The Supreme Court has reversed and remanded California v. Texas, holding that the Plaintiffs do not have standing to challenge the Patient Protection and Affordable Care Act’s (ACA) minimum essential coverage provision.

The Supreme Court has reversed and remanded California v. Texas, holding that the Plaintiffs do not have standing to challenge the Patient Protection and Affordable Care Act’s (ACA) minimum essential coverage provision.

In 2010, ACA, under the newly added Code Sec. 5000A, required most Americans to obtain minimum essential health insurance coverage, or pay a penalty. In 2017, under the Tax Cuts and Jobs Act, Congress effectively nullified the penalty by setting its amount at $0. The IRS issued guidance that the statute no longer required taxpayers to report whether they did or did not maintain coverage.

In 2018, Texas and 17 other states brought a lawsuit against the United States and federal officials. They were later joined by two individuals (Neill Hurley and John Nantz). The United States took the side of the plaintiffs. The plaintiffs claimed that without the penalty, the minimum essential coverage requirement was unconstitutional and that the minimum essential coverage requirement was not severable from the rest of ACA. Hence, they believed ACA as a whole was invalid. California, along with fifteen other states and the District of Columbia, intervened to defend ACA.

The District Court found that the individual plaintiffs had standing to challenge the constitutionality of the minimum essential coverage provision, Code Sec. 5000A(a). The court further held that the minimum essential coverage provision was unconstitutional and not severable from the rest of ACA. It granted relief in the form of a declaration stating just that. On appeal, a panel majority agreed with the District Court that the plaintiffs had standing and that the minimum essential coverage provision was unconstitutional. It found that the District Court’s severability analysis, however, was "incomplete," and it remanded the case for further analysis.

The Supreme Court did not analyze whether the provision or ACA is unconstitutional, because it held that Texas and the other plaintiffs in the suit lack standing to bring the case. The plaintiffs do not have standing because they were not able to show a past or future injury, pocketbook or otherwise, fairly traceable to the government enforcing the minimum essential coverage requirement. The Court vacated the lower court’s judgment and remanded the case with instructions to dismiss.

The IRS issued two new, separate sets of frequently-asked-questions (FAQs) to assist families and small and mid-sized employers) in claiming credits under the American Rescue Plan (ARP). These FAQs provide information on eligibility, computing the credit amounts and how to claim these important tax benefits. Enacted in March to assist families and small businesses with the fallout of the COVID-19 pandemic and recovery underway, the ARP enhanced the child and dependent care credit and the paid sick and family leave credit.

The IRS issued two new, separate sets of frequently-asked-questions (FAQs) to assist families and small and mid-sized employers) in claiming credits under the American Rescue Plan (ARP). These FAQs provide information on eligibility, computing the credit amounts and how to claim these important tax benefits. Enacted in March to assist families and small businesses with the fallout of the COVID-19 pandemic and recovery underway, the ARP enhanced the child and dependent care credit and the paid sick and family leave credit.

Child and Dependent Care Credit
For 2021, the ARP increased the maximum amount of work-related expenses for qualifying care that may be taken into account in calculating the credit, increased the maximum percentage of those expenses for which the credit may be taken, modified how the credit is reduced for higher earners, and made it refundable. Additionally, eligible taxpayers can claim qualifying work-related expenses up to:

• $8,000 for one qualifying person, up from $3,000 in prior years; or
• $16,000 for two or more qualifying persons, up from $6,000 in prior years.

Further, the taxpayers are required to have earnings, and the amount of qualifying work-related expenses claimed cannot exceed the taxpayer’s earnings. Combined with the increase to 50-percent in the maximum credit rate, taxpayers with the maximum amount of qualifying work-related expenses would receive a credit of $4,000 for one qualifying person, or $8,000 for two or more qualifying persons.

A dependent under the age of 13 or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year is considered a qualifying person for this credit. Under the new ARP, more taxpayers will qualify for the new maximum 50-percent credit rate. However, the 50-percent credit rate goes down as income rises above $125,000. Taxpayers with adjusted gross income over $438,000 are not eligible for the credit.

The credit is fully refundable for the first time in 2021. This means eligible taxpayers can receive the credit even if they owe no federal income tax. To be eligible for the refundable credit, a taxpayer must reside in the U.S. for more than half of the year. However, special rules apply to military personnel stationed outside the U.S. To claim the credit for 2021, taxpayers need to complete Form 2441, Child and Dependent Care Expenses, and include the form when filing their tax returns in 2022.

Paid Sick and Family Leave Credit
The paid sick and family leave credits reimburse eligible employers for the cost of providing paid sick and family leave to their employees for reasons related to COVID-19, including leave taken by employees to receive or recover from COVID-19 vaccinations. Self-employed individuals are eligible for similar tax credits. Additionally, under the ARP, eligible employers may now claim the credit for paid family leave wages for the same reasons that they can claim the credit for paid sick leave wages.

Under the ARP, eligible employers, including businesses and tax-exempt organizations with fewer than 500 employees and certain governmental employers, may claim tax credits for qualified leave wages and certain other wage-related expenses (such as health plan expenses and certain collectively bargained benefits) paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021. The ARP kept the daily wage thresholds that previously existed for these credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). The aggregate cap on qualified sick leave wages remains at two weeks (up to a maximum of 80 hours), and this aggregate cap reset with respect to leave taken by employees beginning on April 1, 2021. The aggregate cap on qualified family leave wages increases to $12,000 from $10,000, and this aggregate cap reset with respect to leave taken by employees beginning on April 1, 2021.

The paid leave credits under the ARP are tax credits against the employer’s share of Medicare tax. This credit is refundable, which means that the employer is entitled to payment of the full amount of he credit to the extent it exceeds the employer’s share of Medicare tax. Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return.

The IRS has started sending letters to over 36 million families who, based on tax returns filed, may be eligible to receive monthly child tax credit payments starting July. Eligibility of these families are being evaluated based on information provided by taxpayers in their 2019 or 2020 tax returns, or through the Non-Filers tool while registering for an Economic Impact Payment. In addition, taxpayers who are eligible for advance child tax credit payments will receive a second, personalized letter listing an estimate of their monthly payment, starting July 15.

The IRS has started sending letters to over 36 million families who, based on tax returns filed, may be eligible to receive monthly child tax credit payments starting July. Eligibility of these families are being evaluated based on information provided by taxpayers in their 2019 or 2020 tax returns, or through the Non-Filers tool while registering for an Economic Impact Payment. In addition, taxpayers who are eligible for advance child tax credit payments will receive a second, personalized letter listing an estimate of their monthly payment, starting July 15.

The IRS further announced that eligible families will begin receiving advance payments, either by direct deposit or check. Importantly, this payment will be up to $300 per month for each qualifying child under six years of age, and up to $250 per month, for each qualifying child from ages six to 17. Moreover, advance child tax credit payments will be issued on July 15, August 13, September 15, October 15, November 15 and December 15, 2021.

To avail themselves of these credits, taxpayers who have not yet filed their 2020 or 2019 return should do so as soon as possible, to receive advance payments. The IRS reminded taxpayers who do not normally file returns, such as families experiencing homelessness, that filing soon will ensure that their most current banking information would be applicable. Similarly, community groups, non-profits, associations, education organizations and others with connections to people with children to share this critical information about the child tax credit and other important benefits.

Finally, the IRS reminded taxpayers of the changes to child tax credit by the American Rescue Plan Act (ARP) ( P.L. 117-2). The entire credit is fully refundable for 2021; meaning eligible families can avail themselves of the credit, even if they owe no federal income tax. The IRS also recommends that taxpayers visit the Advance Child Tax Credit Payments in 2021 page to learn more about these changes.

The IRS has finalized regulations relating to the mandatory 60-day postponement of certain time-sensitive tax-related deadlines by reason of a federally declared disaster. Further, the regulations clarify the definition of "federally declared disaster." The regulations affect individuals who reside in or were killed or injured in a disaster area, businesses that have a principal place of business in a disaster area, relief workers who provide assistance in a disaster area, or any taxpayer whose tax records necessary to meet a tax deadline are located in a disaster area.

The IRS has finalized regulations relating to the mandatory 60-day postponement of certain time-sensitive tax-related deadlines by reason of a federally declared disaster. Further, the regulations clarify the definition of "federally declared disaster." The regulations affect individuals who reside in or were killed or injured in a disaster area, businesses that have a principal place of business in a disaster area, relief workers who provide assistance in a disaster area, or any taxpayer whose tax records necessary to meet a tax deadline are located in a disaster area.

Background
Section 205 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as Division Q of the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94), amended Code Sec. 7508A relating to the discretionary authority of the Secretary of the Treasury or her delegate to postpone certain time-sensitive tax deadlines by reason of a federally declared disaster, by adding Code Sec. 7508A(d). This provision provides qualified taxpayers a mandatory 60-day period that is disregarded "in the same manner as a period specified" under Code Sec. 7508A(a).

On January 13, 2021, the IRS published in the Federal Register a notice of proposed rulemaking ( NPRM REG-115057-20) to interpret and implement Code Secs. 165(i)(5) and 7508A(d). As described in the proposed regulations, Code Sec. 7508A(d) was ambiguous in at least two important respects—the time-sensitive acts to be postponed (beyond the pension-related actions described in Code Sec. 7508A(d)(4)) were not specified and it was unclear how the mandatory 60-day postponement period was to be calculated when the disaster declaration specified in Code Sec. 7508A(d) did not contain an incident date. The legislative history was also insufficient to explain these areas of ambiguity

Final Regulations
The final regulations adopt the proposed rules including providing that the definition of a federally declared disaster includes both a major disaster and emergencies declared under sections 401 or 501 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) ( P.L. 100-707). Also, one minor modification has been made to an example in the proposed rules to better illustrate the calculation of the mandatory 60-day postponement period in the event of multiple declarations and shifting "latest" incident dates.

Applicable Date
The final regulations under Code Sec. 7508A for a mandatory 60-day postponement period apply to disasters declared on or after December 21, 2019. The final regulations under Code Sec. 165 for the definition of a federally declared disaster apply June 11, 2021.

The IRS has released a revenue procedure explaining how a taxpayer changes its method of computing depreciation for certain residential rental property. Automatic consent procedures for changing accounting method are available for taxpayers adopting the depreciation method changes.

The IRS has released a revenue procedure explaining how a taxpayer changes its method of computing depreciation for certain residential rental property. Automatic consent procedures for changing accounting method are available for taxpayers adopting the depreciation method changes.

Residential Rental Property Allowed 30-Year ADS Depreciation
Tax Cuts and Jobs Act ( P.L. 115-97) added residential rental property held by an electing real property trade or business to the list of property to which a 30 year recovery periods applies under the alternative depreciation system (ADS), thus changing the recovery period from 40 years to 30 years. The change applied to property placed in service after December 31, 2017, and therefore only to property newly placed in service.

The Taxpayer Certainty and Disaster Tax Relief Act (Taxpayer Certainly Act) ( P.L. 116-260), enacted December 27, 2020, extended 30-year depreciation to apply to residential rental property placed in service before January 1, 2018 held by certain electing real property trade or businesses. To apply the 30-year recovery period to property already placed in service, taxpayers have to change their computation of depreciation for the property.

Procedures Provided for Changing Depreciation Method
This revenue procedure permits taxpayers who are affected by the Taxpayer Certainly Act's retroactive effective date to file an amended federal income tax return or information return, administrative adjustment request (AAR), or a Form 3115, Application for Change in Accounting Method, to change their method of computing depreciation of certain residential rental property held by an electing real property trade or business to use a 30-year ADS recovery period. If the property is included in a general asset account, it permits taxpayers to change their general asset account treatment for the property to comply with Reg. §1.168(i)-1(h)(2).

The revenue procedure also provides automatic consent procedures for changing accounting method, and in certain cases simplified procedures, for taxpayers adopting the depreciation method changes.

An eligible partnership may file amended partnership returns for tax years beginning in 2018, 2019, and 2020 by filing a Form 1065, U.S. Return of Partnership Income (Form 1065), with the "Amended Return" box checked. The partnership may also issue an amended Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. (Schedule K-1), to each of its partners.

An eligible partnership may file amended partnership returns for tax years beginning in 2018, 2019, and 2020 by filing a Form 1065, U.S. Return of Partnership Income (Form 1065), with the "Amended Return" box checked. The partnership may also issue an amended Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc. (Schedule K-1), to each of its partners.

Partnerships Eligible for Amended-Return Procedures
The amended-return procedures apply to "BBA partnerships," which include most partnerships that are subject to the centralized audit regime provided by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The centralized audit regime replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) ( P.L. 97–248) partnership procedures.

An eligible BBA partnership may use amended returns to:

• change its method of depreciation and/or general asset account treatment for its residential rental property, or
• make a late election to be an electing real property trade or business under Code Sec. 163(j)(7) by filing an amended Form 1065 in accordance with Rev. Proc. 2020-22, 2020-18 IRB 745.

Amended Partnership Returns in Special Situations
If the partnership is currently under examination for a tax year beginning in 2018, 2019, or 2020, it must send written notice to the revenue agent coordinating the before or at the same time it files its amended Form 1065.

If the partnership previously filed an administrative adjustment request (AAR) for a tax year covered by the amended return, it should use the items as adjusted in the AAR on the amended return.

If, under Notice 2019-46, 2019-37 I.R.B. 695, a partnership has applied the Global Intangible Low-Taxed Income (GILTI) rules of Proposed Reg. §1.951A-5 for tax years ending before June 22, 2019, the partnership may continue to apply those rules to those tax years. However, the partnership must also furnish amended Schedules K-1 and appropriate notifications to its partners.

An estate was allowed a marital deduction because the decedent’s marriage was valid in the country of celebration. The decedent, who was Jewish, obtained a religious divorce under rabbinical law in New York from his first wife after a New York court had declared his Mexican divorce invalid, which resulted in the declaration that his marriage to a second wife was null and void. The decedent traveled to Israel and married his third wife in an Orthodox Jewish ceremony. The Israeli marriage certificate noted that the decedent was free to marry because he was divorced. The government claimed that because the divorce was not valid under state law, no marital deduction was allowed because the property did not pass to the decedent’s surviving spouse.

An estate was allowed a marital deduction because the decedent’s marriage was valid in the country of celebration. The decedent, who was Jewish, obtained a religious divorce under rabbinical law in New York from his first wife after a New York court had declared his Mexican divorce invalid, which resulted in the declaration that his marriage to a second wife was null and void. The decedent traveled to Israel and married his third wife in an Orthodox Jewish ceremony. The Israeli marriage certificate noted that the decedent was free to marry because he was divorced. The government claimed that because the divorce was not valid under state law, no marital deduction was allowed because the property did not pass to the decedent’s surviving spouse.

Marriage Was Valid in New York
Under New York law, the marriage was valid since it was recognized in Israel unless it was contrary to public policy or violated "positive law." Because Code Sec. 2056(a) focuses on the identity of the surviving spouse, the initial question was whether the decedent and the surviving spouse were validly married, and not whether the religious divorce was valid. Under Israeli law, the decedent was validly divorced and could remarry. Thus, for purposes of New York law, the marriage was not bigamous and not contrary to public policy. New York divorce law was not violated by the finding because that law was not broken by a New York resident marrying outside of the state and recognizing a non-New York marriage was not equivalent to ruling on the divorce’s validity. However, the ruling was narrowly focused on whether the New York Court of Appeals would recognize the Israeli marriage, which was not contested by the prior spouse and left undisturbed by the lower courts.

The Treasury Department and the IRS have announced that they intend to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Sec. 59A and Code Sec. 6038A to defer the information reporting requirements for qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2023. The current regulations provide that the QDP reporting requirements apply to tax years beginning on or after June 7, 2021.

The Treasury Department and the IRS have announced that they intend to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Sec. 59A and Code Sec. 6038A to defer the information reporting requirements for qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2023. The current regulations provide that the QDP reporting requirements apply to tax years beginning on or after June 7, 2021.

Background
Under the BEAT rules, a base erosion minimum tax is imposed on certain corporations with annual average annual gross receipts of at least $500 million over the previous three tax years. The tax applies to base erosion payments paid or accrued in tax years beginning after December 31, 2017. Generally speaking, base erosion payments are certain types of payments made by a taxpayer to foreign related parties or foreign persons.

QDPs are not base erosion payments. A QDP is any payment made by a taxpayer to a foreign related party pursuant to a derivative for which:

• the taxpayer recognizes gain or loss on the derivative on a mark-to-market basis (treats the derivative as sold on the last business day of the tax year);
• the gain or loss is ordinary; and
• any gain, loss, income or deduction on a payment made pursuant to the derivative is also treated as ordinary.

This QDP exception applies only if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts, the aggregate amount of QDPs for the tax year, and make a representation that all payments satisfy the reporting requirements of Reg. §1.59A-6(b)(2).

Reg. §1.6038A-2(b)(7)(ix) applies to tax years beginning on or after June 7, 2021. During the “transition period” before that date, a taxpayer is treated as satisfying the reporting requirements to the extent that it reports the aggregate amount of QDPs on Schedule A of Form 8991, provided the taxpayer reports this amount in good faith ( Reg. §§1.59A-6(b)(2)(iv); 1.6038A-2(g)).

QDP Reporting Deferred
The preamble to 2020 final regulations relating to Code Sec. 59A included a comment which recommended that Treasury and the IRS address the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements in Reg. §1.59A-6 and Reg. §1.6038A-2(b)(7)(ix). While studying this matter, Treasury and the IRS have determined that it is appropriate to extend the transition period.

Accordingly, Treasury and the IRS intend to amend Reg. §1.6038A-2(g) to provide that Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2023. Until that reporting requirement applies, the transition period rules described above continue to apply.

Taxpayer Reliance
Taxpayers may rely on this Notice before the amendments to the final regulations are issued.

If you converted your traditional IRA to a Roth IRA earlier this year, incurred a significant amount of tax liability on the conversion, and then watched as the value of your Roth account plummeted amid the market turmoil, you may want to consider undoing the conversion. You can void or significantly lower your tax bill by recharacterizing the conversion, then reconverting your IRA back to a Roth at a later date. Careful timing in using the strategy, however, is essential.

What is a recharacterization?

"Recharacterization" is simply the term given to the transaction in which you undo your original conversion from a traditional IRA to the Roth. Even if you converted your entire account to a Roth, you do not need to recharacterize the entire amount that you converted from your traditional IRA to the Roth and can choose to only recharacterize a portion of the amount. To roll the money back and then forward into new Roth IRA, you must undo the original Roth conversion, wait at least 30 days (discussed in further detail, below) and then reconvert the IRA back to the Roth. This move may save you significant tax dollars since your IRA account is worth less due to the decline in market values.

Note. Roth IRAs are currently - but temporarily - restricted to taxpayers with adjusted gross incomes (AGI) that do not exceed certain amounts. For example, for 2008 Roth IRAs can be established by individuals with a maximum AGI of $116,000 ($169,000 for joint filers and heads of household). This restriction is completely lifted in 2010, when the AGI and filing status restrictions are eliminated.

Example. In June 2008, you converted your entire traditional IRA account balance of $200,000 to a Roth. However, the market has taken a toll on your account and it has declined in value and now in December is worth $100,000. Say you are in the 25 percent tax bracket -- the conversion would have left you with a $50,000 tax bill (since conversion amounts, in this case $200,000, are taxed at ordinary income tax rates). However, if you recharacterize and convert the $100,000 account back into a Roth after meeting the timing requirements, you will owe only $25,000 in taxes on the conversion.

Reasons for recharacterization

Recharacterizing a Roth conversion may be appropriate for many reasons, especially if your Roth account has lost significant value but you have a large tax bill for the conversion, which perhaps may even be more than the amount currently in your account. You might also want to consider undoing the conversion if you cannot afford the tax bill due, the conversion will propel you into a higher tax bracket, or subject you to the alternative minimum tax (AMT).

What is required

The recharacterization of a Roth conversion must meet certain requirements. The conversion must be completed by your tax filing deadline (typically April 15). If you converted an IRA in 2008, you have until October 15, 2009 to recharacterize the Roth conversion. However, you will then have to wait at least until the year after you originally converted the IRA to reconvert the account back to a Roth, or at least 30 days after the recharacterization (whichever is later). Essentially, if you converted your traditional IRA into a Roth in 2008 you will have to wait until 2009 to convert the funds back into a Roth account.

Notice

For the recharacterization to work, you will also have to provide notice to the financial institution(s) which is the trustee of your IRA accounts and the IRS before the date of the trustee to trustee transfer (a recharacterization is generally done in a trustee-to-trustee transfer). The notice generally includes information pertaining to the date of applicable transfers, type and amount of contribution being recharacterized, and will need to be attached to your tax return Form 8606, Nondeductible IRAs, with a statement explaining the recharacterization.

Net Income Attributable (NIA) to the conversion

A recharacterization must also include the transfer of any net income attributable (NIA) to the contribution amount. NIA is generally any earnings or losses attributable to the converted amounts in the account. If the Roth IRA that you are recharacterizing consists only of the amounts originally converted from the traditional IRA, there is generally no need to compute NIA. Generally, NIA must be computed when less than the entire account balance is being recharacterized, your Roth includes amounts from other transaction such as a Roth IRA contribution (made after the conversion to the Roth), or the Roth includes funding from another Roth IRA conversion. The financial institution that has custody of your Roth may offer a service to help you compute your NIA, or talk with your tax advisor for help.

If you would like further information on Roth conversions or reconversions, please feel free to contact this office. As explained, there are time periods and deadlines that must be met, so procrastination may prove expensive in some situations.