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Virtual Currencies & US tax and financial account reporting

January 15, 2021 by Reynolds & Rowella Leave a Comment

By: Christopher Galakoutis, Reynolds + Rowella

In 2014, the Internal Revenue Service (IRS) issued initial guidance on cryptocurrencies with Notice 2014-21.  Particularly how taxpayers who held Bitcoin, as well as other virtual currencies, would be required to report transactions involving these cryptocurrencies for US income tax purposes. 

Specifically, the IRS stated such virtual currencies were not a ‘currency,’ but rather property that was to be treated as a capital asset.  In addition, the IRS also reminded taxpayers that failure to accurately report income from cryptocurrency transactions would result in civil and criminal penalties.

In 2019 the IRS added a question to Form 1040 (US Individual Income Tax Return), Schedule 1, which asked taxpayers to respond ‘yes’ or ‘no’ regarding any transactions or any financial interest in any virtual currency.  That same question has, for 2020 tax purposes, graduated to page one of Form 1040 itself. 

With regards to foreign account reporting, because Notice 2014-21 did not address whether reporting of these cryptocurrencies was required for purposes of FinCEN Form 114 (also known as FBAR), there has been uncertainty surrounding this question.  The filing threshold for FinCen Form 114 is reached when the aggregate value of a taxpayer’s foreign financial accounts exceeds $10,000 at any time during a calendar year, with significant penalties possible for non-compliance.

On December 30, 2020, the US Treasury Department via its Financial Crimes Enforcement Network (FinCEN), announced in a short notice published on its website, its intention to propose to amend regulations implementing the Bank Secrecy Act.  Notice 2020-2 states that such amendments would seek to include virtual currency as a type of reportable account for FBAR purposes.  No date was stated. 

In addition to the FBAR, US taxpayers may also have obligations to report their foreign assets on Form 8938, Statement of Specified Foreign Financial Assets, which is a part of the Form 1040.  The thresholds for completing that form are different than for the FBAR, while also potentially including a wider scope of foreign assets. 

Reynolds + Rowella can assist clients assess whether US reporting requirements apply to them under either the FinCen 114/FBAR rules or Form 8938.  Clearly, virtual currencies remain of high interest to the IRS particularly as they continue to set record prices.  Please contact Reynolds + Rowella for more information.

About Reynolds + Rowella

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Filed Under: Virtual Currencies Tagged With: Best Accounting Firms Fairfield County CT, Best Accounting Services CT, US tax and financial account reporting, Virtual Currencies

Tax-Smart Gifting

October 27, 2020 by Reynolds & Rowella Leave a Comment

By: Eric Miller

As with every election year, there is a great deal of uncertainty of what to expect. Taxes are always a popular topic amongst the candidates regardless of the year, and that trend has continued for the 2020 election. When discussing taxes the popular area that is addressed are Income Taxes and an area that can sometimes be overlooked can be the Gift and Estate Tax. 

The 2018 tax reform brought with it significant changes to the Gift and Estate Tax, increasing the federal exemptions from 5.49 million to 11.18 million. When this happened, many taxpayers believed they no longer needed to worry about any sort of major gifting or estate planning as their estate was under 11 million, or 22 million if married.  However, a change in the presidency or a shift in control in the House or Senate could change these rules. With the possibility that these exemptions could decrease to 2012 levels or even pre-2012 levels means that taxpayer’s need to evaluate their current financial position, future plans, and prepare for the future to not miss out on being able to protect large amounts of their hard earned wealth from estate taxes.

If Trump is re-elected or the Republicans maintain control, there is the possibilities that the current rules are kept in place through 2025, as originally set under the 2018 reform. There is even the possibility of making the current exemptions permanent and not subject to sunset in 2025.  If no action is taken, the exemptions are set to decrease to pre-2018 levels of 5 million. 

If Biden is elected or if the Democrats gain control, the rumored changes to the current exemptions could be drastic.  Not only is there a chance that the exemption amount could drop to the 2012 exemption amount of 5 million, there is a chance it could go to the 2009 amount of 3.5 million. The fact that the exemption amounts could decrease so much is scary enough on its own but the potential changes do not stop there. There is also the possibility that the stepped-up basis may be removed, meaning that the taxpayer’s original cost basis will be passed to the beneficiaries of an estate even after estate taxes have been paid on the fair market value of the asset. For many assets, this can lead to massive amounts of taxes paid for both estate taxes and future income taxes by the beneficiaries.  And if that weren’t enough, the tax rate could be changed. The current Estate and Gift Tax rate is 40%.  This was 45% in 2009 and has been as high as 55%. 

Additionally, some of the more popular estate planning vehicles, such as Grantor Retained Annuity Trusts (GRATs), Generation Skipping Trusts, and Grantor trusts might be targeted and changed. A very popular technique that has been used is to make a gift of an asset to a Grantor trust that removes the asset from the taxpayer’s estate but requires the taxpayer to then continue reporting the income generated by the trust on their personally filed income tax return. Doing this allows for the Grantor trust to not have to use any of its own assets to pay income taxes as the taxpayer pays it on behalf of the trust and does not need to incur any additional gift tax. This helps the trust to continue growing, not needing to spend any of its own earnings on taxes, while it further helps to reduce the estate of the taxpayer.

Another important item to note is that if there is a change in the gift tax exemption, gifts are made from a bottom up approach, not a top down. What this means is that if a taxpayer makes a gift of $4 million in 2020 when the exemption is $11 million, there will be $7 million of gift and estate exemption remaining.  If in 2021 the exemption is reduced to $5 million, the taxpayer will still have used up $4 million of their exemption while only have $1 million remaining. 

One item that will need to be considered and planned for if making large gifts will be the state of residency.  Connecticut for example has its own separate gift tax.  While this amount has been increasing each year since 2018, up from $2 million, the 2020 exemption is only at $5.1 million.  This means that any federal gift in excess of $5.1 million, assuming no exemption has been used, will be subject to Connecticut gift taxes.  Connecticut also has its own set of unique rules when calculating its gift tax as if any exemption has been used already, it is not a dollar for dollar increase.  A calculation will need to be done to see how much Connecticut gift tax is still available. 

While New York does not have its own gift tax like Connecticut, it does present its own items to consider when making gifts.  New York has a “claw back” period of three years.  This means that any gifts made within three years of the date of death are brought back into the taxpayer’s estate for New York purposes. 

It is very unlikely that any sort of change, if they were to occur, would happen right away in 2021.  Even with that thought, one should not gain a potential false sense of security that any gifts done before any changes are made are safe.  There can always be the possibility that a change can be made retroactively.  This would mean even though a change occurred in July of 2021, gifts made in January 2021 when the then old rules are still in place, could now be subject to the new rules. 

While the above items are not guaranteed, the possible changes that could occur are drastic enough that taxpayer’s should be considering all of their options. While taxpayer’s can wait to see how the election plays out and will have until December 31 to execute any plans, the planning can start now.  What is your overall goal?  Do you want to make sure you have just enough and leave everything to the next generation?  What assets do you have available to use?  Depending on the answers to these sorts of questions, the manner of gifting will be different, as well as seeing whether or not it is worth doing this gifting.  Everyone’s situation is a little different, and as such everyone needs to look at their own estate and plan differently.

Additionally, your accountant and attorney will greatly appreciate discussing these items while there is more time to determine the best course of action. 

About Reynolds + Rowella

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Filed Under: Uncategorized Tagged With: Accounting Services Fairfield County CT, Best Accounting Services CT, Gift and Estate Tax, Tax-Smart Gifting

The Problem with “The 5-Year Exit Plan”

August 21, 2017 by Reynolds & Rowella Leave a Comment

Most business owners who are asked about their exit plans will reply that they want to exit their business ‘in about 5 years’. Often times, 5 years later, the same owner will give the same answer to the same question. In reality, the 5-year window is a subconscious resistance to beginning the process of planning for an exit. This newsletter is written to help owners see that the perpetual 5-year plan is not good for themselves or their businesses and that the natural tendency to delay the planning for your eventual exit may be costly to both you, your company, and the people who depend on your business for their livelihood.

The Five (5) Year Exit Phenomenon

The 5-year, universal answer to ‘when will you exit your business’ represents a number of interesting factors relating to the challenges associated with developing and executing an exit plan.

First – the 5-year window of time is, in many ways, a simple refusal to commit to anything immediate. This means that an owner who says that they will exit in 5 years is essentially saying “I don’t have any idea when and / or how I will exit, but if I say ‘5 years’ then this is enough time to begin to think about it at a later date.’

Next – the 5-year window can many times reflect an accurate amount of time that it will take for an owner to properly exit a business. However, if that owner does not take any action today, then the 5-year window will often times become an indefinite period of time before the exit planning occurs. The ‘rolling 5-year phenomenon’ then begins to take form.

The Challenges Associated with Planning an Exit Strategic vs. Tactical

Most owners of private businesses lack the ability to see beyond their day-to-day running of their business. This leads to a natural delay in doing long-term planning such as ‘exit planning’.

WHY IS THIS THE CASE?

Quite simply, most business owners are tactical and not strategic in their approach to their businesses. Time is not put aside for looking far into the future to try to see where the owner thinks that he/she and the company want to be.

The beauty of 5 years is that it is just far enough to be ‘out of sight’, conveniently delaying the process of planning for the event. Most owners can see what is ahead of them for the next year and perhaps the next 2 to 4 years. However, few if any owners can look ahead 5 years to anticipate what will become of their business. Therefore most business plans – written or otherwise – address the next 1 to 3 years, and not the longer time horizon.

Planning for an exit often requires going beyond the next few years. And, because it is difficult for most owners to do this, the planning gets put off until some point in the future.

An Outside Force is Often Needed as a Motivator for Many Owners

Business exits do not happen by themselves. Too many owners rely upon a hope that something good will happen to them in the future. However, exit planning is complex and often does not occur without an outside motivating force compelling it to happen. Unfortunately, many owners will experience that outside force in the form sickness, disability, divorce or just simple burnout from running the business.

Because these outside forces compel an owner to react, the process is not proactive. And as a result of being in a reactionary mindset, these outside, uncontrolled forces tend to diminish the value of what you receive at the point of your exit because you are being compelled to exit in a manner and time period that is not suited to your needs. A proactive, strategic approach to planning your exit is the significantly better way to go.

Do you have a rolling / permanent 5-year window?

This is a good question to ask yourself to begin the exit planning process. The real answer to this question requires a bit of time and reflection about ‘why’ you are in business to begin with. Did you start your business because you wanted to be independent and autonomous from previous employers? Or was there a more logical reason for starting your business – such as the fact that a well-built business would, one day, provide you with enough financial resources to be permanently independent to live a life of your choosing? There are many challenges associated with any business exit but the first one is figuring out if the trap of the 5-year phenomenon is really you just putting off the planning aspect of your business exit.

Overcoming the 5-Year Plague – Begin Planning Your Exit Today

The best way to avoid the loss of wealth and discomfort associated with losing your business to a rolling 5-year plan is to reject the idea that you cannot begin your exit planning today.

There is a system and process in place that can organize your exit planning. The money and time that you invest today in the exit planning process will reward you with peace of mind and the knowledge that you have not have fallen prey to the ineffective and non-existent 5-year plan that so many of your business owner counterparts will continue to falsely believe in. Take action today. Make exit planning one of your top business planning priorities. And, finally, be aware that if your answer to when you will exit your business is ‘in 5 years’, then you too need to heed the false assumptions that exist with the 5-year phenomenon. The good news is that this 5-year obstacle is easy to overcome.

Need some help? Want to explore your exit plan with Reynolds & Rowella? Give us a call at 203.438.0161 or email us!

Filed Under: Exit Planning Tagged With: Accounting Services Fairfield County CT, Best Accounting Services CT, Exit Planning Services, Exit Planning Services CT

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