Lottery fever remains at a high level lately, thanks in part to jackpots that sometimes exceed $1 billion, including the $1.334 billion Mega Millions winning ticket sold in July to individuals in Illinois, who claimed the prize via an anonymous partnership. They opted for the lump-sum amount.
While those winners chose the lump sum, if a newly wealthy winner comes to you for advice about how to receive the windfall, we strongly recommend carefully evaluating the installment option before claiming the prize.
Installment vs. Lump Sum
Most lottery winners elect the lump-sum option, and their reasons for making this choice are often erroneous. Many believe that installment payouts stop if the winner dies. This is not true. Or they fear the state and/or lottery commission could go bankrupt before they are fully paid out. This is highly unlikely since the installment obligation is backed up by a “laddered” bond portfolio. Other concerns include higher tax rates and/or high inflation in the future — which are valid concerns that should be factored into the analysis.
Taking the lump-sum option on a multimillion-dollar prize is usually a poor decision, partly because winners will take a permanent net-present-value haircut of 30% or more on their payout, plus pay 100% of the tax in the first year of winning.
To explain further, the advertised winning amount is the pretax payout over several decades, often 30 years. By patiently waiting for their annual installments, the winner(s) will receive the full advertised winnings. By electing a lump sum, on the other hand, there will be a time-value-of-money discount, which generally falls in the mid-30% range but can be as high as 39%. (This discount decreases with larger prizes, since a smaller annual return is required to compound the lottery commission’s initial investment and increase to the full prize. Due to the record amount of the recent Mega Millions award, the actual discount rate on the lump-sum payout reportedly dropped to a record low of 17.65%, which may have factored into the Mega Millions jackpot winners’ decision to take the lump sum.)
The Department of Treasury has published a 120 Page Report on General Explanations of the Biden Administration’s Fiscal Year 2023 Revenue Proposals. After reviewing this report it is apparent why so many wealthy individuals/families are turning to Opportunity Zones.
The Biden Administration wants to do the following:
Reform Business And International Taxation
- Raise The Corporate Income Tax Rate To 28%
- Adopt The Undertaxed Profits Rules
- Provide Tax Incentives For Locating Jobs In U.S.
- Remove Tax Deductions For Jobs Overseas
- Prevent Basis Shifting By Related Parties Through Partnerships
- Conform Definition Of Control With “Corporate Affiliation Test”
- Expand Access To Retroactive Qualified Electing Fund Elections
- Expand The Definition Of Foreign Business Entity To Include Taxable Units
Supporting Housing And Urban Development
- Make Permanent The New Markets Tax Credit
- Allow Selective Basis Boosts For Bond Financed Low Income Housing Credits Projects
Modify Fossil Fuel Taxation
- Eliminate Fossil Fuel Tax Preferences
- Modify Oil Spill Liability Trust Fund Financing And Super Fund Excise Taxes
Reposted Valuable Article From 2021 On Crypto Currency
Whether you consider cryptocurrency an investment, a commodity, an alternative banking system or a form of legalized gambling, the rapid adoption and stunning recent volatility of cryptocurrencies has led to frenetic trading by investors. As a result of COVID-19 disruption, economic uncertainty and the entry of PayPal into the crypto-consumer market (allowing more than 300 million users to buy cryptocurrencies easily), the crypto market has seen a dramatic runup in the values of Bitcoin and many other cryptocurrencies.
Speculative crypto trading (as well as day trading of stocks) has made many crypto investors wealthy on paper. Their trading generated a substantial amount of short-term capital gains. The IRS has made it clear that Bitcoin and other cryptocurrencies should be treated as assets or intangible property — and not currency — since it is not issued by a central bank. This results in taxability virtually every time crypto is transferred or liquidated.
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Attend this session to learn how this leading tax advisory expert on Opportunity Zones is helping tax advisors who have a client with a botched 1031 or other investments to reinvest into OZ assets or uncertain on replacement strategy. If you want to be certain that your tax clients receive the best investment expertise available in the land of OZ, you will greatly benefit from this session on Opportunity Zones with Blake Christian.
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SAVVY TAXPAYERS ARE TRANSFORMING BUSINESS GAIN TAXATION LEAD INTO GOLD. THEIR APPROACH IS FAR FROM “ORDINARY”.
- Treasury and IRS initially struggled regarding how to deal with IRC Section 1231 gains and losses in the context of the OZ program; however, the final OZ Regulations ended up being extremely taxpayer-friendly.
- Understanding how and why Treasury arrived at its decision unlocks a remarkable, yet brief, planning opportunity for taxpayers and their advisors.
- With the right planning, taxpayers can isolate gross 1231 gains for OZ reinvestment eligibility but still claim gross 1231 losses in the same year at ordinary income rates – resulting in permanent tax savings.
- Taxpayers who already reported net 1231 gains in tax years 2019 and 2020 can still likely make tax-advantaged QOF investments for those years—but the window is closing fast – especially for 2019 1231 gains.
- This ability to defer 1231 gain and recognize 1231 losses can further benefit certain taxpayers who would have otherwise been forced to pay ordinary rates on net 1231 gains in a given year as a result of the five-year “look-back” period under 1231(c).
The Biden Administration is continuing to support the program. This comes as no surprise, considering the architects of the 2018 program came out of the Obama Administration. We do anticipate a few OZ program refinements this year, but no major overhaul. The legislative program updates we anticipate are summarized below, in Exhibit A. For the most part, these changes will be beneficial to investors.
Perhaps the most talked about topic in the tax world is President Biden’s proposal to increase the rates for long-term capital gains. If passed, the maximum rate could rise from 23.8% to 43.4% for taxpayers with over one million dollars of taxable income. There are doubts that Congress will increase the rate to that level, but any rate change may or may not survive until 2026, when the OZ deferred gains are generally reportable (based on the next administration). The risk of the rate increase for 2020 and 2021 deferred gains should be considered when deciding to defer, and we will be glad to discuss the long-term impact.
As a result of the continuing COVID-19 impact on businesses and individuals the IRS released a second Notice (IRS Notice 2021-10) on January 19, 2021 to provide Opportunity Zone (OZ) investors with additional time to roll capital gains into a Qualified Opportunity Fund (QOF), as well as additional time to make “substantial improvements” to acquired property and additional time to acquire Qualified Opportunity Zone Business Property (QOZBP). This Notice follows the June 2020 Notice 2020-39 which extended various 2019 and 2020 OZ Program deadlines and testing dates – generally through December 31st. The extended relief under 2021-10 is generally through March 31, 2021.
Details of the relief given by Notice 2021-10 are outlined below:
The Tax Cuts and Jobs Act included changes for businesses and individuals. One of these is the creation of the Opportunity Zones tax incentive, an economic development tool that allows people to invest in distressed areas. This incentive’s purpose is to spur economic development and job creation in distressed communities
by providing tax benefits to investors. Low income communities and certain contiguous communities qualify as Opportunity Zones if a state, the District of Columbia or a U.S. territory nominated them for that designation and the U.S. Treasury certified that nomination. Following the nomination process, 8,764 communities in all 50
states, the District of Columbia and five U.S. territories were certified as Qualified Opportunity Zones (QOZs). Congress later designated each low-income community in Puerto Rico as a QOZ effective Dec. 22, 2017. The list of each QOZ can be found in IRS Notices 2018-48 and 2019-42. Further, a visual map of the census tracts designated as QOZs may be found at Opportunity Zones Resources.
Benefits Of Investing In Opportunity Zones
Relief for Qualified Opportunity Funds and Investors Affected by Ongoing Coronavirus Disease 2019 Pandemic
The key components of Notice 2020-39 (issued 6/04/2020) are listed below:
This notice extends the termination date of the 180-day reinvestment period. The termination of the 180-day reinvestment period would otherwise end between April 1, 2020, and December 31, 2020, will now have until December 31 to fund the Qualified Opportunity Fund (QOF). The prior COVID extension was July 15, under Notice 2020-23.
There are significant 2019/2020 long-term tax planning opportunities and a unique situation where a taxpayer might file a return (current extended due date – October 15) before funding their QOF. Amended returns will be allowed if the taxpayer had not estimated the funding amount before filing their return.
This extension will avoid complications associated with the early adoption of the Final Regulations for taxpayers with pre-March 15th, 2020 gains.
The 30-month “Substantial Improvement” test (i.e., doubling of basis) is extended to at least 39 months (the regular April – December 2020 period is essentially frozen). Additional COVID-related extensions may also be available under the Opportunity Zone (OZ) Regulations.
Failure to meet the 90% qualified asset test at the QOF level during any testing period falling in the April 1 – December 31, 2020 period is effectively ignored although IRS Form 8996 must still be completed and filed.
While the first set of Treasury Regulations and initial OZ statute primarily emphasized real estate projects as re-investment options, the final regulations clarified that operating businesses are also appropriate reinvestments for deferred gains.
Unsurprisingly, most of the early Qualified Opportunity Funds (QOFs) focused entirely on real estate projects. However, once regulations had been finalized, investors and advisors have grasped the full flexibility and power of the OZ program. Additionally, private investors, PE firms and VC firms have come to realize that using the OZ program for operating businesses may yield even more substantial long-term benefits than real estate investments — for investors as well as OZ communities.
SINGIFICANT OZ BENEFITS FOR ACTIVE BUSINESSES
Both the Trump Administration and QOF architects view the use of the OZ program as a valuable tax and economic development tool for operating businesses for the following reasons:
The Internal Revenue Service today provided guidance for Qualified Opportunity Funds (QOFs) and their investors in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic.
Notice 2020-39 (PDF) answers questions regarding relief from certain requirements under section 1400Z-2 of the Internal Revenue Code (Code) and the implementing regulations. Additionally, the IRS has updated the Qualified Opportunity Zones frequently asked questions.
Taxpayers who sold property for an eligible gain and who would have had 180 days to invest in a QOF to defer that gain, may have additional time. Notice 2020-39 provides that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF. (The 180th day for some of these taxpayers was already postponed through July 15, 2020, under Notice 2020-23.) In addition, the notice provides that the period between April 1, 2020, and December 31, 2020, is suspended for purposes of the 30-month period during which property may be substantially improved.
The IRS issued Notices 2020-18, 2020-20, and 2020-23 (“Notices” or “Notice”) in response to the COVID-19 crisis and CARES Act. These Notices are intended to provide some needed guidance, extended filing and compliance deadlines, and cash-flow relief to taxpayers struggling with this current economic environment. The following is a quick summary of these Notices and how Opportunity Zone investors may be able to benefit from:
-an extended window for investing their capital gains into a Qualified Opportunity Fund (QOF),
-an additional 24-month Federal Disaster extension of the standard 31-month working capital safe harbor and the “substantial improvement” period for a tangible property (if included in the —–written business plan), and an extension of time to deploy Qualified Opportunity Zone Business (QOZB) funds into QOZB Property (QOZBP).
-Postpones the due date from April 15, 2020, until July 15, 2020, for filing the vast majority of federal income tax returns and making Federal income tax payments otherwise due April 15, 2020.
Provides additional relief by postponing specific Federal gift (and generation-skipping transfer) tax return filings and payments. Read More