This post is a follow-up to my previous post in which I discussed some of the basics concerning Individual Retirement Accounts (“IRAs”). It can be found here if you haven’t read that post yet. In this “Part 2” post, I’ll discuss some of the limitations and tax implications of contributions to and distributions from IRAs.
As noted in my prior post, the tax advantages of an IRA depend on whether the IRA is classified as a “Traditional” or “Roth” IRA. I’ll discuss each of those separately here.
As a general matter, taxpayers can only contribute a certain amount to IRAs each year.  This amount is adjusted on an annual basis to account for a “cost of living adjustment,” which is, in turn, computed based on annual core inflation.  For 2023, this amount was $6,500 , but was increased to $7,000 for 2024 .
An additional $1,000 is added to this annual limitation if you’re over the age of 50. 
- Contributions to a Traditional IRA
Contributions to a traditional IRA are typically deductible. . However, there are certain limitations that apply to individuals participating in certain listed pension plans. 
- Distributions from a Traditional IRA
Distributions from a traditional IRA are typically included in taxable income.  There are several exceptions to this, perhaps most notably the exception for “rollover contributions.” In short, amounts that are distributed but are rolled into another qualifying IRA or eligible retirement plan are not includible in taxable income. 
As many of you may know, California’s beverage recycling program has recently undergone significant changes. The program, which aims to reduce waste and promote recycling, has been expanded to include wine and other alcoholic beverages in addition to traditional recyclables like plastic bottles and aluminum cans.
While the changes are certainly a step in the right direction for the environment, they have also significantly impacted the wine industry in California. Many wineries and vineyards are now required to pay additional fees to help fund the recycling program, and they must also comply with new labeling and reporting requirements.
Aside from the challenge of the new requirement to include a recycling symbol on all wine bottles sold in California, the reporting requirements can be time-consuming and complex, requiring beverage manufacturers to track and report on their sales and recycling efforts. That is where Thompson Tax can help. We can assist your winery with CRV (California Redemption Value) registration and filing compliance. Reach out to us today for all of your beverage deposit and tax needs, as well as any sales and use tax needs that you may have. We are only a phone call away!
Have a question? Contact Nicole Brown, Thompson Tax. Call firstname.lastname@example.org
This information provided in this post was updated in November 2023, and now includes an additional 2 states.
According to a recent article attributed to Nerd Wallet, tax credits available to an individual taxpayer include:
California State Tax Credits
Tax credits are a type of benefit that decreases your taxes owed by the credit amount. Some credits may also be refundable, meaning if the credit amount exceeds how much you owe in taxes, you might be able to get the overage back in the form of a refund.
Here is an overview of a few popular tax credits available in California for the 2023 tax year (taxes filed in 2024).
California Earned Income Tax Credit (CalEITC)
The CalEITC is a tax benefit that mirrors the federal earned income tax credit. Californians with earned income and federal AGI of up to $30,950 in 2023 may be eligible for a tax credit of up to $3, The exact credit amount depends on your filing status and the number of qualifying children. (People without kids also qualify.)
California Young Child Tax Credit (YCTC)
The refundable young child tax credit is another state-level tax credit modeled after the federal version of the child tax credit. People who qualify for the California earned income tax credit mentioned above and who also had a child younger than 6 by the end of the 2023 tax year are generally eligible for the YCTC. The maximum credit for 2023 is $1,117. The credit begins to phase out for those with an earned income of $25,775 and above and is not available for anyone making above $30,931.
Retirement accounts that provide tax breaks have very specific rules that must be followed if you want to enjoy the financial rewards of those tax breaks.
One of these rules defines WHEN you’re allowed to pull money from your retirement accounts. If you pull money too soon, you’re at risk of being levied with a penalty by the IRS. There are several exceptions to this rule, such as paying for qualified higher education expenses or paying for expenses if you become permanently disabled. In general, though, if you withdraw retirement funds before you reach age 59½, you’ll be hit with a 10% penalty in addition to regular income taxes. In the April 2023 court case Magdy A. Ghaly and Laila Ryad v. Commissioner, the taxpayers learned this rule the hard way.
In 2018, Mr. Ghaly took two distributions from his retirement account.
Distribution #1: Withdrawal
Mr. Ghaly was laid off from his job, and in 2018, he withdrew money from his retirement account to provide for his family. He requested and received a withdrawal of $71,147 from his retirement account. His retirement company provided him with a Form 1099-R indicating the withdrawal was taxable.
Distribution #2: Deemed Distribution
In 2015, Mr. Ghaly took a loan from his retirement account. Because the loan followed certain IRS-approved guidelines, it was not considered a taxable distribution from his account that year. However, when Mr. Ghaly failed to repay that loan when it came due in 2018, it became a taxable distribution. His retirement company provided him with a 1099-R tax form for the deemed distribution.
Mr. Ghaly had not yet reached age 59½ before either amount was distributed.
In an “applicable asset acquisition,” the sale of the assets of a business may be subject to certain allocation and reporting requirements for federal income tax purposes. It’s essential for the seller and purchaser to be aware of these requirements.
What’s an Applicable Asset Acquisition?
An “applicable asset acquisition” is any transfer of assets which constitute a trade or business and with respect to which the transferee’s basis in such assets is determined wholly by reference to the consideration paid for such assets. A group of assets is a trade or business if its character is such that goodwill or going concern value could under any circumstances attach to those assets.
Goodwill is the value of a trade or business attributable to the expectancy of continued customer patronage, which may be due to the name or reputation of a trade or business or any other factor. Going concern value is the additional value that attaches to property because of its existence as an integral part of an ongoing business activity. Going concern value includes the value attributable to the ability of a trade or business (or a part of a trade or business) to continue functioning or generating income without interruption notwithstanding a change in ownership. It also includes the value that is attributable to the immediate use or availability of an acquired trade or business, such as the use of the revenues or net earnings that otherwise would not be received during any period if the acquired trade or business were not available or operational.
The basis of an asset generally is its cost as adjusted for various items including depreciation or amortization. Thus, when an asset is sold, its basis generally is the consideration paid for that asset.
What Happens in an Applicable Asset Acquisition?
National Taxpayer Advocate Erin M. Collins today released her 2023 Annual Report to Congress, describing 2023 as a year of “extraordinary transition for the IRS and therefore for taxpayers.” The report credits the IRS with substantially improving taxpayer services and developing plans to transform the taxpayer experience in the coming years, but it identifies paper processing as an area of continuing weakness.
Most Serious Problems
By law, the Advocate’s report is required to identify the ten most serious problems taxpayers are experiencing in their dealings with the IRS and to make administrative and legislative recommendations to address those problems. Before cataloging taxpayer challenges, however, Collins praised the IRS for taking notable strides forward. However, paper processing is an area of continuing weakness. The areas in which taxpayers continued to experience delays were primarily those that required employees to process tax returns and taxpayer correspondence, including:
- Extraordinary delays in assisting victims of identity theft;
- Delays in processing amended tax returns and taxpayer correspondence;
- Challenges in receiving telephone assistance despite overall improvements; and
- Employee Retention Credit (ERC) processing.
At the end of each of the ten most serious problem sections in the report, the National Taxpayer Advocate makes administrative recommendations to address the problems. Among her key recommendations:
- Prioritize the improvement of online accounts for individual taxpayers, business taxpayers, and tax professionals to provide functionality comparable to that of private financial institutions;
- Improve the IRS’s ability to attract, hire, and retain qualified employees;
- Ensure all IRS employees – particularly customer-facing employees – are well-trained;
- Upgrade the back end of the Document Upload Tool (DUT) to fully automate the processing of taxpayer correspondence;
- Enable all taxpayers to e-file their federal tax returns; and
- Extend eligibility for first-time penalty abatement to all international information return penalties.
Legislative Recommendations: The “Purple Book”
The National Taxpayer Advocate’s 2024 Purple Book proposes 66 legislative recommendations intended to strengthen taxpayer rights and improve tax administration. Among the recommendations:
The proposed regulations on broker reporting of digital assets released August 29, 2023 (REG-122793-19
) included more than guidance under IRC section 6045. They also included related proposed regulations under section 1001 on amount realized and section 1012 on basis. I think that generally, the 1001 and 1012 proposed regulations are fairly straightforward and tie to the general rules at these provisions.
One clarification they offer is that in a transaction where a taxpayer exchanges, for example, X coin for Y coin and pays a transaction fee, 50% of the transaction fee is treated as a reduction to the amount realized for the disposition of X coin and 50% is added to the basis of the Y coin acquired.
Unlike the virtual currency FAQs #39 – #41
, Prop. Reg. 1.1012-1(j) provides that in applying the specific identification method to know which digital asset was disposed of (when the taxpayer has more than one unit or code representing their digital assets), the taxpayer must apply specific identification on a wallet by wallet or exchange by exchange system. In contrast, the FAQs allow (or at least do not disallow) use of a universal tracking approach where the taxpayer transferring, for example, 2 Xcoin out of wallet 1 to buy goods, could specifically identify to say they used the basis of 2 Xcoin in T’s wallet 2. This would not be allowed under the proposed regulations. The long list of questions in the proposed regulations include though, whether there are alternatives to this approach (questions 44 & 45 at page 59616
in the Fed. Register).
Prop. Reg. 1.1001-7(c) and 1.1012-1(j)(6) provide that these proposed regulations are effective on the January 1 following when final regulations are published. However, page 59616
in the Fed. Register states that the 1001/1012 proposed regulations are reliance regulations. That is, per the preamble, taxpayers “may rely on these proposed regulations under sections 1001 and 1012 for dispositions in taxable years ending on or after August 29, 2023, provided the taxpayer consistently follows the proposed regulations under sections 1001 and 1012 in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations.”
1. Determine The Correct Sales Tax To Charge
One of the primary taxation issues for direct mailers is determining the correct sales tax to charge. Sales tax laws vary from state to state and even within different areas of the same state, making it difficult to keep track of the applicable tax rates. For example, if you send mail to customers in multiple states, you may need to charge different sales tax rates for each state. Additionally, some products or services may be exempt from sales tax in certain states, further complicating the matter.
2. Identify The Correct Tax Classification
Another issue that direct mailers may face is determining the correct tax classification for their products or services. Depending on the type of product or service offered, it may fall under different tax classifications, each with its own set of regulations. For example, some states may classify advertising services as taxable, while others may consider them exempt.
3. Be Aware of Tax Implications When Using Third-Party Vendors
Direct mailers should also be aware of the tax implications of using third-party vendors. If you use a third-party vendor to provide services such as printing, mailing, or list management, you may be responsible for collecting and remitting sales tax on those services. However, the tax laws surrounding these services can be complex, and it’s important to consult with a tax professional to ensure compliance.
4. Keep Accurate Tax Transactions Records
Direct mailers should keep accurate records of all tax-related transactions. This includes keeping track of sales tax collected and any exemptions or deductions claimed. In the event of an audit, having detailed records can help demonstrate compliance and avoid any penalties.
Thompson Tax Can Help!
Although tax compliance can be a significant challenge for direct mailers, understanding the various taxation issues they may face and taking appropriate measures to ensure compliance, direct mailers can avoid complications and focus on growing their business. It’s always recommended to seek the advice of a tax professional to ensure compliance with all applicable tax laws. Contact Thompson Tax today for all your sales and use tax needs and let us be your Trusted Tax Advisor.
Contact Nicole Brown, CEO Thompson Tax.
According to an article posted in Americans for Tax Reform.org:
Members of the North Carolina House and Senate have passed their own versions of a new state budget and are now working to reach a consensus deal before the end of the month, which marks the end of the fiscal year. A review of the significant tax provisions in the Senate and House budgets finds a number of pro-growth reforms that should end up in the final budget deal sent to Governor Roy Cooper (D), including accelerated and possibly additional income tax rate reduction.
North Carolina’s personal income tax rate dropped from 4.99% to 4.75% at the beginning of 2023 and is going to continue falling every year until the end of 2026, when the rate goes to 3.99%. The House-passed budget accelerates the phasedown to 3.99%, achieving it two years ahead of schedule. The Senate budget, meanwhile, does that and also schedules further rate reduction, taking the rate down to 2.49% by the end of the decade. The final budget deal that is ultimately worked out, many suspect, could get the rate down to around 3%.
Further reduction in the personal income tax rate will benefit small businesses across North Carolina, most of whom file under the personal income tax system. The House and Senate budgets also provide additional relief to employers by reducing the state franchise tax.
Authorization of a limited number of casinos is also being discussed as part of budget negotiations. In a new article published in Forbes.com on June 16, ATR’s Patrick Gleason writes about the additional revenue that approval of new casinos would generate for state coffers and how that could be put toward future tax relief goals. That article comes in response to recent reports that some Republican legislators in North Carolina have told their colleagues they might vote against an income-tax cutting budget if it also authorizes new casinos.
Aside from the personal income tax relief and franchise tax cuts that are likely to be included in a final budget deal, both the House and Senate budgets extend an expiring sales tax exemption for jet fuel. As in other states, ATR is urging North Carolina lawmakers to extend the sales tax exemption for jet fuel. Such an exemption is not a special carve out or give-away. Rather, the sales tax exemption for jet fuel is important to avoiding taxation of a key business input that, if taxed, would see higher costs passed along to consumers.
According to Illinois Tax Policy.org:
Chicago Mayor Brandon Johnson’s mansion tax idea failed in Los Angeles, something his recent trip there should have shown him. Here’s why it promises to drag down Chicago businesses in an already hostile environment and shift costs to homeowners.
Chicago Mayor Brandon Johnson recently found himself in Los Angeles, ironically, home to a recent real estate transfer tax hike much like the one he is pushing in Chicago on the March 19 ballot.
So, did he ask LA Mayor Karen Bass about her city’s disastrous experience with its “mansion tax” increase? If he had, he’d have learned it’s been a total failure he shouldn’t want to replicate. Not only has LA’s mansion tax generated a fraction of the money projected, but it is harming commercial property and rental property owners.
The same will be true in Chicago.
Presented as a tax on rich mansion dwellers to provide funding to address homelessness, Chicago’s real estate transfer tax will do neither. Instead, it’s a tax hike on businesses that will knock down Chicago’s struggling business scene and, in the process, hurt residential properties, too.
According to Crain’s Chicago Business, commercial properties are a disproportionate number of the properties sold over $1 million, at a ratio of 9-to-1. Owners of high rises, apartment complexes, storefronts and more will be asked to pay more. Chicago businesses are already wrestling with the second-highest commercial property taxes in the nation and the third-worst state in the nation for business, according to Chief Executive Magazine.
Johnson’s “Bring Chicago Home” piles on an already suffering sector of Chicago. The program would be more accurately called “Bring Chicago Down.”
1.”I love you.” You: “Is that you or the wine talking?” Me: “It’s me talking to the wine.”
2. What did the toast say to the butter on Valentine’s Day? A: You’re my butter half!
3. Did you hear about the bed bugs who fell in love? They’re getting married in the spring!
4. Why do skunks love Valentine’s Day? A. Because they’re scent-imental creatures!
5. What did the girl cat say to the boy cat on Valentine’s Day? You’re purrr-fect for me.
6. Knock Knock. Who’s there? Olive. Olive who? Olive you!
7. Knock Knock Who’s there? Pooch Pooch who? Pooch your arms around me!
8. What did the rabbit say to his girlfriend on Valentine’s Day? A: Somebunny loves you!
9. What did the whale say to his girlfriend on Valentine’s Day? A: Whale you be mine!
10. What did the boy bee say to the girl bee on Valentine’s Day? A: You are bee-utiful!