What Another Trump Presidency Means for Tax Policy in 2025 and Beyond

Key Takeaways:

Potential 2025 tax changes may lower corporate rates and extend key business deductions, affecting planning and cash-flow strategies.

Trump’s policies may reduce clean energy incentives while maintaining fossil fuel preferences, impacting energy investments.

Estate tax exemption increases from the TCJA could be made permanent, with long-term implications for estate planning.

With President-elect Donald Trump winning a second term in the November 5 election, we have a clearer picture of what tax policies will be at the forefront of discussions as we head into 2025 and the scheduled expiration of many Tax Cuts and Jobs Act (TCJA) provisions. While Trump has not released a detailed tax plan, he has commented on several areas of tax law and policy, making it possible to get a good idea of the direction tax policy may take next year.

Republicans also gained control of the Senate and will have a small majority in the chamber in 2025. As of the date of publication of this article, control of the House has yet to be called. Even if Republicans retain control of the House, passing tax legislation may still be challenging. Unless the legislative filibuster is eliminated from Senate rules, any tax law changes will likely still have to be passed through the budget reconciliation process. If the Democrats manage to gain control of the House, passing tax legislation to advance Trump’s policies would become much more difficult and will require much more bipartisan negotiating.

Although it remains to be seen what specific legislative proposals will emerge, businesses and individuals should pay close attention to how Trump’s proposed policy preferences could alter their total tax liabilities.

The tables below outline current tax law and policy, as well as expected potential future tax policies under a Trump administration. Four separate tables cover provisions for business tax, international tax, individual tax, and estate, gift, and generation-skipping transfer (GST) tax. All data is based on information released or discussed by Trump as of November 8, 2024.

Business tax provisions

International tax

Individual tax

Estate, gift, and GST tax

How MGO can help:

MGO delivers comprehensive tax advisory and compliance services to guide you through an increasingly complex and evolving tax landscape. Leveraging deep industry insights and a proactive approach, we assist your business in managing tax liabilities efficiently while uncovering opportunities for growth.

Our team works diligently to provide tailored solutions that address unique challenges, from navigating shifting regulations to optimizing your overall tax strategy. Even in times of regulatory uncertainty, we are committed to helping your organization remain agile and well-positioned for long-term success.

Have questions? Reach out to our tax team today.

Massachusetts Tax Amnesty: What You Need to Know

Key Takeaways:

Massachusetts Tax Amnesty 2024 offers penalty relief for unfiled returns or outstanding tax liabilities from periods before December 31, 2024.
Eligible taxpayers can request waivers on penalties for personal income, corporate excise, sales and use, and other taxes from November 1 through December 30, 2024.
MGO’s State and Local Tax team can help you determine eligibility, prepare returns, and file amnesty requests for the program.

If you are a Massachusetts taxpayer who missed filing a tax return, filed an amended return, has unpaid taxes, or is currently involved in an audit or appellate review, don’t miss this valuable limited-time opportunity to get penalty relief.

From November 1, 2024, to December 30, 2024, the Massachusetts Department of Revenue is offering a tax amnesty program. This program allows eligible taxpayers to request a waiver of penalties on outstanding tax liabilities for any filing periods with a return due date on or before December 31, 2024.

What Types of Taxes Are Covered?

This program includes a variety of tax types, such as:

Personal Income Tax
Corporate Excise Tax
Partnership Income Tax
Sales and Use Tax
Trusts and Estates
Marijuana Retail Tax
Room Occupancy Tax
Pass-Through Entity Withholding
And more (you can find a full list of eligible and ineligible tax types on the Massachusetts Department of Revenue website)

Who Is Eligible?

Taxpayers may qualify for amnesty if they have:

Unfiled returns, underreported income, or outstanding tax obligations.
Audits for periods with returns due on or before December 31, 2024.
Pending resolution or appellate tax board cases.
Open collection cases.

Who Is NOT Eligible?

Taxpayers are not eligible if they:

Received amnesty relief in 2015 or 2016 for the same tax type and period.
Are looking to waive penalties on taxes already paid.
Are requesting a refund or credit for overpayment.
Are under a tax-related criminal investigation or prosecution.
Are currently in bankruptcy.

Special Rules for Non-Filers

For eligible non-filers, the program offers a limited look-back period of three years. This means qualifying non-filers will only need to submit returns for the last three years (January 1, 2022 – December 31, 2024).

However, this limited look-back period does not apply to non-filers who have been contacted by the Massachusetts Department of Revenue about unfiled returns, taxpayers responsible for trustee taxes (such as sales and use, withholding, and marijuana retail taxes), or those filing estate tax returns.

How to Participate in the Amnesty Program

To participate in the Massachusetts tax amnesty program, you must:

Submit an amnesty request through MassTaxConnect.
Pay the full amount of tax and interest owed by December 30, 2024.
File all required returns (via MassTaxConnect or third-party software) by December 30, 2024.

How MGO Can Help

Navigating the Massachusetts tax amnesty program can be complex. Our State and Local Tax team is here to guide you every step of the way. We can help you:

Determine if you or your business have a Massachusetts filing obligation.
Analyze any nexus exposure and find potential liabilities.
Prepare and file the required returns accurately and on time.
Confirm your amnesty request is submitted properly in compliance with all state guidelines.

MGO has extensive experience helping clients with state and local tax matters, including amnesty programs. Our team is committed to helping you resolve outstanding tax issues, minimize penalties, and stay compliant with state tax regulations.

Don’t wait — reach out to our team today to find how we can help you save.

New Jersey Enacts Corporate Transit Fee

Key Takeaways:

New Jersey enacted a corporate transit fee entailing a 2.5% tax on corporate business taxpayers that have New Jersey allocated taxable income of more than $10 million.

The tax is effective for privilege periods beginning on and after January 1, 2024, through December 31, 2028. Because of the June 28, 2024, enaction date, you should evaluate the impact on your effective tax rates for ASC 740 purposes.

Those taxpayers who were subject to the former CBT surtax should not assume that they will be subject to the transit fee, given both the allocated taxable income floor of $10 million and the definition of “taxpayer” that the transit fee has.

On June 28, New Jersey enacted a corporate transit fee, a 2.5% tax on some corporation business tax (CBT) payers that have New Jersey allocated taxable net income in excess of $10 million.[1] The fee is effective for privilege periods beginning on and after January 1, 2024, through December 31, 2028.

All revenue collected from the corporate transit fee will be deposited into the general fund. Beginning in state fiscal year 2026, the revenue will be appropriated annually to support New Jersey Transit’s operating expenses and pay for matching funds required to receive federal funding for eligible New Jersey Transit capital projects.

The Former CBT Surtax

For tax years beginning on or after January 1, 2018, through December 31, 2023, New Jersey assessed a 2.5% surtax on “each taxpayer, except a public utility, that has allocated taxable income in excess of $1 million.”[2]

The former CBT surtax defined the term “taxpayer” to include any business entity subject to tax as provided in the Corporation Business Tax Act.[3] It defined allocated taxable net income as “allocated entire net income for privilege periods ending before July 31, 2019, or taxable net income as defined in [the Corporation Business Tax Act] for privilege periods ending on and after July 31, 2019.”

Regarding applicable payments and credits against the former CBT surtax, no credits were allowed against the surtax liability computed under the relevant statutory section except for credits for installment payments, estimated payments made with a request for an extension of time for filing a return, or overpayments from prior privilege periods.

The Transit Fee

As noted above, the new legislation has retroactive applicability to tax years beginning on or after January 1, 2024.

Unlike the former CBT surtax, the transit fee has an explicit exclusion for S corporations. It defines the term “taxpayer” as “any business entity or combined group that is subject to tax, as provided in the Corporation Business Tax [Act], except not including any S corporation or public utility.”

The allocated taxable income floor to be subject to the transit fee is higher than that under the former CBT surtax: The fee applies to taxpayers with allocated taxable income in excess of $10 million in New Jersey. However, it applies to all income, not just that over $10 million.

The transit fee defines the term “allocated taxable net income” as taxable net income, which is the entire net income allocated to New Jersey, less applicable New Jersey net operating losses.

Like the former CBT surtax, the transit fee is applied in addition to the New Jersey CBT rate of 9%.

No credits are allowed against the corporate transit fee liability computed except for credits for installment payments, estimated payments made with a request for an extension of time for filing a return, or overpayments from prior privilege periods.

Applicability of the Transit Fee to CBT Combined Groups

A transit fee taxpayer is defined to include a combined group, which is generally a group of companies that have common ownership and are engaged in a unitary business. Combined groups are to be treated as a single taxpayer.[4]

The New Jersey Division of Taxation has provided additional guidance on the transit fee’s applicability to combined groups.[5] Despite the exclusion of those groups from the definition of taxpayer, the allocated net taxable income of public utilities and S corporations in a combined group is included when determining if that group is subject to the transit fee.

Insights

Given the June 28, 2024, enaction date, taxpayers should evaluate the impact on their effective tax rates for ASC 740 purposes.
Taxpayers that were subject to the former CBT surtax cannot assume they will be subject to the transit fee, given both the allocated taxable income floor of $10 million and the transit fee’s definition of taxpayer.
Despite the exclusions for public utilities and S corporations, combined groups that have such members must be cautious because the allocated income of those entities is taken into consideration when determining transit fee applicability.
The statute excludes only public utilities and S corporations from the definition of taxpayer, so the transit fee may apply to entities such as real estate investment trusts, regulated investment companies, and investment companies.

How MGO Can Help

New Jersey’s new corporate transit fee could very well shape an already complex tax environment — but MGO is poised to support your business in navigating these challenges. Our experience in tax planning and compliance, coupled with a deep understanding of state tax regulations, enables us to provide tailored solutions after evaluating the impact of the transit fee on your effective tax rates for ASC 740 purposes that align with your organization’s strategic objectives.

Reach out to our team today to learn how we can help you optimize your tax strategy and comply with the new corporate transit fee in New Jersey.

[1] 2024 N.J.A. 4704.

[2] N.J. Rev. Stat. §54:10A-5.41(a)(1).

[3] Id. at §54:10A-5.41(b)(1).

[4] 2024 N.J.A. 4704(a); N.J. Rev. Stat. §54:10A-4(z).

[5] New Jersey Division of Taxation, “Corporate Transit Fee” (July 3, 2024).

Update: How the Latest Ruling on Farhy v. Commissioner Could Affect Your Penalty Assessments

Executive Summary

In April 2023, the U.S. Tax Court made news when it ruled in favor of businessman Alon Farhy, who challenged the Internal Revenue Service (IRS)’s authority to assess penalties for the failure to file IRS Form 5471.
IRS Form 5471 is the Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
In May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling — underscoring the significance of context in assessing penalties for international information returns.

UPDATE (May 2024):

Recent developments in the Farhy v. Commissioner case have captured significant attention in the tax and legal sectors. On May 3, 2024, the U.S. Court of Appeals reversed the Tax Court’s initial decision, highlighting the importance of statutory context in penalty assessments for international information returns. This ruling emphasizes the need for a closer examination of statutory language, altering perspectives on penalty applicability for non-compliance.

The implications of this case extend to taxpayers and practitioners, as detailed in analyses by MGO (see below). The decision underscores the need for meticulous compliance practices and adept navigation of the complexities of U.S. international tax law, along with a deep understanding of judicial interpretations of tax regulations.

MGO’s professionals are well-positioned to assist clients in navigating the complexities arising from the recent Farhy v. Commissioner decision. With a comprehensive understanding of the changing landscape in penalty assessments for international information returns, we provide guidance to help companies adapt to new judicial interpretations and maintain compliance with evolving tax regulations.

ORIGINAL ARTICLE (published June 8, 2023):

On April 3, 2023, the U.S. Tax Court came to a decision in the case Farhy v. Commissioner, ruling that the Internal Revenue Service (IRS) does not have the statutory authority to assess penalties for the failure to file IRS Form 5471, or the Information Return of U.S. Persons With Respect to Certain Foreign Corporations, against taxpayers. It also ruled that the IRS cannot administratively collect such penalties via levy.

Now that the IRS doesn’t have the authority to assess certain foreign information return penalties according to the court, affected taxpayers may want to file protective refund claims, even if the case goes to appeals — especially given the short statute of limitations of two years for claiming refunds.

Our Tax Controversy team breaks down the Farhy case, as well as what it may mean for your international filings — and the future of the IRS’s penalty collections.

The IRS Case Against Farhy

Alon Farhy owned 100% of a Belize corporation from 2003 until 2010, as well as 100% of another Belize corporation from 2005 until 2010. He admitted he participated in an illegal scheme to reduce his income tax and gained immunity from prosecution. However, throughout the time of his ownership of these two companies, he was required to file IRS Forms 5471 for both — but he didn’t.

The IRS then mailed him a notice in February 2016, alerting him of his failure to file. He still didn’t file, and in November 2018, he assessed $10,000 per failure to file, per year — plus a continuation penalty of $50,000 for each year he failed to file. The IRS determined his failures to file were deliberate, and so the penalties were met with the appropriate approval within the IRS.

Farhy didn’t dispute he didn’t file. He also didn’t deny he failed to pay. Instead, he challenged the IRS’s legal authority to assess IRC section 6038 penalties.

The Tax Court’s Initial Ruling

The U.S. Tax Court then held that Congress authorized the assessment for a variety of penalties — namely, those found in subchapter B of chapter 68 of subtitle F — but not for those penalties under IRC sections 6038(b)(1) and (2), which apply to Form 5471. Because these penalties were not assessable, the court decided the IRS was prohibited from proceeding with collection, and the only way the IRS can pursue collection of the taxpayer’s penalties was by 28 U.S.C. Sec. 2461(a) — which allows recovery of any penalty by civil court action.

How This Decision Affects Your International Penalty Assessments

This case holds that the IRS may not assess penalties under IRC section 6038(b), or failure to file IRS Form 5471. The case’s ruling doesn’t mean you don’t have an obligation to file IRS Form 5471 — or any other required form.

Ultimately, this decision is expected to have a broad reach and will affect most IRS Form 5471 filers, namely category 1, 4, and 5 filers (but not category 2 and 3 filers, who are subject to penalties under IRC section 6679).

However, the case’s impact could permeate even deeper. For years, some practitioners have spoken out against the IRS’s systemic assessment of international information return (IIR) penalties after a return is filed late, making it impossible for taxpayers to avoid deficiency procedures. The court’s decision now reveals how a taxpayer can be protected by the judicial branch when something is deemed unfair. Farhy took a stand, challenged the system, and won — opening the door for potential challenges in the future.

It’s uncertain as to whether the IRS will appeal the court’s decision. But it seems as though the stakes are too high for the IRS not to appeal. While we don’t know what will happen, a former IRS official has stated he expects that, for cases currently pending review by IRS Appeals, Farhy will not be viewed as controlling law yet.

The impact of the ruling is clear and will most likely impact many taxpayers who are contesting — or who have already paid — IRC 6038 penalties. It may also affect other civil penalties where Congress has not prescribed the method of assessment in the future.

How You Should Respond to the Court’s Decision

You should move quickly to take advantage of the court’s decision, as there is a two-year statute of limitations from the time a tax is paid to make a protective claim for a refund. It’s likely this legislation wouldn’t affect refund claims since that would be governed by the law that existed when the penalties were assessed. Note that per IRC section 6665(a)(2), there is no distinction between payments of tax, addition to tax, penalties, or interest — so all items are treated as tax.

If you’ve previously paid the $10,000 penalty, it’s important to file your protective claim now, unless you’ve entered into an agreement with the IRS to extend the statute of limitations, which can occur during an examination. Requesting a refund won’t ever hurt, but some practitioners believe the IRS may try to keep any penalty money it collected, even if the assessment is invalid — because, in its eyes, the claim may not be. Just know, you can file your protective claim for a refund, but may not get it (at least not any time soon).

The Farhy decision could likewise be applied to other US IRS forms, such as 5472, 8865, 8938, 926, 8858, 8854. Some argue the Farhy decision may also be applied to IRS Form 3520.

How MGO Can Help

Only time will tell if the court’s decision will open the government up to additional criticisms for other penalty assessments. If you have paid your penalties and are wondering what your current options are, MGO’s experienced International Tax team can help you determine if you’re eligible to file a refund claim.

Top Strategies to Help Your Entertainment, Sports, and Media Clients Manage Global Income and Taxes

Executive Summary:

Agents and managers can help globally earning clients like professional athletes, musical artists, and entertainers strategically manage finances and taxes across borders to maximize earnings.
For U.S. citizens and residents earning money abroad, key areas for advisors to address include endorsement deals, royalties, foreign properties, foreign tax returns, and tax structuring that considers foreign investments.
For foreign (non-resident) athletes, artists, and entertainers performing in the U.S., considerations include but are not limited to U.S. taxable income, withholding rules, tax status, Central Withholding Agreements (CWA), and tax treaties.

As an agent or manager for athletes, artists, and entertainers, many of your clients likely earn income across borders as they perform worldwide. Strategically managing their finances and taxes is crucial to maximize earnings. Proper planning can help reduce tax burdens and avoid double taxation across jurisdictions. This allows your clients to focus on their careers while you may finesse your assistance to them in optimizing their income with guidance from tax professionals.

Understanding key tax considerations can enable you to put frameworks in place to mitigate your clients’ liabilities. For clients who are citizens or residents of the United States earning money abroad, all worldwide income must be reported to the IRS. However, foreign countries also tax income earned by non-residents. Assessing relevant tax treaties and structuring contracts in an appropriate manner can lead to more advantageous tax treatment.

When your clients have income from various sources both from inside and outside the United States, proactive tax planning is key. Common international income types to consider include:

Salaries from foreign leagues and tournaments
Performance fees from concerts and festivals
Royalties
Endorsements and sponsorships
Bonuses and prizes from international tournaments
Merchandise sales
Other income earned while playing or performing overseas

How these income types are classified and sourced impacts tax liabilities. Consulting tax professionals before your clients sign any deals allows for upfront planning that can keep more money in your clients’ pockets.

5 Key Considerations for U.S.-Based Athletes, Artists, and Entertainers Earning Income Abroad

If you are an advisor to musical artists, professional athletes, film actors, or other performers who are U.S. citizens, residents, or green card holders with foreign income sources, here are five important areas to address:

Endorsement Deals – How will the construction of a contract impact tax treatment abroad? Will the income be considered U.S. or foreign sourced? What are some ways to proactively plan for potential tax savings?

Royalties – Can royalties be classified differently if content is published while clients are abroad? How are royalties affected by collaborations with international artists? Is it considered U.S. income if royalties are received while playing or performing abroad?

Foreign Properties – What are the tax rules surrounding your clients purchasing or renting homes abroad (rules may vary by country)? Did you know that foreign rental income may need to be disclosed on a U.S. tax return? How do investments in foreign countries get reported and taxed?

Foreign Tax Returns – When is return filing required for extended stays abroad? Can foreign taxes be credited (and is the credit dollar-for-dollar)? What should be expected for payments received as a contractor versus as an employee? Which expenses are deductible in each country? For example, are agent fees, travel expenses, and entertainment deductible?

Foreign Tax Structuring – Is it better to withhold taxes on gross revenues or after deductible expenses? How do local, state, and regional (provincial, cantonal, district, county) taxes factor in?

With these areas addressed upfront, you can maximize income and minimize overall tax burdens for your clients as opportunities arise.

5 Top Considerations for Foreign Domiciled Athletes, Artists, and Entertainers Performing or Playing in the U.S.

If you are an advisor to athlete, artist, and entertainer clients who are not residents or citizens of the U.S. but earn income in this country, areas that could have an impact on your clients’ taxes include (but are not limited to):

U.S. Taxable Income – Is U.S.-sourced income taxable? What types of income may this include? Is there a requirement to file a U.S. federal income tax return? Is there an income threshold that must be met?

Withholding Rules – What are the withholding rules surrounding payments to foreign athletes, artists, and entertainers?

U.S. Tax Status – How is U.S. tax status determined — residency for income tax and domicile for transfer tax? How is taxation affected with or without a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)?

Central Withholding Agreements (CWAs) – A CWA is a tool that can help entertainers and athletes who don’t live in the U.S. by having U.S. income tax withheld based on the non-resident’s income. Is a CWA beneficial for the individual’s situation?

Tax Treaties – Does the individual’s home country have a tax treaty with the U.S.? How does it impact tax liabilities?

Evaluating options surrounding tax statuses, withholding approaches, and applicable treaties can mitigate liabilities and optimize tax treatment for your foreign clients.

Work with Tax Professionals to Help Your Clients Maximize Global Income

As an agent or manager navigating global income for your clients, working with experienced tax professionals is key. Advisors can assess your clients’ situations across jurisdictions to put frameworks in place reducing liabilities and avoiding double taxation. With the right global tax strategy tailored to each client, you can position them to pursue worldwide career opportunities with maximum income and minimum taxes.

Need help navigating the world of international tax for athletes, artists, and entertainers? We have experienced professionals dedicated to both international tax and entertainment, sports, and media (ESM) ready to answer all your questions. Reach out to our International Tax Team today.

California Franchise Tax Board Announces One-Time Penalty Abatement Program for Individual Tax Returns

The California Franchise Tax Board (FTB) recently announced a one-time penalty abatement program for California resident and non-resident individual taxpayers.

Here’s what you need to know to claim it:

It’s a one-time abatement of any “timeliness” penalties incurred on individual income tax returns (Form 540, Form 540NR, Form 540 2EZ) for tax years beginning on or after January 1, 2022.
It’s only available to individual taxpayers subject to personal income tax law (so estates, trusts, and fiduciaries aren’t eligible).
It can be requested verbally or in writing starting on April 17, 2023.
For California taxpayers who qualify for an extended 2022 income tax return due date because of the California Winter Storms (i.e., most California taxpayers), the “timeliness” penalties that would be abated through this program should not start being imposed until after the new extended due date for that tax year – October 16, 2023.

Which penalties are eligible?

Both the Failure to File Penalty (i.e., you did not file your tax return by the due date nor did you pay by the due date of your tax return) and the Failure to Pay Penalty (i.e., you did not pay the entire amount due by your payment due date) on California individual income tax returns for tax years beginning on or after January 1, 2022 are eligible for the one-time penalty abatement.

How do I qualify?

How do I request a one-time penalty abatement?

You can mail in a completed Form FTB 2918 or call the FTB at +1 (800) 689-4776 to request penalty abatement.

What if I can provide that I had reasonable cause for late filing or late payment?

If you can demonstrate that you exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time, then you may qualify for penalty relief due to reasonable cause. Reasonable cause is determined on a case-by-case basis and considers all the facts of your situation.

You may request penalty abatement based on reasonable cause by mailing in a completed Form FTB 2917 or by filling out a reasonable cause request on your MyFTB online account. Penalty abatement based on reasonable cause may – depending on the circumstances – be preferable to using up your one-time penalty abatement request.

How we can help

If you need help with relief for your “timeliness” penalties or if you need help with any other state and local tax matters, please reach out to our experienced State and Local Tax team.

Estate Planning for Digital Assets: What You Need to Know to Ensure a Smooth Transition

Executive summary

When planning your estate, you must now consider the future of your digital assets.
Digital assets can include cryptocurrency, nonfungible tokens, intellectual property rights, domain names and websites, and more.
To make sure your digital assets can be accessed and transferred without incident, proactive planning is key.
There are risks and challenges associated with each storage and transfer method, so you must choose the best one for you and your beneficiaries.

Estate planning is an ever-evolving process that should be continually revisited as one moves through the various phases of life. There are many facets to consider when it comes to protecting and planning for your assets. Who will get the house and other tangible assets? What about choosing beneficiaries for retirement accounts and life insurance policies?

These are questions surrounding more traditional assets, which certainly play an important role in estate planning, but in today’s technologically advanced age, these are not the only types of assets that should be considered. Digital assets play a larger role in our lives with each passing year, bringing their own unique complications and potential pitfalls to your estate plan.

It can be akin to the Wild West when it comes to the laws governing access to digital assets after one has passed, which can vary in different states or countries, as well as company to company. Read on to learn more about the proactive planning they require to be confident your estate will be administered smoothly.

What are digital assets?

Digital assets are anything created and stored digitally (i.e., on a cell phone, a server, computer, or other electronic device) that has or provides value. This can be sentimental value, as well as the more direct financial value. They can include data, videos, images, written content, and more — and, like tangible assets, they have ownership rights.

Some of the more common examples when it comes to estate planning are:

Cryptocurrency, such as bitcoin
Nonfungible tokens (NFTs)
Intellectual property rights
Domain names and websites

Accessing your digital assets

Issues can arise with digital assets if they aren’t given proper consideration in your estate plan. Without adequate planning, the executor of one’s estate may have issues locating and accessing the assets, meaning they could go untouched, never reaching the intended beneficiary or providing value to anyone.

Typically, digital assets are password-protected. To ensure the fiduciary will have access after one passes, it is important to create and maintain a secure inventory of your digital assets and online accounts with their respective login information (such as passwords and usernames). If access requires a biometric reading, such as face or iris recognition or fingerprint scanning, be sure you communicate this to the service provider or administrator, so authority is not challenged, risking permanent loss of access.

However, due to federal privacy laws such as the Computer Fraud and Abuse Act and the Stored Communications Act, as well as online user agreements, it can be difficult to gain access to online accounts from service providers. To mitigate this, as part of one’s estate plan, it is advisable to prepare a statement to permit these companies to disclose the account information to whoever is executing the will and handling the estate proceedings. Unfortunately, some companies don’t always comply with intended authorization, depending on the terms and conditions of their agreement.

To best avoid control and access issues, periodically download digital information to a home computer so, with the assistance of online afterlife companies, the information can be easily restored.

Digital storage of digital assets

There is also an option to store certain digital assets in a way that is not reliant on the internet: using a digital wallet. This is also referred to as “cold storage” or a “cold wallet,” and they are not accessible via the internet. Thus, they are what most consider to be the safer approach to storing digital assets because they can’t be easily hacked or broken into. In fact, in some cases, it’s impossible to do so.

This type of storage, however, does come with its own set of risks. Because it is accessed by a password and private key (which is like a secret PIN used to confirm transactions and prove ownership of a blockchain address), if those are lost or destroyed, it could mean losing the assets forever. There is no “forgot password” option or customer service department to call for help. We advise storing the password and key in a way that is also not accessible through the internet (i.e., on a phone or computer). Storing the access information at home could also prove risky due to the chance of a break-in, house fire, or natural disaster. Securing them in a safe deposit box or making multiple copies to store in various places are recommended approaches.

Transferring your digital assets

Physically transferring digital assets to heirs can also be challenging. It is important that clear instructions are left detailing the intent for the content and ensure heirs have access to the assets as needed.

For example, if digital assets are stored on a computer, those may be transferred with the computer without proper planning. If the same person isn’t to inherit the computer and the digital assets housed there, this needs to be specified.

When working with cryptocurrency, it can be especially challenging to transfer to heirs because most exchanges do not allow a beneficiary to be named directly within the account — transferring ownership must be done via a will or legal document. Be sure to leave account information and/or private keys with a trusted source — or, as noted above, secure it in a safe place (and tell someone where it is). It is challenging enough when a family loses a loved one; difficulties in executing their estate plan will further the burden.

Another measure that can be taken to ensure estate executors and heirs know how to work with digital assets is for all parties to have familiarity with the transfer process. This can be more complicated than a basic bank transaction — each recipient will need his or her own personal digital address for each type of digital currency. Some range in excess of 100 characters and can be confusing or overwhelming to maneuver and work with.

We advise some training or practice while the original owner of the assets is still living to help alleviate these concerns. When needing to transfer larger asset values, we suggest first initiating a transfer of a very small portion of the total asset value to ensure the process is working as intended, then proceeding to repeat the process with the remainder. If a mistake is made and asset value is sent to the wrong digital address, it may be lost permanently.

MGO’s perspective on digital assets and estate planning

A proper estate plan should ensure your assets — all of them — fall into good hands after one passes. Without proper planning in this new and ever-changing arena of digital assets, the value of these assets may be lost. Maintaining an inventory of assets, accounts, and their associated passwords; backing up data; and meeting with a professional who can assist with these steps goes a long way towards ensuring your digital assets are not lost into the digital abyss.

MGO’s Private Client Services team is equipped to help you with this unique form of family wealth management. Contact us to learn more about how you can ensure your digital assets endure the test of time.

5 Things You Don’t Know About the Tax Implications of a Divorce

You’ve figured out who gets the beloved Hermès Kelly bag. You’ve split custody — of both the kids and the dog. The boat’s been sold. And, miraculously, everyone’s feeling pretty amicable. Divorce: it’s not something you ever anticipated, but it’s happening, and you feel prepared.

We just have one question: have you hired a Certified Divorce Financial Analyst (CDFA®) yet?

The truth of the matter is, your attorney can do a lot, but they can’t provide all the guidance you need. Read on to learn the five things you don’t know about the tax implications of a divorce — and why you should hire a CDFA for your own financial security and peace of mind.

1: Be prepared for the long haul

It’s great that you and your former spouse are on good terms now, but you want to make sure you understand the divorce’s full scope of financial impact. Splitting everything down the middle sounds easy, but things are rarely simple, and the process could take longer than anticipated — especially if you want to make sure your interests are being looked after. As soon as you’ve decided on a divorce, equip yourself with financial knowledge by hiring a CDFA. If you know your interests, you have control over how they are handled, giving you the upper hand, preventing you from being blindsided later — no matter how long the “long haul” ends up being.

2: Know your long-term tax liabilities for the assets you’re divvying up pre-divorce

Whether it is interest-free bonds, the house you raised your kids in, your retirement fund, or a timeshare to Walt Disney World, there will be tax consequences and implications for the assets you divide between the two of you.

Often, people look at the fair market value of jointly owned property instead of a property’s tax basis, assuming that this is enough to go on when divvying up. But let’s say you have two different assets you’re splitting “fairly”: stock options and undeveloped land (you never did get around to building that second home together … ). Both assets are valued at the same amount. So, naturally, it makes sense for you to get one, and your spouse to get the other. That is, until one of you sells your asset, and you get a hefty tax bill. This is considered a tax carryforward, and you should understand them before the divorce is finalized.

Tax carryforwards are important to consider when dividing assets because of the tax consequences — and planning opportunities — that could exist in the future. They include carryovers like:

net operating loss carryovers,
business tax credit carryovers,
capital loss carryovers,
excess business loss carryovers,
investment interest expense carryovers, and
suspended passive activity loss carryovers.

Tax regulations give you a great framework, but unfortunately, they do not tell you how these carryovers should be allocated between you and your spouse; instead, you must decide. A CPA should be leveraged to identify the tax considerations, as well as any potential impact they could have on each spouse.

3: Rely on a seasoned professional to gain the full financial picture

You don’t want to think this way, but you need to be prepared for the fact your spouse may have been getting away with unsavory tax practices you were not aware of when you were married. And if so, you need someone on your side. A CDFA can help you gain the clarity and understanding you will need to strategize so you are satisfied with the choices you make during a divorce long after the marriage is dissolved.

For example, imagine your spouse purchased a Mercedes-Benz G-Wagon SUV during the marriage. At the time, you thought everything was above board. But your analyst uncovers that the G-Wagon’s full value was written off because of the weight, thus showing a lower annual income — negatively impacting you and your likelihood of a fair division of property and income.

To combat this, your CDFA would provide a lifestyle analysis. This entails scrutinizing everything from tax returns to credit card transactions, which could uncover hidden trails of unreported income or assets in the uncovered discrepancies. The party’s liquid assets may not support their current standard of living with business class flights abroad and stays at the newest Dorchester Collection hotel. An analysis would show the warning signs.

The examinations and reports gathered by an analyst can show both you and your attorneys a clear picture of the financial matters you’re dealing with on both sides, which can contribute to an equitable resolution between parties. This applies whether you settle or go to court. If it’s the latter, your CDFA can be an invaluable witness on your “team.”

4: Conduct a financial analysis early in the divorce process

As we mentioned, projecting financial impacts for both the short- and long-term is critical to understanding how you will be affected by the divorce. Have your CDFA prepare an independent analysis of the tax consequences under different scenarios, so you know possible outcomes. This will not only create a framework for you moving forward, but it will prevent your partner from successfully sneaking around and attempting to pull the wool over your eyes. These financial analyses can also include a review of the last income tax return filed by your spouse.

5: Remember, this service pays for itself

You may be tempted to forgo a CDFA in the throes of your divorce, thinking it’s just another bill to pay. But the truth is, the service they provide does pay for itself. If fraud or misuse is identified at any point in the divorce process, you will save yourself money in the long run having prepared for these tax liability scenarios, and when it comes to figuring out your assets, you will be able to see beyond the current fair market value, so you won’t be blindsided later on.

Our perspective on hiring a CDFA for your divorce

At the end of the day, think of the financial side of your divorce like a puzzle: you need each and every piece in order to complete the picture. While you may be on good terms with your spouse now, things are rarely simple when money is involved. It is far better to see the puzzle in its entirety now instead of picking up a piece that got edged under the sofa later and discovering you’ve been misled or treated unfairly.

Hiring a CDFA purges the emotion from the situation, which is exactly what you must do to ensure your financial security.

At MGO, we can help. Our Private Client Services practice puts you and your story first.

How Does the Rise in Interest Rates Impact You?

For the second time in 2022, the Internal Revenue Service (IRS) has announced an interest rate increase of 1% for both overpayments and underpayments for the calendar quarter beginning on July 1, 2022. Under the Internal Revenue Code, the IRS sets a new interest rate every quarter, but due to the low prevailing market rates, prior to Q2 of 2022, the agency had not updated the rate since Q3 of 2020. Whether you are filing as a corporation or an individual taxpayer, this interest rate hike could have critical consequences for those who have unpaid tax balances with the IRS.

How is interest calculated on unpaid taxes?

Interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly. Interest compounds daily and is charged on the sum of all outstanding taxes and penalties.

Understanding overpayment and underpayment rates

The overpayment rate is the sum of the federal short-term rate plus 3 percentage points. For corporations, it is the federal short-term rate plus 2 percentage points. For the portion of a corporate overpayment of tax exceeding $10,000, it is the federal short-term rate plus 0.5%.

The underpayment rate is the sum of the federal short-term rate plus 3 percentage points, except underpayments for large corporations is the sum of the federal short-term rate plus 5 percentage points.

Starting July 1, the new increased rates will be:

5% for overpayments (4% for corporations),
2.5% for the portion of corporate overpayment exceeding $10,000,
5% for underpayments, and
7% for large corporate underpayments.

What are the most common penalties?

Failure to Pay Penalty: If a return is filed but the tax owed was not paid on time, a late payment penalty will be imposed at .5% of the unpaid taxes for each month, or the part of the month the taxes remained unpaid. The penalty will not exceed 25% of the unpaid tax amount. Full monthly charges are applied even if taxes are paid in full before the end of the month.

Failure to File Penalty: Based on how late the tax return is filed and the amount of unpaid tax as of the original payment due date, this penalty is 5% of the unpaid taxes for each month, or the part of the month that a tax return is late. The penalty will not exceed 25% of the unpaid tax amount.

Combined Failure to Pay and Failure to File Penalty: If both penalties are applied in the same month, the Failure to File Penalty will be reduced by the amount of the Failure to Pay Penalty applied in that month. Based on the current penalty percentages, the late payment penalty would remain at .5%, and the late filing penalty would be reduced to 4.5%.

Substantial Underpayment Penalty: This penalty applies to (1) individuals if the tax liability is understated by 10% of the tax required to be shown on the return or $5,000, whichever is greater or (2) to corporations, if the tax liability is understated by 10% (or, if greater, $10,000) or $10,000,000. The penalty is 20% of the portion of the underpayment of tax that was understated on the return.

Negligence or Disregard of Rules or Regulations Penalty: At 20% of the portion of the underpayment of tax, this occurs due to negligence (lack of a reasonable attempt to follow the tax laws) or a disregard for the tax rules, meaning the taxpayer carelessly, recklessly, or intentionally ignores the tax laws.

Underpayment of Estimated Tax Penalty: This penalty applies to corporations or individuals that do not make enough estimated tax payments or are late in paying them when required. The penalty is based on (1) the amount of the underpayment, (2) the period when the underpayment was due and underpaid, and (3) the interest rate for underpayments published quarterly by the IRS. To avoid it, corporations can make quarterly estimated tax payments if they expect to owe $500 or more in estimated tax when they file their return. Individual taxpayers can avoid it if they owe less than $1,000 in tax after subtracting withholding and refundable credits, or if they paid withholding and estimated tax of the lesser of at least 90% of the tax for the current year or 100% of tax shown on the prior year’s return.

Can a penalty or interest be removed (abated)?

The IRS can remove or reduce some penalties if the taxpayer acted in good faith and can show reasonable cause for the failure to meet their tax obligations. However, by law, the IRS cannot reduce or remove interest unless the penalty is removed or reduced.

Reasonable cause is based on all the facts and circumstances of each situation, and the IRS will consider any reason establishing that a taxpayer used all ordinary business care and prudence to meet their federal tax obligations but were unable to do so. It is important to note that lack of funds is not a reasonable cause for failing to file or pay on time — but it could be considered reasonable cause for the failure-to-pay penalty.

The IRS’s First Time Penalty Abatement Policy (FTA) can provide relief from a penalty if a taxpayer has not incurred penalties previously. To qualify under this policy, the taxpayer (1) did not previously need to file a return or had no penalties for the last 3 years prior to the tax year in which the penalty was received, (2) is current on all required returns or extensions of time to file, and (3) has paid or arranged to pay any tax due.

What options are available if a taxpayer cannot pay the taxes due?

Short Term Payment Plan: This plan is not available for businesses unless it is a sole proprietor or an independent contractor. There is no setup fee, and the balance must be paid within 180 days. A short-term payment plan is available for individuals if less than $100,00 in combined tax, penalties and interest is due. Penalties and interest accrue until the balance is paid in full. T

Long Term Payment Plan (Installment Agreements): An installment agreement is available for individuals if less than $50,000 is owed or for a business if less than $25,000 is due in combined tax, penalties and interest and all required returns are filed. Penalties and interest accrue until the balance is paid in full. The maximum term for most installment plans is 72 months.

If a taxpayer pays less than the full amount due, how is the partial payment applied?

If a taxpayer makes a partial payment accepted by the IRS, and the taxpayer provides specific written directions as to the application of the payment, then the IRS will apply the payment as instructed by the taxpayer. If the taxpayer does not provide instructions with the partial payment, then the partial payment is applied to periods in order of priority that the IRS determines is in its best interest. The payment will be applied to satisfy the liability in successive periods in descending order of priority until the payment is absorbed. If the partial payment applied to a period is less than the liability for the period then the payment will be applied to the tax, then penalty and finally interest, until the amount is exhausted (Rev. Proc. 2002-26).

Example: The taxpayer incurs the following tax deficiency, penalties and interest:

Year 1: Tax: 6,000, Penalty: $1,800, Interest: $1,200

Year 2: Tax: 7,000, Penalty: $ 0, Interest: $ 1,500

The IRS agrees that the taxpayer can satisfy the total liability of $17,500 for a payment of $15,000. There is no agreement as to the allocation of the payment and the taxpayer does not provide any directions for application of the partial payment. The payment is first applied to the Year 1 tax, penalty, and interest (a total of $9,000), leaving $6,000 to be applied to Year 2. The remaining amount is completely absorbed by the tax due for Year 2, which results in the payment of interest in Year 1, but not for Year 2.

However, if the partial payment accepted by the IRS is less than the total of tax and penalties due in both years and there is no agreement regarding the application of the partial payment, then nothing is allocated to the interest in either year. For example: following the amounts listed above, if the partial payment was $12,000 instead, then the entire amount is applied to the tax and penalty in Year 1 (a total of $7,800) and the remaining amount of $4,200 is applied to the Year 2 tax due. None of the partial payment would be applied to the interest in either year.

Final thoughts

Delaying paying (or paying down) any outstanding balances with the IRS will cost you more than in pr

Disasters and Your Taxes. What you need to know.

Homeowners and businesses across the country have experienced weather-related disasters in recent months. From hurricanes, tornadoes and other severe storms to the wildfires again raging in the West, natural disasters have led to significant losses for a wide swath of taxpayers. If you’re among them, you may qualify for a federal income tax deduction, as well as other relief from the IRS.

Eligibility for the casualty loss deduction

Casualty losses can result from the damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes and volcanic eruptions. Normal wear and tear or progressive deterioration of property doesn’t constitute a deductible casualty loss. For example, drought generally doesn’t qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal-use or business-use items. Generally, you can deduct casualty losses related to your home, household items and personal vehicles if they’re caused by a federally declared disaster — meaning a disaster that occurred in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are deductible in the year of the loss, usually the year of the casualty event. If your loss stemmed from a federally declared disaster, you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

The role of reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. (You also must reduce the loss by any salvage value). Reimbursement also could lead to capital gains tax liability.

When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You’ll need to include that gain as income unless you’re eligible to postpone reporting the gain.

You may be able to postpone the reporting obligation if you purchase property that’s similar in service or use to the destroyed property within the specified replacement period. You also can postpone if you buy a controlling interest (at least 80%) in a corporation owning similar property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. This is the only way you can deduct personal-use property casualty losses incurred in areas not declared disaster areas.

The loss amount vs. the deduction

For personal-use property, or business-use or income-producing property that isn’t completely destroyed, your casualty loss is the lesser of:
• The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation), or
• The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that’s completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure the loss on each separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property (including improvements such as landscaping) is treated as one item. The loss is the smaller of the decline in FMV of the entire property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you may deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you’ve subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. If two or more taxpayers have losses from the same casualty, the $100 rule applies separately to each taxpayer.

But that’s not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income, after you’ve applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

The requisite records

Documentation is critical to claim a casualty loss deduction. You’ll need to be able to show:
• That you were the owner of the property or, if you leased it, that you were contractually liable to the owner for the damage,
• The type of casualty and when it occurred,
• That the loss was a direct result of the casualty, and
• Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Additional relief

The IRS has granted tax relief this year to victims of numerous natural disasters, including “affected taxpayers” in Alabama, California, Kentucky, Louisiana, Michigan, Mississippi, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee, and Texas. The relief typically extends filing and other deadlines. (For detailed information for your state visit: https://bit.ly/3nzF2ui.)

Note that you can be an affected taxpayer even if you don’t live in a federally declared disaster area. You’re considered affected if records you need to meet a filing or payment deadline postponed during the applicable relief period are located in a covered disaster area. For example, if you don’t live in a disaster area, but your tax preparer does and is unable to pay or file on your behalf, you likely qualify for filing and payment relief.

A team effort

If you’ve incurred casualty losses this year, tax relief could mitigate some of the financial pain. We can help you maximize your tax benefits and ensure compliance with any extensions.