Tag: tax planning

Year-end Planning for a Biden Administration and the SECURE Act: Zoom Seminar December 18, 2020

2020 saw a lot of tax law changes due to COVID-19. We expect the same in 2021 with the continuing pandemic and a probable change in Administrations.  Are you prepared?

Join Chuck Porter, Jr., AIF, CFMFO and Brent Thompson, CPA CMA CGMA on Friday, December 18, 2020, for a Zoom session from 10:00 a.m. – 11:30 a.m. They will provide you with valuable information as well as the opportunity to ask questions via the Zoom chat feature. This virtual seminar is ideal for business owners and high net worth individuals alike.

Topics will include:

  • Review of the potential Biden tax plan
  • Review of the SECURE Act and other recent tax law changes
  • Planning points to evaluate prior to the end of the year
  • Brief update on PPP loan forgiveness and related recent and pending legislation

Registration is limited to 100 attendees and is available on a first-come, first-served basis. After registering, you will receive a confirmation email containing information about joining the meeting. Please feel free to share with friends and colleagues you feel will benefit from this information.

Register here.

Tax Cuts and Jobs Act: Opportunities for Tax Beneficial Wealth and Retirement Planning

We continue our blog series recapping our recent presentation on the new tax laws to the Indian Valley Chamber of Commerce. This blog discusses opportunities for tax beneficial wealth and retirement planning.

Tax years 2018 to 2025 (the year many of the changes within the Tax Cuts and Jobs Act are set to expire) brings many changes in the status quo to the individual taxpayer, including:

  • Brackets expanded and tax rates are lowered
  • Capital Gains tax rate changes
  • Standard Deduction increase
  • State and Local Tax limitation (capped at $10,000)
  • Mortgage Interest Deduction limitations (Home Equity interest no longer deductible)
  • Elimination of miscellaneous Itemized Deductions
  • Suspension of Personal Exemptions
  • Child Tax Credit expanded
  • Significant impact on AMT

At first glance, the lowering of the overall tax rate and the increase in the standard deduction looks like good news to most taxpayers. However, not necessarily so when placed alongside the loss of personal exemptions, miscellaneous itemized deductions, home equity interested deductions, and the rest of the negative impact items listed above.

These changes do present four opportunities to create long-term strategies to help build wealth as well as plan for retirement:

“Play” the Tax Brackets and Standard Deduction

For 2018, the standard deduction is now $24,000. If you’re over 65, it is $26,600. One avenue to get the most out of this scenario is to stagger the taxable year of deduction timing given this higher standard deduction.

Let’s look at charitable giving. In years past, your donations would be included amongst your itemized deductions. Now, you might consider frontloading your giving at a higher amount into a Donor Advised Fund. So, if you normally donate $5,000 each year, consider placing $25,000 now into a Donor Advised Fund – this places you above the $24,000 threshold of the standard deduction. Then, over the course of five years, give the annual gift of $5,000 from that Donor Advised Fund. This allows you to get the full advantage of the standard deduction in one tax year, followed by several tax years of maximizing itemized deductions.

Portfolio Rebalancing / Tax Loss Harvesting / Capital Gain Harvesting

Take advantage of stock market downturns and volatility by rebalancing to a formal investment allocation. The more volatile things are, the better the portfolio rebalancing works. Studies show a .75% higher return when rebalancing to a formal investment allocation.

Tax loss harvesting comes into play when the market goes down, allowing you to generate a tax loss. You can still reinvest in a similar fund and enjoy the benefits of that investment.

With historically low Capital Gains rates, take advantage of a zero tax rate Capital Gains situation. It might be an ideal time to sell certain assets, pay zero tax, and reinvest.

Dynamic Asset Location Optimization

Where are you placing your wealth as you go through life?

  • Tax Deferred: IRA, 401(k), 403(b)
  • Taxable: Investment Accounts, Bank Accounts
  • Tax Free: Roth IRA, Roth 401(k)

And, when you retire, from where will you draw this wealth? Think about an asset allocation mix between these three wealth locations.

Roth 401k & IRA

Use this 2018-2025 window of low tax rates to your advantage, with a tax-free Roth 401(k) or IRA. Consider converting 100% of your IRA to a Roth account to allow for “back door” (long-term) Roth IRA contributions in the future or convert smaller amounts over several years.

If you have any questions or concerns about these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.

To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.

Tax Cuts and Jobs Act: Changes to Business Taxes

We continue our blog series recapping our recent presentation on the new tax laws to the Indian Valley Chamber of Commerce. This blog covers changes made to business tax laws.

One of the advantageous aspects of this new tax law is that the government has provided a clear definition of what constitutes a “small business.” A “small business” is defined as a company with average gross receipts for the past three years of $25 million or less.

This means that businesses meeting the definition of a small business can now avail themselves of these aspects of the tax law:

  • Expanded ability of cash method: This means that If you have been operating on the accrual method and consistently have higher receivables than payables, you can elect to switch to the cash method, allowing for potential consistent deferment of income.
  • Inventory tracking requirements: This allows you to elect to treat your inventory as non-incidental materials and supplies (items you expense when used or consumed). However, under the non-incidental materials and supplies category there is another election called the de minimis safe harbor election, which allows you to expense, safely and without fear of audit, anything under $2500 or less. So, if you have inventory that qualifies as non-incidental materials and supplies, and the unit cost of each item is $2500 or less, you can potentially write off your entire inventory for this year, presuming the inventory is under a year old. For example, if you are the owner of a junkyard business and have $400,000 in inventory, if you did not pay over $2500 per car, you can make these elections and have a $400,000 expense.
  • Section 263A threshold raised: This was a tax requiring that you had to capitalize indirect costs, just for tax. This is gone

Other changes include:

  • C-corporate rate is a flat 21%
  • Entertainment no longer deductible: Meals, however, are another story. Technically, right now, according to the law meals are not deductible, but in October 2018 the IRS put out a guidance that they are deductible because there was a mistake in the writing of the law. This is likely one of the technical directions that will eventually be passed by Congress. Until then, we can rely on the IRS guidance.
  • Interest deductions limited: If your gross receipts are over $25 million, your interest deductions are limited to 30% of your taxable income and any unused portion will get carried forward.
  •  Business losses, no carryback and limited to 80% of income
  • Like-Kind Exchanges now only qualify on real estate
  • Technical terminations of partnerships are eliminated

Business Change Highlights – Depreciation

Changes were also made on depreciation. Here are the highlights:

  • Additional first-year/bonus depreciation: 100% for property acquired after 9/27/17
  • Bonus now allowed for new and used property: it used to be allowed only for new property
  • Bonus on qualified improvement property no longer qualifies as written. This is another item needing correction, but the IRS has not provided any guidance to date.
  • Bonus phase-down schedule for years after 2022
  • Luxury auto limits (note that the additional $8k depreciation has been extended for 2017)
  • Increased to Sec. 179 ($1M and threshold $2.5M)
  • SUV limitation remains at $25,000
  • 179 limits are indexed for inflation
  • 179 expansion for certain real property (HVAC, roofs)
  • 179 allows for residential rental property improvements

New Employer Credit

There is a new employer credit for paid family and medical leave. This is a general business credit that employers can claim based on wages paid to qualified employees while on leave, subject to conditions.

Planning Opportunities

Please keep in mind, these tax changes are set to expire at the end of 2025. There are a number of potential savings opportunities within these tax law changes. We recommend that businesses evaluate their tax structure and engage in multi-year tax planning.

If you have any questions or concerns about these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.

To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.

Tax Cuts and Jobs Act: What’s New and How Will It Affect Your 2018 Tax Return?

We recently had the pleasure of presenting a seminar on the effect of the Tax Cuts and Jobs Acts on businesses and individuals. This is the first in a series of blog posts highlighting the information covered.

While we were all focused on the changes that were coming courtesy of the new Tax Cuts and Jobs Act, a number of additional tax law revisions took effect. The following is a brief recap.

Partnership Audit Regime Laws – Federal Law

Starting January 1, 2018, this Federal Law allows tax to now be accessed at the partnership level. While this is an administrative win, it comes with hidden ramifications to the taxpayer:

  • Assessed at the highest individual rate of tax – which is currently 37%
  • The 20% 199A (flow-through) deduction is no longer applicable
  • Current partners can be assessed for deficiencies from the year prior.

As a result, we recommend that all partnerships evaluate your partnership agreements.

1099 Withholding and Filing Requirements – State (Pennsylvania) Law

These requirements also went into effect on January 1, 2018.

The 1099 Withholding Requirement means you must engage in withholding on Pennsylvania-sourced non-employee compensation to non-residents. This includes business income and leases of real estate. This withholding is currently on a volunteer basis if the entity receiving payment is receiving $5,000 or less per year.

The new filing requirements state that starting in 2018, 1099s and W2s are required to be filed electronically if you are filing 10 or more forms. However, the Pennsylvania Department of Revenue is granting a waiver for the 2018 filing period. Learn more about this requirement in one of our previous blog posts.

Wayfair Decision Affecting Revenue from Online Sources

The Wayfair Decision brings economic nexus to online transactions. “Physical nexus” is when the consumer is making a purchase from a store or transacting with a business with a physical location. With the growth of online shopping, many B2C and B2B transactions take place with companies who do not have a physical presence in Pennsylvania, but their product is coming into Pennsylvania. With the Wayfair Decision, if you are a Pennsylvania-based business conducting online sales with people or companies outside of Pennsylvania, you may have multi-state filing requirements. Most states have differing thresholds, so if you are selling one or two items in a year and do not reach their particular threshold, you would not be required to file.

As always, if you have any questions or concerns regarding these changes, please call us at 215-723-4881. You may also consult our free online 2018-19 Tax Planning, which can be found here.

To view the portions of his seminar that were broadcast via Facebook Live, please visit our Facebook page.

Time for a “Paycheck Check-up” – IRS Issues New W-4 Form and Updated Withholding Calculator

With the passage of the Tax Cuts and Jobs Act, you might be receiving a higher net amount of money in your paycheck. To ensure you’re having the right amount of funds withheld in order to avoid a surprise during next year’s tax season, please follow the recommended steps in this message from the IRS:

“The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets.

If changes to withholding should be made, the Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer.

The withholding changes do not affect 2017 tax returns due this April. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.

Steps to Help Taxpayers: Do a ‘Paycheck Checkup’ 

The IRS encourages employees to use the Withholding Calculator to perform a quick ‘paycheck checkup.’  An employee checking their withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld; with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

The Withholding Calculator can be used by taxpayers who want to update their withholding in response to the new law or who start a new job or have other changes in their personal circumstances in 2018.

As a first step to reflect the tax law changes, the IRS released new withholding tables in January. These tables were designed to produce the correct amount of tax withholding — avoiding under- and over-withholding of tax — for those with simple tax situations. This means that people with simple situations might not need to make any changes. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.

People with more complicated financial situations might need to revise their W-4.  With the new tax law changes, it’s especially important for these people to use the Withholding Calculator on IRS.gov to make sure they have the right amount of withholding.

Among the groups who should check their withholding are:

  • Two-income families.
  • People with two or more jobs at the same time or who only work for part of the year.
  • People with children who claim credits such as the Child Tax Credit.
  • People who itemized deductions in 2017.
  • People with high incomes and more complex tax returns.

Taxpayers with more complex situations might need to use Publication 505, Tax Withholding and Estimated Tax, expected to be available on IRS.gov in early spring, instead of the Withholding Calculator.  This includes those who owe self-employment tax, the alternative minimum tax, or tax on unearned income from dependents, and people who have capital gains and dividends.

Plan Ahead: Tips for Using the Withholding Calculator

The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items.

Take a few minutes and plan ahead to make using the calculator on IRS.gov as easy as possible. Here are some tips:

  • Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
  • Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018.  However, note that the new tax law made significant changes to itemized deductions.
  • Keep in mind the Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
  • The Withholding Calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
  • Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
  • As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
  • If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.”

If you have any questions about your specific situation, please consult with your tax advisor. If you do not currently have a tax advisor, we welcome the opportunity to serve you. Please call 215-723-4881 or contact us online.

IRS Standard Mileage Rates Increase for 2018

The IRS has announced standard mileage rates for 2018. As of January 1, 2018, the standard mileage rates for the use of a vehicle (car, van, pick-up truck, or panel truck) for business, charitable, medical, or moving purposes are:

  • 54.5 cents for every mile of business travel driven (an increase of 1 cent from the 2017 rate)
  • 18 cents per mile driven for medical or moving purposes (an increase of 1 cent from the 2017 rate)
  • 14 cents per mile driven in service of charitable organizations

We’ve touched on the importance of keeping good mileage logs and recommend using a mobile app such as TripLog or MileIQ. It’ll save you a lot of time and stress as you gather your financial data for tax preparation.

We’re happy to answer any questions you might have about this or any of your financial service needs. Call 215-723-4881 or contact us online.

Tax Filing Season is Officially Open

Yesterday — Monday, January 29, 2018 –- marked the first day the IRS began accepting tax returns for the 2017 tax year. This year’s deadline to file your taxes is Tuesday, April 17. BusinessInsider.com has this recap on what you can expect for this year’s filing.

Keep in mind that the changes that come with the new tax law do not apply to your 2017 tax year returns. As always, our team of CPAs are here to help. Contact us with any questions.

Prepay Your Property Taxes? It Depends

You’ve probably seen or heard news reports about prepaying 2018 state and local real estate taxes in reaction to the recently-passed Tax Cuts and Jobs Act.

With this new legislation, beginning in 2018, taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes. The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

So, can you prepay your 2018 real estate taxes in 2017? Yes, and no. If you live in Montgomery or Bucks counties in Pennsylvania, the answer is “No.” Montgomery County has posted the following statement on their website:

The county has received a number of inquiries from individuals seeking to prepay their 2018 county real estate taxes. While the county understands and supports these efforts, Montgomery County is not permitted under Pennsylvania Law to accept such prepayments. Unlike Philadelphia, Delaware, and Allegheny counties, which are governed by Home Rule charters and thus permitted to allow the prepayment of taxes, Montgomery County, as well as Bucks, Chester, and other counties which are not Home Rule, must work within the confines of the tax collection requirements imposed by the Commonwealth. As these requirements explicitly prohibit the prepayment of real estate taxes, Montgomery County is prohibited from accepting 2018 real estate taxes until after the first of the year.

If you pay property taxes in a region where prepayment is permitted, you may only do so if you’ve received your 2018 tax assessment, as this article from Yahoo Finance explains:

But many residents trying to avoid that deduction limit on their state and local taxes will be disappointed: the IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.

As always, we are here to help. If you have any questions, or would like to discuss your tax plan for 2018, please contact us online or call 215-723-4881.

The Tax Cuts and Jobs Act Has Passed: What You Need to Know

The Tax Cuts & Jobs Act Bill (H.R. 1) has now passed the House and Senate and is on its way to the White House for the President’s signature to become law.

Here is a summary of some of the major provisions that will affect both Individuals and Businesses after this Bill becomes law. Most changes will be effective January 1, 2018; however, there are certain specific changes which will take effect before 2018.

Changes for Individuals

Individual Rates: The top individual rate will be 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. There will be seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent. The tax bill will nearly double the standard deduction, increasing it to $24,000 for a couple filing jointly and to $12,000 for single taxpayers. The tax rates and standard deduction expansion will expire in 2026.

Mortgage Interest Deduction: The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

State and Local Tax Deduction: Taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes.

Child Tax Credit: The child tax credit will be increased to $2,000 from the current $1,000 per child credit, with up to $1,400 of it being refundable.

Medical Expense Deduction: The bill will allow taxpayers to deduct medical expenses exceeding 7.5 percent of adjusted gross income for 2017 and 2018.

Individual Mandate: The plan would zero out the penalties for not obtaining health coverage for individuals and families.

529 College Accounts: 529 Accounts can now be used for elementary, secondary, and higher education.

Individual Alternative Minimum Tax: The individual AMT will increase to apply to individual filers earning more than $500,000 or joint filers earning $1 million or more.

Changes for Businesses

Corporate Rate: The corporate rate will be reduced to 21 percent starting January 1, 2018.

Pass-through Taxation: Pass-through entity owners that meet certain conditions will be eligible for a 20 percent deduction on their business income.

Business Expensing: Full expensing of new and used capital investments will be permitted for five years. After 2022, the 100 percent allowance will be phased down by 20 percent each year. Section 179 expensing, which doubles the amount eligible for the special small business investment write-offs, will also be made permanent.

Corporate Alternative Minimum Tax: The corporate AMT will be repealed.

Other Changes

Estate Tax: The exemption is doubled for estates worth approximately $11 million for individuals and $22 million for couples. The exemptions will revert to current levels after 2025.

International Business: Eliminates incentives that now reward companies for shifting jobs, profits, and manufacturing plants abroad. These incentives will prevent American jobs, headquarters, and research from moving overseas.

For even more information, here is a summary of the policy highlights as provided by the Joint House and Senate Conference Committee for your review.

If you have any questions about how this tax bill will affect your specific tax situation, please contact us online or call 215-723-4881 to set up a time to review the effects of these changes with you.

Disclaimer: This communication contains general tax information and should not be construed as specific tax advice for your situation.

 

Four Little Words Cost My Client over $55,000

“Details matter.” That’s what a client recently said as I was handing her a series of amended tax returns for 2014 and 2015 which included around $18,000 in additional taxes owed. Add to that a projection of an additional $37,000 owed for 2016. Why? Four words. Four little words cost my client over $55,000 in unexpected taxes, and I am helpless to do anything about it at this point.

“Details matter.” How simple, yet how profound.

The four words? “Tenants-by-the-entireties.” What does that even mean?

My client’s husband had 50/50 ownership of several rental properties with an unrelated partner. My client’s husband began to have failing health and passed away in 2014. Before his passing, they approached a lawyer to provide some estate planning.

Fortunately, the lawyer established an estate where shares of the partnership would be passed to the children and heirs. This not only kept the partnership from terminating upon my client’s husband’s death but it also meant the partnership was no longer a 50/50 split. Simply put, you need two people for a partnership. If one passes away, the partnership no longer has two individuals and therefore can’t exist. So the lawyer adequately addressed one concern by passing the partnership on to the children and heirs. However, he also did something else that he probably shouldn’t have done. He admitted the wife into the partnership as “tenants-by-the-entireties.” Those four words – “tenants by the entireties” – cost my client about $55,000.

When my client’s husband passed away, the partnership interest (aka ownership) would have automatically gone to his surviving spouse. The fair market value of the partnership interest would have passed through his estate, and his wife would have inherited the properties/partnership interest at full fair market value. So if the properties were sold the day after the husband’s passing, the wife wouldn’t pay a penny in federal income tax because it was handled through the estate.

What should have been a simple inheritance was complicated by the lawyer admitting the wife to the partnership, creating a tenancy by the entireties. From a tax perspective, she then owned 50% of her husband’s share and became ineligible to inherit the whole ownership at fair market value. She was only eligible to inherit half of it at fair market value. As a result, she had to pay taxes on her half of her husband’s share.

Communication is Key

While this is a very complicated area of tax law, the point of the story is this: Whether you have a multi-million-dollar business or as little as two rental properties, make sure your team is in communication with each other. Your accountant, lawyer, insurance agent, investment broker, etc., should all be on the same page. I recommend your accountant should be the “quarterback” guiding the team and identifying the “details” that matter.

It wasn’t until after we drafted the final partnership return in 2016 that we discovered the partnership agreement as it was revised. At that point, there was nothing we could do. While the lawyer did what he did to ease the transfer of ownership, it cost my client approximately $55,000.

Don’t be deceived into thinking this couldn’t happen to you. These particular clients weren’t “big clients with a lot of money.” There were only two rental properties. So please, hear my plea, and that of my clients: “Details matter.”

If you have questions about how your estate planning affects your tax situation, we’d be happy to help. Contact us or call 215-723-4881.

 

BrentThompson fromweb

Brent Thompson, CPA has been with Canon Capital since 1998. He provides management advisory services, tax and general business planning, tax preparation, and financial statement preparation and review services for numerous businesses and their owners. He holds the Certified Management Accountant (CMA) designation and a Chartered Global Management Accountant (CGMA) designation. Brent is a member of the AICPA and the Institute of CMA’s.

This article is designed for general information only. The information presented should not be construed to be formal advice nor the formation of a client relationship.