The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed many retirement account rules and was expanded in 2022 with SECURE 2.0. Although there were expectations that tax legislation or a correction to SECURE 2.0 would have been enacted during the 117th Congress, 2nd session (2023), that didn’t happen. This will make the 2023 tax filing session a bit challenging. This article reviews some of the issues that may affect taxpayers.
Form 1099-K
Section 9674 of the American Rescue Plan Act of 2021 amended Internal Revenue Code (IRC) §6050W requiring third party settlement organizations (TPSOs), such as PayPal and Venmo, to issue Form 1099-K to the taxpayer and the Internal Revenue Service (IRS) when transactions exceed $600 in aggregate payments during the year. This amendment was to be effective for calendar years 2022 and thereafter. However, the IRS delayed the implementation of this amendment after receiving comments from taxpayers, tax professionals, and payment processors that sufficient lead time was needed to implement this change. Notice 2023-10 (2023-3 Internal Revenue Bulletin (IRB) 403) was issued on January 17, 2023, delaying the start of the amendment until calendar years beginning after December 31, 2022. Notice 2023-74 was issued on November 24, 2023, further delaying the start of the amendment until calendar year 2024. Therefore, TPSOs are now required to report aggregate transactions exceeding $20,000 and more than 200 transactions for calendar year 2023.
The IRS also indicated in Information Release 2023-221 (November 21, 2023) that the $600 threshold is complex and is estimated to affect 44 million taxpayers, many of whom may not even have a tax obligation. In addition, this reporting process will impact taxpayers living in states with a state income tax. The IRS is therefore investigating 2024 as a transition year, which would set the threshold at $5,000. The purpose of this higher threshold is to allow TPSOs and taxpayers to gain insight into the implementation process of this new filing and reporting process. It would also allow the IRS an opportunity to handle fewer issues during this period. This transition period may lead Congress to modify IRC §6050W, but only time will tell.
Electronically Filed Requirements
The IRS issued final regulations (T.D. 9972) in February 2023 implementing the changes made by the Taxpayer First Act (TFA), which was enacted on July 1, 2019. Pursuant to TFA, e-filing of returns is required by persons filing 100 returns in calendar year 2021 and then reduced to 10 returns after 2021. Partnerships, on the other hand, are required to e-file 50 or more returns after 2020. The final regulations, however, delay the requirement to e-file until 2024.
The rationale for requiring e-filing of returns is expressed in a House Committee on Ways and Means report that “paperless filing is the preferred and most convenient means of filing Federal tax and information returns.” As noted in that report, “Electronic filing produces a number of benefits both for taxpayers and the IRS, including shorter processing times, fewer errors, and better data.” The committee said the efficiencies and cost savings achieved through electronic filing justify expanding such requirements.
Estate Tax Issues
The Tax Cuts and Jobs Act (TCJA) of 2017 sunsets at the end of 2025, which means there are only two years left before the unified tax credit (UTC)—a dollar amount that a person can give during their lifetime before gift or estate taxes apply—amount drops to pre-2018 levels unless Congress extends this tax provision. The UTC exclusion amount for 2024 is $13.61 million, which, if reverted to pre-2018 levels today, would be approximately $6.8 million.
There are two noteworthy issues. First, individuals taking advantage of the increased gift tax exclusion amount currently won’t be adversely impacted after 2025 (Reg. §20.2010-1(c)(2)). That is, an individual who made taxable gifts of $9 million prior to the decrease in the UTC exclusion amount (in 2025 to $6.8 million) wouldn’t be required to restore any of the excess UTC claimed (i.e., $2.2 million). Likewise, if the taxpayer dies after 2025, when the basic exclusion amount is hypothetically $6.8 million, the taxpayer isn’t required to restore the exclusion amount.
Second, an individual who fails to take advantage of the higher UTC amount before TCJA sunsets can’t carry forward any unused amount. In this case, the unused $2.4 million is lost. Although very few people are impacted by the UTC amount, it does impact some individuals, and, as such, some taxpayers need to be advised of this situation.
RMD for Inherited IRAs, Bonus Depreciation and Per Diem Rates
The original SECURE Act of 2019 modified the required minimum distribution (RMD) rules for designated beneficiaries who aren’t surviving spouses for retirement plans. The initial thought was that the entire inherited individual retirement account had to be distributed by the end of the 10th year and no distributions required during the 10-year period. Treasury issued proposed regulations that distributions would be required during the 10 years beginning in 2022. However, the IRS delayed the issuance of the final regulations initially to 2023 by Notice 2022-53 and then recently to 2024 by Notice 2023-54.
TCJA introduced 100% bonus depreciation for business assets with a recovery period of 20 years or less and certain other property. The benefit of bonus depreciation is the ability of a business owner to deduct the full amount of an acquired asset in the year of acquisition. However, this tax provision wasn’t permanent, and the percentage phases out 80% for 2022, 60% for 2024, 40% for 2025, and finally 20% for 2026.
In addition, Treasury issued Notice 2023-68 with special per diem rates for the period of October 1, 2023, through September 30, 2024. Taxpayers claiming business expenses under the per diem method for travel within the United States in lieu of actual lodging, meal, and incidental expenses would apply the rates applicable for travel in each quarter. The applicable per diem rates for travel prior to October 1 and after September 30 in non-high-cost localities are $214 (was $202 and $204, respectively) and in high-cost localities are $309 (was $296 and $297, respectively). The portion of the rates treated as paid-for meals remains unchanged at $74 for high-cost localities and $64 for all other localities. A listing of the high-cost localities is available in Notice 2022-44 for 2023 and Notice 2023-68 for 2024.
Tax preparers are facing another challenging year of providing quality service to their clients without running afoul of the tax pitfalls that are abundant.
© 2024 A.P. Curatola
January 2024
