Ask Captain Codehead – Tax advice appropriate for an irrational world

Dear Captain Codehead,

I filed my 2020 tax return last June, and I still haven’t gotten my refund. I was counting on that money to expand my closet and buy some new shoes.  My friend Miranda suggested I try Where’s My Refund? at IRS.gov, but its response was, “Somewhere. Probably.” Then I tried calling the IRS: is eight days a long time to spend on hold? I even called one of my Senators’ offices, but the staff person there laughed, then cried, then sobbed uncontrollably, then laughed again, and then I heard sirens in the background, so I hung up.  What’s going on inside the IRS? Do you have any advice?

— Not Carrie Bradshaw

Dear NCB,

I feel your pain.  Not your foot pain: Captain Codehead typically wears an old pair of running shoes, or – when he’s feeling fancy – a pair of loafers he got during the Reagan administration.  Back to your point, an unusually high number of taxpayers have reported long delays in receiving their refunds over the past two years.  The delays have been especially noticeable for taxpayers like you with larger refunds.  The semi-good news is that IRS must pay taxpayers interest on refunds that are outstanding for more than 45 days. The bad news is that the interest rate they pay is similar to the rate of interest in Dave Matthews Band cover groups.

In terms of what’s going on inside the IRS, we discussed this question on a recent edition of my podcast, and my expert panel was evenly divided between several explanations: Covid-related staff shortages and turnover; insufficient budgetary funding from Congress; the replacement of IRS with an evil AI created by Russian hackers.  Take your pick.

In terms of whether I have any advice, yes: this is, after all, an advice column.  Ish.  In your particular case, I’d advise buying less expensive shoes.  But assuming that’s a non-starter, here are some other options.

IRS calling services.  There are organizations out there that pay their employees to stay on hold with the IRS so you don’t have to.  These services claim hold time reductions of up to 90%.  Pro: this is a real thing (also real: interest on late refunds and my old loafers; most of the other facts herein are, well, alternative). Con: it might make you feel better to speak to a real person/Russian AI, but it won’t actually get you your refund any faster.

PPP.  (Not that PPP.) Patience, persistence, and prayer.  Have you considered that your delayed refund is the universe’s way of encouraging you to reevaluate your priorities?  Taxpayers have reported getting relief from a wide variety of metaphysical practices.  For example, many CPA firms maintain a shrine to St. Matthew, the patron saint of tax collectors and accountants.  Some firms even burn draft copies of tax returns to Matthew, though IMHO, this practice is mostly about not having to pay for a paper shredding service.  Captain Codehead recommends a more spiritual approach, which he attributes to the late Thich Nhat Hanh.  Sit in a darkened cubicle, close your eyes. Inhale slowly while thinking, “Breathing in, I exclude my income.”  Exhale, thinking, “Breathing out, I deduct.” Repeat until you get your refund – or enlightenment.  Pro: lower blood pressure.  Con: there’s no peer-reviewed research that associates faster refunds with prayer, meditation, or burnt offerings.  Also, some midwestern CPAs have reported setting their toupees on fire (there’s always a silver lining, no?).

Direct public action.  Sometimes, you just have to take to the streets for your voice to be heard.  To that end, Captain Codehead is calling for a Day of Taxpayer Solidarity.  Activities will include a mass sage burning (demon possession of IRS management being another popular explanation for slow refunds) and a march on the IRS national headquarters.  Join us on May 1 (which gives Captain C time to finish filing his clients’ 1040s, do his billing, and enjoy a short vacation).  If you’re unable to be there in person, I encourage you to support us on my Kickstarter page.  Pro: at the $50 level, you get a very nice t-shirt.  Con: Day of Taxpayer Solidarity speeches.  Zzzzz.

Finally, NCB, I want to remind you that while you can’t always control what happens at the IRS, you can control how you look at it, so let’s practice some reframing.  On a human timeframe, that refund is taking a long time.  But on a geological timeframe, it’s so very much shorter than the Jurassic era.  Put another way, the arc of the taxpayer universe is long, but it bends toward refund.  Enjoy your shoes!

By Greg Yoder

 

Cryptocurrencies Issues for Exempt Organizations

More and more charities are accepting cryptocurrency as donations. Before an organization decides whether or not to accept cryptocurrency, it should understand some of the related issues.

Gift acceptance

Gift acceptance policies for charities are a best practice for determining what type of donations will be accepted.  An organization needs a policy that specifies who will approve a cryptocurrency donation, what cryptocurrencies will be accepted, and whether currency will be sold immediately or held in the hope of appreciating.  As with stock donations, there is no tax effect to the exempt organization for an increase in value, but there is the added volatility to consider.

Before a charity can accept a crypocurrency donation, it must determine whether to control the cryptocurrency internally or utilize a payment processor, which may make sense for the added expertise and security. Some well-known processors include Engiven, the Giving Block and Every.org.  These processors can also assist with tax issues.

Tax issues

Cryptocurrency is considered a capital asset for income tax purposes.  A donor can avoid capital gains tax on appreciated cryptocurrency by donating it to a charity.  The donation would also be deductible as an itemized deduction.  If the gift is over $5000, the nonprofit must also sign the Noncash Charitable Contributions form (Form 8283) acknowledging the receipt of property, as well as have the cryptocurrency donation appraised by a “qualified appraiser.”  There are firms that offer crypto appraisal services. This differs from donations of publicly traded stock, which do not require an appraisal.

If the charity sells the donated cryptocurrency within three years of donation, the charity must provide the Donee Information Return form- also known as Form 8282 to the IRS (and a copy to the donor) within 125 days of sale. Also, as with any other donation, if the value of the cryptocurrency donation was over $250, the organization must provide a donor acknowledgement letter.

Financial statement/audit issues

Under generally accepting accounting principles (GAAP), cryptocurrency is treated as an intangible asset, rather than cash, investments, or inventory.  The gift of the cryptocurrency donation would be recorded at fair value at the time of donation, but if the cryptocurrency is held for a longer period, you would not adjust the value of the crypocurrency for market fluctuations.  You would, however, need to test for impairment each year.

We are staying abreast of the current developments with respect to both the IRS and with GAAP. If you have any questions, feel free to reach out to a member of our team.

By Keith Jennings

Gifting Strategies for 2022

Gifting is always a nice gesture. However, as with most transfers of assets, there may be tax implications. Most gifts that exceed the annual gift tax exclusion of $16,000 per donee (2022) will create a federal gift tax return filing requirement. Two exceptions are payments of the recipient’s medical expenses or education tuition, both of which must be paid directly to the provider or institution to qualify for the exclusion.

On top of the annual gift tax exclusion, each individual is allowed a lifetime exclusion provided by the Unified Tax Credit. For the 2022 tax year, this exclusion is $12,060,000. A gift in excess of $16,000 can be applied to this exclusion which means no taxes are due on the gifts as long as the total lifetime gift amounts don’t exceed the exclusion limit, on a cumulative basis.

There are a variety of gifting options, including giving investments, funding an irrevocable trust, contributing to a minor’s Roth IRAs, and funding 529 college plans, that provide more “bang for your buck” when it comes to taking advantage of the exclusions and exemptions. However, when the recipient sells the investments, he or she will generally use the donor’s cost basis to calculate capital gains or losses, effectively transferring capital gains tax obligations from the donor to the recipient.

Irrevocable trusts are useful for beneficiaries who are not yet capable of handling large sums of money, where there are concerns about shielding assets from creditors or where the amount and timing of each beneficiaries’ share is to be decided in the future. Such trusts allow the donor to spell out how the funds will ultimately be distributed. The drawback of such a trust is that once the assets are gifted, the donor cannot take back (revoke) the transfer nor retain control over many aspects of the trust operation.  Gifts contributed to irrevocable trusts are considered a “future interest,” which do not qualify for the annual gift tax exclusion. For the annual exclusion to apply to such gifts, the trust language must include a provision that allows the beneficiaries the right to withdraw the gift for a short period.

Consider contributions to a minor’s Roth IRA. Any adult can create a custodial account to contribute to on behalf of a beneficiary who is under the age of 18. The beneficiary must have employment compensation, babysitting and lawn mowing count, and contributions may be no more than the minor’s earnings, capped at $6,000 per year for 2022.

There are also gifts to help with future education expenses. 529 plans are savings plans intended for higher education expenses and are available in most states.  Gifts to these plans have special rules that allow the donor to “front load” the annual exclusion for five years, allowing more time for tax-free growth. Maryland, for example, offers two options: the College Investment Plans and the Prepaid College Trusts. A College Investment Plan uses contributions to fund a selection of investment options managed by T. Rowe Price. A Prepaid College Trust uses contributions to lock in future tuition prices at today’s prices with flexible tuition plans and payment options while being backed by a Maryland Legislative Guarantee. Distributions are tax-free when used for qualified education expenses. After The Tax Cuts and Jobs Act of 2017, funds from the College Investment Plans can also be used to pay for private primary and secondary school on top of higher education.

Although the 529 plan contributions are not deductible on the federal level, many states offer their own state income tax return benefits. Maryland offers a $2,500 deduction per beneficiary per year or $5,000 for married taxpayers filing jointly with a 10-year carryforward of excess contributions. To illustrate, if a single parent contributes $10,000 towards his or her child’s Maryland 529 plan by December 31, 2022, they may take a $2,500 deduction on their Maryland income tax return for 2022 and each subsequent year until 2026, assuming no subsequent contributions.

These are just some of the available gifting strategies. Please keep in mind that laws and limits may change and are often more complicated than explained in this short summary. If you have any questions or concerns, or if you would like more details before making decisions, Snyder Cohn is always available to help.

 

By Doris Truong