As the holiday season quickly approaches, gift giving will be top of mind. While gifts of electronics, toys and clothes are nice, making tax-free gifts of cash using your annual exclusion is beneficial for both you and your family.
Even in a potentially changing estate tax environment, making annual exclusion gifts before year end can still benefit your estate plan.
Understanding the annual exclusion
The 2017 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free without using up any of your $5.49 million lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $28,000 per recipient. The gifts are also generally excluded from the generation-skipping transfer tax, which typically applies to transfers to grandchildren and others more than one generation below you.
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can also avoid gift and estate taxes.
Making gifts in 2017 and beyond
Be aware that time is running out to make annual exclusion gifts this year: December 31 is the deadline. It’s also important to know that next year the exclusion amount increases for the first time since 2013, to $15,000 ($30,000 for split gifts). And the inflation-adjusted gift and estate tax exemption is currently scheduled to increase to $5.6 million in 2018.
It’s also important to keep an eye on Congress. With both the U.S. House of Representatives and U.S. Senate now having released their tax reform bills, more details regarding the potential future of the estate tax have emerged. But what, if any, estate tax law changes are ultimately passed remains to be seen. Even if the estate tax is repealed, it likely won’t be permanent. And current proposals retain the gift tax. So making 2017 annual exclusion gifts can still be a tax-smart move.
In the meantime, we can help you determine how to make the most of your 2017 gift tax annual exclusion and keep you abreast of the latest regarding new estate tax laws.
When you draft an estate plan, the centerpiece is your will or living trust. Such a document determines who gets what, where, when and how, as well as tying up the loose ends of your estate. A valid will or living trust can be supplemented by other legally binding documents, such as trusts (or additional trusts), powers of attorney and health care directives.
But there’s still a place at the table for a document that has absolutely no legal authority: a “letter of instructions” to your heirs. This informal letter can provide valuable guidance and act as a road map to the rest of your estate.
Begin your letter of instructions by stating the location of your will or living trust. Then create an inventory of all your assets and include their location, any account numbers and relevant contact information. This may include, but isn’t necessarily limited to, checking and savings accounts, 401(k) plans and IRAs, health insurance policies, business insurance, life and disability income insurance, stocks, bonds, mutual funds and other investments, and any tangible assets your heirs may not readily find.
The contact information should include the names, phone numbers and addresses (including emails) of the professionals handling your financial accounts and paperwork, such as an attorney, CPA, banker, life insurance agent and stockbroker. Also, list the beneficiaries of retirement plans, IRAs and insurance policies and their contact information.
Guidance for personal preferences
A letter of instructions is more than just a listing of assets and their locations. Typically, it will include other items of a personal nature, such as funeral, burial or cremation arrangements, accounting of fees paid for cemetery plots or mausoleums, the names, addresses and telephone numbers of people and organizations to be notified upon death, and specific instructions for handling personal and financial affairs after you’re gone.
The letter can also expand on instructions in a living will or other health care directive. For example, it might provide additional details about the decision for being taken off life support systems. It may also cover charitable contributions you wish to be made after death or the manner in which property should be donated to charity.
Putting pen to paper
As you’re writing your letter, bear in mind that there are no legal requirements backing it. And just like a will or living trust, the letter should be updated periodically to reflect significant changes in your life. Finally, keep the letter in a safe place where the people whom you want to read it can easily find it. Contact us if you have questions about a letter of instructions.
Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.
Timing strategies for businesses
Here are two timing strategies that can help businesses defer taxes:
1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
Potential impact of tax reform
These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.
Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.
But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.
Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.
A tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2017 tax liability.
But what if you expect an investment that would produce a loss if sold now to not only recover but thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to beware of the wash sale rule.
The rule up close
The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.
Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.
Achieving your goals
Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:
If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.
For more ideas on saving taxes on your investments, please contact us.
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only if they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.
Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. If tax reform legislation is signed into law, it might be especially beneficial to bunch deductible medical expenses into 2017.
Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income. The 10% floor applies for both regular tax and alternative minimum tax (AMT) purposes.
Beginning in 2017, even taxpayers age 65 and older are subject to the 10% floor. Previously, they generally enjoyed a 7.5% floor, except for AMT purposes, where they were also subject to the 10% floor.
Benefits of bunching
By bunching nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.
Normally, if it’s looking like you’re close to exceeding the floor in the current year, it’s tax-smart to consider accelerating controllable expenses into the current year. But if you’re
far from exceeding the floor, the traditional strategy is, to the extent possible (without harming your or your family’s health), to put off medical expenses until the next year, in case you have enough expenses in that year to exceed the floor.
However, in 2017, sticking to these traditional strategies might not make sense.
The nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27 proposes a variety of tax law changes. Among other things, the framework calls for increasing the standard deduction and eliminating “most” itemized deductions. While the framework doesn’t specifically mention the medical expense deduction, the only itemized deductions that it specifically states would be retained are those for home mortgage interest and charitable contributions.
If an elimination of the medical expense deduction were to go into effect in 2018, there could be a significant incentive for individuals to bunch deductible medical expenses into 2017. Even if you’re not close to exceeding the floor now, it could be beneficial to see if you can accelerate enough qualifying expense into 2017 to do so.
Keep in mind that tax reform legislation must be drafted, passed by the House and Senate and signed by the President. It’s still uncertain exactly what will be included in any legislation, whether it will be passed and signed into law this year, and, if it is, when its provisions would go into effect. For more information on how to bunch deductions, exactly what expenses are deductible, or other ways tax reform legislation could affect your 2017 year-end tax planning, please contact us.
One health care arrangement that has been soaring in popularity in recent years has been the pairing of a high-deductible health plan (HDHP) with a Health Savings Account (HSA). The good news is that not only does an HSA provide a tax-advantaged way to pay for health care costs, but it also can help you achieve your estate planning goals.
How does it work?
An HSA can be offered by an employer, or an individual can set up his or her own account, similar to an IRA. Contributions to an employer-sponsored HSA are pretax and may be made by employers, employees or both. If you set up your own HSA, you can deduct your contributions.
An HSA must, however, be coupled with a high-deductible health plan (HDHP). For 2017, to qualify as an HDHP, a plan must have a minimum deductible of $1,300 ($2,600 for family coverage) and a $6,550 cap on out-of-pocket expenses ($13,100 for family coverage).
Even if you have HDHP coverage, you generally won’t be eligible to contribute to an HSA if you’re also covered by any non-HDHP health insurance (such as a spouse’s plan) or if you’re enrolled in Medicare.
For 2017, the maximum HSA contribution is $3,400 ($6,750 for family coverage). If you’re age 55 or older, you can make additional “catch-up” contributions of up to $1,000.
The HSA funds can bear interest or be invested on a tax-deferred basis. You can make tax-free withdrawals to pay for qualified medical expenses. Unused funds may be carried over from year to year, continuing to grow tax-deferred.
Withdrawals before age 65 not used for medical expenses will be subject to income tax and a 20% penalty. But after age 65, the penalty won’t apply. Essentially, to the extent you don’t need the funds for medical expenses before age 65, an HSA serves as a supplemental IRA.
What are the estate planning benefits?
Like an IRA or a 401(k) plan account, HSAs with unused balances can supplement your retirement income or continue growing on a tax-deferred basis for the future benefit of your family. Unlike most other retirement savings vehicles, however, there are no required minimum distributions from HSAs, potentially allowing you to leverage tax-deferred compounding to build up a larger account for your heirs.
Carefully consider your HSA’s beneficiary designation. When you die, any remaining HSA balance becomes the beneficiary’s property. If the beneficiary is your spouse, your HSA becomes his or her HSA and is taxable only to the extent he or she makes nonqualified withdrawals.
If the beneficiary is someone other than your spouse, however, the account no longer will qualify as an HSA. The beneficiary must include the account’s fair market value in his or her gross income. But if he or she is in a lower income tax bracket than you were, this still may save tax overall for your family.
Please contact us for additional details regarding HSAs.
One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step.
If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.
A traditional 401(k) offers many benefits:
For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld.
If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.
Employers can include a Roth option in their 401(k) plans. If your plan offers this, you can designate some or all of your contribution as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.
Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. On the other hand, if you expect your tax rate to be lower in retirement, you may be better off sticking with traditional 401(k) contributions.
Finally, keep in mind that any employer matches to Roth 401(k) contributions will be pretax and go into your traditional 401(k) account.
How much and which type
Have questions about how much to contribute or the best mix between traditional and Roth contributions? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.
If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.
Complacency can be costly
During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.
Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.
You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Merging accounting functions
One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.
To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.
The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.
If a substantial portion of your wealth is tied up in a family or closely held business, you may be concerned that your estate will lack sufficient liquid assets to pay federal estate taxes. If that’s the case, your heirs may be forced to borrow funds or, in a worst-case scenario, sell the business in order to pay the tax.
For many eligible business owners, Internal Revenue Code Section 6166 provides welcome relief. It permits qualifying estates to defer a portion of their estate tax liability for up to 14 years from the date the tax is due (not the date of death). During the first four years of the deferment period, the estate pays interest only, set at only 2%, followed by 10 annual installments of principal and interest.
A deferral isn’t available for the total estate tax liability, unless a qualifying closely held business interest is the only asset in your estate. The benefit is limited to the portion of estate taxes that’s attributable to a closely held business.
Estate tax deferral is available if the value of an “interest in a closely-held business” exceeds 35% of your adjusted gross estate. To determine whether you meet the 35% test, you may only include assets actually used in conducting a trade or business — passive investments don’t count.
Active vs. passive ownership
To qualify for an estate tax deferral, a closely held business must conduct an active trade or business, rather than merely manage investment assets. Unfortunately, it’s not always easy to distinguish between the two, particularly when real estate is involved.
The IRS provided welcome guidance on this subject in a 2006 Revenue Ruling. The ruling confirms that a “passive” owner may qualify for estate tax deferral, so long as the entity conducts an active trade or business. The ruling also clarifies that using property management companies or other independent contractors to conduct real estate activities doesn’t disqualify a business from “active” status, so long as its activities go beyond merely holding investment assets.
In determining whether a real estate entity is conducting an active trade or business, the IRS considers such factors as the amount of time owners, employees or agents devote to the business, whether the business maintains an office with regular business hours, and the extent to which owners, employees or agents are actively involved in finding tenants and negotiating leases.
Weigh your options
As you plan your estate, consider whether your family will be eligible to defer estate taxes. If you own an interest in a real estate business, you may have an opportunity to qualify it for an estate tax deferral simply by adjusting your level of activity or increasing your ownership in an entity that manages the property. Contact us for additional details.
Among the taxes that are being considered for repeal as part of tax reform legislation is the estate tax. This tax applies to transfers of wealth at death, hence why it’s commonly referred to as the “death tax.” Its sibling, the gift tax — also being considered for repeal — applies to transfers during life. Yet most taxpayers won’t face these taxes even if the taxes remain in place.
Exclusions and exemptions
For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, then no federal estate tax will be due.
Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But every gift you make won’t use up part of your lifetime exemption. For example:
What’s your estate tax exposure?
Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.
You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).
If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.
Be aware that many states impose estate tax at a lower threshold than the federal government does. So you could have state estate tax exposure even if you don’t need to worry about federal estate tax.
If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us. We also can keep you up to date on any estate tax law changes.
Estate planning typically focuses on what happens to your assets when you die. But it’s equally important (some might say more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.
That’s where the power of attorney (POA) comes in. A POA appoints a trusted representative (the “agent”) who can make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Typically, separate POAs are executed for health care and property. Without them, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions. (Depending on the state you live in, the health care POA document may also be known as a “medical power of attorney” or “health care proxy.”)
A question that people often struggle with is whether a POA should be springing or nonspringing.
To spring or not to spring
A springing POA is effective on the occurrence of specified conditions; a nonspringing, or “durable,” POA is effective immediately. Typically, springing powers would take effect if you were to become mentally incapacitated, comatose or otherwise unable to act for yourself.
A nonspringing POA offers two advantages:
It allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, if you’re traveling out of the country for an extended period of time, your POA for property agent could pay bills and handle other financial matters for you in your absence.
It avoids the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.
A potential disadvantage to a nonspringing POA — and a common reason people opt for a springing POA — is the concern that the agent may be tempted to commit fraud or otherwise abuse his or her authority. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re incapacitated solve the problem? Arguably, the risk of fraud or abuse would be even greater at that time because you’d be unable to monitor what the agent is doing.
What to do?
Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, a nonspringing POA is generally preferable. Just make sure the person you name as agent is someone you trust unconditionally.
Contact us with any questions regarding POAs.
If your business is a limited liability company (LLC) or a limited liability partnership (LLP), you know that these structures offer liability protection and flexibility as well as tax advantages. But they once also had a significant tax disadvantage: The IRS used to treat all LLC and LLP owners as limited partners for purposes of the passive activity loss (PAL) rules, which can result in negative tax consequences. Fortunately, these days LLC and LLP owners can be treated as general partners, which means they can meet any one of seven “material participation” tests to avoid passive treatment.
The PAL rules
The PAL rules prohibit taxpayers from offsetting losses from passive business activities (such as limited partnerships or rental properties) against nonpassive income (such as wages, interest, dividends and capital gains). Disallowed losses may be carried forward to future years and deducted from passive income or recovered when the passive business interest is sold.
There are two types of passive activities: 1) trade or business activities in which you don’t materially participate during the year, and 2) rental activities, even if you do materially participate (unless you qualify as a “real estate professional” for federal tax purposes).
The 7 tests
Material participation in this context means participation on a “regular, continuous and substantial” basis. Unless you’re a limited partner, you’re deemed to materially participate in a business activity if you meet just one of seven tests:
The rules are more restrictive for limited partners, who can establish material participation only by satisfying tests 1, 5 or 6.
In many cases, meeting one of the material participation tests will require diligently tracking every hour spent on your activities associated with that business. Questions about the material participation tests? Contact us.
Most of the talk about possible tax legislation this year has focused on either wide-sweeping tax reform or taxes that are part of the Affordable Care Act. But there are a few other potential tax developments for individuals to keep an eye on.
Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The question now is whether Congress will extend them for 2017.
An education break
One break the PATH Act extended through 2016 was the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers).
You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings.
But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts.
Mortgage-related tax breaks
Under the PATH Act, through 2016 you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. The deduction phased out for taxpayers with AGI of $100,000 to $110,000.
The PATH Act likewise extended through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modified the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. So even if this break isn’t extended, you might still be able to benefit from it on your 2017 income tax return.
Please check back with us for the latest information. In the meantime, keep in mind that, if you qualify and you haven’t filed your 2016 income tax return yet, you can take advantage of these breaks on that tax return. The deadline for individual extended returns is October 16, 2017.
Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”
Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:
Calculating the tax
So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentative amount equals the greater of the following two prongs:
In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.
In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).
The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.
If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.
Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.
As you plan your estate, don’t overlook the generation-skipping transfer (GST) tax. Despite a generous $5.49 million GST tax exemption, complexities surrounding its allocation can create several tax traps for the unwary.
The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, other family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). If your child predeceases his or her children, however, they’re no longer considered skip persons.
GST tax applies to gifts or bequests directly to a skip person and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $14,000 per recipient; $28,000 for gifts split by married couples) are also shielded from GST tax.
To take full advantage of the GST tax exemption, you (or your estate’s representative) must properly allocate it to specific gifts and bequests (on a timely filed gift or estate tax return). Allocating the exemption wisely can provide substantial tax benefits.
Suppose, for example, that you contribute $2 million to a trust for the benefit of your grandchildren. If you allocate $2 million of your GST exemption to the trust, it will be shielded from GST taxes, even if it grows to $10 million. If you don’t allocate the exemption, you could trigger a seven-figure GST tax bill.
To help prevent costly mistakes like this from happening, the tax code and regulations provide for automatic allocation under certain circumstances. Your exemption is automatically allocated to direct skips as well as to contributions to “GST trusts.” These are trusts that could produce a generation-skipping transfer, subject to several exceptions.
Often, the automatic allocation rules work well, ensuring that GST exemptions are allocated in the most tax-advantageous manner. But in some cases, automatic allocation can lead to undesirable results.
Suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST taxes.
Handle with care
If you plan to make gifts to skip persons, or to trusts that may benefit skip persons, consider your potential GST tax exposure. Also, keep in mind that repeal of the GST tax, along with the gift and estate tax, has been proposed. We’ll keep you abreast of any tax law changes that affect estate planning, and we can answer your questions regarding the GST tax.
For families with disabled family members who’re potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. On the one hand, you want to provide the most comfortable life possible for your loved one. On the other hand, you don’t want to jeopardize his or her eligibility for needed government benefits.
For many years, the most effective solution to this problem has been to set up a special needs trust (SNT). But beginning in 2014, the Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.
How ABLE accounts work
The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.
The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.
An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.
Comparison with SNTs
Here’s a quick review of a few of the relative advantages and disadvantages of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.
Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.
Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.
Contact us with additional questions you may have regarding ABLE accounts.
You may be tempted to forget all about taxes during summertime, when “the livin’ is easy,” as the Gershwin song goes. But if you start your tax planning now, you may avoid an unpleasant tax surprise when you file next year. Summer is also a good time to set up a storage system for your tax records. Here are some tips:
Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you owe. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 with your employer. If you make estimated payments, those may need to be changed as well.
Keep records accessible but safe. Put your 2016 tax return and supporting records together in a place where you can easily find them if you need them, such as if you’re ever audited by the IRS. You also may need a copy of your tax return if you apply for a home loan or financial aid. Although accessibility is important, so is safety.
A good storage medium for hard copies of important personal documents like tax returns is a fire-, water- and impact-resistant security cabinet or safe. You may want to maintain a duplicate set of records in another location, such as a bank safety deposit box. You can also store copies of records electronically. Simply scan your documents and save them to an external storage device (which you can keep in your home safe or bank safety deposit box). If opting for a cloud-based backup system, choose your provider carefully to ensure its security measures are as stringent as possible.
Stay organized. Make tax time easier by putting records you’ll need when you file in the same place during the year. That way you won’t have to search for misplaced records next February or March. Some examples include substantiation of charitable donations, receipts from work-related travel not reimbursed by your employer, and documentation of medical expenses not reimbursable by insurance or paid through a tax-advantaged account.
For more information on summertime tax planning or organizing your tax-related information, contact us.
It’s common for a business to own not only typical business assets, such as equipment, inventory and furnishings, but also the building where the business operates — and possibly other real estate as well. There can, however, be negative consequences when a business’s real estate is included in its general corporate assets. By holding real estate in a separate entity, owners can save tax and enjoy other benefits, too.
Capturing tax savings
Many businesses operate as C corporations so they can buy and hold real estate just as they do equipment, inventory and other assets. The expenses of owning the property are treated as ordinary expenses on the company’s income statement. However, if the real estate is sold, any profit is subject to double taxation: first at the corporate level and then at the owner’s individual level when a distribution is made. As a result, putting real estate in a C corporation can be a costly mistake.
If the real estate is held instead by the business owner(s) or in a pass-through entity, such as a limited liability company (LLC) or limited partnership, and then leased to the corporation, the profit on a sale of the property is taxed only once — at the individual level.
LLC: The entity of choice
The most straightforward and seemingly least expensive way for an owner to maximize the tax benefits is to buy the real estate outright. However, this could transfer liabilities related to the property (such as for injuries suffered on the property ) directly to the owner, putting other assets — including the business — at risk. In essence, it would negate part of the rationale for organizing the business as a corporation in the first place.
So, it’s generally best to put real estate in its own limited liability entity. The LLC is most often the vehicle of choice for this. Limited partnerships can accomplish the same ends if there are multiple owners, but the disadvantage is that you’ll incur more expense by having to set up two entities: the partnership itself and typically a corporation to serve as the general partner.
We can help you create a plan of ownership for real estate that best suits your situation.
With school letting out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger.
One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.
Here are some other key ESA benefits:
A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs).
The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing.
However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range.
If there is a balance in the ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to a 10% penalty. But these taxes can be avoided by rolling over the full balance to another ESA for a qualifying family member.
Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!
When it comes time to transition your role as business owner to someone else, you’ll face many changes. One of them is becoming a mentor. As such, you’ll have to communicate clearly, show some patience and have a clear conception of what you want to accomplish before stepping down. Here are some tips on putting your successor in a position to succeed.
Find ways to continuously pass on your knowledge. Too often, vital business knowledge is lost when leadership or ownership changes — causing a difficult and chaotic transition for the successor. Although you can impart a great deal of expertise by mentoring your replacement, you need to do more. For instance, create procedures for you and other executives to share your wisdom.
Begin by documenting your business systems, processes and methods through a secure online employee information portal, which provides links to company databases. You also could set up a training program around core business methods and practices — workers could attend classes or complete computer-based courses. Then, you can create an annual benchmarking report of key activities and results for internal use.
Prepare your company to adapt and grow. With customer needs and market factors continually changing, your successor will likely face challenges that are different from what you encountered.
To enable your company to adapt to an ever-changing business world, ensure your successor understands how each department works and knows the fundamentals of key areas, including customer service, marketing and accounting. One way is to have your successor work in each business area.
Also have your successor join industry trade associations and community organizations to meet other executives and successors in diverse industries. In addition, require him or her to review and, if necessary, help update your company’s business plan.
To encourage your successor to develop relationships with key players inside and outside your company, include him or her in meetings with managers and trusted advisors, such as your accountant, lawyer, banker and insurance agent.
Ideally, when you walk away from your company, your successor will feel completely comfortable and ready to guide the business into a fruitful future. Please contact our firm for more help maximizing the effectiveness of your succession plan.
All charitable donations aren’t created equal — some provide larger deductions than others. And it isn’t necessarily just how much or even what you donate that matters. How the charity uses your donation might also affect your deduction.
Take vehicle donations, for example. If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it.
Determining your deduction
You can deduct the vehicle’s fair market value (FMV) if the charity:
But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.
Getting proper substantiation
You also must obtain proper substantiation from the charity, including a written acknowledgment that:
For more information on these and other rules that apply to vehicle donation deductions — or deductions for other charitable gifts — please contact us.
If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.
Reasons to reimburse
While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?
It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.
On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.
Per diem method
The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.
You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.
A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family.
If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection.
Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans.
IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy.
The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million.
The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy.
To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected.
Outside bankruptcy, the protection afforded an IRA depends on state law.
What about inherited IRAs?
In 2014, the U.S. Supreme Court held that inherited IRAs don’t qualify as retirement accounts under bankruptcy law. The Court reasoned that money in an IRA retirement account was set aside “at some prior date by an entirely different person.” But after an inheritance, it no longer bears the legal characteristics of retirement funds because the heir can withdraw funds at any time without a tax penalty and take other steps not required with noninherited IRAs. Therefore, they’re not protected in bankruptcy. (Clark v. Rameker)
Consult with your attorney about protection for retirement accounts in a nonbankruptcy context.
If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.
If you recently filed for your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.
Catching the IRS’s eye
Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:
An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.
More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS selects you for an audit, our firm can help you:
Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.
A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.
Unfortunately, your employer might not offer a Roth 401(k) or another Roth option, and modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute to a Roth IRA. Fortunately, there is a solution: the “back door” Roth IRA.
Are you phased out?
The 2017 contribution limit for all IRAs combined is $5,500 (plus an additional $1,000 catch-up contribution if you’ll be age 50 or older by December 31). You can make a partial contribution if your MAGI falls within the applicable phaseout range, but no contribution if it exceeds the top of the range:
(Note: Married taxpayers filing separately are subject to much lower phaseout ranges.)
Using the back door
If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you.
How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion, which should be little, if any, assuming you’re able to make the conversion quickly.
More limited tax benefit in some cases
If you do already have a traditional IRA, the back-door Roth IRA strategy is still available but there will be more tax liability on the conversion. A portion of the amount you convert to a Roth IRA will be considered attributable to deductible contributions and thus be taxable. It doesn’t matter if you set up a new traditional IRA for the nondeductible contributions; all of your traditional IRAs will be treated as one for tax purposes.
Roth IRAs have other benefits and downsides you need to factor into your decision, and additional rules apply to IRA conversions. Please contact us for assistance in determining whether a backdoor Roth IRA is right for you.
Many companies take an ad hoc approach to technology. If you’re among them, it’s understandable; you probably had to automate some tasks before others, your tech needs have likely evolved over time, and technology itself is always changing.
Unfortunately, all of your different hardware and software may not communicate so well. What’s worse, lack of integration can leave you more vulnerable to security risks. For these reasons, some businesses reach a point where they decide to implement a strategic IT plan.
The objective of a strategic IT plan is to — over a stated period — roll out consistent, integrated, and secure hardware and software. In doing so, you’ll likely eliminate many of the security dangers wrought by lack of integration, while streamlining data-processing efficiency.
To get started, define your IT objectives. Identify not only the weaknesses of your current infrastructure, but also opportunities to improve it. Employee feedback is key: Find out who’s using what and why it works for them.
From a financial perspective, estimate a reasonable return on investment that includes a payback timetable for technology expenditures. Be sure your projections factor in both:
Also calculate the price of doing nothing. Describe the risks and potential costs of falling behind or failing to get ahead of competitors technologically.
Working in phases
When you’re ready to implement your strategic IT plan, devise a reasonable and patient time line. Ideally, there should be no need to rush. You can take a phased approach, perhaps laying the foundation with a new server and then installing consistent, integrated applications on top of it.
A phased implementation can also help you stay within budget. You’ll need to have a good idea of how much the total project will cost. But you can still allow flexibility for making measured progress without putting your cash flow at risk.
Bringing it all together
There’s nothing wrong or unusual about wandering the vast landscape of today’s business technology. But, at some point, every company should at least consider bringing all their bits and bytes under one roof. Please contact our firm for help managing your IT spending in a measured, strategic way.
It can be difficult in the current job market for students and recent graduates to find summer or full-time jobs. If you’re a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.
By shifting some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s wages must be reasonable.
Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.
The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.
Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.
Saving employment taxes
If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.
If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.
Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses generally are deductible only against passive income, with the excess being carried forward.
Of course the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation will be passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate.
To qualify as a real estate professional, you must annually perform:
Each year stands on its own, and there are other nuances. (Special rules for spouses may help you meet the 750-hour test.)
If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider doing one of the following:
Increasing your involvement in the real estate activity. If you can pass the real estate professional tests, the activity no longer will be subject to passive activity rules.
Looking at other activities. If you have passive losses from your real estate investment, consider investing in another income-producing trade or business that will be passive to you. That way, you’ll have passive income that can absorb some or all of your passive losses.
Disposing of the activity. This generally allows you to deduct all passive losses — including any loss on disposition (subject to basis and capital loss limitations). But, again, the rules are complex.
Also be aware that the IRS frequently challenges claims of real estate professional status — and is often successful. One situation where the IRS commonly prevails is when the taxpayer didn’t keep adequate records of time spent on real estate activities.
If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.
Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.
Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.
Reasons to modify amounts
It’s particularly important to check your withholding and/or estimated tax payments if:
Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.
Making a change
You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.
While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.
If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us.
House passes the AHCA. By a slim margin of 217 to 213, the U.S. House of Representatives passed the American Health Care Act (AHCA), the Republican plan to repeal and replace the Affordable Care Act (ACA). The AHCA, as amended, would repeal most ACA provisions, including the individual and employer mandates, the 3.8% net investment income tax, the 0.9% additional Medicare tax, and the premium tax credit. The “Cadillac” tax on high cost employer-sponsored health plans would be delayed until 2026. The bill now heads to the Senate for consideration.
Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it’s a great time to take a look at your records for previous tax years to see what you can purge.
Consider the statute of limitations
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss — or electronically purge — most records related to tax returns for 2013 and earlier years (2012 and earlier if you filed for an extension for 2013).
In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the limitations period jumps to six years. And there is no statute of limitations if you fail to file a tax return or file a fraudulent one.
Keep some documents longer
You’ll need to hang on to certain records beyond the statute of limitations:
Tax returns. Keep them forever, so you can prove to the IRS that you actually filed.
W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations).
This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.
If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer.
Adequately disclosing a gift
A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:
The IRS also may require certain financial statements or other financial data and records.
Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.
Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.
A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.
Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.
Providing a strong package of benefits is a competitive imperative in today’s business world. Like many employers, you’ve probably worked hard to put together a solid menu of offerings to your staff. Unfortunately, many employees don’t perceive the full value of the benefits they receive.
Why is this important? An underwhelming perception of value could cause good employees to move on to “greener” pastures. It could also inhibit better job candidates from seeking employment at your company. Perhaps worst of all, if employees don’t fully value their benefits, they might not fully use them — which means you’re wasting dollars and effort on procuring and maintaining a strong package.
Targeting life stage
Among the most successful communication strategies for promoting benefits’ value is often the least commonly used. That is, target the life stage of your employees.
For example, an employee who’s just entering the workforce in his or her twenties will have a much different view of a 401(k) plan than someone nearing retirement. A younger employee will also likely view health care benefits differently. Employers who tailor their communications to the recipient’s generation can improve their success rate at getting workers to understand their benefits.
Covering all bases
There are many other strategies to consider as well. For starters, create a year-round benefits communication program that features clear, concise language and graphics. Many employers discuss benefits with their workforces only during open enrollment periods.
Also, gather feedback to determine employees’ informational needs. You may learn that you have to start communicating in multiple languages, for instance. You might also be able to identify staff members who are particularly knowledgeable about benefits. These employees could serve as word-of-mouth champions of your package who can effectively explain things to others.
Identifying sound strategies
Given the cost and effort you put into choosing, developing and offering benefits to your employees, the payoff could be much better. We can help you ensure you’re getting the most bang for your benefits buck.
Just about every business intends to provide world-class customer service. And though many claim their customer service is exceptional, very few can back up that assertion. After all, once a company has established a baseline level of success in interacting with customers, it’s not easy to get to that next level of truly great service. But, fear not, there are ways to elevate your game and, ultimately, strengthen your bottom line in the process.
Start at the top
As is the case for many things in business, success starts at the top. Encourage your fellow owners (if any) and management team to regularly serve customers. Doing so cements customer relationships and communicates to employees that serving others is important and rewarding. Your involvement shows that customer service is the source of your company’s ultimate triumph.
Moving down the organizational chart, cultivate customer-service heroes. Publish articles about your customer service achievements in your company’s newsletter or post them on your website. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.
Just make sure to empower all employees to make customer-service decisions. Don’t talk of catering to customers unless your staff can really take the initiative to meet your customers’ needs.
Create a system
Like everyone in today’s data-driven world, customers want information. So strive to provide immediate feedback to customers with a highly visible response system. This will let customers know that their input matters and you’ll reward them for speaking up.
The size and shape of this system will depend on the size, shape and specialty of the company itself. But it should likely encompass the right combination of instant, electronic responses to customer inquires along with phone calls and, where appropriate, face-to-face interactions that reinforce how much you value their business.
Give them a thrill
Consistently great customer service can be an elusive goal. You may succeed for months at a time only to suffer setbacks. Don’t get discouraged. Our firm can help you build a profitable company that excels at thrilling your customers.
While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.
Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.
A Roth IRA can be a valuable estate planning tool, offering the opportunity for tax-free growth as long as it exists and requiring no distributions during your life, thus allowing you to pass on a greater amount of wealth to your family. While traditional IRAs are more common, there’s no time like the present to consider how a Roth IRA might better help you achieve your estate planning goals.
Roth vs. traditional IRA
With a Roth IRA, you give up the deductibility of contributions for the opportunity to make tax-free withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.
With a Roth IRA, you can make tax-free withdrawals up to the amount of your contributions at any time. And withdrawals of account earnings are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older.
Also on the plus side, especially from an estate planning perspective, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ that generally apply to traditional IRAs.
So, with a Roth IRA, you can let the entire account grow tax-free over your lifetime for the benefit of one or more heirs. While the beneficiary will be required to take distributions, they’ll be tax-free and can be spread out over his or her lifetime, allowing the remaining assets in the account to continue to grow tax-free.
For 2017, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.
In 2017, the contribution limit phases out for married couples filing jointly with MAGIs between $186,000–$196,000. The 2017 phaseout range for single and head-of-household filers is $118,000–$133,000.
If your income is too high to contribute to a Roth IRA, consider converting your traditional IRA into a Roth, effectively turning future tax-deferred potential growth into tax-free potential growth. When you do a Roth conversion, you have to pay taxes on the amount you convert. But this also has an estate planning benefit because you’re paying taxes that your heirs might otherwise have to pay later.
If you have questions on how a Roth IRA may fit into your estate plan, please get in touch with us.
Today’s businesses operate in an era of hyper-connectedness and, unfortunately, a burgeoning global cybercrime industry. You can’t afford to hope you’ll luck out and avoid a cyberattack. It’s essential to establish policies and procedures to minimize risk. One specific area on which to focus is your employees.
Know the threats
There are a variety of cybercrimes you need to guard against. For instance, thieves may steal proprietary or sensitive business data with the intention of selling that information to competitors or other hackers. Or they may be more interested in your employees’ or customers’ personal information for the same reason.
Some cybercriminals may not be necessarily looking to steal anything but rather disable or damage your business systems. For example, they may install “ransomware” that locks you out of your own data until you pay their demands. Or they might launch a “denial-of-service attack,” under which hackers overwhelm your site with millions of data requests until it can no longer function.
Naturally, crimes may be committed by shadowy outsiders. But, all too often, it’s a company employee who either leaves the door open for a cybercriminal or perpetrates the crime him- or herself.
For this reason, it’s essential for your hiring managers to be mindful of cybersecurity when reviewing employment applications — particularly those for positions that involve open access to sensitive company data. If an applicant has an unusual or spotty job history, be sure to find out why before hiring. Check references and conduct background checks as well.
For both new and existing employees, make sure your cybersecurity policies are crystal clear. Include a statement in your employment handbook informing employees that their communications are stored in a backup system, and that you reserve the right to monitor and examine company computers and emails (sent and received) on your system. When such monitoring systems are in place, prudence or suspicious activity will dictate when they should be ramped up.
These are just a few points to bear in mind in relation to your employees and cybercrime. Although most workers are honest and not looking to do harm, all it takes is one mistake or one bad apple to compromise your company’s cybersecurity. We can provide you with more ideas for protecting your data and your business systems.
Reimbursing employees for education expenses can both strengthen the capabilities of your staff and help you retain them. In addition, you and your employees may be able to save valuable tax dollars. But you have to follow IRS rules. Here are a couple of options for maximizing tax savings.
A fringe benefit
Qualifying reimbursements and direct payments of job-related education costs are excludable from employees’ wages as working condition fringe benefits. This means employees don’t have to pay tax on them. Plus, you can deduct these costs as employee education expenses (as opposed to wages), and you don’t have to withhold income tax or withhold or pay payroll taxes on them.
To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the employees’ current occupations and not qualify them for new jobs. There’s no ceiling on the amount employees can receive tax-free as a working condition fringe benefit.
An educational assistance program
Another approach is to establish a formal educational assistance program. The program can cover both job-related and non-job-related education. Reimbursements can include costs such as:
Reimbursement of materials employees can keep after the courses end (except for textbooks) aren’t eligible.
You can annually exclude from the employee’s income and deduct up to $5,250 (or an unlimited amount if the education is job related) of eligible education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or withhold or pay payroll taxes on these reimbursements.
To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated employees, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available.
Train and retain
If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Please contact us for more details.
Now that the bill to repeal and replace the Affordable Care Act (ACA) has been withdrawn and it’s uncertain whether there will be any other health care reform legislation this year, it’s a good time to review some of the tax-related ACA provisions affecting businesses:
Small employer tax credit. Qualifying small employers can claim a credit to cover a portion of the cost of premiums paid to provide health insurance to employees. The maximum credit is 50% of premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.
Penalties for not offering complying coverage. Applicable large employers (ALEs) — those with at least 50 full-time employees (or the equivalent) — are required to offer full-time employees affordable health coverage that meets certain minimum standards. If they don’t, they’re charged a penalty if just one full-time employee receives a tax credit for purchasing his or her own coverage through a health care marketplace. This is sometimes called the “employer mandate.”
Reporting of health care costs to employees. The ACA generally requires employers who filed 250 or more W-2 forms in the preceding year to annually report to employees the value of health insurance coverage they provide. The reporting requirement is informational only; it doesn’t cause health care benefits to become taxable.
Additional 0.9% Medicare tax. This applies to:
While there is no employer portion of this tax, employers are responsible for withholding the tax once an employee’s compensation for the calendar year exceeds $200,000, regardless of the employee’s filing status or income from other sources.
Cap on health care FSA contributions. The Flexible Spending Account (FSA) cap is indexed for inflation. For 2017, the maximum annual FSA contribution by an employee is $2,600.
There’s also one significant change that hasn’t kicked in yet: Beginning in 2020, the ACA calls for health insurance companies that service the group market and administrators of employer-sponsored health plans to pay a 40% excise tax on premiums that exceed the applicable threshold, generally $10,200 for self-only coverage and $27,500 for family coverage. This is commonly referred to as the “Cadillac tax.”
The ACA remains the law, at least for now. Contact us if you have questions about how it affects your business’s tax situation.
Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:
Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).
Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.
Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.
Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.
Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.
Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.
Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.
Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.
The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.
Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.
Grandparents often want to play a role in financing their grandchildren’s education. If you’re one of them, it’s important to consider the impact that different financing options will have on your estate plan.
Make direct tuition payments
A simple but effective technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the educational institution, they avoid gift and generation-skipping transfer (GST) taxes without using up any of your $5.49 million gift or GST tax exemption or $14,000 gift tax annual exclusion.
But this technique is available only for tuition, not for other expenses, such as room and board, fees, books, and equipment. So it may be desirable to combine it with other techniques.
Is a HEET an option?
Another disadvantage of direct payments is that, if you wait until the student has tuition bills to pay, there’s a risk that you’ll die before the funds are removed from your estate. Other techniques allow you to set aside funds for future education expenses, shielding those funds from estate taxes. A tool that’s particularly attractive for grandparents is the health and education exclusion trust (HEET).
A HEET is a “dynasty” trust designed to make direct payments of tuition (and, if you desire, medical expenses) on behalf of its beneficiaries. You can use your annual exclusions and lifetime exemption to make gift-tax-free contributions. Contributed assets are removed from your estate.
Most significant, a properly designed HEET allows you to avoid GST tax without using up any of your GST tax exemption. A trust can trigger GST taxes in two ways: 1) a taxable distribution to your grandchild or another “skip person” (that is, a person more than one generation below you), or 2) a taxable termination, in which all nonskip trust interests terminate and only skip interests remain.
A HEET avoids taxable distributions by making direct payments to educational or health care organizations. And it avoids taxable terminations by granting a significant interest (usually 10% or more) to a charity, which ensures that there’s always at least one nonskip interest.
Explore all of your options
It’s possible that gift, estate and GST taxes could be repealed later this year. But even if this happens, as long as funding your grandchild’s education is an important goal of yours, implementing one or both of these strategies likely won’t have any negative impact. And doing so can be beneficial if these taxes aren’t repealed or if they return in the future. If you’d like to learn more about your options to help fund your grandchild’s education expenses, please contact us.
Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it will be too late.
Without a plan that expresses your wishes, your family may have to make medical decisions on your behalf or petition a court for a conservatorship. Either way, there’s no guarantee that these decisions will be made the way you would want, or by the person you would choose.
2 documents, 2 purposes
To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney (HCPA).
Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” or “health care directives.” And HCPAs may also be known as “durable powers of attorney for health care” or “health care proxies.”
Regardless of terminology, these documents serve two purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.
A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.
An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.
Put your plan into action
No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Contact us with questions.
Although probate can be time consuming and expensive, perhaps its biggest downside is that it’s public — anyone who’s interested can find out what assets you owned and how they’re being distributed after your death. The public nature of probate can also draw unwanted attention from disgruntled family members who may challenge the disposition of your assets, as well as from other unscrupulous parties.
However, by implementing the right estate planning strategies, you can keep much or even all of your estate out of probate.
Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts and transfers assets to your heirs.
Is probate ever desirable? Sometimes. Under certain circumstances, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.
Choose the right strategies
There are several ways you can avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)
The right strategies depend on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and retirement plans.
For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. However, keep in mind that, while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.
For homes or other real estate — as well as bank and brokerage accounts and other assets — some people avoid probate by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” Be aware that drawbacks exist for this technique.
Contact us with all of your probate questions.
If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.
The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.
The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.
Running the numbers
If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.
Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).
If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.
We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.
Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.
Benefits beyond a deduction
Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.
This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.
The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:
1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.
2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.
Want to know which option best fits your situation? Contact us.
It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.
Factors to consider
Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.
Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.
Easing the financial burden
Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.
The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.
The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this deadline is nothing new for S corporation returns, it’s earlier than previous years for partnership returns.
In addition to providing continued funding for federal transportation projects, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the due dates for several types of tax and information returns, including partnership income tax returns. The revised due dates are generally effective for tax years beginning after December 31, 2015. In other words, they apply to the tax returns for 2016 that are due in 2017.
The new deadlines
The new due date for partnerships with tax years ending on December 31 to file federal income tax returns is March 15. For partnerships with fiscal year ends, tax returns are due the 15th day of the third month after the close of the tax year.
Under prior law, returns for calendar-year partnerships were due April 15. And returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.
One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April 15 deadline (April 18 in 2017 because of a weekend and a Washington, D.C., holiday). After all, partnership (and S corporation) income flows through to the owners. The new date should allow owners to use the information contained in the partnership forms to file their personal returns.
If you haven’t filed your partnership or S corporation return yet, you may be thinking about an extension. Under the new law, the maximum extension for calendar-year partnerships is six months (until September 15). This is up from five months under prior law. So the extension deadline doesn’t change — only the length of the extension. The extension deadline for calendar-year S corporations also remains at September 15. But you must file for the extension by March 15.
Keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. But if filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 18 deadline.
Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. Please contact us if you need help or have questions about the filing deadlines that apply to you or avoiding interest and penalties.
As you file your 2016 income tax return and plan your charitable giving for 2017, it’s important to keep in mind the available deduction. It can vary significantly depending on a variety of factors.
What you give
Other than the actual amount you donate, one of the biggest factors that can affect your deduction iswhat you give:
Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.
Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.
Tangible personal property. Your deduction depends on the situation:
Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.
Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.
Your annual charitable donation deductions may be reduced if they exceed certain income-based limits. And if you receive some benefit from the charity, your deduction generally must be reduced by the benefit’s value.
In addition, various substantiation requirements apply. And the charity must be eligible to receive tax-deductible contributions. Finally, keep in mind that tax law changes could be passed later this year that might affect your 2017 charitable deductions.
If you have questions about how much you can deduct on your 2016 return, let us know. We also can keep you apprised of the latest information on any tax law changes.
Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.
What are the deduction rates?
The rates vary depending on the purpose and the year:
Business: 54 cents (2016), 53.5 cents (2017)
Medical: 19 cents (2016), 17 cents (2017)
Moving: 19 cents (2016), 17 cents (2017)
Charitable: 14 cents (2016 and 2017)
The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.
In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.
What other limits apply?
The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.
For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)
And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.
There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.
So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.
And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.
Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.
Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.
When filing is required
Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:
When filing isn’t required
No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.
If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.
Meeting the deadline
The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.
Have questions about gift tax and the filing requirements? Contact us to learn more.
Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous.
SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested.
Deadline for set-up and contributions
A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:
The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return.
Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017).
Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee.
For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively.
Setting up a SEP is easy
A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us.
Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.
Current tax treatment
ISOs must comply with many rules but receive tax-favored treatment:
So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.
Future exercises and stock sales
If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.
Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.
The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.
Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain.
If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward.
In many respects, estate planning for single parents of minor children is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask:
1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan recently, do so as soon as possible to ensure that it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future.
2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.
3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents don’t have a “backup” income in the event they can no longer work.
4. What if I become incapacitated? As a single parent, it’s particularly important for you to include in your estate plan a living will or advance directive to specify your preferences for the use of life-sustaining medical procedures and a health care power of attorney to designate someone to make other medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances.
5. Have I established a trust for my children? Trust planning is one of the most effective ways to provide for children regardless of their age. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees, and you specify when and under what circumstances funds should be distributed to your kids. But a trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.
If you’re a single parent, we can help answer all of your estate planning questions.
Was a college student in your family last year? Or were you a student yourself? You may be eligible for some valuable tax breaks on your 2016 return. To max out your higher education breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.
Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.
Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.
Be aware that the tuition and fees deduction expired December 31, 2016. So it won’t be available on your 2017 return unless Congress extends it or makes it permanent.
How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2016 tax returns — and which will provide the greatest tax savings — please contact us.
At the beginning of the year, many people decide they’re going to get in the best shape of their lives. Similarly, many business owners declare that they intend to cut costs and operate at peak efficiency going forward.
But, like keeping up an exercise routine, controlling costs takes an ongoing effort. You need to not only review expenses now, but also commit yourself to doing so regularly. Here are some key points to keep in mind.
Choosing where to slim down
A good cost-control plan starts by clearly identifying manageable expenses in every business area — no exceptions. Prime candidates include:
Controlling expenses in these and other areas doesn’t mean one-time cost cutting, which is really just a reaction to a problem. Cost control requires foresight and strategic management.
Going the distance
Indeed, many business owners sometimes confuse cost-control programs with cost-cutting initiatives. The difference is that a cost-control plan should be a long-term solution — not just a quick-fix measure to make budget or shore up a bad quarter.
Managing expenses should be a strategic decision that starts at the top and is clearly communicated down the organizational chart. Train and encourage your managers to accurately track costs with an eye toward maximizing profitability. In turn, team leaders should work with their employees to solve the problems driving up expenses. It’s always better to be proactive than reactive.
Boosting cash flow
Controlling costs is among the best ways to maintain or increase cash flow. Tightly managed expenses free up dollars for profitable operations, prevent excessive inventory and wasteful spending, and keep cash available for business growth. Need help with your cost-control regimen? Please contact our firm.
Asset protection trusts — both offshore and domestic — can be effective vehicles for protecting your wealth in today’s litigious society. But these trusts can be complex and expensive, so they’re not right for everyone. For those seeking simpler asset protection strategies, there are several basic, yet effective, tools to consider.
Some of these strategies involve transferring assets to another person or entity, or changing the way property is titled. Here are a few common asset protection strategies:
Insurance. For many people, insurance is the first line of defense against liability claims that expose their assets to risk. It includes personal or homeowners liability insurance, as well as professional liability insurance for doctors, lawyers and other professionals who are common targets for lawsuits.
Lifetime gifts. The most effective asset protection strategy may also be the simplest: giving your assets away to your children or other loved ones. After all, a creditor can’t come after assets you don’t own. The disadvantage of this approach is that you must relinquish control over the assets.
Tenancy by the entirety. Many states permit married couples to hold their homes or other real estate as “tenants by the entirety.” This form of ownership protects assets against claims by either spouse’s separate creditors. So, for example, it can be effective when one spouse is exposed to professional liability risks. It doesn’t, however, protect couples against claims by their joint creditors. Tenancy by the entirety, if available, may be a good option for people who aren’t comfortable transferring title to their spouses.
Retirement accounts. Qualified retirement plans — such as 401(k), 403(b), and 457 plans, as well as certain pension and profit-sharing plans — are excellent asset protection vehicles. IRAs offer more limited protection. Assets held in most qualified plans enjoy unlimited protection from creditors’ claims — both in bankruptcy and outside of bankruptcy — under the Employee Retirement Income Security Act.
Keep in mind that, for these strategies to work, you must implement them at a time when there are no pending or threatened claims against you. Otherwise, you may run afoul of fraudulent conveyance laws.
Before you weigh your asset protection options, we can help you conduct a risk assessment to evaluate your level of exposure. Armed with this information, you can determine which asset protection tools are right for you.
Your company probably offers its employees a retirement plan. If so, can you identify all of your plan fiduciaries? From a risk management perspective, it’s critical for business owners to know who has fiduciary status — and the associated liability. Here are some common, though in some cases overlooked, plan fiduciaries:
Named fiduciaries. The Employee Retirement Income Security Act (ERISA) requires a plan to have named fiduciaries. The plan document identifies the corporate entity or individual serving as the named fiduciary. If they aren’t immediately identified, the plan document will set the requirements for naming them.
Plan trustees. These are people who have exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary. These plan fiduciaries have a broad scope of responsibility.
Board of directors and committee members. The individuals who choose plan trustees and administrative committee members are considered under ERISA to be fiduciaries. Typically these are the members of the corporate board of directors. The scope of their fiduciary duty focuses on how they fulfill that specific function, and not on everything that happens with the plan itself. The law also sees as fiduciaries people who exercise discretion in key decisions about plan administration, including members of the administrative committee, if such a committee exists.
Investment managers and advisors. The named fiduciary can appoint one or more investment managers for the plan’s assets. People or firms who manage plan assets are plan fiduciaries. However, individuals employed by third party service providers can fall into different fiduciary categories. The investment manager who has complete discretion over plan asset investments has the greatest fiduciary responsibility. In contrast, a corporation or individual who offers investment advice, but doesn’t actually call the shots, has a lesser fiduciary responsibility.
These are just a few examples. Anyone who exercises discretionary authority over any vital facet of plan operations may be considered a “functional fiduciary.” Please contact our firm for a review of your retirement plan and its fiduciaries.
The executor’s role is critical to the administration of an estate and the achievement of estate planning objectives. So your first instinct may be to name a trusted family member as executor (also referred to as a personal representative). But that might not be the best choice.
Your executor has a variety of important duties, including:
Typically, family members lack the skills and time to handle all of these tasks on their own. They’re entitled, of course, to hire accountants, attorneys, financial planners and other advisors — at the estate’s expense — for assistance. But even with professional help, serving as executor is a big job that requires a substantial time commitment during an already stressful period. Plus, if your executor is also a beneficiary of your will, other beneficiaries may view that as a conflict of interest.
A few alternatives
So, what are your options? One is to name a trusted advisor, such as an accountant or lawyer, as executor. Another is to appoint an advisor and a family member as co-executors. The advisor would handle most of the executor’s day-to-day responsibilities, while your family member would oversee the process and ensure that the advisor acts in your family’s best interests.
We can help you decide who would best serve as your estate’s executor. Please contact us with questions.
For many people, the cost of medical care keeps going up. So if possible, you should find ways to claim tax breaks related to health care. Unfortunately, it can be difficult because there’s a threshold for deducting itemized medical expenses that can be tough to meet.
To make matters worse, the threshold for senior taxpayers is going up beginning January 1, 2017.
Before 2013, you could claim an itemized deduction for unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items, reduced by certain write-offs, including those for deductible IRA contributions, alimony payments and student loan interest.
As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI now applies to most taxpayers. However, if either you or your spouse were at least 65 as of December 31, 2016, the 10%-of-AGI deduction threshold won’t affect you for the 2016 tax year (the tax return you’ll file in 2017). For 2016, the 7.5%-of-AGI deduction threshold still applies for qualifying seniors.
However, this exemption is temporary. Beginning January 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.
Consider “bunching” expenses in alternating years
If you aren’t eligible for a deduction, you might be able to qualify if you concentrate medical expenses in alternating years. That way, you may qualify to claim an itemized medical expense deduction every other year — instead of losing the opportunity to claim any deduction for health care costs. Of course, this might only work if you have flexibility about when medical expenses are incurred.
Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. This includes payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices, prescription drugs and other health care expenses.
Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction.
If your elderly parent’s mental state is deteriorating to the point where he or she is unable to manage day-to-day activities, it may be time to make the difficult decision to have him or her declared incapacitated. But how do you know if such action is necessary?
2 key questions
Knowing the answers to these two key questions can help you determine whether it’s necessary to have a parent declared incapacitated:
1. What’s the difference between capacity and incapacity? The legal definition of “capacity” varies from state to state, but generally it’s the mental ability to adequately function. A person is presumed competent unless an adjudication process determines otherwise. That is, a judge must declare a person incompetent. Factors leading to such a decision will depend on the circumstances.
One barometer of whether someone is able to adequately function is the person’s ability to understand basic financial matters. Another is whether a person is able to attend to his or her own health needs.
2. What’s the role of a guardian/conservator? If you make the decision to have an incapacity determination and the judge agrees that your parent is no longer competent, the court will appoint a guardian/conservator. He or she will be responsible for managing your parent’s affairs.
More often than not, an incapacitated person’s child is appointed guardian/conservator, but the guardian/conservator doesn’t have to be a family member. In some states a person can designate whom he or she wants to act as his or her guardian/conservator.
The guardianship/conservatorship will specify if the guardian/conservator has been appointed for the management of all aspects of your parent’s life or a specific aspect of it, such as for solely financial matters. Whatever the decision, the guardian/conservator will owe a duty of care to your parent and will be held accountable by the court for showing that his or her actions are appropriate.
Estate planning strategies
An estate planning technique that may be worth exploring is to have your parent execute a durable power of attorney for property or a living trust. If your parent executes one of these documents, generally the agent or trustee named can manage your parent’s financial affairs.
Similarly, a durable power of attorney for health care, or health care proxy, can allow the agent named to make health care decisions on behalf of your parent. These documents can provide the criteria under which your parent will be considered incapacitated so that a guardianship/conservatorship proceeding isn’t necessary.
Deciding whether to have your parent declared incapacitated can be excruciating. If you’re in this situation, please don’t hesitate to reach out to us for guidance.
Come tax time, owner-employees face a variety of distinctive tax planning challenges, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. Whether you’re thinking about your 2016 filing or planning for 2017, it’s important to be aware of the challenges that apply to your particular situation.
Partnerships and LLCs
If you’re a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). And this income likely will be subject to self-employment taxes — even if the income isn’t actually distributed to you. This means your employment tax liability typically doubles, because you must pay both the employee and employer portions of these taxes.
The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income and modified adjusted gross income, which are the triggers for certain additional taxes and phaseouts of many tax breaks.
But flow-through income may not be subject to self-employment taxes if you’re a limited partner or the LLC member equivalent. And be aware that flow-through income might be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.
S and C corporations
For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively — but not unreasonably — low and increasing your distributions of company income (which generally isn’t taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.
In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, are taxed at the shareholder level and could be subject to the 3.8% NIIT).
Whether your entity is an S or a C corporation, tread carefully, however. The IRS remains on the lookout for misclassification of corporate payments to shareholder-employees. The penalties and additional tax liability can be costly.
As you can see, tax planning is extra important for owner-employees. Plus, tax law changes proposed by the President-elect and the Republican majority in Congress could affect tax treatment of your income in 2017. Please contact us for help identifying the ideal strategies for your situation.
Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.
|Type of limit||
|Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||
|Contributions to defined contribution plans||
|Contributions to SIMPLEs||
|Contributions to IRAs||
|Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans||
|Catch-up contributions to SIMPLEs||
|Catch-up contributions to IRAs||
Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.
However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.
If you have unadopted stepchildren, estate planning is critical to ensure that your property is distributed the way you desire. Stepchildren generally don’t have any inheritance rights with respect to their parents’ new spouses unless the spouse legally adopts them. If you have stepchildren and want them to share in your estate, one option is to adopt them. Another is to amend your estate plan to provide for them expressly.
Of course, estate planning isn’t the only reason to adopt stepchildren. Adoption also gives you all of the legal rights of a parent during your life. Before you adopt stepchildren, however, you and your spouse should consider the potential effect on their ability to inherit from (or through) their other biological parent’s relatives. In most states, when a child is adopted by a stepparent, the adoption decree severs the parent-child relationship with the other biological parent and his or her family.
That means the child can’t inherit from that biological parent’s branch of the family — and vice versa — through intestate succession. For example, if Tina is adopted by her stepfather, Mark, the adoption would terminate Tina’s intestate succession rights with respect to her biological father, Ed, and consequently, Ed’s family.
Most states provide an exception for certain “family realignments.” From the previous example, let’s suppose that Ed is deceased. Mark’s adoption of Tina wouldn’t sever the connection to Ed’s family. If, for example, Ed’s sister Emily dies intestate, Tina will be included in the class of heirs. In a state that doesn’t recognize a family realignment exception, however, Tina won’t be considered Emily’s heir.
Have a plan
If you wish to exclude stepchildren from your estate, in most cases it’s sufficient to do nothing. But some states permit stepchildren to inherit through intestate succession under certain circumstances.
To ensure your desired treatment of stepchildren, whether or not you adopt them, the best strategy is for you and your spouse to spell out your wishes in wills, trusts and other estate planning documents. As with most estate planning issues, relying on the laws of intestate succession can lead to unwelcome surprises. Contact us with questions on how the makeup of your family may affect your estate planning.
There are many ways to save for a child’s or grandchild’s education. But one has annual contribution limits, and if you don’t make a 2016 contribution by December 31, the opportunity will be lost forever. We’re talking about Coverdell Education Savings Accounts (ESAs).
How ESAs work
With an ESA, you contribute money now that the beneficiary can use later to pay qualified education expenses:
Not just for college
One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.
Another advantage is that you have more investment options. So ESAs are beneficial if you’d like to have direct control over how and where your contributions are invested.
Annual contribution limits
The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.
The limit begins to phase out at a modified adjusted gross income (MAGI) of $190,000 for married filing jointly and $95,000 for other filers. No contribution can be made when MAGI hits $220,000 and $110,000, respectively.
Maximizing ESA savings
Because the annual contribution limit is low, if you want to maximize your ESA savings, it’s important to contribute every year in which you’re eligible. The contribution limit doesn’t carry over from year to year. In other words, if you don’t make a $2,000 contribution in 2016, you can’t add that $2,000 to the 2017 limit and make a $4,000 contribution next year.
However, because the contribution limit applies on a per beneficiary basis, before contributing make sure no one else has contributed to an ESA on behalf of the same beneficiary. If someone else has, you’ll need to reduce your contribution accordingly.
Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!
A tried-and-true estate planning strategy is to make tax-free gifts to loved ones during life, because it reduces potential estate tax at death. There are many ways to make tax-free gifts, but one of the simplest is to take advantage of the annual gift tax exclusion with direct gifts. Even in a potentially changing estate tax environment, making annual exclusion gifts before year end can still be a good idea.
What is the annual exclusion?
The 2016 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free without using up any of your $5.45 million lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $28,000 per recipient. The gifts are also generally excluded from the generation-skipping transfer tax, which typically applies to transfers to grandchildren and others more than one generation below you.
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can also avoid gift and estate taxes.
Making gifts in 2016
The exclusion is scheduled to remain at $14,000 ($28,000 for split gifts) in 2017. But that’s not a reason to skip making annual exclusion gifts this year. You need to use your 2016 exclusion by Dec. 31 or you’ll lose it.
The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your daughter this year, you can’t add $14,000 to your 2017 exclusion to make a $28,000 tax-free gift to her next year.
While the President-elect and Republicans in Congress have indicated that they want to repeal the estate tax, it’s uncertain exactly what tax law changes will be passed, since the Republicans don’t have a filibuster-proof majority in the Senate. Plus, in some states there’s a state-level estate tax. So if you have a large estate, making 2016 annual exclusion gifts is generally still well worth considering.
We can help you determine how to make the most of your 2016 gift tax annual exclusion.
Whether you didn’t save as much for retirement as you would have wished earlier in your career or you’d simply like to make the most of tax-advantaged savings opportunities, if you’ll be age 50 or older on December 31, consider making “catch-up” contributions to your employer-sponsored retirement plan by that date. These are additional contributions beyond the regular annual limits that can be made to certain retirement accounts.
401(k)s and SIMPLEs
Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.
But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.
If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution.
You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution.
Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2016 tax liability. And keep in mind that catch-up contributions are available for IRAs, too, but the deadline for 2016 contributions is later: April 18, 2017. If you have questions about catch-up contributions or other retirement saving strategies, please contact us.
Year end is just about here. You know what that means, right? It’s a great time to settle in by a roaring fire and catch up on reading … your company’s financial statements. One chapter worth a careful perusal is the balance sheet. Therein may lie some important lessons.
3 ratios to consider
In a nutshell, a balance sheet summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. Its objective: To provide an accurate snapshot of the financial standing of the business.
Yet a balance sheet can do so much more. There are a number of ratios you can draw from this report, which can help you lay out strategic plans for next year. Here are three to consider:
1. The ratio of current assets to current liabilities. If this ratio falls below 1, the company may struggle to pay bills coming due. Some business experts believe a current ratio of less than 2:1 is problematic. But the ideal ratio varies from industry to industry.
2. Growth in accounts receivable compared to growth in sales. If receivables are growing faster than increases in sales, your company might be building up bad debts or you could be selling to large customers under disadvantageous terms. You may even be the victim of fraud. (Note: Sales are expressed on your income statement, so you’ll need to look at that statement, as well.)
3. Growth in inventory vs. growth in sales. When inventory levels increase at a faster rate than sales, a business is producing products faster than they’re being sold. Or, in the retail industry, a company may be overbuying — an inefficient use of working capital. There can be many mitigating circumstances, however, so it’s critical to determine exactly what’s going on.
These are just a few things you can learn from your balance sheet. And we haven’t even gotten into the thrilling tales lying within your income statement and statement of cash flow — the other two parts of your financial statements. Please contact our firm for help making the most of this important information.
During the holiday season your thoughts likely turn to helping those in need by making charitable donations. Doing so will benefit your favorite organizations and help you achieve your estate planning goal of reducing the size of your taxable estate. In addition, by donating during your lifetime, rather than at death, you’ll receive an income tax deduction. But to take a 2016 deduction, you must make the gift by December 31, 2016.
Making an outright gift of cash is the most common and simple option. These gifts can include donations made via check, credit card and payroll deduction. The key is to substantiate them. To be deductible, cash donations must be:
Deductions for cash gifts to public charities can’t exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to nonoperating private foundations. Contributions in excess of the applicable AGI limit can be carried forward for up to five years.
Another option is to donate appreciated publicly traded stock you’ve held more than one year. Because this is considered long-term capital gains property, it can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.
Donations of long-term capital gains property are subject to tighter deduction limits — 30% of AGI for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).
If you’re planning on making charitable donations this year, please get in touch with us to learn about additional rules that may apply.
Could your company’s benefits package use a bit of an upgrade? If so, one idea to consider is adding an option for employees to convert their regular 401(k)s to Roth 401(k)s.
Under a Roth 401(k), participants make after-tax contributions to a qualified plan and receive tax-free distributions, provided the funds are in the plan for at least five years from the date of the initial Roth contribution. Thus, while participants pay a tax on the income that was the source of the contribution, the earnings on the contributions are tax-free.
Penalties to consider
The ability to convert existing pretax balances within a 401(k) to Roth status was expanded by the American Taxpayer Relief Act of 2012. It’s generally easier for participants to start making after-tax contributions to Roth accounts within their 401(k) plans than it is to convert a significant existing pretax amount to the plan’s Roth component.
Why? Because, as with an IRA conversion, a Roth 401(k) conversion triggers tax liability that participants must pay on the conversion. If they need to raise the cash from retirement funds and they’re younger than age 59½, they get to keep only 90% of the amount after the 10% premature withdrawal penalty, less whatever amount regular income taxes take.
The initial financial hit of a Roth 401(k) conversion might appear to be a deal-breaker. Yet more and more plan sponsors are offering the option. One possible explanation for this is the rising number of working Millennials (roughly defined as those born between the 1980s and 2000s).
Converting to a Roth 401(k) makes sense for these younger participants because they have a longer period to build tax-free earnings on their contributions — despite the initial penalty. They’re also less likely to face the prospect of a big tax hit by converting an existing pretax 401(k) plan balance to a Roth account, because their existing balances are generally lower.
An intriguing option
Giving employees the opportunity to participate in a Roth 401(k) plan may help them hedge their bets about the income tax environment they’ll face in retirement. And, as Millennials continue to hit the job market, you might draw better candidates when hiring. Please contact our firm for more information.
Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.
When’s the delivery date?
To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?
The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Pay-by-phone account. The date the financial institution pays the amount.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Is the organization “qualified”?
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.
When planning their estates, many people agonize over the negative impact their wealth might have on their children. To address these concerns, some people establish quiet trusts, also known as silent trusts. In other words, they leave significant sums in trust for their children; they just don’t tell them about it. An interesting approach, but is it effective?
A questionable strategy
Many states permit quiet trusts, but the risks associated with them may outweigh the potential benefits. For one thing, it’s difficult — if not impossible — to keep your wealth a secret. Even if your children are unaware of the details of your estate plan, their expectations of a future inheritance can encourage the same irresponsible behavior the quiet trust was intended to avoid.
A quiet trust may also increase the risk of litigation. The trustee has a fiduciary duty to act in the beneficiaries’ best interests. When your children become aware of the trust years or decades later, they’ll likely seek an accounting from the trustee and, with the help of counsel, may challenge any past decisions of the trustee that they disagree with.
A better alternative
The idea behind a quiet trust is to avoid disincentives to responsible behavior. But it’s not clear that such a trust will actually accomplish that goal. A better approach may be to design a trust that providesincentives to behave responsibly — sometimes referred to as an incentive trust. It provides an opportunity for you or the trustee to help shape the beneficiaries’ future behavior.
With a quiet trust, you keep your beneficiaries’ inheritance a secret and hope that, without the negative influence of future wealth, they will behave responsibly. With an incentive trust, on the other hand, you provide positive reinforcement by communicating the terms of the trust, letting beneficiaries know what they must do to receive their rewards, and providing them with the help they need to succeed.
Questions on the benefits of either of these trusts? We can provide the answers.
Many companies, especially smaller ones, minimize in-house training to cut costs. But the current business environment — with its hard-to-predict changes, external threats and regulatory demands — is causing some owners to rethink this strategy. A strong training program can not only help you attract and retain quality talent, but can also help you reduce operational risk.
Today’s companies face many challenges beyond simply turning a profit. Many industries are highly regulated, and just about every type of business has become, in some sense, technology-dependent. This has brought a renewed emphasis on risk management.
One of the keys to managing operational risk is well-trained personnel at all levels. After all, no matter how carefully a business designs its policies, procedures and controls, they’re only as reliable as the employees entrusted to implement them.
2 examples to consider
Here are just a couple of examples of operational risks that can be reduced with good training:
1. Compliance. As mentioned, many businesses are now more heavily regulated. (This may change with the incoming presidential administration, but it’s hard to say when or how any deregulatory measures may occur.) Failure to comply with federal, state or local regulations can expose your company to penalties ranging from monetary fines, to rescission of loans or other contracts, to criminal liability. Train your employees to avoid breaking the rules and to spot compliance threats when they arise.
2. Cybersecurity. As companies’ reliance on technology and automation continues to increase, so does the risk of cyberattacks. Although the techniques cybercriminals use are becoming more sophisticated, many businesses also remain vulnerable to simple tactics, such as email phishing.
Phishing involves sending emails to employees or customers that appear to be from a legitimate source. By tricking recipients into clicking on links that install malware, cybercriminals can gain access to company assets or customers’ sensitive personal information. Teach your staff how to deal with suspicious emails and other technology-related threats.
On the lookout
It’s not enough to be aware of risks to your business at the ownership or management level. You’ve got to train your employees to be on the lookout, too. Please contact our firm for help.
Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial. One deductible expense you may be able to control is your property tax payment.
You can prepay (by December 31) property taxes that relate to 2016 but that are due in 2017, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2017 and deduct the payment on this year’s return.
Should you or shouldn’t you?
As noted earlier, accelerating deductible expenses like property tax payments generally is beneficial. Prepaying your property tax may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
However, under the President-elect’s proposed tax plan, some taxpayers (such as certain single and head of household filers) might be subject to higher tax rates. These taxpayers may save more tax from the property tax deduction by holding off on paying their property tax until it’s due next year.
Likewise, taxpayers who expect to see a big jump in their income next year that would push them into a higher tax bracket also may benefit by not prepaying their property tax bill.
Property tax isn’t deductible for AMT purposes. If you’re subject to the AMT this year, a prepayment may hurt you because you’ll lose the benefit of the deduction. So before prepaying your property tax, make sure you aren’t at AMT risk for 2016.
Also, don’t forget the income-based itemized deduction reduction. If your income is high enough that the reduction applies to you, the tax benefit of a prepayment will be reduced.
Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2016 (or should consider deferring to 2017)? Contact us. We can help you determine the best year-end tax planning strategies for your specific situation.
Typically, much of the estate planning process focuses on money. But the most successful estate plans are founded on relationships. Building and preserving family wealth isn’t an end in itself. Rather, it’s a tool for promoting shared family values or encouraging family members to lead responsible, productive, healthy lives. Drafting a family mission statement can be an effective way to define and communicate these values.
Because each family is different, there’s no cookie-cutter formula for drafting a family mission statement. The most important thing is for the statement to clearly articulate your family’s shared values, whatever they may be.
Ideally, the mission statement will also create mechanisms for intrafamily communication and for putting the statement’s ideas into action. For example, the statement might call for regular family meetings. Or it may create a governance structure for managing the family’s wealth and making decisions about charitable giving and other endeavors.
Few families agree on everything. But facilitating communication and decision making in this way minimizes conflicts that can arise when family members don’t know what’s going on or feel they have no say. To make family meetings more efficient and effective, consider inviting outside advisors to lead or participate in the meetings.
Consider a principled approach
Many people today are moving away from a rules-based approach to estate planning and embracing a principles-based approach. Rather than conditioning a child’s inheritance on a rigid list of “acceptable” behaviors, for example, a principles-based approach allows greater flexibility for trustees and others to make decisions based on the values you wish to promote. If you feel a mission statement should be part of your overall estate plan, please contact us.
If you hold investments outside of tax-advantaged retirement plans, you may be able to take steps before year end to reduce your 2016 tax liability.
Offsetting gains with losses
Suppose you’ve sold investments at a loss this year but you have other investments in your portfolio that have appreciated. If you believe those appreciated investments have peaked in value, you may want to sell them before this year ends, at least to the extent that the gains from the sales will be offset by your losses.
What if you’ve sold investments and are fortunate to have gains this year? By the last business day of the year (Dec. 30 in 2016), consider selling some losing investments to absorb the gains.
Tax rates to consider
At the federal level, long-term capital gains (on investments held more than one year) are taxed at rates as high as 20% — 23.8% if you’re subject to the net investment income tax. The short-term capital gains rate (on investments held one year or less) is the same as the tax rate you pay on ordinary income and can go as high as 39.6%.
The netting rules
Before taking action, you need to keep in mind the netting rules for gains and losses, which depend on whether gains and losses are long term or short term.
To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains. And you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.
Start planning now
Careful handling of your capital gains and losses can save you substantial amounts of tax. But make sure you fully understand all of the implications for your tax and investment situation. Contact us if you have questions.
Life insurance can be a powerful financial and estate planning tool, but its benefits may be reduced or even eliminated if you designate the wrong beneficiary or fail to change beneficiaries when your circumstances change.
Here are common pitfalls to avoid:
Naming your estate as beneficiary. Doing so subjects life insurance proceeds to unnecessary state inheritance taxes (in many states), exposes the proceeds to your estate’s creditors and ensures that the proceeds will go through probate, which may delay payment to your loved ones.
Naming minor children as beneficiaries. Insurance companies won’t pay life insurance proceeds directly to minors, which means a court-appointed guardian (who, if you’re divorced, could be your former spouse) will manage the funds until your minor-age children reach the age of majority. A better approach is to designate a trust as beneficiary. This allows you to determine who will manage the funds and how they’ll be distributed to your children.
Naming your former spouse as beneficiary. It’s unlikely that you’d do this intentionally. But if you get divorced and neglect to designate a new beneficiary, this could be the result (even if you’ve updated your will or trust).
For many people, the best strategy is to establish an irrevocable life insurance trust (ILIT) to purchase and own a life insurance policy, and to designate the ILIT as the policy’s beneficiary. For more information on how to best address your life insurance policy in your estate plan, please contact us.
Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.
So if you haven’t already set up a tax-advantaged plan, consider doing so this year.
Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.
Here are three options:
Contact us if you want more information about setting up the best retirement plan in your situation.
The owners of many companies launch their enterprises with a business plan — a written document outlining the company’s strategic objectives and practical means of accomplishing them. Likewise, many owners leave their businesses via a succession plan, a written document outlining how the company’s ownership will transition.
Often, however, these two documents never cross paths, much less join toward a common goal. If this is the case with your business, and you’ve already identified your likely successor, mentoring can make your succession plan better by uniting it with your business plan.
One of the principles of mentoring is establishing a relationship based on mutual respect and trust. So, as your company evolves, you’ll need to ensure your successor is learning the skills and gaining the knowledge he or she will need to keep your business competitive and, ideally, take it to higher levels of success.
Let’s say, for example, that your company has always just sold widgets and is now expanding to help clients service the widgets. You’ll need to make both strategic and operational changes so that your successor and staff can handle a diversified business that’s both product- and service-based. Under a mentoring relationship, you can disclose these plans to your successor in a confidential setting and start laying the groundwork with him or her to move the business in the new direction.
Another principle of mentoring is making a definite commitment of time and face-to-face contact. So meet with your successor often. The first days of running a company are particularly stressful. But coaching during the period leading up to the transition can help successors manage the pressures.
During this time, you can also provide a secure environment for your successor to apply these new abilities and assume more of your responsibilities. To maximize your mentoring efforts, have your successor meet monthly with key personnel to discuss current matters, growth and operations strategies, your and your competitors’ products and services, and industry trends.
Create an effective plan
These are but two of many principles of mentoring. Please contact our firm for more help maximizing the effectiveness of your succession plan.
Your estate plan likely accommodates your spouse, children and grandchildren. But have you overlooked your parents? How can you best handle their financial affairs in the later stages of life? You may want to incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made.
Here are four critical steps:
1. Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.
2. List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. It would be wise to keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits. When all is said and done, don’t be surprised if their net worth is higher or lower than what you (or they) initially thought. You can use this information to formulate the appropriate planning techniques.
3. Open the lines of communication. Before going any further, have a frank and honest discussion with your elderly parents, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help, so some arm twisting may be required.
4. Execute documents. Assuming you can agree on how to move forward, develop a plan incorporating several legal documents such as wills, trusts, powers of attorney, living wills or advance medical directives, and beneficiary designations. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones.
Estate planning for elderly parents, which is complex in its own right, is intertwined with your own finances. Contact us for help with developing a comprehensive plan that addresses all of your family’s needs.
Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.
If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.
Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).
The limits in action
These AGI-based limits can be very costly to high-income taxpayers. Consider this example:
Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.
The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).
These two AGI-based provisions combined could increase the couple’s tax by $17,805!
If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.
For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.
Many retirement plan sponsors consider converting to new providers starting with the new plan year. For calendar year plans, that means January 1. If this is the case for your company, now is a good time to ensure your service provider is truly providing.
A good provider should have demonstrable experience in your industry. Check to see whether your current provider (or a prospective one) has clients with plans similar to yours. Ask for references.
Service and administration should be easy, and communications clear. Reports from your provider should be timely and accurate. You shouldn’t have problems contacting your service provider, and they should give quick and accurate answers to routine questions.
Look for a provider that offers educational seminars for employees to help them understand the importance of maximizing their savings. Make sure the provider has a website that your employees can access, and that participant statements and reports are user-friendly.
The provider should give ongoing plan reviews. This includes open discussions of participation levels, deferral percentages, loans, nondiscri! mination testing, and enrollment and communication strategies.
Remember, cheapest isn’t always best. Certain providers market their services directly to plan sponsors with the idea that the cost of an advisor is unnecessary. Generally, this type of arrangement works only if the plan sponsor has an employee dedicated to certain 401(k) plan functions or the plan accepts less service.
The 401(k) fees paid by a company typically include a one-time fee to establish the plan and an ongoing annual, quarterly or monthly fee to manage it. The costs cover record keeping, support from an account manager, government-required testing and tax forms, and product and service improvements. Administrative expenses vary dramatically based on the provider and the total plan assets.
It’s also important that employees pay! the least fees possible so they can invest more of their money. Add up the average fund expenses plus the management fees, participant record-keeping fees, custodial fees or any other fees charged to your employees.
Comprehensive, well-administered benefits are a competitive necessity in today’s business environment. Please contact us for help evaluating the services you’re receiving and their associated costs.
Whether you’re selling your business or acquiring another company, the tax consequences can have a major impact on the transaction’s success or failure.
Consider installment sales, for example. The sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. And it sometimes — but not always — can offer the seller tax advantages.
An installment sale may make sense if the seller wishes to spread the gain over a number of years. This could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.
For 2016, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2016 taxable income exceeds $415,050 for singles, $441,000 for heads of households and $466,950 for joint filers (half that for separate filers).
But an installment sale can backfire on the seller. For example:
Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.
In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.
The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.
Additional 0.9% Medicare tax
Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).
If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.
Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.
If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.
Deductions for the self-employed
For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)
As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.
For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.
Nearly every business owner wants to grow his or her company. But with growth comes risk, and that can keep you from taking the steps necessary to move forward. Yet if you don’t think big and come up with a long-term strategic plan, you’ll likely continue to spin your wheels.
Eyes on profits and value
Public companies answer to investors who consider earnings per share and stock price to be key indicators of their return on investment. Maximizing earnings is a short-term goal, but building value requires a long-term focus.
Many small to midsize businesses, however, have only their ownerships’ vision to motivate them. You also may have to operate much leaner, with more limited staff and overhead. In doing so, you may sacrifice value-building opportunities.
For example, a company that fails to invest in marketing may lose market share to a competitor that aggressively advertises and offers promotions. Or a business that hires managers only from within or chooses candidates based primarily on minimizing salary expense may lose out on the professional expertise that comes with a more seasoned management team.
Systematic, formal planning
Some companies may be able to run “lean and mean” for a while. But, eventually, most businesses need to grow. And a reasonably ambitious, long-term strategic plan is the first step. It will allow you to communicate a nuanced, specific vision for growth down the organizational chart.
Planning should extend to employees, too. What’s each worker’s expected role in your strategic vision? This is why annual performance reviews are so critical. They’ll help you gauge whether each employee is meeting or exceeding management’s expectations — or whether he or she is truly contributing to your long-term plan.
The right goals
Again, don’t be afraid to think big. A tentative or half-hearted long-term strategic plan may leave you disappointed — and fail to truly motivate anyone. Please contact our firm for help choosing the right goals and putting them into a feasible, reasonable financial context.
Do you wish to play an active role in funding your grandchildren’s college educations? As you examine the financing options, don’t forget about their impact on your estate plan. Two trust types to consider are grantor and Crummey trusts.
A trust can be established for your grandchild, and assets contributed to the trust, together with future appreciation, are removed from your taxable estate. The funds can be used for college expenses.
If the trust is structured as a “grantor trust” for income tax purposes, its income will be taxable to you, allowing the assets to grow tax-free for the benefit of the beneficiaries. Plus the income tax you pay further reduces your taxable estate.
On the downside, for financial aid purposes a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available to him or her. So keep this in mind if your grandchild is hoping to qualify for aid.
Another potential downside is that trust contributions are considered taxable gifts. But you can reduce or eliminate gift taxes by using your annual exclusion or your lifetime exemption to fund the trust.
To qualify for the annual exclusion, however, the beneficiary must receive a present interest. Gifts in trust are generally considered future interests, but you can convert these gifts to present interests by structuring the trust as a Crummey trust.
With a Crummey trust, each time you contribute assets, you must give the beneficiaries a brief window (typically 30 to 60 days) during which they may withdraw the contribution. You also must notify beneficiaries of their withdrawal rights.
If a Crummey trust is established for a single beneficiary, annual exclusion gifts to the trust are also generation-skipping transfer (GST) tax-free. If there are multiple beneficiaries, however, contributions may be subject to GST tax. The impact of the GST tax can be mitigated, or even eliminated, if you allocate some of your GST exemption to the trust.
Contact us to learn more about using either of these trusts in your estate plan.
Turning receivables into cash is among the most important things a business must do. Of course, it’s easier said than done. Here are five ways to speed up collections:
1. Streamline the billing process. You can’t collect what you don’t bill. Invoice customers promptly — as soon as the product ships, if possible. Or, if your company provides services, track billable hours daily and bill monthly — or as often as permitted under the customer’s contract. Implementing an electronic payment system, or upgrading your existing one, may accelerate invoicing and enable faster receipt of receivables.
2. Reward early birds and penalize procrastinators. Enticing customers to pay before the due date may require early-bird discounts, such as a small percentage off bills or value-added perks for those who pay on time or improve their payment histories. Conversely, you might consider assessing fees on past-due payments. However, many companies decide to waive late charges as an act of goodwill when customers immediately resolve outstanding balances.
3. Take a multifaceted approach. A variety of strategies, rather than a single phone call demanding payment, can yield better results. Courtesy calls may allow you to more quickly discover discrepancies (such as wrong addresses) and settle disputes. Payment plans can help distressed customers catch up on overdue accounts. And promissory notes can help prevent future billing disagreements.
4. Minimize risky business. Before conducting business with anyone, review a prospective customer’s payment history, references and credit score to assess ability to pay. Poor credit shouldn’t necessarily stop you from providing products or services to a customer. But be prepared to alter your typical payment terms when dealing with high-risk buyers.
5. Look for outside help. If late payments become a serious concern, third parties can offer assistance. Turning over particularly bad debts to a reputable collection agency allows you to distance yourself from the matter and focus on business. And let it not go unsaid that our CPA firm can review your financial statements and collection procedures to help you set specific, achievable goals in getting paid faster.
There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:
1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.
2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.
3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.
If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.
Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.
There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.
One way your business can find and keep valuable employees is to offer an attractive compensation package. Fringe benefits are an important incentive — especially those that are tax-free. Here’s a rundown of some common perks and their tax implications.
Other tax-free benefits include adoption assistance (up to a certain amount), on-premises athletic facilities and meals provided occasionally to employees who work overtime. Contact us for more information about how to treat fringe benefits for tax purposes.
If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.
More tax savings
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.
By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.
Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).
And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.
If you’re looking to boost your deductions — and reduce your 2016 tax bill — you may want to consider purchasing a business vehicle before year end. Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your deduction will depend in part on the gross vehicle weight rating.
The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2016 is $500,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.01 million.
But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2016 the depreciation limit is $3,160. The amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.
In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.
Maximize your tax benefits
Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to learn what tax benefits you might enjoy if you make the purchase by December 31.
For many years, family limited partnerships (FLPs) have been a popular estate planning tool, in part due to their tax benefits. Specifically, they can allow you to transfer assets to your children (and other family members) at discounted values for gift tax purposes. The gifts may even be tax-free if you apply your lifetime exemption or annual exclusion.
However, the IRS recently proposed regulations that, if finalized, would limit the effectiveness of FLPs for reducing the taxable value of transferred interests.
FLP in action
To execute an FLP strategy, you contribute assets — such as marketable securities, real estate and private business interests — to a limited partnership. In exchange, you receive general and limited partner interests.
Over time, you gift, sell or otherwise transfer interests to family members and anyone else you wish (even charitable organizations). For gift tax purposes, the limited partner interests may be valued at a discount from the partnership’s underlying assets because limited partners can’t control the FLP’s day-to-day activities and the interests may be difficult to sell.
This can provide substantial tax savings. For example, under federal tax law, you can exclude certain gifts of up to $14,000 per recipient each year without depleting any of your lifetime gift and estate tax exemption. So, if discounts total, say, 30%, in 2016 you can gift an FLP interest that’s worth as much as $20,000 before discounts (based on the net asset value of the partnership’s assets) tax-free because the discounted fair market value doesn’t exceed the $14,000 gift tax annual exclusion.
An FLP must be established for a legitimate business purpose, such as efficient asset management and protection from creditors, to qualify for valuation discounts. Partnerships set up exclusively to minimize gift and estate taxes won’t pass IRS muster.
Time is of the essence
If you’ve been considering using an FLP, you may need to act soon to take advantage of current tax provisions in the event the rules change. Contact us to learn more about FLPs and how the proposed regs may affect them.
Employers who offer retirement savings plans are already helping their workforces. But not all employees take advantage of these plans. And many who do still don’t contribute enough to retire comfortably. As a business owner, you can help your employees even more — and drive plan participation — by providing proper education on retirement planning.
Here are five ways to go:
1. Teach them about the general concepts of investing. Many employees are unfamiliar with basic economic and investing concepts. Offer instruction on concepts such as:
Providing such information can help your employees make informed decisions about their options.
2. Explain how the plan functions. For instance, do they need to enroll in the plan, or are they automatically enrolled? Once enrolled, how do they decide how much to contribute and how to allocate their money among different investments?
3. Provide information in various formats. Webinars or other online communication methods will resonate with some employees, while others will prefer printed material. By offering a mix of options, you’ll likely be effective in reaching different segments of your workforce.
4. Arrange face-to-face sessions. Even if your business offers printed and electronic materials, in-person sessions can go a long way in helping employees understand the plan. These sessions also provide an opportunity to reinforce the value of a retirement plan as part of the employee’s overall compensation package. If one-on-one sessions are impractical, consider small groups.
5. Offer information regularly. Providing consistent education is a great way to remind employees of the value of their retirement savings plans.
Remember, employees aren’t the only ones who benefit from proper retirement savings education. As participation increases, plan fees may diminish. And the more non–highly compensated employees sock away in a plan, the more its highly compensated employees can contribute. Please contact our firm for more ways to maximize the strategic value of your retirement plan.
Everyone needs a solid estate plan to distribute assets according to their wishes and benefit their heirs. But this necessity is especially keen for business owners, many of whom have spent years working hard to build up the values of their companies.
If you can relate to this statement, one effective way to reduce estate taxes is to limit the amount of appreciation in your estate — and your company may provide just the ticket for doing so.
You’ll save the most in estate taxes by giving away assets with the highest probability of future appreciation. Why? Because gifting these assets today will keep future appreciation on those assets out of your taxable estate. Thus, there may be no better gift than your company stock, which could be the most rapidly appreciating asset you own.
For example, assume your business is worth $5 million today but is likely to be worth $15 million in several years. By giving away some of the stock today, you’ll keep a substantial portion of the future appreciation out of your taxable estate.
What are the limits?
Naturally, there are limits to how much you can give without tax consequences. Each individual is entitled to give as much as $14,000 per year per recipient without incurring any gift tax or using any of his or her $5.45 million lifetime gift, estate or generation-skipping transfer tax exemption amount.
Also be aware that, because you’re giving away company stock, the IRS may challenge the value you place on the gift and try to increase it substantially. The agency is required to make any challenges to a gift tax return within the normal three-year statute of limitations — even when no tax is payable with the return. But the statute of limitations applies only if certain disclosures are made on the gift tax return. Generally, for gifts of stock that isn’t publicly traded, a professional business valuation is highly recommended.
Who can help?
If the idea of giving away portions of your business to reduce estate tax exposure intrigues you, please contact us. We can help you fully assess the feasibility of this strategy as it pertains to your specific situation.
When drafting an estate plan, it’s critical to select the right trustee to carry out your wishes and protect your beneficiaries. It’s also important to establish procedures for removing a trustee in the event that circumstances change.
Failing to do so doesn’t mean your beneficiaries will be stuck with an inadequate trustee. But they’ll have to petition a court to remove the trustee for cause, which can be an expensive, time-consuming and uncertain process. Making the process more onerous is the fact that courts generally are reluctant to remove a trustee who was hand-picked by the trust maker.
Reasons for removing a trustee
Grounds for removing a trustee vary according to state law, but typically include:
To avoid the need for court intervention, include procedures for removing a trustee in your trust agreement. You might allow beneficiaries to remove a trustee without cause if they’re dissatisfied with his or her performance. Or you might provide for removal of a trustee under specific circumstances defined in the trust agreement.
Provide a list of successor trustees
Your trust agreement also should include a list of successor trustees. If one trustee is removed, the next person on your list becomes the new trustee. Another option is to appoint a trust protector — a “super trustee” empowered to make certain decisions, including firing a trustee and appointing a new one. If you have questions regarding trustees, please contact us.
Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:
Prepaid tuition plans
With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.
One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.
This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.
But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.
As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.
ncome tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Fortunately, since 2007, homeowners have been allowed to exclude from their taxable income up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion had been available only for debts forgiven through 2014, but last year Congress extended it. Now, however, that new expiration date — Dec. 31, 2016 — is rapidly approaching.
Ins and outs
Debt forgiveness is only one of the ways to generate COD income in relation to QPRI. You also can have COD income if a creditor reduces your interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.
QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).
Pluses vs. minuses
If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home.
Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it’s generally better to defer tax when possible.
If you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion in case lawmakers don’t extend it again.
Many companies reach a point in their development where they have to make an important decision: Innovate themselves or acquire a competitor? Of course, it isn’t always an either/or decision. Nonetheless, business owners should consider the pluses and minuses of both approaches.
Innovating to grow
Innovation is a broad term that encompasses many strategies — all of which are intended to help the company achieve goals such as boosting profits, improving cash flow, or diversifying products or services. Common strategies are:
Each strategy takes time, effort and capital. Understandably, business leaders can be hesitant to devote such vital resources to innovation initiatives and risk decreases in productivity and profitability.
For companies that don’t want to bet the farm on internal development, acquisitions can be appealing. If you’re looking to expand a product line, for example, it might be more time- and cost-effective to buy a competitor that already offers the goods you want.
Your acquisition target has already done the hard work — including funding, testing and creating the product or service and building a client base. By buying this competitor, you may incur less risk than you would by investing your own capital and building the product from scratch. The same holds true for geographic expansion and productivity improvements.
But business combinations come with their own risks. To fully benefit from any acquisition, your company needs to “stick the landing” — efficiently integrate operations and retain divisions and employees capable of ensuring that innovations continue to pay off. For many buyers, that’s a tall order.
Considering your options
In an ideal world, companies would devote resources to innovation and also make the occasional acquisition to bolster their standing in particular markets. But most companies don’t have the luxury to do both simultaneously. Please contact us for help examining the risks and potential rewards associated with each option.
A shared family vacation home can be a great place for family bonding. And a little estate planning can go a long way toward avoiding conflict and keeping the home in the family.
Who owns it and how?
All family members must understand who actually owns the home. Family members sharing the home will more readily accept decisions about its usage or disposition knowing that the decisions come from those holding legal title.
If the home has multiple owners — several siblings, for example — consider the form of ownership carefully. There may be advantages to holding title to the home in a family limited partnership (FLP) or family limited liability company (FLLC) and using FLP or FLLC interests to allocate ownership interests among family members. You can even design the partnership or operating agreement (or a separate buy-sell agreement) to help keep the home in the family.
What about the future?
What happens if an owner dies, divorces or decides to sell his or her interest in the home? It depends on who owns the home and how the legal title is held. If the home is owned by a married couple or an individual, the disposition of the home upon death or divorce will be dictated by the relevant estate plan or divorce settlement.
If family members own the home as tenants-in-common, they’re generally free to sell their interests to whomever they choose, to bequeath their interests to their heirs or to force a sale of the entire property under certain circumstances. If they hold the property as joint tenants with rights of survivorship, an owner’s interest automatically passes to the surviving owners at death. If the home is held in an FLP or FLLC, family members have a great deal of flexibility to determine what happens to an owner’s interest in the event of death, divorce or sale.
Let’s talk about it
There are many ways to own and share a family vacation home. We’d be pleased to help you and your loved ones keep yours in the family for generations to come.
Has your small business procrastinated in setting up a retirement plan? You might want to take a look at a SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” If you decide you’re interested in a SIMPLE IRA, you must establish it by no later than October 1 of the year for which you want to make your initial deductible contribution. (If you’re a new employer and come into existence after October 1, you can establish the SIMPLE IRA as soon as administratively feasible.)
Pros and cons
Here are some of the basics of SIMPLEs:
Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE. An employee may defer up to $12,500 in 2016. This amount is indexed for inflation each year. Employees age 50 or older can make a catch-up contribution of up to $3,000 in 2016.
If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.
Consider your choices
A SIMPLE IRA might be a good choice for your small business but it isn’t the only choice. You might also be interested in setting up a simplified employee pension plan, a 401(k) or other plan. Contact us to learn more about a SIMPLE IRA or to hear about other retirement alternatives for your business.
If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?
Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.
That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.
Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.
Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.
Passing the trader test
What does it take to successfully meet the test for trader status? The answer is twofold:
1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.
2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.
If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.
No estate plan is complete without considering long-term care (LTC) expenses and how to pay for them. LTC insurance is an option, but these policies can be expensive. One solution is to use a total or partial tax-free exchange of an existing life insurance policy or annuity contract.
Reviewing the history
For many years, Internal Revenue Code Section 1035 has permitted taxpayers to exchange one life insurance policy for another, one annuity contract for another, or a life insurance policy for an annuity contract without recognizing any taxable gain.
In the late 1990s, the U.S. Tax Court approved partial tax-free exchanges. A partial exchange might involve using a portion of an annuity’s balance or a life insurance policy’s cash value to fund a new contract or policy. In order for the transaction to be tax-free, the exchange must involve a direct transfer of funds from one carrier to another.
The Pension Protection Act of 2006 expanded Sec. 1035 to include LTC policies. So now it’s possible to make a total or partial tax-free exchange of a life insurance policy or annuity contract for an LTC policy (as well as one LTC policy for another).
Funding LTC costs
Partial tax-free exchanges can work well for standalone LTC policies, which generally require annual premium payments and prohibit prepayment. A partial tax-free exchange not only provides a source of funds for LTC coverage but also offers significant tax benefits.
Ordinarily, if the value of a life insurance policy or annuity contract exceeds your basis, lifetime distributions include a combination of taxable gain and nontaxable return of basis. A partial tax-free exchange allows you to defer taxable gain and, to the extent the gain is absorbed by LTC insurance premiums, eliminate it permanently.
If you’re concerned that LTC costs might deplete your funds, thus allowing less wealth to pass to heirs, contact us. We can help you determine whether one of these strategies may be an option for you.
If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.
Usually tax free
As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.
The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”
There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.
For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.
The value of the miles for tax purposes generally is their estimated retail value.
If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.
If you run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.
By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings from classifying payments as dividends rather than salary may be even greater than it once would have been.
IRS audit target
But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.
To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.
Prove a salary is reasonable
There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:
Ascertain the right mix
Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.
Did you know that the estate of director John Hughes donated the family’s Illinois mansion to a nonprofit hospital? After allowing another charity to use the home for a fundraising event, the hospital sold the home and used the proceeds to expand its campus.
In this instance, two organizations were able to enjoy this gift. If you’re considering donating real estate to charity, beware of these four potential tax traps:
Before taking action, consult us to ensure that you avoid these traps.
The prospect of leaving your company in the hands of someone else likely brings mixed emotions. You’ve no doubt spent a substantial amount of time and a great degree of effort in getting your enterprise to where it is today. So, as the saying goes, parting will be such sweet sorrow.
Yet, when it comes to creating and executing a succession plan, decisive action is critical. You’ve got to respect the importance of timeliness — not only for you and your family, but also for your successor and employees. So here are two key questions to answer.
1. When’s your target date?
By designating your departure date far enough in advance, you’re more likely to pick the right successor, as well as facilitate a smoother transfer of power.
In some industries, it can take years to appoint and train a qualified successor and effectively work through the many management, ownership and organizational issues. But don’t choose a date too far away, because your successor-to-be may get tired of waiting.
2. How will you break the news?
Maybe it’s many years away, maybe it’s sooner than that. But don’t wait too long to reveal to staff when you’re leaving the company and whom you’ve selected as a replacement. Giving everyone ample notice (as long as one to two years) will allow plenty of time for employees to voice their concerns about your successor and the transition as a whole.
Break the news gently to gain their support for the new boss while giving employees good reasons to stay with your company. If disagreements arise, discuss the issues openly. Seek compromise by enabling your successor to exercise his or her newfound decision-making authority but staying involved as a consultant to ensure he or she doesn’t alienate staff.
Need some help?
Coming up with — and carrying out — a succession plan can be among the most difficult things a business owner ever does. Please contact us for help assessing the financial and operational viability of your plan.
Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.
Should you bunch into 2016?
If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:
But beware …
These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.
Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).
If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.
Many businesses use independent contractors to keep payroll taxes and fringe benefit costs down. But using outside workers may result in other problems. The IRS often questions businesses about whether workers should be classified as employees or independent contractors for federal employment tax purposes.
If the IRS reclassifies a worker as an employee, your company could be hit with back taxes, interest and penalties. In addition, the employer could be liable for employee benefits that should have been provided but weren’t. Audits by state agencies may also occur.
The key is control
So, how can you safeguard your use of independent contractors? Unfortunately, no single factor determines a worker’s legal status. The issue is complicated, but the degree of control you have over how a worker gets the job done is often considered the most important factor. Little or no control indicates independent contractor status.
The IRS looks at a number of other issues, including:
Tools and facilities. Employers usually give tools, equipment and workspace to employees, while contractors invest their own money in these items.
Hours. Employees generally have set schedules, while contractors are allowed greater flexibility. (However, the IRS recognizes that some work must be done at specific times.)
With those guidelines in mind, here are some tips:
In many cases, proactive planning can help secure independent contractor status. Contact us if you have questions about worker classification.
Special needs trusts (SNTs), also called “supplemental needs trusts,” benefit children or other family members with a disability that requires extended-term care or that prevents them from being able to support themselves. This trust type can provide peace of mind that your loved one’s quality of life will be enhanced while not disqualifying him or her for Medicaid or Supplemental Security Income (SSI) benefits.
Preserve government benefits
Medicaid and SSI pay for basic medical care, food, clothing and shelter. To qualify for these benefits, however, a person’s resources must be limited to no more than $2,000 in “countable assets.” Generally, every asset is countable with a few exceptions, including among other things a principal residence, a car and a small amount of life insurance.
An SNT is an irrevocable trust designed to supplement, rather than replace, government assistance. To preserve eligibility for government benefits, the beneficiary can’t have access to the funds and the trust must be prohibited from providing for the beneficiary’s “support.” That means it can’t be used to pay for medical care, food, clothing, shelter or anything else covered by Medicaid or SSI, such as the basic medical care provided by those programs.
Pay for supplemental expenses
What an SNT can be used for is to pay for virtually anything government benefits don’t cover, such as unreimbursed medical expenses, education and training, transportation, insurance, and modifications to the beneficiary’s home. It can also pay for “quality-of-life” needs, such as travel and entertainment.
The trust must not pay any money directly to the beneficiary. Rather, the funds should be distributed directly — on behalf of the beneficiary — to the third parties that provide goods and services to him or her.
Alert family and friends
To ensure an SNT’s terms aren’t broken, notify family members and friends to make gifts or donations directly to the trust and not to the loved one with special needs. If you think an SNT may benefit your family, contact us.
Paying the proper amount of tax by the annual federal income tax filing deadline isn’t enough to avoid interest and penalties; you must also meet requirements for paying tax throughout the year through withholding and/or quarterly estimated tax payments. If you have income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets, you may have to pay estimated tax.
Generally, you must pay estimated tax if both of these statements apply:
If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
Making the payments
Payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15, Sept. 15 and Jan. 15, unless the date falls on a weekend or holiday.
Estimated tax is calculated by factoring in expected gross income, taxable income, taxes, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
If you’d like assistance determining whether you need to pay estimated tax or calculating your payments, contact us.
When looking to manage benefits costs, employers have many ideas to consider. One in particular is whether and how to offer health care insurance to their employees’ spouses.
The Affordable Care Act doesn’t require spousal coverage. It only requires coverage for dependent children. But many employees may frown on seeing spousal coverage suddenly become expensive or vanish entirely. So this is a question warranting careful forethought.
2 established ways
Essentially, there are two established ways of saving money on spousal coverage: 1) rationalizing the expense through a cost-sharing surcharge, or 2) eliminating coverage altogether through a “spousal carve-out” policy.
Few employers appear willing to lower the boom on spousal coverage by eliminating it (also known as an “absolute carve-out”) — especially when spouses lack access to coverage through their own employers. Forcing workers’ spouses to seek coverage on the individual market, possibly at a very high cost, would likely embitter the affected employees, potentially increasing turnover.
But it doesn’t have to be an all-or-nothing proposition. One variation on the surcharge approach is to give a monetary award to employees whose spouses switch from your plan to the spouse’s employer’s plan.
Or you could have a spousal carve-out program with an escape hatch. Such an arrangement would allow the spouse to remain on your plan if the price the spouse would have to pay for coverage under his or her own employer’s plan exceeds a specified threshold.
Still another approach is to require employed spouses whose own employers offer coverage to enroll in those plans in order to receive benefits under your plan. This way, yours becomes the secondary plan, incurring only the portion of claims not covered by the spouse’s employer’s plan (the primary plan).
Unfortunately, there are no quick and easy ways to keep health care plan costs in check. But policies that ensure you aren’t paying the medical bills of employee spouses who could be getting coverage through their own employers are certainly worth contemplating.
If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?
Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.
What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.
Business days vs. pleasure days
The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.
Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).
You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.
Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.
We can help
Questions? Contact us if you want more information about business travel deductions.
When spouses have similar irrevocable trusts for each other’s benefit, they can be subject to the “reciprocal trust” doctrine. It prohibits tax avoidance through trusts that 1) are interrelated, and 2) place both grantors in the same economic position as if they’d each created trusts naming themselves as life beneficiaries.
What not to do
Suppose that your and your spouse’s estates will trigger a substantial tax bill when you die. You transfer your assets to an irrevocable trust that provides your spouse with an income interest for life, access to principal at the trustee’s discretion and a testamentary, special power of appointment to distribute the trust assets among your children.
Ordinarily, assets transferred to an irrevocable trust are removed from your taxable estate (though there may be gift tax implications). But let’s say that two weeks later your spouse establishes a trust with identical provisions, naming you as life beneficiary. This arrangement would violate the reciprocal trust doctrine, so the transfers would be undone by the IRS and the value of the assets you transferred would be included in your respective estates.
In this example, the intent to avoid estate tax is clear: Each spouse removes assets from his or her taxable estate but remains in essentially the same economic position by virtue of being named life beneficiary of the other spouse’s estate.
Create two substantially different trusts
To avoid unintended tax consequences, trusts should be designed to avoid the reciprocal trust doctrine. There are many ways to accomplish this, but essentially the goal is to vary factors related to each trust, such as the trust assets or terms, trustees, beneficiaries, or creation dates, so that the two trusts aren’t deemed “substantially similar” by the IRS. If you and your spouse have separate trusts, allow us to review them to ensure they don’t invoke the reciprocal trust doctrine.
Many businesses start life small and simple. But with growth comes the need for a stronger company infrastructure and increased operational sophistication. As you pursue a more robust business, focus on these four pillars:
1. Organizational management
Implement a formalized system for measuring performance that begins with written job descriptions and training. Issue a clearly written handbook of company policies. Give employees regular and constructive feedback.
Taking these steps is not only necessary — it also serves to motivate, compensate and reward staff members. Strong organizational management is particularly key to attracting and retaining goodemployees, who typically desire an objective and well-balanced performance evaluation system.
2. Business processes
At the core of your business are its processes. The more you can systematize and document them, the more easily you can train your staff to follow them for increased efficiency, productivity and quality.
Professionalizing your business processes also involves streamlining operations in mission-critical areas. These include sales and marketing, finance, human resources, and customer product and service delivery.
3. Strategic planning
For new businesses and many small ones, business planning discussions occur randomly and informally. But, as your operations become increasingly complex, you’ve got to make strategic planning a regular and formalized activity.
Hold regular strategic planning meetings. Update your written business plan and communicate your strategic goals companywide. Doing so will keep employees in the loop and empower them to make effective decisions and act in alignment with your stated objectives.
4. IT systems
There’s no way around it: Advanced technology runs today’s businesses. Yet, as a company’s operations grow, it can struggle with a conglomeration of outdated and disconnected hardware and applications.
Supporting a professionalized, process-oriented business environment requires integrated IT systems. Employees can more easily access operational information and improve productivity with connected technology.
Every business, no matter how large or small, goes through growing pains. Please contact us for help managing your growth in a measured and financially savvy manner.
Giving away assets during your life will help reduce the size of your taxable estate, which is beneficial if you have a large estate that could be subject to estate taxes. For 2016, the lifetime gift and estate tax exemption is $5.45 million (twice that for married couples with proper estate planning strategies in place).
Even if your estate tax isn’t large enough for estate taxes to be a concern, there are income tax consequences to consider. Plus it’s possible the estate tax exemption could be reduced or your wealth could increase significantly in the future, and estate taxes could become a concern.
That’s why, no matter your current net worth, it’s important to choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make.
Here are three strategies for tax-smart giving:
1. To minimize estate tax, gift property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
2. To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
3. To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss. You can then gift the sale proceeds.
For more ideas on tax-smart giving strategies, contact us.
Business owners may be able to see substantial tax savings faster by conducting cost segregation studies. These studies identify property components and their costs, allowing you to maximize current depreciation deductions by using shorter lives and speeding up depreciation rates available for the qualifying parts of the property.
Buildings generally are depreciated over 27.5 years (residential rental) or 39 years (commercial) using the straight-line method. This recovery period applies to real property, which includes buildings as well as structural components such as walls, concrete floors, paint, windows, ceilings and HVAC systems.
You may be able to write off some parts of a property faster than 27.5 or 39 years by separating the parts that aren’t structural. In some cases, you can use a 5-, 7- or 15-year rate of depreciation. There are no hard-and-fast rules for distinguishing personal property eligible for accelerated depreciation from structural components that are depreciated as part of a building. Various factors come into play, including how the property is affixed to the building, whether it’s designed to remain in place permanently, and how difficult it would be to move or remove.
Examples of personal property that can qualify for a faster depreciation deduction include:
You can also depreciate the allocated portion of certain capitalized indirect or overhead costs — such as architectural and engineering fees. And land improvements that you can isolate with a cost segregation study include parking lots, sidewalks, fences and landscaping.
Consider a cost segregation study when you buy, build or remodel — or when you’ve done so within the last few years. Be aware that the overall benefits may be limited in certain circumstances, such as when a business is subject to the alternative minimum tax or located in a state that doesn’t follow federal depreciation rules. Passive activity loss rules can also defer benefits.
A cost segregation study can be an excellent way for gaining faster write-offs on real estate and construction projects. Contact us to help determine whether you can benefit.
Powers of attorney are critical components of an effective estate plan. After you’ve executed powers of attorney, it’s important to review them periodically — at least every five years and preferably more frequently — and consider executing new ones.
A sound estate plan should include two types of powers of attorney:
4 reasons to review
Here are four reasons to review your powers of attorney regularly:
Even if nothing has changed since you signed your powers of attorney, it’s a good idea to sign new documents every few years. Because of liability concerns, some financial institutions and health care providers may be reluctant to honor powers of attorney that are more than a few years old. We’d be pleased to review your powers of attorney today and, if necessary, assist in executing new ones.
What keeps business owners up at night? Many would say sluggish productivity or escalating expenses. An employee coming to work every day usually doesn’t make the list. But a staff member who never takes a day off can cause problems by showing up sick, distracted or too stressed out to be effective. There’s a name for this problem: presenteeism.
What’s the issue?
The premise of presenteeism is simple. Employees who aren’t feeling well — for whatever reason — don’t perform well. They may:
But it may not end there. When employees come to work while suffering from communicable diseases, such as a cold or the flu, the problem can grow exponentially. One worker coughs on two people who get sick, and they cough on four people who get sick, and so on.
Is there a cure?
Because presenteeism can stem from a gamut of sources, companies must be on guard for dips in productivity. When one occurs, managers should know how to discuss the matter with the potentially affected employees.
Your benefits program may hold the key. Both the employee and your organization may be better served if the worker takes advantage of available benefits — such as paid sick days, an employee assistance program or leave of absence — that will help him or her deal with the outside stressor causing presenteeism.
It’s also important to emphasize wellness. Many companies now offer formal wellness programs to encourage actions such as engaging in exercise, getting an annual physical and learning about healthy living.
What’s the number?
It’s much easier to detect presenteeism when you’re measuring productivity. Choose the right metrics and don’t underestimate this potentially costly threat to your profitability.
For anyone who takes a spin at roulette, cries out “Bingo!” or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.
You must report 100% of your wagering winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.
Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, keep in mind that the IRS will expect to see the winnings on your tax return.
You can write off wagering losses as an itemized deduction. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth don’t count as gambling losses and, therefore, can’t be deducted.
To claim a deduction for wagering losses, you must adequately document them, including:
The IRS allows you to document income and losses from wagering on table games by recording the number of the table that you played and keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.
Please contact us if you have questions or want more information. If you qualify as a “professional” gambler, some of the rules are a little different.
If your company engages in research and development, you’re driven to innovate and bring new products and improvements to market. It’s that spirit of discovery that keeps businesses in the United States on the leading edge. Even better, you may qualify for a lucrative federal tax credit for some of your expenses related to R&D. Many states also offer research tax incentives.
Improved and permanent
The federal research tax credit is now permanent, thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015. This is good news because, for more than 30 years, the popular tax break periodically expired and was reinstated (usually for a year or two), which caused uncertainty for businesses.
Generally, the credit is equal to a portion of qualified research expenses incurred during the taxable year. The credit is complicated to calculate and not all research activities are eligible but the tax savings can be sizable.
The PATH Act added two new features that are especially favorable to small businesses.
Tax planning opportunity
Now that the credit is permanent, companies can count on it when they plan R&D projects. There could also be an opportunity to file an amended tax return and collect a refund if you incurred qualified expenses in previous years but didn’t claim them.
Be aware that the IRS announced recently that it “does see a significant amount of misuse of the research credit each year.” Good recordkeeping is important. To claim a credit, taxpayers must document their activities to establish the amount of qualified research expenses paid. Contact us to find out how to maximize the benefits allowed under the law.
With the gift and estate tax exemption at $5.45 million in 2016, you may be less concerned about these taxes. But if you don’t take advantage of making tax-free direct payments of tuition and medical expenses, you’re missing a valuable opportunity to reduce your potential gift and estate tax exposure down the road.
Leveraging the break
Federal tax law allows you to pay tuition and medical expenses on behalf of your children or other loved ones without incurring gift tax or using up any of your gift and estate tax exemption. This may not seem like much if your net worth is well under the current exemption amount. But what if your wealth grows beyond the exemption amount in the coming years and decades? Or, what if lawmakers decide to reduce the exemption? Either way, your estate could end up with a hefty tax bill, leaving less for your family after your death.
You may already be making $14,000 per recipient annual exclusion gifts to your children, grandchildren or other loved ones, which can help minimize your taxable estate. But if estate tax is a concern, also consider paying some or all of their tuition and medical expenses. Unlike the annual exclusion, there’s no limit on the amount of tuition or medical expenses you can pay tax-free. It’s a powerful technique for transferring wealth gift-tax-free while also reducing the size of your estate.
Making direct payments is critical
A few caveats: This strategy works only if you make payments directly to a qualifying educational institution or medical provider — advancing the funds to a loved one or reimbursing previously paid expenses doesn’t count. The break covers tuition at all grade levels, but not payments for room and board, books, supplies, or other nontuition expenses. And it doesn’t apply to medical expenses reimbursed by insurance.
We can help ensure that you’re taking full advantage of your $5.45 million gift and estate tax exemption. Get in touch with us today.
Have you dreamed of spending your golden years in a tropical paradise or a culture-rich European city? If so, it’s important to understand the potential tax and estate planning implications so there are no surprises. These include:
1. Double taxation. If you’re a citizen of the United States, you’ll remain subject to U.S. taxes even if you move to another country. So you might be subject to gift and estate taxes in your new country andin the United States (possibly including state taxes if you maintain a residence in a U.S. state). In some cases, you can claim a credit against U.S. taxes for taxes you pay to another country, but these credits aren’t always available.
One option for avoiding U.S. taxes is to relinquish your U.S. citizenship. But this strategy raises a host of legal and tax issues of its own, including potential liability for a one-time “expatriation tax.”
2. Real estate issues. If you wish to purchase a home in a foreign country, you may discover that your ability to acquire property is restricted. Some countries, for example, prohibit foreigners from owning real estate that’s within a certain distance from the coast or even anywhere in the country. It may be possible to bypass these restrictions by using a corporation or trust to hold property, but this can create burdensome tax issues for U.S. citizens.
3. Unfamiliar inheritance rules. If you own real estate or other property in a foreign country, you may run up against unusual inheritance rules. In some countries, for example, your children have priority over your spouse, regardless of the terms of your will.
If you and your spouse are making retirement plans to live in another country, contact us now to reduce the chances of undesirable tax and estate planning consequences later.
The income tax credit for certain energy-efficient home improvements and equipment purchases was extended through 2016 by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). So, you still have time to save both energy and taxes by making these eco-friendly investments.
The credit is for expenses related to your principal residence. It equals 10% of certain qualified improvement expenses plus 100% of certain other qualified equipment expenses, subject to a maximum overall credit of $500, which is reduced by any credits claimed in earlier years. (Because of this reduction, many people who previously claimed the credit will be ineligible for any further credits in 2016.)
Examples of improvement investments potentially eligible for the 10% of expense credit include:
Examples of equipment investments potentially eligible for the 100% of expense credit include:
Manufacturer certifications required
When claiming the credit, you must keep with your tax records a certification from the manufacturer that the product qualifies. The certification may be found on the product packaging or the manufacturer’s website. Additional rules and limits apply. For more information about these and other green tax breaks for individuals, contact us.
Health Savings Accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small to midsize businesses and the self-employed. So, assuming your company falls into one of these categories, have you considered the strategy of using these accounts with a high-deductible health plan (HDHP)?
The tax benefits of HSAs are quite favorable and substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there’s an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax-free.
An HSA is a tax-exempt trust or custodial account established exclusively for paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under an HDHP. Consequently, an HSA isn’t insurance; it’s an account, which must be opened with a bank, brokerage firm, or other provider (typically an insurance company). It’s therefore different from a Flexible Spending Account in that it involves an outside provider serving as a custodian or trustee.
The 2016 maximum contribution and deduction for individual self-only coverage under a high-deductible plan is $3,350, while the comparable amount for family coverage is $6,750. Individuals age 55 or older by the end of 2016 are allowed additional contributions and deductions of $1,000. However, when an individual enrolls in Medicare, contributions cannot be made to an HSA.
For 2016, an HDHP is defined as a health plan with an annual deductible that is not less than $1,300 for self-only coverage and $2,600 for family coverage, and the annual out-of-pocket expenses (including deductibles and co-payments, but not premiums) must not exceed $6,550 for self-only coverage or $13,100 for family coverage.
Worthy of consideration
An HSA with an HDHP is, of course, but one benefits strategy of many. But it’s worth considering. Please call us for help determining whether it would be the right move for your company this year or perhaps in 2017.
It’s common for parents, grandparents and others to make gifts to minors and college students. Perhaps you want to help fund education expenses or simply remove assets from your taxable estate. Or maybe you’re hoping to shift income into a lower tax bracket. Whatever the reason, beware of the “kiddie tax.”
What is the kiddie tax?
For children subject to the kiddie tax, any unearned income beyond $2,100 (for 2016) is taxed at their parents’ marginal rate (assuming it’s higher), rather than their own likely low rate.
For example, let’s say you transferred to your 16-year-old some stock you’d held for several years that had appreciated $10,000. You were thinking she’d be eligible for the 0% long-term gains rate so could sell the stock with no tax liability for your family. But you’d be in for an unhappy surprise: Assuming your daughter had no other unearned income, $7,900 of the gain would be taxed at your rate (15% or 20%, depending on your bracket).
Or let’s say you transferred the appreciated stock to your 18-year-old grandson with the plan that he could sell the stock tax-free to pay for his college tuition. If his parents are in a higher tax bracket, he won’t end up with the entire $10,000 gain available for tuition because of the kiddie tax liability.
Who’s a “kiddie”?
Years ago, the kiddie tax applied only to those under age 14 — providing families with the opportunity to enjoy significant tax savings from income shifting. Today, the kiddie tax applies to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
Fortunately, there may be ways to achieve your goals without triggering the kiddie tax. For example, if you’d like to shift income and you have adult children who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring income-producing or highly appreciated assets to them. Or, if you want to help your grandchild fund college, consider paying tuition directly to his or her school. An added bonus: a direct tuition payment isn’t subject to gift tax.
For more on the kiddie tax and ways to achieve your goals without triggering it, contact us.