Category: Blog

No one knows for sure what 2022 will bring in the form of tax legislation, but there is certain to be some action. Top tax analysts think there are several topics that are likely to come up in 2022. Most predict that a lot of potential changes that were discussed but never made much traction in 2021 will be revisited.

Rolling Back Corporate Tax Rates

Back in 2017, then-President Trump’s Tax Cuts and Jobs Acts (TCJA) reduced corporate tax rates. While a bid raise them again failed in 2021, many believe there is a good chance that Democrats will try again in 2022. Most believe a 2022 proposal would try to raise the current 21 percent corporate tax bracket up to between 25 percent and 28 percent, but opinions vary. While most analysts see a push to raise rates, no one predicts a push to go back to pre-2017 rates, which were as high as 35 percent. Republican opposition to any such measure is expected to be strong.

The Billionaire Tax

New spending proposals in 2021 saw the backing of a billionaire tax as a method to help finance them. While no such tax made its way into law during 2021, many analysts believe that a billionaire tax is likely to resurface once again in 2022.

The name is a bit of a misnomer, as the most recent proposals applied to more than just billionaires; they were set to impact taxpayers with more than $1 billion in assets as well as those with over $100 million of income for three years in a row. Under these thresholds, the tax would only impact approximately 700 to 800 people in the United States.

Proposals from 2021 included a controversial provision that is a major deviation from current tax law: taxing unrealized gains. Currently, with few exceptions for professional traders who can elect to mark-to-market for example, tradable assets such as stocks are taxed only on realized gains once the asset is sold. Iterations of the billionaire tax proposed to change this and require such assets to be valued annually and taxed according to the unrealized portion as well. The rationale is that the ultra-wealthy can take loans against their assets and avoid ever selling or realizing the gains – and therefore avoid taxes as well.

Finally, it’s important to note that this particular form of billionaire tax is not the same as a wealth tax. This tax focuses on unrealized gains only and not the taxpayer’s total wealth.

A True Wealth Tax

Another tax law that made its way into the national spotlight during 2021 and is likely to get another try in 2022 is some form of a wealth tax.

Typically, a wealth tax is a flat tax percentage placed on a taxpayer’s total net worth annually; say one percent, for example. Unlike essentially all forms of taxation in the United States, a wealth tax would see someone owing money year-after-year even if they never made any more money.

One of the biggest non-political problems with a wealth tax is logistics. Taxing net worth means that every asset a taxpayer owns needs to be valued annually, including real estate, cash, investments, business ownership and other assets. This creates a huge administrative burden and leaves a lot of room for interpretation between valuation professionals as well.

No analyst foresees any wealth tax proposals applying broadly. Instead, most see it being targeted at the ultra-wealthy – those with a net worth over $50 million. This makes it politically palatable as the vast majority of taxpayers are exempt; however, there are many who oppose any such tax either due to ideological reasons or because they feel it represents a slippery slope to eventually capture more and more taxpayers with lower net worth thresholds.

Tougher Regulations on Cryptocurrency

One of the most unclear areas for potential 2022 tax law proposals involve cryptocurrencies. The reality is that most of Congress simply doesn’t understand the market and the IRS itself is mired in technical rules on how to treat various sectors of the emerging financial arena.

While some analysts predict there will be proposals to differentiate the tax treatment from more traditional assets, others believe the moves will be largely regulatory and focus on compliance and minimizing tax avoidance within the asset class.

Conclusion

Many of the above tax provisions are highly partisan in nature. As a result, it is likely that congressional gridlock will ensue and little if anything will get passed through legislative channels. This leaves many analysts predicting that tax changes, to the extent possible under our system, may see more executive actions than usual. Regardless, with the current economic uncertainty, high inflation and geopolitical instability, the topics above may or may not come up this year. One thing is certain however, taxes won’t be going away or getting any simpler.

Self-directed IRAs (SDIRAs) are becoming more and more popular as IRA holders look to enter alternative investments. While SDIRAs can open up a world of investment options, the rules around them are complicated and compliance can be tricky. Below, we’ll look at a couple of relevant court cases that illustrate some of the potential pitfalls.

Self-Directed Equals Higher Fees

A SDIRA can own an investment in pretty much any type of asset except life insurance or collectibles. The downside to accessing investments beyond stocks, mutual funds, ETFs and bonds is that it is more expensive.

The SDIRA custodian usually charges an annual fee as well as per transaction fees. The assets also need to be valued at the end of every year for reporting purposes so there is usually a custodial appraisal or valuation fee. These fees and structures often lead to SDIRA owners taking shortcuts to save money or ease administration.

Side-Stepping Rules is Looking for Trouble

One recent case that went before the tax court involved a taxpayer whose SEP-IRA owned an LLC where he was the only owner and manager, with a national bank as the custodian. The taxpayer opened a checking account for the LLC at the same bank.

The taxpayer took distributions from his SEP-IRA and put the money into the LLC account. He then used the money to fund loans on real estate to third parties. The loans paid back over time and the repayments, including interest, were deposited back into the IRA.

The bank issued a Form 1099-R reporting the distributions as taxable events; however, the taxpayer included this income on his tax return. The IRS taxed distributions, plus the 10 percent penalty because he was under 59½. The case went to tax court with the taxpayer claiming he never actually took distributions because the money went from the IRA custodian to the LLC checking account.

The tax court found in favor if the IRS for several reasons. Most important of which is that the taxpayer held full control of the funds that were distributed. Another mistake was that he owned the LLC, which held his checking account and not the IRA. As a result, the bank as IRA custodian no longer held legal control over the money.

In the end, the taxpayer didn’t want to change custodians from the national bank, which held his SEP-IRA, because he didn’t want to pay the fees associated with setting-up a proper SDIRA. If he had, then he could have structured the investments to be made via the LLC, with the IRA as the owner of the LLC and avoided the taxable distributions completely. In the end, it cost him far more than the fees ever would have.

Collectibles Versus Property and Possession

In another case that went before the tax courts, the taxpayer opened an LLC owned by her IRA where she was the sole managing member. The IRA then purchased American Eagle gold coins, which she took physical delivery of and held in her possession.

IRAs are not allowed to own collectibles, with gold bullion and coins generally considered collectibles. There are exceptions however, with gold American Eagles being one of them – so no issue here.

The problem centered on whether the taxpayer took physical possession of the coins. The tax code says that exempt precious metals can held in physical possession by an IRA custodian. As a result, the taxpayer taking physical possession of the gold was deemed a distribution.

Conclusion

These two cases show that LLCs created to invest through a SDIRA must follow all the IRA rules. This is because the IRA is the entity considered to be engaged in all transactions executed by the LLC. Further, the IRA owner shouldn’t be the managing member of the LLC or take physical possession of the assets. It should always be the IRA custodian who holds the assets and maintains control.