On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

The plan includes many provisions that would make good on the President’s campaign promises. The proposal would provide universal preschool to three and four year-olds, two free years of community college, and free tuition for certain universities specializing in serving underrepresented students. The plan would also invest in teacher and child care education, provide free or lower cost child care to lower income families, expand paid leave programs, and improve the quality of student lunch programs. It would also establish automatic adjustments to unemployment insurance, depending upon economic conditions.

Personal Tax Breaks Extended

The proposal would also extend tax benefits already signed into law under the American Rescue Plan Act. This includes:

• extending enhanced premium tax credits and making premium reductions permanent;
• extending the enhanced child tax credit through 2025 (currently a fully refundable $3,000 per child ($3,600 for a child under age six) for 2021 only);
• permanently extending the enhancements of the child and dependent care tax credit, which increase the amount of the credit as well as the incomes at which the credit is phased out;
• permanently extending the increased earned income tax credit for taxpayers without children.

Tax Changes, TCJA Rollback

On the campaign trail, President Biden promised to increase taxes on both corporations and higher-income individuals. While the provisions of the American Jobs Plan are largely funded through a proposed increase in the corporate tax rate from 21% to 28%, the provisions of his American Families Plan are funded by the promised increases to individual taxes.

The proposal would increase the top tax rate on individuals to 39.6 percent from the current rate of 37 percent. This would return the tax rate on the highest bracket of income to where it was before the Tax Cuts and Jobs Act took effect in 2018.

The proposal would also increase the tax rate on capital gains and dividends for households making over $1 million, to match the 39.6 percent rate on income. For 2021, capital gains and certain qualified dividends are taxed at 20 percent for joint filers with taxable income of $496,000 or more.

The plan proposes to eliminate the tax-free step-up in basis on inherited property where the gain would be in excess of $1 million (up to $2.5 million in the case of a couple using existing real estate exemptions. The plan also eliminates the carried interest loophole that allows hedge fund partners to pay tax on income at capital gains rates. The plan would also limit a provision allowing for tax deferral on property exchanges, permanently extend the limitation on excess business losses, and ensure that higher income taxpayers cannot avoid the 3.8 percent Medicare tax.

The plan also provides increased funding for the IRS to improve enforcement, specifically to ensure that higher income taxpayers are unable to avoid proper payment of taxes. While the White House estimates that this will produce an additional $700 billion in revenue over 10 years, many believe this to be a vast overestimate.

Notably absent from the plan is an increase to the cap on the deduction of state and local taxes. The Tax Cuts and Jobs Act set a $10,000 limit for the deduction, but many lawmakers, particularly those representing higher tax states like New York and California, have been pressing to increase the limit or completely eliminate it

Next Steps?

It is uncertain when Congress may take up the process of proposing legislation carrying out the American Families Plan. President Biden has indicated his willingness to negotiate on any proposals he makes. However, the chilly reception to his American Jobs Plan does not indicate a smooth process to get a vote on a legislative package for the infrastructure proposal, let alone passage with razor-thin majorities in both chambers of Congress. With many lawmakers indicated that they want to work on infrastructure before moving on to other proposals, the process from proposal to law could stretch out for months.

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) (P.L. 117-2).

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) ( P.L. 117-2).

Unemployment compensation is taxable income, but the ARP excludes $10,200 in unemployment compensation from the income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers who are single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund itself.

The IRS has identified over 10 million taxpayers who filed their tax returns prior to the ARP becoming law in March, and is reviewing past returns to determine the correct taxable amount of unemployment compensation and tax. This could potentially result in a refund, reduced balance due, or with no refund being owed.

The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits. Notices explaining the corrections will be sent to taxpayers, and are expected to reach them within 30 days of the correction being made.

The IRS stated that it will issue refunds by direct deposit to taxpayers who provided their bank account information on their returns. Alternatively, refunds will be mailed as a paper check to the taxpayer’s address of record.

These refunds will be subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts, such as student loans. The IRS will send separate notices to those taxpayers whose refunds could be offset to settle unpaid debts.

Further, corrections to any Earned Income Tax Credit (EITC) without qualifying children and the recovery rebate credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits that were not claimed on their original return. The IRS also reminded taxpayers to file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

The IRS had initially determined that businesses whose PPP loans were forgiven or expected to be forgiven could not deduct business expenses paid for by the loan. However, the Consolidated Appropriations Act of 2021 ( P.L. 116-260), enacted on December 27, 2020, subsequently permitted taxpayers to deduct these expenses.

Safe Harbor Eligibility

To be eligible for the safe harbor, the taxpayer must have received an original PPP covered loan and filed a federal income tax return or information return for the 2020 tax year on or before December 27, 2020. The taxpayer must have paid or incurred original eligible expenses during the taxpayer’s 2020 tax year that the taxpayer did not deduct because:

• the expenses resulted in forgiveness of the original PPP covered loan; or
• the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in forgiveness.

Electing the Safe Harbor

A taxpayer elects the safe harbor by attaching a statement to a timely, including extensions, federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred. The statement must include:

• the taxpayer’s name, address, and social security number or taxpayer identification number;
• a statement that the taxpayer is applying the safe harbor provided by section 3.01 of Revenue Procedure 2021-20;
• the amount and date of disbursement of the taxpayer’s original PPP loan; and
• a list, including descriptions and amounts, of the original eligible expenses.

Certain Expenses and Loans Not Covered

The safe harbor applies only to original eligible expenses, and not to additional expenses that were added by the Consolidated Appropriations Act. The safe applies only to original PPP loans. It does not apply to PPP second draw loans.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit. Under the procedures:

• individuals who are not required to file returns for 2020 can use a simplified federal income tax return filing procedure; and
• individuals with zero adjusted gross income (AGI) for 2020 can file electronic returns by entering "$1" in several fields.

Simplified Return Procedures

Individuals may file simplified 2020 returns electronically or on paper if they have not filed and are not required to file 2020 returns. The simplified procedures apply to Forms 1040, 1040-SR and 1040-NR.

The individual should write "Rev. Proc. 2021-24" at the top of a paper return. The procedure includes detailed instructions for providing identification, income and direct deposit information.

Zero AGI

Many filing systems for electronic returns will not accept returns that report zero AGI. To file an electronic return, in addition to all other information required to be entered on Form 1040, Form 1040-SR, or Form 1040-NR, an individual with no AGI should report:

• $1 as taxable interest on line 2b of the form;
• $1 as total income on line 9 of the form; and
• $1 as AGI on line 11 of the form.

Filers of Form 1040-NR with no AGI should also report $1 as itemized deductions on lines 7 and 8 of Schedule A (Form 1040-NR) and line 12 of Form 1040-NR.

Returns Must Be Accurate

Simplified returns and zero-AGI electronic returns are federal income tax returns for all purposes. Thus, the individual must properly sign the return under penalties of perjury. The returns must also provide accurate information. However, the IRS will not challenge the accuracy of income items reported by taxpayers using these special procedures.

Individuals Who Filed 2020 Returns

Individuals who have already filed their 2020 returns do not have to do anything further to:

• receive advance child credit payments for an eligible child shown on that return;
• receive a third-round Economic Impact Payment (EIP) for the 2021 recovery rebate credit that is attributable to a dependent shown on that return; or
• claim a previously claimed 2020 recovery rebate credit and additional 2020 recovery rebate credit for themselves and for each eligible qualifying child.

Similarly, an individual who filed a federal income tax return for 2019, including by entering information in the "Non-Filers: Enter Information Here" tool on the IRS website, also do not need to file any additional forms of contact the IRS in order to receive advance child credit payments for a qualifying child shown on that return. An individual who did not receive EIPs for the full amount of the 2020 Recovery Rebate Credits may claim them by filing a 2020 federal income tax return.

U.S. Territory Residents

The simplified return and zero-AGI procedures do not apply to residents of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.

• Residents of Puerto Rico may be eligible to claim the child tax credit from the IRS under procedures to be announced at a later date, but they are not eligible to receive advance child tax credit payments.
• Residents of other U.S. territories should contact their local territory tax agency for additional information about the child tax credit and advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

COBRA provides eligible former employees, retirees, spouses, former spouses, and dependent children with the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. State mini-COBRA laws often provide similar benefits for insured small employers not subject to Federal COBRA.

The American Rescue Plan Act ( P.L. 117-2) provided a temporary 100% reduction in the premium that individuals would have to pay when they elect COBRA continuation health coverage following a reduction in hours or an involuntary termination of employment. The new law provides a corresponding tax credit for the entities that maintain group health plans, such as employers, multiemployer plans, and insurers. The 100% reduction in the premium and the credit are also available with respect to continuation coverage provided for those events under comparable state laws, sometimes referred to as "mini-COBRA."

Under the new law, COBRA premium assistance is available to eligible individuals as of the first period of coverage beginning on or after April 1, 2021, and will not be available for periods of coverage beginning after September 30, 2021. For each Assistance Eligible Individual, COBRA premium assistance does not extend beyond the period of COBRA continuation coverage in the event that the period ends prior to September 30, 2021. If an individual receiving premium assistance becomes eligible for coverage under any other group health plan or for Medicare, the premium assistance period ends.

Example: On April 1, 2021, the individual’s employment is terminated, and the individual becomes a qualified beneficiary. The individual elects COBRA continuation coverage and becomes an Assistance Eligible Individual with COBRA continuation coverage beginning on April 1, 2021, the date the individual lost coverage. On July 1, 2021, the individual becomes eligible for coverage under a group health plan sponsored by the employer of the individual’s spouse and ceases to be an Assistance Eligible Individual. The individual ceases COBRA continuation coverage as of July 1, 2021, and enrolls in coverage in the group health plan sponsored by the employer of the individual’s spouse. On August 1, 2021, the individual’s spouse has an involuntary termination of employment, and as a result the individual and spouse lose coverage. The individual and spouse become qualified beneficiaries due to the loss of coverage and elect COBRA continuation coverage with the plan sponsored by the spouse’s employer. The individual and spouse become Assistance Eligible Individuals with respect to COBRA continuation coverage as of August 1, 2021.

In Notice 2021-31, the IRS has provided information regarding the calculation of the credit, the eligibility of individuals, the premium assistance period, and other information vital to employers, plan administrators, and insurers to understand the credit.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

ARP tax credits are available to eligible employers that pay sick and family for leave from April 1, 2021, through September 30, 2021. Under the Act, eligible employers include any business, including tax-exempt organizations with fewer than 500 employees who are not able to work or telework due to reasons related to COVID-19, including needing to recover from any injury, disability, illness or condition related to the vaccinations.

The IRS has informed taxpayers that the paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, and the employer is entitled to payment of the full amount of credits if it exceeds the employer’s share of the Medicare tax. The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons, for up to two weeks at 100 percent of the employee’s regular rate of pay. Further, the tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, at 2/3rds of the employee’s regular rate of pay. Importantly, the amount of these tax credits increases according to allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages.

Eligible employers are recommended to report their total paid sick and family leave wages, health plan expenses and collectively bargained contributions, including their share of social security and Medicare taxes on the paid leave wages for each quarter on their federal employment tax return. Form 941, Employer’s Quarterly Federal Tax Return, can be used to report income tax and social security and Medicare taxes withheld from employee wages.

Further, in anticipation of claiming the credits on the Form 941, eligible employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld, the employees’ share of social security, Medicare taxes and their share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If, however, an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages, the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will then have to account for the amounts received as an advance when they file Form 941, Employer's Quarterly Federal Tax Return, for the relevant quarter. Finally, self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS stated that the most important thing that taxpayers with a tax bill should do is file a return by the May 17 due date, even if they cannot pay in full, or request a six-month extension to avoid higher penalties for failing to file on time. The IRS emphasized that even though automatic tax filing extensions are available, these extensions do not change the payment deadline.

Further, interest, plus the much smaller late-payment penalty, will apply to any payments made after May 17. Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month. The interest rate, adjusted quarterly, is currently 3% per year, compounded daily.

The IRS urges taxpayers to use Direct Pay, which is the fastest and easiest way to pay a personal tax bill. In addition, the IRS has noted that online payment plans are processed more quickly than requests submitted with electronically-filed tax returns.

There are two main types of online payment plans:

• Short-term payment plan: The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest. A 180-day payment plan is also possible, but is only available by calling or writing the IRS.
• Long-term payment plan ( "installment agreement"): Payments are made monthly, and the amount owed must be less than $50,000 in combined tax, penalties and interest. If the IRS approves an installment agreement, a setup fee normally applies, but low-income taxpayers may qualify to have the fee waived or reimbursed. In addition, for anyone who filed their return on time, the late-payment penalty rate is cut in half while an installment agreement is in effect. This means that the penalty accrues at the rate of one-quarter-of-one percent (0.25%) per month, instead of the usual one-half-of-one percent (0.5%) per month.

Taxpayers who do not qualify for an online payment agreement may still be able to arrange to pay in installments. If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. Taxpayers can request a delay by calling the phone number on their IRS notice or 800-829-1040.

Some taxpayers can qualify to settle their tax bill for less than the full amount due through an offer in compromise. Though there is typically a $205 non-refundable application fee, it is generally waived for low-income taxpayers, and for offers based on doubt as to liability. The Offer in Compromise Pre-Qualifier tool can help determine eligibility for anyone interested in applying.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS advises taxpayers to do the following:

• Secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Keep duplicates of these documents with a trusted person outside the area of the taxpayer. Scan these documents for backup storage on electronic media such as a flash drive.
• Take current photos or videos of a home or business’s contents, especially expensive and high value items. The IRS disaster-loss workbooks in IRS Pub. 584-B can help individuals and businesses compile lists of belongings or business equipment.
• Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
• Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent Care Assistance Exclusion

Employees may exclude amounts their employer pays or incurs for dependent care assistance benefits if furnished pursuant to a dependent care assistance program. For 2020, the exclusion could not exceed $5,000, $2,500 if married filing separately (for 2021 only, increased to $10,500, $5,250 if married filing separately). Unused benefits may be used during a 2 1/2 month grace period following the plan year’s end. However, if the sum of the benefits used in the tax year (including unused benefits used during a grace period that falls in the tax year) exceeds the limitation, the excess is taxable.

Carryovers and Extensions

Beyond the grace period, carryovers of unused dependent care assistance program amounts generally are not permitted. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) allowed employers to amend their plans to permit carryovers to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period.

Under Notice 2021-15, I.R.B. 2021-10, 898, if an employer adopts the carryover or the extended period, the annual limits apply to amounts contributed for a year, and not to amounts reimbursed or otherwise available for reimbursement.

Notice 2021-26 clarifies that dependent care assistance program benefits that would have been excluded from income if used during the tax year ending in 2020 or 2021, remain eligible for exclusion from the participant’s gross income, and are disregarded in applying the limits for the employee's subsequent tax years when they are carried over from a plan year ending in 2020 or 2021 or permitted to be used pursuant to an extended claims period.

Notice 2021-26 also provides examples illustrating the possible tax consequences of electing $10,500 in benefits for a plan year beginning in 2021 but ending in 2022.

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. 

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. While roughly 99 percent of the taxes due on wages are remitted to the IRS, compliance across other forms of income is substantially less, because the IRS has had difficulty verifying whether income from unverified sources is properly reported. The Treasury states that noncompliance is concentrated at the top of the distribution: according to a recent study, the top one percent failed to report 20 percent of their income, and failed to pay nearly $175 billion in taxes owed annually.

The Treasury states that lower levels of compliance not only negatively impact tax progressivity, but also lower tax revenue and deteriorate the country’s fiscal position. If left unaddressed, the difference between taxes owed to the government and taxes actually paid will total approximately $7 trillion in the next 10 years. This massive gap in revenue would mean that policymakers must choose between higher taxes elsewhere in the tax system, lower spending on fiscal priorities, or rising budget deficits. This tax gap has many underlying causes, with insufficient resources being at the forefront. In addition, budget cuts over the past decade have resulted in an IRS that lacks the capacity to address sophisticated tax evasion efforts. Over this period, audit rates for taxpayers making over $1 million in income have fallen by almost 80 percent.

To ensure a fair and effective tax system, the Treasury says that a robust and sustained investment in the IRS is necessary. The IRS requires access to 21st century technology and to better information, so that it can target its efforts at offenders while helping compliant taxpayers avoid unnecessary and costly audits. Importantly, this investment will also put the IRS in a position to provide taxpayers with timely answers to questions.

The Treasury has listed some considerations that provide the basis for a series of proposals in the American Families Plan (AFP). The AFP intends to overhaul tax administration and provide the IRS with the resources and information it needs to address tax evasion. These reforms are expected to generate an additional $700 billion in tax revenue over the course of a decade. The reforms are expected to:

• Provide the IRS with necessary resources to stop sophisticated tax evasion. A key component of this initiative is the provision of a sustained, multi-year stream of funds to help the IRS tackle costly tax evasion.
• Provide the IRS with more complete information on third parties. When the IRS has information from third parties, income is accurately reported, and taxes are fully paid. Importantly, this proposal intends to provide additional information to the IRS without an increased burden on taxpayers. It leverages the information that financial institutions have about account holders, requiring that they add to their regular, annual reports information about aggregate account outflows and inflows.
• Overhaul outdated technology to help IRS identify tax evasion, by providing the IRS with resources to modernize its technological infrastructure.
• Improve taxpayer service and deliver tax credits. Service enhancement will improve the ability of the IRS to communicate with taxpayers securely and promptly. The proposal would also include the necessary resources to ensure that the IRS efficiently delivers credits to families and workers, including newly expanded child tax credits and child and dependent care tax credits.
• Regulate paid tax preparers by providing the IRS with legal authority to implement safeguards in the tax preparation industry. This includes stiffer penalties for unscrupulous or "ghost preparers" who fail to identify themselves on tax returns and defraud taxpayers.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Image and Likeness

The estate claimed that the decedent’s image and likeness was valued at about $2,000. However, at trial, the estate brought in additional experts and increased the value to about $3 million. This amount was based on a 10-year revenue projection, which examined pre-death revenue, post-death rights, and growth and decline rates using pre-death marketability and a potential post-death boom. An estimate of expenses incurred in administering the image and likeness and expenses related to rehabilitation of the decedent’s image reduced the revenue stream. As a result, the Tax Court determined that the date-of-death value of the decedent’s image was $4.1 million.

Interest in Sony/ATV

In the years prior to his death, the decedent had borrowed against his interest in the Sony/ATV company. The company was valued using the discounted cash flow method. After finding the value of the company as a whole, a discount for lack of control was applied to one-half of that amount to reflect the decedent’s 50-percent interest. Because of the debt secured by the interest, however, the Tax Court determined that the date-of-death value of NHT II was zero.

Interest in Mijac Music

The major asset of NHT III was Mijac Music, which owned compositions from many artists, including the decedent. The decedent also assigned the income he earned from his writer’s share of certain performance revenue to NHT III. The discounted cashflow analysis was used again and the court determined the revenue streams of Mijac Music and the writer’s share of revenue. After subtracting the trust’s liabilities from the revenue, the Tax Court determined the value of NHT III was $107 million.

No Penalties

Although the values differed widely, the estate was not liable for accuracy-related penalties. Its reliance on the appraisal values was reasonable.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

IRS shutdown

On October 1, many IRS employees in Washington, D.C. and nationwide were furloughed after Congress failed to approve funding for the government's fiscal year (FY 2014). During the shutdown, only 10 percent of the IRS' approximately 90,000 employees remained on the job, most engaged in criminal investigations and infrastructure support. Employees on furlough, including revenue agents assigned to exams and hearing officers assigned to collection due process cases, were expressly prohibited from doing any work, including checking email and voice messages.

Employees return to work

The IRS reopened on October 17. The previous day, Congress had passed legislation to fund the government through mid-January 2014. The IRS immediately cautioned taxpayers to expect longer wait times and limited service as it would take time for employees to resume work and process backlogged inventory. Upon their return to work, IRS employees began reviewing email, voice messages and their files as well as completing administrative tasks to reopen operations. The IRS reported that it received 400,000 pieces of correspondence during the furlough period in addition to nearly one million items already being processed before the shutdown.

Returns and refunds

The 16-day furlough overlapped with the October 15 deadline for taxpayers on extension to file 2012 returns. The IRS reported that during the shutdown it continued as many automated processes as possible, including accepting returns and processing payments. The Free File system also was open during the furlough period. However, refunds were not issued while the IRS was closed. Refunds are now being processed. If you have any questions about a refund or payment, please contact our office.

Filing season

The start of the 2014 filing season will be delayed approximately one to two weeks so the IRS can program and test tax processing systems following the 16-day federal government closure. The IRS had anticipated opening the 2014 filing season on January 21. With a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28, 2014 and no later than February 4, 2014. The IRS reported it will make a final determination on the start of the 2014 filing season in mid-December.

The IRS explained that the government shutdown took place during the peak period for preparing its return processing systems for the 2014 filing season. The IRS must program, test and deploy more than 50 systems to handle processing of nearly 150 million tax returns.

"Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right," Acting Commissioner Daniel Werfel said in a statement. "The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation's taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season."

Affordable Care Act

Beginning January 1, 2014, the Affordable Care Act generally requires individuals - unless exempt - to carry health insurance or make a shared responsibility payment (also known as a penalty). Individuals exempt from the payment include individuals covered by most employer-sponsored health plans, Medicare, Medicaid, and other government programs. The penalty is $95 in 2014 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

The Obama administration launched individual Marketplaces (formerly known as Exchanges) on October 1 in all 50 states and the District of Columbia. The enrollment period for coverage for 2014 began on October 1 and is scheduled to end March 31, 2014, which is after the January 1 effective date of the individual mandate. In late October, the Obama administration clarified on social media that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

Because of technical problems, some applications on HealthCare.gov have not been running at 100 percent, the U.S. Department of Health and Human Services (HHS) reported. Individuals can, however, enroll and obtain insurance at in-person assistance centers. Marketplace customer call centers are also open, HHS explained.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.