With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.
Pros and cons
Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:
· They’re easy to get (no income or credit score requirements),
· There’s minimal paperwork,
· Interest rates are low, and
· You pay interest back into your 401(k) rather than to a bank.
Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.
You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.
Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.
Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.
If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.
Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.
Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.
The right move
Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.
When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.
For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.
Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.
But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)
In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.
Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.
Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.
Five Tax Tips about Hobbies that Earn Income
Millions of people enjoy hobbies. Hobbies can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income from hobbies is different from how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:
1. Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses, to learn more. You can also visit IRS.gov and type “not-for-profit” in the search box.
2. Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
3. Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
4. How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
5. Use IRS Free File. Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 17. If you make $62,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through IRS.gov.
How Identity Theft Can Affect Your Taxes
Tax-related identity theft normally occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund. Many people first find out about it when they do their taxes.
The IRS is working hard to stop identity theft with a strategy of prevention, detection and victim assistance. Here are nine key points:
1. Taxes. Security. Together. The IRS, the states and the tax industry need your help. We can’t fight identity theft alone. The Taxes. Security. Together. awareness campaign is an effort to better inform you about the need to protect your personal, tax and financial data online and at home.
2. Protect your Records. Keep your Social Security card at home and not in your wallet or purse. Only provide your Social Security number if it’s absolutely necessary. Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for internet accounts.
3. Don’t Fall for Scams. Criminals often try to impersonate your bank, your credit card company, even the IRS in order to steal your personal data. Learn to recognize and avoid those fake emails and texts. Also, the IRS will not call you threatening a lawsuit, arrest or to demand an immediate tax payment. Normal correspondence is a letter in the mail. Beware of threatening phone calls from someone claiming to be from the IRS.
4. Report Tax-Related ID Theft to the IRS. If you cannot e-file your return because a tax return already was filed using your SSN, consider the following steps: • File your taxes by paper and pay any taxes owed. • File an IRS Form 14039 Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. You may include it with your paper return. • File a report with the Federal Trade Commission using the FTC Complaint Assistant; • Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on your account;
5. IRS Letters. If the IRS identifies a suspicious tax return with your SSN, it may send you a letter asking you to verify your identity by calling a special number or visiting a Taxpayer Assistance Center. This is to protect you from tax-related identity theft.
6. IP PIN. If you are a confirmed ID theft victim, the IRS may issue an IP PIN. The IP PIN is a unique six-digit number that you will use to e-file your tax return. Each year, you will receive an IRS letter with a new IP PIN.
7. Report Suspicious Activity. If you suspect or know of an individual or business that is committing tax fraud, you can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.
8. Combating ID Theft. In 2015, the IRS stopped 1.4 million confirmed ID theft returns and protected $8.7 billion. In the past couple of years, more than 2,000 people have been convicted of filing fraudulent ID theft returns.
9. Service Options. Information about tax-related identity theft is available online. We have a special section on IRS.gov devoted to identity theft and a phone number available for victims to obtain assistance.
Five Tips for Starting a Business
Understanding your tax obligation is one key to business success. When you start a business, you need to know about income taxes, payroll taxes and much more. Here are five IRS tax tips that can help you get your business off to a good start:
1. Business Structure. An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.
2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, you can use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from your checking or savings account.
3. Employer Identification Number (EIN). You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.
4. Accounting Method. An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. You’re eligible for the credit if you have fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. For more information on your health care responsibilities as an employer, see the Affordable Care Act for Employers page on IRS.gov.
BY JEFF STIMPSON
Truckers and other owners of heavy highway vehicles must, in most cases, file their next federal highway use tax return on August 31.
The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that began July 1 and ends June 30, 2017.
Returns must be filed and tax payments made by August 31 for vehicles used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.
The tax of up to $550 per vehicle is based on weight; varied special rules apply and are explained in the 2290 instructions.
The highway use tax applies to motor vehicles with a taxable gross weight of 55,000 pounds or more, which usually includes trucks, truck tractors and buses. Ordinarily, vans, pick-ups and panel trucks fall below the weight limit and aren’t taxed.
BY LYNNLEY BROWNING
Democratic presidential nominee Hillary Clinton and her husband, former president Bill Clinton, earned adjusted gross income of $10.6 million in 2015 and paid $3.6 million in federal income taxes, according to a tax return her campaign released Friday as it sought to draw a contrast with her Republican rival, Donald Trump.
Their income would place the Clintons well within the top 0.1 percent of earners, based on data for the 2014 tax year analyzed by a leading economist on income inequality.
The couple paid an effective tax rate of 34.2 percent in 2015 and donated 9.8 percent of their adjusted gross income to charity—including a $1 million gift to the Clinton Family Foundation—according to the return. The family foundation, which is separate from the better-known Clinton Foundation, listed Hillary and Bill Clinton as its only donors on its 2014 tax filing.
Friday’s release adds to eight years of returns that Hillary Clinton’s campaign made public last year. “All told, the Clintons have made their tax returns public for every year dating back to 1977,” according to a campaign news release.
In releasing the return—along with 10 years of tax information for her running mate, Virginia Senator Tim Kaine—Clinton’s campaign once again tried to create a contrast between her and Trump over transparency in their personal finances.
Departing from 40 years of tradition for presidential candidates, Trump has so far refused to release any of his tax returns for public inspection. Trump has said that he’s under an audit by the Internal Revenue Service and won’t release his returns until that audit is concluded—which may not happen before the Nov. 8 election. IRS officials have said there’s no law preventing taxpayers from releasing their returns to the public, even if they’re under audit.
Yet the Clintons’ eight-figure income, which included almost $6 million from speaking fees and consulting fees for Bill Clinton and more than $4 million in speaking fees and income from book sales for Hillary Clinton, may complicate her attempts to appeal to lower- and middle-income voters. Their income appears to place them well within the top 0.1 percent of earners, based on data gathered by economist Emmanuel Saez of the University of California at Berkeley.
Taxpayers in that group had average income of just over $6 million in 2014, according to Saez’s data.
The Clintons’ prior tax returns showed that from 2007 through 2014, the couple made $139.1 million—much of it from paid speeches. The Clintons paid $43.9 million in federal taxes over those years—an average tax rate that works out to 31.6 percent.
In 2015, their return shows, they overpaid their federal taxes by more than $1 million and asked that the excess be applied to their 2016 tax bill.
Kaine and his wife, Anne Holton, paid an effective federal tax rate of 20.3 percent in 2015 on $313,441 in adjusted gross income, according to a copy of their return for the year. Over the past 10 years, the couple have donated 7.5 percent of their adjusted gross income to charity, according to the campaign’s news release.
BY MICHAEL COHN
Frank Abagnale, the con man portrayed by Leonardo DiCaprio in Steven Spielberg’s 2002 hit movie, “Catch Me If You Can,” has a message for accountants and their clients about the dangers of using free public Wi-Fi hotspots: Don’t get conned.
During his career as a teenage fraudster during the 1960s, Abagnale successfully impersonated a doctor, a prosecutor and a Pan-Am co-pilot, while also forging checks, before he was caught by a dogged FBI agent. He now specializes in advising companies and business people on protecting themselves from fraudsters and other criminals. Abagnale has also worked with Intuit on counseling users of QuickBooks on how to safeguard their security, and more recently he has teamed up with AARP on a public awareness campaign for consumers, particularly senior citizens.
“I have spent the last four decades working with banks, corporations and financial institutions,” he told Accounting Today. “I worked as a consultant for Intuit for many years protecting CPAs and their clients, but the last couple of years I have had the opportunity to reach the actual consumer, the person who is most likely to be harmed by some of these scams through the AARP Fraud Watch Network. Each time we pick something that we know is the most common thing going on to alert people on how to protect themselves from that. Right now we’re concerned about Wi-Fi and public domains.”
AARP conducted a survey and found that about 70 percent of the people polled use public Wi-Fi networks to do things like checking Facebook and their emails, while about 33 percent of the respondents admitted they perform banking transactions, order items with their credit cards, and answer sensitive emails. However, they could be exposing themselves to hackers and identity thieves that way since the wireless networks may be unsecured or masquerading as legitimate ones.
“We just want to remind people that when you’re on a public Wi-Fi it is not private,” said Abagnale. “If you’re in a coffee shop or an airport, you do not want to do banking transactions, give out banking information, or purchase things with a credit card. It’s always wise to just go to your settings and shut off the auto-connect to your Wi-Fi so that you don’t forget about it and you’re in a public domain and someone gets into your laptop or your device and gets that information.”
AARP has created a website, aarp.org/watchyourwifi, which provides this and other tips. “We also have some video there to show you how people actually steal information in a public Wi-Fi situation like that,” Abagnale noted.
He is encouraging accountants to spread the word to their clients about the security vulnerabilities that could expose their personal or business information to criminals.
“A CPA is an advisor to their customer, so it’s important for the CPA to have that information to be able to pass it on to their customers about protecting themselves from embezzlement, check forgery, etc.,” said Abagnale. “I work with Intuit to help educate their four and a half million users of QuickBooks, as well as their CPAs. These are basically simple tips about protecting your business from embezzlement, and using the right check stock to make it more difficult for someone altering and forging a bad check.”
By working with AARP now, Abagnale wants to spread the word to the average consumer. “This has given me a unique opportunity to get out of the corporate world for a while and really take care of the people who need that information,” he said. “That’s the everyday walk of life men, women and children who fall victim to these crimes every day and have nowhere to go for resources to get that information.”
Firewalls, antivirus programs and other forms of security software can help to some extent, but technology users should also be aware that cybercriminals have ways to get around those defenses.
“It helps a little bit, but it will not help you completely,” said Abagnale. “Even though I may have those things on my laptop or on my iPhone, they’re not going to protect me from someone stealing information from me on a public Wi-Fi network or someone setting up a fake network and me signing onto that fake network, or automatically being connected to that fake network because I haven’t shut off my auto-connect to Wi-Fi. Technology is great, but you have to go beyond the technology and just be a little smarter and a little wiser. That’s why we find it very useful to simply provide people these educational tips.”
Besides the free advice on the AARP site, he also has his own site, Abagnale.com, where he is offering free information that accountants can give to their clients.
“A CPA can go there and under Publications I write many things for CPAs to pass on to their clients,” said Abagnale. “They can find a 20-page booklet there about protecting them from embezzlement, check forgery, all kinds of things. It’s free. They can download it, print it out, reprint it, and send it out to their customers. There’s no advertising in it, so there’s a lot of information there. I have found that education is the most powerful tool for fighting crime. AARP is a great resource for me to get to everybody, but CPAs can go to my website and get that information that they can pass on to their clients as well.”
Moving Expenses Can Be Deductible
Did you move due to a change in your job or business location? If so, you may be able to deduct your moving expenses, except for meals. Here are the top tax tips for moving expenses.
In order to deduct moving expenses, your move must meet three requirements:
IRS Warns of Back-to-School Scams; Encourages Students, Parents, Schools to Stay Alert
The Internal Revenue Service today warned taxpayers against telephone scammers targeting students and parents during the back-to-school season and demanding payments for non-existent taxes, such as the “Federal Student Tax.”
People should be on the lookout for IRS impersonators calling students and demanding that they wire money immediately to pay a fake “federal student tax.” If the person does not comply, the scammer becomes aggressive and threatens to report the student to the police to be arrested. As schools around the nation prepare to re-open, it is important for taxpayers to be particularly aware of this scheme going after students and parents.
“Although variations of the IRS impersonation scam continue year-round, they tend to peak when scammers find prime opportunities to strike”, said IRS Commissioner John Koskinen. “As students and parents enter the new school year, they should remain alert to bogus calls, including those demanding fake tax payments from students.”
The IRS encourages college and school communities to share this information so that students, parents and their families are aware of these scams.
Scammers are constantly identifying new tactics to carry out their crimes in new and unsuspecting ways. This year, the IRS has seen scammers use a variety of schemes to fool taxpayers into paying money or giving up personal information. Some of these include:
If you receive an unexpected call from someone claiming to be from the IRS, here are some of the telltale signs to help protect yourself.
The IRS Will Never:
If you get a suspicious phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:
Tax Effects of Divorce or Separation
If you are divorcing or recently divorced, taxes may be the last thing on your mind. However, these events can have a big impact on your wallet. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:
5 Reasons Your Small Business Needs an Accountant
BY LEVI KING
As a small-business owner, you probably thrive in a DIY environment; but the more hats you wear, the less you’ll accomplish successfully. Accounting is one of the most important areas for keeping your company profitable. As you start out and your company grows, software can only take you so far. Accountants can help your company move forward. Below are reasons why your business needs an accountant in all stages of your growth.
1. Your business is in the startup phase
There are many things to think about when you’re just starting out:
You might think it’s too early to hire an accountant, but the way you set up your operations can have a serious impact on your future success. An accountant can help you determine the most appropriate business structure, analyze your business plan for financial compatibility, and assist you with making sound financial decisions throughout the startup process so you don’t have to spend more money to correct mistakes later.
2. Your business has employees
In the first few years of operation, you may not feel you have enough work for an accountant. The truth, though, is that an accountant will have the specialized knowledge to make your money work for you even though you don’t have a huge workforce. The accountant can:
3. Your business structure requires audits
Not all small businesses are required to conduct audits, but unless you consult with an accountant you might not know until it’s too late. Publicly owned businesses are required to comply with the Sarbanes–Oxley Act (SOX), and private companies that are preparing for an initial public offering might also need to comply with certain SOX provisions. Furthermore, all businesses should comply with local generally accepted accounting principles (GAAP). Hiring an accountant can ensure your records are compliant with the appropriate regulations.
4. Your lender requests a financial statement
The Small Business Administration reports that small businesses borrowed over $6 billion last year. At some point your business will probably need additional funding, whether it’s for expansion, new equipment, purchasing property, or even establishing an emergency fund. Before you approach a lender, having an accountant prepare a financial statement can increase your chances of getting approved.
5. Your budget is falling short
According to the Bureau of Labor Statistics, about half of all businesses will fail within five years of opening. Although there are many factors related to failure, not meeting budget goals can decrease the chances of your business survival. Having an accountant on hand to analyze your budget, assist in making changes and catch errors will help you make sure your budget is on target for success.
Questions to ask yourself before hiring an accountant:
If you answered “no” to any of these questions, you can benefit from hiring an accountant.
How to find an accountant
You could do a quick Google search, but how would you know if the accountant is qualified? There are numerous databases of accountants, but to ensure that the accountant you choose has the knowledge and experience you need, look for a certified public accountant (CPA). These professionals will have passed a rigorous CPA exam and are licensed by the state in which they work. Enrolled agents are another option for tax preparation and tax resolution. Enrollment agents are authorized by the federal government to represent taxpayers before the IRS. They specialize in taxes, whereas CPAs often specialize in tax, accounting, and financial services to businesses in the state in which they are certified.
Accountant Bridge is a great place to start your search for a CPA that matches your needs.
Levi King is CEO of Nav, a business financing company.
Schumer Proposes to Exempt Olympic Medals from Taxes
BY MICHAEL COHN
Sen. Charles Schumer, D-N.Y., is urging Congress to exempt Olympic medalists from taxes on their medals and monetary bonuses.
Speaking last week at the Olympic Training Center in Lake Placid, N.Y., which hosted the Winter Olympics in 1980, Schumer called on the House of Representatives to pass legislation blocking the Internal Revenue Service from taxing Olympic and Paralympic medalists. The Senate passed a bipartisan bill last month co-sponsored by Schumer and Sen. John Thune, R-S.D., known as the United States Appreciation for Olympians and Paralympians (USA Olympians and Paralympians) Act.
“Our Olympian and Paralympic athletes should be worried about breaking world records, not breaking the bank, when they earn a medal,” said Schumer. “Most countries subsidize their athletes; the very least we can do is make sure our athletes don’t get hit with a tax bill for winning. After a successful and hard fought victory, it’s just not right for the U.S. to welcome these athletes home with a tax on that victory. We worked hard to pass a bill that would exempt athletes from these tax penalties in the Senate, and now I’m hopeful that this bill will earn strong bipartisan support in the House and quickly become law.”
Schumer pointed to a 2014 report by NBC News that said the U.S. Olympic Committee awards cash prizes to medal winners: $25,000 for gold medalists, $15,000 for silver medalists and $10,000 for bronze medalists. The IRS considers the money to be income earned abroad, so the monetary value of the medal is taxable.
A similar bill has been introduced at the state level in California by Brian Jones, a Republican Assemblyman.
Millennials Are Freaking over Retirement, and Not Doing Much About It
BY BEN STEVERMAN
Young workers today probably can't even think about retiring for 40 or 50 years. Longer lives and the prospect of weaker investment returns mean millennials will probably have to save more money, over a longer period of time, than their parents and grandparents. And the earlier they start saving, the easier it will be to accumulate a nice nest egg.
Yet it's not easy to sacrifice now for something that won't happen until the 2060s.
When millennials are asked, they say retirement is a top priority. In a recent Charles Schwab survey, retirement was by far the first concern of all age groups. Millennials even put saving for retirement well ahead of student loans, credit card debt, and job security.
But if young workers are this worried about retirement, why aren't they doing something about it?
It looks like they need a nudge to make the right decisions. That's one takeaway from data T. Rowe Price Retirement Plan Services shared that offer a window on how seriously millennials—and other generations—are taking retirement savings. The company runs 401(k)-style plans for almost 1.9 million people.
Just getting started—filling out the paperwork to enroll in an employer's retirement plan—is an obstacle. When left to their own devices, just 30 percent of young workers get around to signing themselves up for their 401(k) plans. More than half of workers in their 30s, 40s, 50s and early 60s voluntarily take this step.
Many companies have started automatically signing up workers for 401(k)s. Employees can decline to participate, but the idea is that very few will bother. According to T. Rowe Price's data, this is working. Among 20-something workers, 84 percent go along with being auto-enrolled in a 40(k) plan.
Younger workers also contribute a smaller percentage of their salaries to T. Rowe Price retirement plans than older workers do. This makes some sense. Workers who start saving early don't need to save as much as older workers who are playing catch-up. And younger workers, who are typically paid less than their elders, often have a harder time finding money to put away.
But most experts recommend devoting 10 percent or 15 percent of your pay to retirement, including employer contributions. The average young worker is less than halfway there.
In some areas, millennials are making smarter decisions than older savers. For example, workers under 40 are far more likely to be using Roth 401(k) retirement accounts, according to T. Rowe Price's data.
Roth accounts take after-tax money, so they don't provide the same immediate tax break as traditional accounts, which take pretax money. But investment gains in a Roth are never taxed, while retirees must pay income taxes on withdrawals from traditional 401(k) and individual retirement accounts. The benefits of Roth accounts are clearest for younger workers, though recent research suggests all workers can benefit from a mix of Roth and traditional assets.
Only 6.7 percent of all worker contributions went to Roth accounts last year, according to T. Rowe Price, but that's up 43 percent in just two years. Employees in their 20s make 8.1 percent of contributions to Roth options.
Millennials are less and less likely to raid their 401(k) accounts for today's needs. Workers in their 20s are half as likely as all employees to borrow money from their 401(k). While workers over 40 have taken out more 401(k) loans over the past two years, young workers are borrowing less often.
Young workers are often tempted to cash out small 401(k) balances when they hop from job to job, even though these early withdrawals come with a 10 percent penalty. But more and more workers are going through the hassle of rolling these balances over into new 401(k)s or IRAs. The share of 20-something participants cashing out their 401(k) is down 10 percent over the past two years.
Clinton Could Have Cut Her Tax Bill in Half under Trump's Plan
BY LYNNLEY BROWNING
Democratic presidential nominee Hillary Clinton could have cut her 2015 federal tax bill roughly in half—lopping about $1.7 million from what she owed—under the plan offered by Republican rival Donald Trump.
Trump has pledged the biggest overhaul of the U.S. tax code since the 1980s, proposing cuts for individuals and businesses. His plan to slash tax rates on individuals’ business income to 15 percent—from a current top rate of 39.6 percent—would have benefited Clinton and her husband, former president Bill Clinton, according to accountants and tax specialists who reviewed the couple’s 2015 return.
By contrast, the Clintons would have paid at least $224,000 more in taxes under Hillary Clinton’s proposals, which include a 4 percent surtax for the highest earners and a cap on the tax benefit they derive from such deductions as home-mortgage interest.
The Clintons, who released their 2015 return on Friday, reported $10.6 million in adjusted gross income that year—enough to place them well within the top 0.1 percent of taxpayers. While their sources of income are atypical—they received millions of dollars in speaking fees and from book deals—their return offers clues as to how some high-earning taxpayers might fare under each candidate’s tax plan.
“Although it is difficult to make a precise calculation because there are always details that need to be clarified, it is nevertheless clear that Secretary Clinton would pay substantially lower taxes under Donald Trump’s plan than either current law or her own plan,” said William Gale, the head of federal economic policy at the Washington-based Brookings Institution. “Donald Trump’s proposed 15 percent tax rate on business income would represent a very large tax cut for Clinton.”
During the campaign, Trump has pitched his menu of tax cuts as a way to stimulate economic growth and create jobs. He has said his policy proposals, including his tax plan, his recommendations for regulatory overhauls and his call for boosting the domestic energy industry, would push growth to 4 percent annually. Clinton, meanwhile, touts her tax increases for high earners as a way to bring more fairness to a U.S. economy that she says is marked by rampant income inequality.
“Unlike Donald Trump, Hillary Clinton is not proposing a massive tax break for herself,” Josh Schwerin, a Clinton campaign spokesman, said in an e-mail. On Wednesday, Clinton is scheduled to discuss taxes during a campaign stop in Cleveland, where she’ll focus on the estate tax, according to her campaign.
Trump wants to abolish that tax, which applies a 40 percent rate to estates worth more than $5.45 million, or $10.9 million for couples. Clinton wants to raise the rate to 45 percent and lower the value threshold to $3.5 million and $7 million respectively.
Trump’s campaign didn’t respond to requests for comment. One of Trump’s economic advisers said last week that the billionaire real estate mogul and reality television star intends to tweak his business tax plan to prevent potential abuse. “We are absolutely dedicated to making sure the 15 percent is for legitimate businesses,” economist Stephen Moore said in an Aug. 11 interview.
When Clinton released her 2015 return last week, her campaign sought to once again blast Trump, who has departed from 40 years of tradition in presidential campaigns and refused to release any of his returns.
Trump has said he’s under an audit by the Internal Revenue Service, and won’t make his tax information public until the audit is over. While there’s no law that would prevent him from releasing returns anyway, tax attorneys said doing so might disadvantage Trump by revealing his tax strategies to public scrutiny, perhaps surfacing issues that the IRS missed.
In 2015, the Clintons received almost $10.2 million—about 95 percent of their total earnings—in business income. They paid about $3.2 million in federal income taxes, their 2015 return shows, along with almost $390,000 in self-employment and other taxes for an effective federal tax rate of 34.2 percent.
If Trump’s plan were in effect, the income-tax portion of the Clintons’ tax bill could have been just $1.5 million—less than half what they actually paid. At that amount—and with their other taxes unchanged—their effective federal tax rate would have been about 17.6 percent.
Trump’s business-tax rate proposal “does cut their tax dramatically,” said Norman Solomon, a retired accountant in La Jolla, California. Brian Stoner, a certified public accountant in Burbank, California, called the tax calculations by Bloomberg News “a fair estimate” of what the Clintons would have paid under Trump’s proposals. Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, called the findings “generally correct.”
Trump’s plan would apply the same 15 percent rate to corporations, partnerships, limited liability companies, sole proprietorships and other so-called pass-throughs. Those sorts of entities don’t pay taxes; instead, they pass their income directly to their owners, who pay income taxes at their regular individual rates. The Clintons in 2015 operated two sole proprietorships and two LLCs; Bill Clinton’s is WJC LLC and Hillary Clinton’s is ZFS Holdings LLC, according to the return.
Trump has pitched his business-tax proposal as a boon for small businesses, which are often organized as pass-through entities. But as written, the plan would confer the same benefit on managers of private-equity, real-estate and other investment funds, which also use pass-through structures. Still, as the analysis of the Clintons’ tax return shows, it’s not just fund managers or mom-and-pop grocers who would benefit.
Trump last week tweaked his tax plan in an attempt to reduce its revenue cost from an estimated $10 trillion over 10 years to what aides say is now roughly $2 trillion. In addition to the 15 percent business rate, he’d offer rate cuts for individuals and reduce the existing seven tax rates to just three—topping out at 33 percent, down from the current 39.6 percent. More tweaks are on the way, according to Moore, the economist who is advising the campaign.
For example, Trump’s campaign has said he wants to limit the value of some itemized deductions—though details haven’t emerged yet. The campaign has indicated that Trump would preserve deductions for charitable contributions and home-mortgage interest, but hasn’t addressed state and local taxes, which are also deductible. The Clintons deducted almost $1.5 million in state income taxes and property taxes they paid in 2015. At the suggestion of Rosenthal at the Tax Policy Center,
Bloomberg’s analysis disregarded those state and local tax deductions, adding their total back into the Clintons’ taxable income.
Still, Trump’s ultimate plan may differ. Moore said on June 12 that he and another Trump adviser, economist Lawrence Kudlow, have urged Trump to propose capping annual deductions at $50,000, but no formal plan has emerged.
With a $50,000 cap on their deductions, the Clintons would have had a much higher taxable income in 2015. They were able to deduct $2.2 million, their return shows, including a $1 million donation to the Clinton Family Foundation, which makes charitable grants, giving them taxable income of almost $8.4 million.
A $50,000 cap on deductions would have boosted their taxable income to $10.5 million. Under that scenario, Trump’s 15 percent tax rate would have set their income tax at almost $1.6 million—still roughly half the amount they actually paid.
Clinton has proposed tax increases on high earners, including a 4 percent surcharge on incomes over $5 million. Applying that to the couple’s 2015 adjusted gross income would have generated about $224,000 in additional income-tax liability.
Clinton also proposes to cap the tax value of most itemized deductions at 28 percent—a move that would raise taxes for high earners. Taxpayers in the top tax bracket, like her and her husband, currently get roughly 39.6 cents of tax relief for every dollar’s worth of their deductions—subject to certain limits.
For taxpayers in lower brackets, the amount of relief decreases. Capping the value of the Clintons’ deductions would raise their taxes—perhaps as much as $140,000, said Joe Rosenberg, a senior research associate at the Tax Policy Center.
Clinton also supports the proposed “Buffett Rule,” named for Warren Buffett, the chairman of Berkshire Hathaway Inc. That proposal is designed to ensure that individuals who make more than $1 million pay an effective tax rate of at least 30 percent. Because the Clintons’ effective tax rate already exceeded that threshold, the Buffett rule wouldn’t apply to their 2015 tax return.
5 Red Flags of Identity Theft
By: Christina Schubert of Nortons
An estimated 11.7 million(link is external) people are victims of identity theft each year. It is a growing crime and it is expected to grow more with each passing year.
There is a big demand for stolen identities in the underground economy. Criminal outfits specializing in identity theft will go to any lengths to get their hands on your information.
So what do these thieves do with your information?
Your personal information in the hands of these criminals means you are putting your finances and your reputation at risk.
It takes less than 30 seconds for a criminal to drain your bank account. They can run up your credit cards, open new credit card accounts, get medical treatment, the list goes on.
Sometimes a thief can file a tax refund in your name and get your refund. In extreme cases, a criminal can give your name to the police during an arrest. All these crimes show up long after a lot of damage has been made.
There are some clues that show up when your identity has been stolen.
1. Your bank statement doesn’t look right or your checks bounce.
Even a small error on your bank account or credit card is a red flag. Criminals are known to make small charges and test the account to see if a charge will go through. View your accounts regularly online and contact your bank if you notice any suspicious charges.
2. Your bills are missing or you receive mysterious bills.
Identity thieves steal the victim’s mail by changing their mailing address via the Post Office. They gather information and piece them together to open new accounts in your name. Sometimes they may purchase goods in your name and max out your credit card. It’s advisable to keep track of all your bills and bank correspondence.
3. You get calls from debt collectors
It is likely that someone has used your name to rack up debts if creditors are hounding you about unpaid bills you know nothing about. Check your credit report for unfamiliar accounts or charges.
4. Your medical bill doesn’t add up.
Medical identity theft is a growing crime. If you get a medical bill for a service you didn’t use or your medical claim is rejected because you have already reached your benefits limit, it is likely something is not right. Sometimes your medical records show a condition you don’t have and yet it shows that you have received treatment for it.
5. A note from the IRS that more than one tax return was filed in your name.
Tax fraud is big business. Criminals have found sneakier ways to cash in on your tax refund. If there is something pointing to identity theft, you will receive a mail from the IRS.
Sometimes people with compromised identity don’t get these telltale signs of identity theft. They can go for years without a clue while someone out there is ruining their credit history.
Fortunately, there are steps you can take to accomplish comprehensive security. For all your digital security needs Norton Security is a reliable and trusted source.
A form of phishing, smishing is when someone tries to trick you into giving them your private information via a text or SMS message. Smishing is becoming an emerging and growing threat in the world of online security. Read on to learn what smishing is and how you can protect yourself against it.
Put simply, smishing is any kind of phishing that involves a text message. Often times, this form of phishing involves a text message in an SMS or a phone number. Smishing is particularly scary because sometimes people tend to be more inclined to trust a text message than an email. Most people are aware of the security risks involved with clicking on links in emails. This is less true when it comes to text messages.
Smishing uses elements of social engineering to get you to share your personal information. This tactic leverages your trust in order to obtain your information. The information a smisher is looking for can be anything from an online password to your Social Security Number to your credit card information. Once the smisher has that they can often start applying for new credit in your name. That’s where you’re really going to start running into problems.
Another option used by smisher is to say that if you don’t click a link and enter your personal information that you’re going to be charged per day for use of a service. If you haven’t signed up for the service, ignore the message. If you see any unauthorized charges on your credit card or debit card statement, take it up with your bank. They’ll be on your side.
In general, you don’t want to reply to text messages from people you don’t know. That’s the best way to remain safe. This is especially true when the SMS comes from a phone number that doesn’t look like a phone number, such as “5000” phone number. This is a sign that the text message is actually just an email sent to a phone. You should also exercise basic precautions when using your phone such as:
Almost all of the text messages you get are going to be totally fine. But it only takes one bad one to compromise your security. With just a little bit of common sense and caution, you can make sure that you don’t become a victim of identity theft.
Protecting Your Child From Identity Theft
Identity theft is a growing menace. With each passing day, cyber criminals are getting greedier and more malicious. They don’t spare anyone when it comes to reaping unethical financial gains.They wont stop at anything and that includes conning innocent little children.
A child’s identity is a hot commodity in the underground economy. Usually a child has no credit history. That’s a clean slate for criminals to restart what they once squandered. Since children wouldn’t be using their Social Security number until much later in their lives, the crime goes unnoticed for years giving the criminals many years of nefarious activities.
How does a child’s identity get compromised?
It doesn’t take a genius to steal your child’s identity. Sometimes adults and children disclose their Social Security number to untrustworthy parties. While most schools, government offices, and hospitals are bound by law to protect a person’s social security number, sometimes it can slip through the cracks and make its way into the wrong hands. Once the Social Security number is out there, it is easy to figure out the child’s full name, address, and birthdate. Once all this information is pieced together the possibilities to exploit the child’s identity becomes limitless.
A new threat called synthetic identity theft allows a criminal to use a child’s Social Security number and forge a different name, address and birthdate. People with lousy credit histories patronize these criminals and have found a way to get loans and mortgages. In most cases they are likely to default on the payment and ruin the child’s credit history.
Is my child’s identity compromised?
There are a few telltale signs of child’s identity being compromised. They include
What’s the worst that could happen?
Even though Identity Theft can be resolved, it is a time consuming frustrating problem to solve. People spend months trying to fix their credit history. One can immediately freeze their credit but whatever credit cards and loans have been applied will continue to exist and will keep surfacing at a later date. This means more hours over the phone explaining who you are.
Sometimes identity theft victims have been arrested for crimes they didn’t commit.
Overall identity theft has the potential to irreversibly damage a person’s reputation, bring financial ruin and hinder job opportunities.
What should I do as a parent?
Use rule No.1 of parenting. Be careful. Do not broadcast your child’s Social Security number anywhere. This includes school forms, athletic events, registration forms, hospital forms, etc. It is easy to steal Social Security numbers from these forms if the people handling it are not careful and aware of identity theft. Make sure it is absolutely necessary for them to have it before you give it to them.
If your child’s identity is compromised, immediately notify the police. You can freeze the child’s credit. This will prevent any further crime. However, whatever has been issued will continue to exist.
How can I protect my child?
There are certain precautions one can take to keep a child’s identity safe.
Always invest in a reliable security suite to keep your digital life safe. Norton by Symantec understands that your everyday life is just as important as your digital life. That is why we are committed to providing you with a new sense of security to help you stay aware and protected.
IRS Provides Tax Info for the Sharing Economy
BY MICHAEL COHN
The Internal Revenue Service has created a new webpage with information to help people who participate in the so-called “sharing economy” get timely tax advice.
The “sharing economy” includes websites and mobile apps such as Airbnb, Uber, Lyft, TaskRabbit and Handy where people can share their homes, hail rides in other people’s cars, offer to perform chores, or get hired to do repairs. Those who do the work are considered entrepreneurs who use the apps to make their services available. However, they generally don’t receive 1099 forms or have taxes withheld from their pay, so they are responsible for taking care of their own taxes.
The IRS’s new Sharing Economy Resource Center provides information to help them meet their tax compliance obligations, including filing requirements, estimated tax payments, self-employment taxes, depreciation and other topics.
“This rapidly evolving area often presents new challenges for people engaged in these economic activities, whether they are renting a room or providing a ride,” said IRS Commissioner John Koskinen in a statement. “The IRS is working to help people in this area by providing them the information and resources they need to file accurate tax returns.”
The resource center stems from a joint initiative between the IRS and the National Taxpayer Advocate. Nina Olson, who heads the Taxpayer Advocate Service, has testified before Congress about the tax implications of the sharing economy (see The Sharing Economy Doesn’t Share Tax Information).
“The IRS has an opportunity to be at the forefront of tax compliance in the emerging and growing area of the sharing economy,” Olson testified in May. “Estimates show that over 2.5 million Americans are earning income through the sharing economy and that number is expected to continue its upward trajectory. Establishing the tax compliance norms for this emerging industry in its infancy will assist the IRS as this segment of taxpayers grows.”
The IRS noted that tax preparation software can help taxpayers deal with the sharing economy, and a trusted tax professional can also assist with many issues. The sharing economy has been a particular focus at this summer'sIRS Nationwide Tax Forums, where tax professionals hear directly from the IRS about the latest tax trends and regulations. The forums will continue at various locations through mid-September, featuring sessions with tax experts discussing the implications of the sharing economy for taxpayers.
Restaurateur Seibel Sent to Jail, Then Kitchen, in Tax Scam
BY JESSE DRUCKER AND CHRISTIAN BERTHELSEN
Restaurateur Rowen Seibel has made the gossip pages for getting socked by Diane von Furstenburg’s son and multimillion-dollar court fights he’s waging with celebrity chef Gordon Ramsay.
On Friday, the 34-year-old New Yorker was sentenced to one month behind bars for using undeclared Swiss bank accounts and a Panamanian shell company to hide more than $1 million from the Internal Revenue Service.
And when he gets out: he must complete 300 hours doing food preparation in an underprivileged neighborhood, the judge said.
Seibel, who opened restaurants in New York, Washington, and Las Vegas, pleaded guilty in April. At his sentencing in Manhattan, U.S. District Judge William Pauley rejected his plea that he remain out of prison because it was his mother who established the account. But the judge also showed leniency, imposing a sentence far less than the 12 to 18 months recommended by federal guidelines.
“I stand before you today deeply saddened, humbled and heartbroken,” Seibel, crying, said in court. “I continue to obsess over what a terrible disappointment I am to myself and my family.”
He represents the trailing end of a wave of prosecutions of Americans accused of hiding money in Switzerland—a sprawling investigation that began in 2007 and has resulted in big fines for Swiss banks and more than 150 cases against alleged tax dodgers and their enablers. Many have ended with financial penalties, and some with prison time.
More than 54,000 Americans avoided prosecution through an amnesty program that let them voluntarily disclose their previously secret accounts, ponying up $8 billion in back taxes, penalties and interest.
Seibel tried to join the amnesty program but the IRS turned him down, court records show. He acknowledged one secret account—but only after stealthily moving his money to another undeclared account at a different bank.
That type of move is an absolute no-no. “It is an essential component of the IRS’s voluntary disclosure policy that a taxpayer coming forward must be truthful and complete,” said Scott Michel, a criminal tax defense attorney at Caplin & Drysdale in Washington. “Anyone who doesn’t follow that rule will undoubtedly anger the IRS and, depending on the circumstances, perhaps be committing a separate crime.”
In sentencing Seibel, Pauley quoted Oliver Wendell Holmes, saying: “Taxes are what we pay for a civilized society,” and emphasized the importance of “wealthy and sophisticated” members of society contributing their share. He also insisted that prison time be part of the sentence, over the objections of defense lawyers who asked the judge to allow the time to be served in home detention.
“This is an offense that can’t just be disposed of like a business debt as a cost of doing business,” he said.
Still, he said he was lowering the sentence because of evidence that Seibel’s mother and her lawyer played a role in setting up the account and filing the amnesty claim with the government.
Prosecutors say Seibel’s Swiss banking began back in 2004. The then-23-year-old, fresh out of New York University’s business school, Seibel flew with his mother to UBS Group AG’s offices in Switzerland to open an account, the government says. The account was not in his name, but identified in internal bank records with the phrase “CQUE.”
For an additional fee, Seibel made sure the bank wouldn’t mail any account information to him in the U.S., since that could risk exposure to the IRS, say prosecutors.
The account was opened with $25,000, and over the next year, his mother arranged for cash and checks totaling about $1 million to be deposited. Over the next several years, prosecutors say, Seibel actively monitored and managed the account. Seibel’s lawyer, Robert Fink, said his mother is too ill to respond to questions on the matter.
As it happened, the UBS banker who helped the Seibels was Bradley Birkenfeld, who blew the whistle in 2007 on how his employer helped thousands of Americans evade taxes. He later was sentenced to 40 months in prison and earned a $104 million whistle-blower award from the IRS for exposing the bank’s schemes.
Since then, more than 80 banks, including UBS and Credit Suisse Group AG, have agreed to pay about $6 billion to the U.S. in penalties and fines.
Birkenfeld said in an interview that he remembered meeting with them and believed he had set up the account. In early May 2008, news broke that Birkenfeld had been indicted and was cooperating with U.S. investigators. Three weeks later, prosecutors say, Seibel went to Switzerland to shut down his UBS account.
But he didn’t move his money back into the U.S. and declare it to authorities. Instead, he set up a Panamanian shell company, opened yet another account at a different Swiss bank—Banque J. Safra—and moved all $1.3 million into the new Safra account, held by the Panamanian entity.
“This was a shrewd move by Seibel to avoid detection by U.S. authorities,” prosecutors wrote in an Aug. 12 court filing.
Later that year, Seibel opened his first restaurant, Serendipity 3, in New York City. He opened a second restaurant, with the same name, at Caesars Palace in Las Vegas in 2009 and a third in Washington two years after that. He also went into business with Ramsay in a series of restaurants in Las Vegas and Los Angeles.
Ramsay, the host of Master Chef and Hell’s Kitchen, has accused Seibel in a lawsuit of inept management. Seibel, in his lawsuit, says Ramsay took his investment to open a different restaurant.
It wasn’t Seibel’s first turn in the gossip pages. Back in 2003, he allegedly flirted with the fiancée of Alex von Furstenburg, the son of the legendary fashion designer. Von Furstenburg slammed his car into Seibel’s. “I hurt my knuckle, probably when I hit him in the head,” von Furstenburg told police, according to press reports.
In 2009, the government introduced its first offshore voluntary disclosure program, allowing U.S. taxpayers to avoid prosecution and pay reduced penalties for declaring their hidden accounts.
Seibel’s mother didn’t qualify, her then-lawyer told her, because IRS agents had already questioned her about Birkenfeld, prosecutors say in a filing. Her attorney, however, suggested that her son could, according to the filing.
In October 2009, Seibel applied for amnesty but said he didn’t know the status of his UBS account until he asked about it—more than a year after he transferred the money to the Safra account. He claimed that the deposits had “been stolen or otherwise disappeared.”
Today, Seibel splits time between a 19th-floor apartment on Central Park South in Manhattan and a $3 million home in Las Vegas, according to court filings and public records. On Friday, he was also ordered to pay a $15,000 fine by the judge.
U.S. prosecutors have been unsuccessful getting prison terms for many Americans who hid the most money in offshore accounts—even sums far larger than Seibel’s. Fink cited H. Ty Warner, the billionaire creator of Beanie Babies, who evaded almost $5.6 million in taxes on an undisclosed account with as much as $107 million. Warner’s evasion was the largest of more than 100 cases in a crackdown against taxpayers and enablers who used offshore accounts to cheat the IRS. He was sentenced to probation and community service.
—With assistance from David Voreacos
The Painful Truth about the Alternative Minimum Tax
BY DIANA SPATOULAS
Most people have never heard of the alternative minimum tax, and those that have probably would love to forget about it and wish that it would just go away.
For 2015, the Tax Policy Center projects the AMT will impact 4.1 million taxpayers and generate $28.2 billion—so it is safe to assume that Congress will not loosen the grip AMT has on taxpayers any time soon. To help ease the painful truth of how AMT can impact your clients, presented below is a brief explanation of what it is and how it is calculated. Sadly, for most of us there is little that can be done to change our AMT liability.
What Is the Alternative Minimum Tax?
AMT is a tax system that was enacted in 1969 as an add-on tax designed to ensure high-income taxpayers pay at least a minimum amount of federal income tax. It was introduced in response to a Treasury study which reported that, in 1966, 155 wealthy individuals paid no federal income tax. Those high-income individuals were able to side-step income tax by combining enough legal tax breaks and deductions to reduce their tax liability to zero, even though they each reported adjusted gross income of more than $200,000—which is equivalent to $1,254,775 in today's dollars.
What Does the Alternative Minimum Tax Do?
The AMT’s role is to identify taxpayers at higher income levels and prevent them from taking excessive advantage of legal tax benefits that allow them to evade paying their “fair” share of income tax. In 1970, approximately 19,000 taxpayers fell within the AMT’s higher income range and nearly $122 million of AMT was generated. Because the AMT did not have a provision for inflation until the American Taxpayers Relief Act of 2012, the income levels used to target 1970’s “high-income taxpayers” ultimately ended up affecting millions of average income taxpayers who fall under its scope.
Will Your Clients Be Subject to the Alternative Minimum Tax?
Taxpayers only have to worry about the possibility of getting hit with AMT if their adjusted gross income is above a certain income level.
The 2015 income levels for each filing status are as follows:
• Single or head of household - $53,600
• Married, filing jointly - $83,400
• Married, filling separately - $41,700
In general, whether or not a taxpayer is subject to AMT is determined by calculating tax twice. "Regular tax" is first calculated with the regular tax system, and then AMT is calculated with the AMT system. Under the AMT system, an AMT income tax base (AMTI) is computed by taking AGI as computed under the regular tax system and adding back or adjusting certain deductions that are not allowed for AMT purposes. An AMT exemption is then subtracted from AMTI, and the net amount is multiplied by an AMT rate. The resulting AMT is compared to the regular tax and any excess is added to your tax liability as the AMT. Your total tax liability will be regular tax plus AMT.
Alternative Minimum Tax Adjustments
Under the regular tax system, deductions subtracted from AGI will reduce taxable income, thus lowering the amount of tax liability, but for AMT purposes certain deductions are added back.
Below is a (not all inclusive) list of typical deductions allowed under the regular tax system, but not allowed (added back) for AMT purposes:
• State and local income taxes,
• Real estate taxes,
• General sales and personal property taxes,
• Investment advisory fees,
• Personal exemptions,
• Employee business expenses that are itemized on Schedule A, and
• The standard deduction (for non-Schedule A filers).
While the regular tax system allows a deduction for mortgage interest on both acquisition indebtedness and home equity indebtedness, the AMT system allows a deduction only on acquisition indebtedness.
With the AMT system, medical and dental expenses are deductible to the extent that they exceed 10 percent of AGI for all taxpayers. This means the deduction remains unchanged for taxpayers under 65, but is reduced for taxpayers 65 or older.
Whether or not you are subject to AMT, you receive a benefit for making charitable contributions if you itemize since the deduction is allowed under the AMT system.
It is worth mentioning that the preferential rates that apply to qualified dividends and long-term capital gains for regular tax purposes also apply for AMT purposes.
Planning for the Alternative Minimum Tax
Most taxpayers’ goal is to reduce total tax liability, which is the sum of regular tax plus AMT. When a deduction that reduces regular tax liability is added back for AMT purposes, AMT liability will increase.
However, a plan to reduce or eliminate AMT liability by decreasing deductions will, in effect, cause regular tax to increase. Ultimately, what appears to be a viable approach to eliminating the pain of getting hit with the AMT may prove to be nothing more than a pyrrhic victory—AMT will go down, but regular tax will go up.
Overall, there is not much that taxpayers can do to reduce their AMT exposure. Thanks to the AMT, projecting the outcome of strategic tax planning is much more complex than multiplying a marginal tax rate by the change in income or deduction—but it is important to be aware of the AMT, and to consider it in analyzing the impact of any tax-planning strategy.
The Bottom Line
Between 2016 and 2025, the Tax Policy Center projects AMT will generate over $372 billion in revenue, which is possible with the ongoing annual increase in the number of average income taxpayers getting hit with an AMT liability. Chances are at least one of your clients will be subject to AMT. Having a good tax planning strategy in place ahead of time will help them understand what to expect when it is time to file their tax returns. It is more critical than ever for them to enlist the assistance of a tax advisor.
Diana Spatoulas is a senior accountant at Kessler Orlean Silver & Co. PC, in Deerfield, Ill.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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