlord. If the tenant does not have good credit, find out why. If the tenant has a reasonable explanation for not having good credit such as a divorce, get the tenant to have a cosigner who has good credit to sign the lease with them.

Have a Good Residential Lease
The lease is very important and should outline what each party can expect from the other party during the lease term. It should contain rules that the you expect the tenant to follow. The lease should explain what charges are paid by each party such as utilities, landscaping snow removal, etc.

The lease should address late charges and eviction procedures including how long you are required to store the tenant’s belongings that are left behind. The lease should include a clause regarding Act 215 so you can recover back rent through wage garnishment. It should also have the tenant waive the written notice to quit. The lease should require the tenant to pay landlord’s attorney fees if he is evicted. It should address the notice period each party must give to terminate the lease after the first year. The lease should require the tenant to provide pay stubs annually so you can verify their employment.

Security Deposit
I recommend you take pictures of the property before you rent it. Then walk the tenant through the rental property so the tenant can see there is no property damage. Then when the tenants move out if there is damage you can take a picture of the damage and provide the tenant with before and after photos so you can explain why you are taking their security deposit. You should always give your tenants a receipt if they pay the rent or security deposit in cash indicating the date and amount received.

Limiting your Liability
You should deposit the rent in a separate bank account and should have the rental property owned by a Limited Liability Company (LLC). If you do not want to pay the 2% transfer tax to transfer the property in the LLC’s name you should have a $1,000,000 umbrella policy in addition to a $300,000 liability policy on the rental property itself. You should require your tenants to have content coverage insurance so their contents can be replaced if there is a fire or other damage. You should require the tenant to provide you with the insurance policy declarations page on an annual basis.

If you have any questions or need a good lease feel free to call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

Why I Should Form a Family Limited Partnership

Basic Strategy
The estate planning strategy employed by business owners is to gift limited partnership interests to family members at a discount based on their future business succession plan. This works well for succession planning because a business owner that has a successful LLC can gift the nonvoting LLC units to his children and out of his estate over time. The business owner acts as a general partner and his children are limited partners. In addition all the assets transferred to the Family Limited Partnership are protected from business creditors.

Gifting to the Limited Partnership
The general partner (business owner) can gift the limited partnership interests up to the annual exclusion of $13,000 in 2012 without filing a form 709 federal gift tax return. If the business owner wants to gift more than $13,000 per person he has to file a Form 709 return and may use part of his $5.12 million exemption in 2012. However, the value of the limited partnership shares or nonvoting LLC units may be discounted up to 30% due to their lack of marketability since there is no ready or available market to sell those shares on.

Tips on Surviving an IRS Challenge
In order for the Family Limited Partnership to survive a challenge by the Internal Revenue Service the general partner (business owner) must resist the temptation to maintain too much control over the partnership assets. The general partner should not pay personal expenses from the partnership bank account or comingle his personal funds with the partnership funds. The partnership should be operated as a separate entity and hold annual meetings to discuss management issues.

The partnership agreement should be drafted to

  1. avoid potential abuses by the general partner;
  2. address when distributions from the partnership bank account should be made;
  3. state at least three nontax reasons indicating why the partnership was formed such as:
    • To make a profit.
    • To increase the family’s wealth
    • To provide a means whereby family members can become more knowledgeable about the management and preservation of the family’s assets.*

If you have any questions about Family limited partnerships please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

*Estate of Turner, TC Memo 2011-209

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