Federal Tax News for Individuals

If You Make Estimated Tax Payments, a Deadline Is Coming Up

If you pay quarterly estimated taxes, circle this date on your calendar: June 15. That’s the payment due date for your second-quarter estimated taxes. Individuals, including sole proprietors, partners and S corporation shareholders, must make estimated tax payments if they expect to owe $1,000 or more in tax when their tax return is filed. In addition, individuals who don’t have enough tax withheld from their wages may need to make estimated tax payments.

Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. If taxpayers don’t pay enough tax through withholding and estimated tax payments, they may be charged a penalty.

Contact your tax advisor for more information or click here.

Exceptions to the 10% Early Withdrawal Penalty Require Proof

You can roll over funds from one IRA to another tax free as long as you complete the rollover within 60 days. What if you miss the deadline? As taxpayers in two recent cases learned, you may owe tax and a 10% early distribution penalty if you’re under age 59½.

The IRS may waive the penalty if there are extenuating circumstances. In one private letter ruling, the IRS waived the 60-day requirement after a taxpayer failed to roll over the proceeds received from her IRA due to a serious medical condition that impaired her ability to manage her financial affairs. The taxpayer was granted a 60-day extension from the date the letter was issued to contribute the stated amounts into an IRA or other eligible retirement plan. (PLR 202218028)

In another case, a taxpayer under age 59½ lost his job. He then took a distribution to “tide himself over.” After the IRS applied the 10% penalty, he stated the funds were used to pay medical bills but he presented no evidence. The amount he claimed also exceeded other statutory limitations for medical expense deductions. The U.S. Tax Court upheld the assessment of $3,765 in additional tax. (TC Memo 2022-29)

The “Tax Gap” Hurts Those Who Pay their Fair Share

Have you ever heard about the “tax gap” and wondered what it is? According to the IRS, “the gross tax gap is the difference between true tax liability for a given period and the amount of tax that is paid on time.”

The tax agency explains that estimates consistently show the United States “enjoys a relatively high and stable voluntary tax compliance rate.” However, it adds that “sustaining and improving taxpayer compliance is important because small declines in compliance cost the nation billions of dollars in lost revenue and shift the tax burden away from those who don’t pay their taxes onto those who pay their fair share on time every year.”

Click here to learn more from the IRS.

Settlement for Legal Malpractice Is Taxable Income

Tax law excludes from “gross income” damages received for “personal physical injuries or physical sickness,” if certain conditions are met. The damages must be based on a wrongful act resulting in injury and they must be awarded for physical injuries or illness. There must be a “direct causal link” between the damages and the injury.

In one case, a taxpayer was injured while at a hospital and sued for negligence. She lost the case. She then sued her attorney for legal malpractice and was awarded $125,000. The IRS said the amount is taxable because it wasn’t for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed. (Blum, 3/22/22)

The Amounts that Delinquent Taxpayers Can Keep Have Been Updated by the IRS

The IRS Collection Financial Standards are revised annually and used in determining how much income delinquent taxpayers can keep to pay their bills (with the rest going toward settling their tax debt). Allowable living expenses include those expenses that meet the “necessary expense test.” This test is defined as expenses that are necessary to provide for a taxpayer’s health and welfare or the production of income.

Allowances for monthly housing and utilities and transportation vary by location. National standardsfor food, clothing and other items apply nationwide.

Taxpayers are allowed the total national standards amount monthly based on their families’ size. Click here for more information about the new amounts.