Late breaking changes to retirement savings and distribution rules has passed Congress!

Known as Secure 2.0 Act of 2022, Congress passed and the President is expected to sign another round of sweeping changes to retirement savings and distribution rules.

If you are wondering about the name "2.0", let me remind you that in late 2019/early 2020, the Secure 1.0 Act was created to push the age of required minimum distributions from age 70-1/2 to age 72, and changed the inherited IRA rules, amongst other things. As a tax community, we were slow to learn about Secure 1.0 because the pandemic hit weeks later, and there were so many other things to learn and educate clients about. Let's not dwell on that dark time now.

Here are the big pieces of news regarding distributions that might apply to you:

*** Increases the age for mandatory distributions from your IRA from age 72 to age 73, starting in 2023. And again to age 75 starting in 2033 (for those born in 1958).

*** The penalty for not taking enough "RMD" (required minimum distribution) will decrease from 50% to 25%. The tax is further reduced to 10% if the taxpayer corrects the shortfall within the "correction window". We have used the 'hat in hand forgiveness" strategy to mitigate the 50% excise tax, and it usually works.

*** The "Penalty-free Retirement Distribution" list has grown. This means if you are not yet age 59-1/2 but must take a distribution from your IRA, you can avoid the 10% penalty now for qualified long-term care distributions, domestic abuse or terminal illness, Presidentially declared disasters, and emergency savings account distributions. The withdrawals remain taxable.

Please contact me before taking a distribution from your IRA if you are not yet age 59-1/2 so we can see if your distribution will qualify as penalty-free. Not all of these new items apply now; the emergency personal expense distribution reason applies for distributions made after December 31, 2023. 

New pricing in 2023

Fees for 2022 tax returns

Hourly rate $305 (staff time will be billed at $180).

*** The minimum fee for a tax return $545. Included in this price is a non-tax season consulting session of one hour or less which can be a paycheck tax withholding evaluation, estimated tax payment check considering an income increase or decrease, or consultation on a financial transaction that has tax implications.

*** Rental property reporting on Schedule E will be at least $125 per property. This charge includes depreciation schedule calculations.

*** Business income on Schedule C will start at $250 reflecting the need to review the financial statements (not just the Profit and Loss), reconcile equity and scrutinize the activity to ensure a complete and accurate tax return is filed.

*** Extensions will have a separate charge of at least $250. In order to prepare a tax extension, it is important to receive at least any Form W-2 and 1099 received and a complete list of estimated tax payments made, in order to accurately calculate an extension payment. There are late payment penalties on underpayments of tax not paid by April 15th. (Note that if your return is essentially complete pending a Schedule K-1 that you do not prepare, or a SEP contribution that you will make later in the year, this extension form fee will not be charged.)

Common tax issues that lead to an audit

The California Franchise Tax Board published a list of common issues for individual taxpayers:

• Sales of personal or real property, including like-kind exchanges

• Owner's basis in a pass-through entity

• Sales of interests in a pass-through entity

• Characterization and sourcing of income

• Sheltering income and tax avoidance strategies

• Determining California residency status

Common issues for business entity taxpayers include:

• Business credits (e.g., Research credit)

• Apportionment and allocation of income (multi-state reporting)

Owners of pass-through entities must keep track of their "tax basis" in the entity. Tax Basis is the amount invested, income allocated and additional capital contributed. Tax Basis is decreased by losses allocated and distributions taken. For any entity that makes a distribution to an owner, it is reported on the Schedule K-1 and tax basis must be disclosed on the tax return. If there is no tax basis, the excess distribution can be capital gain income. Tax basis also is important if the owner sells their interest, decreasing the proceeds received from the sale and capital gain on the sale.

When someone moves from California, there are stringent rules to ensure the income earned going forward won't get allocated back to California. If California property is sold even when residency is established elsewhere, it is taxable to California. If you ever exchanged property while a California resident, and later sell that property even if you no longer live here, California will tax it as well. Anyone who sells California property through a like-kind exchange is required to file an annual Form 3840. In that way California keeps track of property sold with deferred capital gains.