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With just 17 days to go before Tax Day, I’m still receiving tax forms—this is why I’m always on extension.
No, those forms aren’t late. Most taxpayers in America—a whopping 80%—report wages and salaries on their tax returns each year. Those numbers are reported on Forms W-2, which were due to taxpayers by January 31, 2024. (☆)
Taxpayers also reported nearly $2.7 trillion in investment income in 2021 (the last year complete data is available). That included almost $160 billion in interest and $387 billion in dividends. Nearly $2.1 trillion in sales of capital assets—another $51 billion was attributable to sales of property other than capital gains. Much of that reporting will come your way on Forms 1099, typically also due on January 31, 2024. Some income associated with investments may be from certain entities—like partnerships—that issue something other than a Form 1099.
We own some of those kinds of investments. Even though they’re held in a brokerage account, we’ll be issued separate tax forms in addition to Form 1099-B from the broker. This has become a running joke in our household because we don’t hold significant positions (the value of one of the LP interests was less than $50)—but they can cause big problems. They can be notoriously tricky to figure out, and not just for everyday taxpayers.
When I was completing my daughter’s FAFSA, I struggled to explain it to the financial aid office of a large northeastern college. They saw a Schedule K-1 reported on our tax return and asked for a profit and loss statement, as well as other financial papers.
(I promise I won’t make this about my frustration with FAFSA. If you’re a fellow college parent, you can hear me complain plenty on X, formerly known as Twitter.)
I had to explain that the company was an LP, so it filed Form 1065 and issued a Schedule K-1. And I had to explain that I wasn’t an active partner in the business, I owned a tiny interest, just as if I were a shareholder in Coca-Cola or Amazon. A more complicated tax form doesn’t confer more substantial ownership—just, occasionally, more headaches.
The reality is that not all income fits neatly on line 1a of your Form 1040. The rules that apply to investment income can be tricky—and require close attention when it comes to taxes. Here’s a look at what you need to know.
Earlier this week, Forbes editor Janet Novack, Forbes contributor Amber Gray-Fenner, and I tackled the tax treatment of investments. If you missed it, you can catch up here.
(And don’t forget about our free Forbes tax guide.)
Thanks for reading!
—Kelly Phillips Erb (Senior Writer, Tax)
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Questions
Real estate sales may not be hot right now, but homeowners certainly have a lot of questions.
One reader asked: My husband and I wanted to buy a home for our family, but neither of us had good credit. My mother agreed to put her name on the house. My husband is the one who paid all closing costs, down payment, and he has also been making all mortgage payments, and everything else involved with the house. We live at the house … My mom has not claimed any of the mortgage interest.
I received a few variations on this question. It’s important to understand this can be a murky area—when ownership is blended or doesn’t match the documentation—and the IRS has not taken steps to make it particularly clear (Pub 936 isn’t very helpful in this regard).
The general rule is that to claim the home mortgage interest deduction, the property must be subject to a mortgage, and the property must be your principal or second residence.
That doesn’t necessarily mean that you must be on the title or mortgage to claim the deduction. Reg. Section 1.163-1(b) states that you must be the legal or equitable owner of the property that secures the mortgage to claim the deduction.
Proving that you’re a legal owner is pretty straightforward—it’s typically evidenced by the name (or names) on the deed.
Proving that you’re an equitable owner can be a bit more tricky—it’s facts and circumstances dependent. Tax practitioners often look to Uslu v. Commissioner, T.C. Memo. 1997-551, for guidance. In that case, the taxpayer couldn’t get a mortgage on his own, so his brother took out the loan. The taxpayer paid the mortgage and other home-related expenses like repairs, maintenance, and improvements. They agreed that the taxpayer would live in the property and take care of it—even though no contracts were signed. Acting as the equitable owner, the taxpayer claimed the home mortgage interest deduction. The IRS denied the deduction, and the taxpayer took the matter to Tax Court.
The Court initially focused on the term “acquisition indebtedness” as outlined in section 163 of the tax code, which says that the indebtedness must be an obligation of the taxpayer. However, the word obligation can be loaded. In this case, the Court found the taxpayer acted like an equitable owner, as opposed to his brother who did not treat the home as his, make any payments, or claim the interest deduction on his own tax return. Ultimately, the Court was satisfied that the taxpayer “continuously treated the…property as if they were the owners, and that they, exclusively, held the benefits and burdens of ownership…” and allowed the deduction.
Your situation sounds similar. I would caution, however, that there are cases claiming equitable ownership where the Court wasn’t so amenable—those are typically distinguished by different facts and circumstances, such as missing mortgage payments. Uslu was issued as a Memorandum Opinion, which means that the judge applied the facts and circumstances to existing law rather than paving a new path. You’ll want to look at your own facts and circumstances and see if they support your claims. You know the saying… If it sounds like a duck and quacks like a duck, it’s a duck.
Another reader had a similar question, with a twist:
In order for our daughter to buy a house, we took a HELOC against our home and used it as her down payment. I took a mortgage (in only my name) to pay for the rest. My daughter is paying us every month for the HELOC and the mortgage. We are all on the title. My daughter…also pays the property tax. What is deductible in this situation?
The same analysis generally applies—just remember, no double dipping. If your daughter is paying you for the mortgage and the HELOC on her home, and properly qualifies for the deduction, then you can’t also claim a deduction.
And pay attention to the 2017 tax reform law which limits the deductibility of mortgage interest and HELOCs. Typically, however, any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Any additional debt not used to buy, build, or substantially improve a qualified home isn’t home acquisition debt.
The twist here, really, is the payment of real estate taxes. To deduct tax under section 164, you must meet two tests: (1) The tax must be imposed on you and (2) you must pay the tax during the tax year.
Your daughter is paying the tax, so she meets the second test. And it sounds like, since she’s also on the deed, the tax is imposed on her. (Some purists may point out that typically, real estate taxes are assessed on the property, not the person. That can matter in some states that apportion ownership.) That combination should lead to a deduction.
As always, a great deal of tax law has to deal with facts and circumstances, and that can involve some nuance—no two situations are exactly alike. Having a written agreement and keeping excellent records are key. And, of course, it’s always a good idea to consult with a tax professional.
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Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.
HOME SALES
Home sales took a hit in 2023. According to the National Association of Realtors, the annual pace of 2023’s existing home sales—totaling 4.09 million—was the lowest number recorded since 1995, when it was 3.85 million.
However, there was some good news for sellers: the median sales price in 2023 hit a historical high of $389,800, up 1% from 2022.
The mix of news means that homeowners were grappling with volatility in home sales in 2023. I wrote about the capital gains exclusion—that $250,000 ($500,000 for married couples) you can exclude from the gain when you sell your home—earlier this week. (☆)
A DEEPER DIVE
Last year, the Tax Court issued a pretty remarkable ruling in a case—Alon Farhy v. Commissioner—that I noted at the time was one of those that, when it came across your desk, made you go, “Whoa.” Farhy got the win, with the Tax Court finding that the IRS could not collect from him in this instance—the IRS had no statutory authority to assess penalties under section 6038. Predictably, the government appealed. The case is currently before the D.C. Circuit, which heard oral arguments on February 14. If the decision is affirmed, it calls into question the viability of other penalties for which deficiency procedure is similarly denied. That includes the penalty under section 6038A, relating to the failure to file Form 5472 (Farhy focused on Form 5471). The IRS has routinely assessed these penalties outside the exam function, but that could be changing.
Another Tax Court case is also attracting some interest. The March 28, 2024, decision in Valley Park Ranch, LLC, Reed Oppenheimer, Tax Matters Partner v. Commissioner, has far-reaching implications for taxpayers who have claimed conservation easement deductions. Notably, the US Tax Court declared Reg. 1.170A-14(g)(6)(ii) invalid, citing non-compliance with the Administrative Procedure Act (APA) as the primary reason. Importantly, that Reg had previously been the IRS’ ace in disallowing certain conservation easement-related deductions. The time may be right for some of those taxpayers to take a second look at their claims.
A second lawsuit challenging the Corporate Transparency Act (CTA) has been filed—this time, in a Michigan court. The Small Business Association of Michigan and other plaintiffs filed a federal lawsuit in the Western District Court of Michigan, Southern Division, seeking declaratory judgment and injunctive relief against the U.S. Treasury. (☆) The legal challenge follows a similar case filed earlier this month. (☆) In that case, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, found the CTA “exceeds the Constitution’s limits on Congress’ power.” The federal government has since appealed the case. (☆)
IMPORTANT DATES
📅 April 15, 2024. Individual federal income tax returns are due (or file for an extension) for most taxpayers.*
📅 April 17, 2024. Individual federal income tax returns are due (or file for an extension) for taxpayers in Maine and Massachusetts.
📅 May 15, 2024. Information tax returns (series 990) are due (or file for an extension) for tax-exempt organizations with a tax year ending in December.
📅 May 17, 2024. Deadline for filing for refunds for tax year 2020. The IRS has announced that almost 940,000 people have unclaimed refunds for tax year 2020.
* The IRS has announced tax relief for individuals and businesses in parts of California affected by severe storms and flooding that began on January 21. They now have until June 17 to file various federal individual and business tax returns and make tax payments.
POSITIONS AND GUIDANCE
The American Bar Association Section of Taxation has submitted comments to the IRS in response to the proposed regulations under section 987 of the tax code (a correction to the proposed regs was issued in December of 2023). Section 987 focuses on foreign currency gains or losses with respect to a qualified business unit (QBU) conducted in a currency other than that of the owner. The proposed regs are highly technical, but seek to simplify how section 987 gains or losses are calculated.
The American Institute of CPAs (AICPA) issued a statement emphasizing its previous coverage related to Employee Retention Credit (ERC) claims. As noted below, it’s timely since the ERC voluntary disclosure program has ended. The AICPA notes that it has provided resources targeted to AICPA members and the public to help them identify dishonest vendors and has strongly discouraged dealings with ERC mills. A key warning sign, they say, that businesses should be aware of are vendors that require hefty contingency fees or fail to sign the amended payroll tax returns.
CARES ACT UPDATES
Tax Day isn’t the only deadline that taxpayers are thinking about. Last week, the IRS suspended its ERC Voluntary Disclosure Program. The program, announced late last year, allowed businesses who want to pay back the money they received after filing ERC claims in error to do so at a discount. The suspension, effective March 22, 2024, means that the IRS could opt to reopen the program, but it won’t be, the agency says, on more favorable terms. According to the agency, efforts to recover ERC funds claimed in error have saved the U.S. government more than $1 billion.
Some ERC claims are still being processed—the IRS says that more than one million claims remain unprocessed or pending further review. The timeframe on those is unclear—there is no federal statute that requires the agency to process ERC claims by a specified deadline. But employers are not without options. Under section 6532 of the tax code, a taxpayer has a statutory right to file a refund lawsuit against the government if the IRS has not acted on a refund claim within six months or issued a notice of disallowance.
Business owners would be smart, however, to be thoughtful about claims. ERC claims were made possible as part of the CARES Act. Since it was passed, the CARES Act, which also included stimulus checks, the Paycheck Protection Program (PPP), and emergency loans, has helped millions of taxpayers—and also been the subject of massive fraud. IRS-Criminal Investigation (CI) says it has investigated 1,644 COVID-related tax and money laundering cases potentially totaling $8.9 billion, with well over half that amount coming from cases opened in the last year. (☆)
NOTEWORTHY
The IRS continues to hire new employees. Several positions were recently posted on the IRS Careers page, including an opening for Revenue Officers.
Lateral hiring by law firms fell 35% in 2023. It’s the second straight year that lateral hiring dropped, according to a National Association for Law Placement report. The 2022 and 2023 dips may be considered a correction—in 2021, lateral hiring had increased by a whopping 111%.
If you have career or industry news, submit it for consideration here.
TRIVIA
The National Association of Realtors predicted the top 10 metropolitan markets most likely to outperform other U.S. areas because of higher pent-up demand in 2024. How many states in those markets have no income tax?
A. Zero
B. Two
C. Five
D. Ten
Find the answer at the bottom of this newsletter.
OUR TEAM
I hope you’ll get to know some of our staff and contributors. Since we’ve talked a lot about homes this week, I asked: What fictional home did you dream about owning or living in?
Kelly Phillips Erb (Senior Writer, Tax): The Vandamm House in North by Northwest
Jena McGregor (Senior Editor, Leadership Team): Barbie’s, of course.
Emily Mason (Writer, Money Team): The Kids Next Door treehouse
Maria Gracia Santillana Linares (Writer, Leadership Team): The Rolie Polie Olie house
Andrew Leahy (Contributor, Tax): Dr. Lecter from the Hannibal TV series. I don’t want his kitchen or his murder-meal torture basement — but the rest of the house is pretty darn nice!
Hank Tucker (Writer, Money Team): The pineapple under the sea (from SpongeBob SquarePants).
Chris Helman (Writer, Money Team): The Millennium Falcon (from the Star Wars movies)
KEY FIGURES
That’s how much taxpayers reported in salaries and wages in 2021, the last year for which we have complete data.
TRIVIA ANSWER
The answer is (B) Two.
The list includes homes in 11 states plus the District of Columbia (some markets include more than one state):
1) Austin-Round Rock-Georgetown, Texas
2) Dallas-Fort Worth-Arlington, Texas
3) Dayton-Kettering, Ohio
4) Durham-Chapel Hill, North Carolina
5) Harrisburg-Carlisle, Pennsylvania
6) Houston-The Woodlands-Sugar Land, Texas
7) Nashville-Davidson-Murfreesboro-Franklin, Tennessee
8) Philadelphia-Camden-Wilmington, Pennsylvania-New Jersey-Delaware-Maryland
9) Portland-South Portland, Maine
10) Washington-Arlington-Alexandria, D.C.-Virginia-Maryland-West Virginia
Two of those states, Texas and Tennessee, have no state income tax.
FEEDBACK
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