Where did the time go? The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2016 tax liability. Here are seven last-minute tax-saving tips to consider — you just must act by December 31:
1. Pay your 2016 property tax bill that’s due in early 2017.
2. Pay your fourth quarter state income tax estimated payment that’s due in January 2017.
3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the applicable floor).
4. Pay tuition for academic periods that will begin in January, February or March of 2017 (if it will make you eligible for a tax deduction or credit).
5. Donate to your favorite charities.
6. Sell investments at a loss to offset capital gains you’ve recognized this year.
7. Ask your employer if your bonus can be deferred until January.
Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.
To make absolutely sure which of these tips are right for you, and learn whether there are other beneficial last-minute moves you might make, please contact our firm. We can help you maximize your tax savings for 2016.
Are you in your 50s or 60s and thinking more about retirement? If so, and you’re still not completely comfortable with the size of your nest egg, don’t forget about “catch-up” contributions. These are additional amounts beyond the regular annual limits that workers age 50 or older can contribute to certain retirement accounts.
Catch-up contributions give you the chance to take maximum advantage of the potential for tax-deferred or, in the case of Roth accounts, tax-free growth.
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.
Another way to save more after age 50 is through a traditional IRA or a Roth IRA. With either plan, those 50 or older generally can contribute another $1,000 above the $5,500 limit for 2016. Plus, you can make 2016 IRA contributions as late as April 18, 2017.
The benefits of making the additional contribution differ depending on which account you’re considering. With a traditional IRA, contributions may be tax deductible, providing you with immediate tax savings. (The deductibility phases out at higher income levels if you or your spouse is covered by an employer retirement plan.)
Roth contributions are made with after-tax dollars, but qualified withdrawals are tax-free. By contributing to a Roth IRA and taking the tax hit up front, you won’t lose any of the income to taxes at withdrawal, provided you’re at least 59½ and have held a Roth IRA at least five years. However, be aware that the ability to contribute to a Roth IRA is phased out based on income level.
Another option if you’d like to enjoy tax-free withdrawals is to convert some or all of your traditional IRA to a Roth IRA — but you’ll also take an up-front tax hit.
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.
The year’s almost over, but you still have time to squirrel away a few extra dollars.
BY ALLYSON VERSPRILLE (BLOOMBERG BNA)
Donald Trump must confront major tax issues when deciding what to do with his real estate empire and other businesses in order to avoid conflicts of interest as he assumes the presidency.
What will happen if he decides to divest his businesses or simply pass them outright to his children?
Trump has hinted at his plans for separating from his businesses but has yet to formally announce them. On Nov. 30, in a series of tweets, he said: “I will be holding a major news conference in New York City with my children on December 15 to discuss the fact that I will be leaving my great business in total in order to fully focus on running the country in order to MAKE AMERICA GREAT AGAIN!”
The president-elect added that while he isn’t mandated to do so under law, “I feel it is visually important, as President, to in no way have a conflict of interest with my various businesses.”
How Trump deals with his holdings could result in different outcomes, practitioners told Bloomberg BNA.
Estate and Gift Tax Implications?
One of Trump’s options is to gift his businesses outright to his children, but Richard Behrendt, director of estate planning services for Annex Wealth Management, points out that may not be the wisest idea.
“He would pay a pretty hefty tax bill if he decided to do so,” Behrendt said Wednesday. A 40 percent tax rate applies to gifts greater than a lifetime exemption amount of $5.45 million per individual in 2016.
That number is indexed for inflation and will increase to $5.49 million in 2017. There is also an annual exclusion for gifts of $14,000 that can be used once a year per gift given—meaning he could make annual gifts of $14,000 to each child and pay no gift tax.
Essentially, Trump and his wife together could pass almost $11 million to the children tax-free, but “that’s almost like me giving a pack of gum away in relation to their estimated net worth,” Behrendt said. “I would be very surprised if they would want to pay 40 percent federal gift tax on the amount between the $11 million exempt amount and” the other billions of dollars in assets, he said.
Determining Trump’s exact net worth requires additional information, but Forbes estimates that number to be about $3.7 billion. On its face, that would amount to a $1.48 billion transfer tax bill.
The more “palatable” option may be to put the assets into a blind trust where he still has beneficial ownership but has given up control and oversight, Behrendt said.
Making a family member—like his daughter Ivanka—the trustee would “be more smoke than an actual transfer,” he said. “I think if you were really going to do that and be really transparent, you would hire some third-party professional, either an attorney or a professional trustee,” and give them control. That has been the more traditional route taken by presidents since Lyndon B. Johnson in 1963.
However, Trump has signaled he may grant control of his businesses to his children in the type of “blind” trust that Behrendt and others have criticized.
What About Passive Losses?
Congress enacted tax code Section 469, which addresses passive activity losses, in the Tax Reform Act of 1986. The statute was aimed at stemming the use of passive losses to dodge taxes.
“At the time of enactment, people with sources of high taxable income that could not directly be tax-massaged very much (e.g., salaried professionals such as doctors, dentists, and lawyers) were buying investments that were designed to generate large tax losses, without commensurate economic losses,” Daniel N. Shaviro, a tax professor at the New York University School of Law, said in an October blog post.
“These losses were used to offset the positive taxable income, hence ‘sheltering’ it,” said Shaviro, who was a legislation attorney at the Joint Committee on Taxation at the time and helped draft rules to prevent such use in 1986.
The 1986 passive loss rules said if a taxpayer invests in a passive activity—meaning one in which he or she doesn’t “materially participate” or is a rental activity—then that person can’t deduct any resulting passive losses against nonpassive income, such as a salary.
During a 1991 House Budget Committee hearing, Trump testified on behalf of the real estate industry to request relief that included relaxation of the passive loss rules. Congress in 1993 enacted a special exception to the rules, permitting people who qualified as real estate professionals to avoid having their rental real estate activities treated as passive.
As Trump becomes president, it is possible that the passive loss rules could apply to him if he ceases to “materially participate” in his rental real estate and other businesses—which most would assume—Shaviro told Bloomberg BNA Tuesday. However, that extra tax bill seems “trivial” compared to the position he is in “to be benefiting his businesses by what he does every day in office,” he said.
Do Loss Carryforwards Count?
Lawrence A. Zelenak, a tax professor at Duke University School of Law, said he suspects the passive loss rules won’t be “a big deal” for Trump for two reasons.
The first is that he can still use loss carryforwards, which apply the current year’s net operating losses to future years’ profits to reduce tax liability. In October, the New York Times released Trump’s 1995 state tax returns, which showed $916 million in net operating losses. The Times reported that those losses may have allowed him to avoid paying federal income tax for as many as 18 years.
Future losses from real estate activities would be passive. But assuming Trump still has loss carryforwards from earlier years in which he wasn’t subject to Section 469, those “would continue to be available to offset income, and they may well be sufficient to zero-out his taxable income for years to come,” Zelenak said Wednesday. “The fact that he’s not materially participating anymore wouldn’t make any difference.”
In addition, the rules don’t prevent Trump from using passive losses to offset income from other passive activities, he said.
“If he had some what are now passive real estate ventures that are throwing off taxable income and others that are throwing off losses, even under the passive loss rules he could still use the losses from” the unprofitable ventures to offset the income of the profitable ones, Zelenak said. “What he can’t do is use losses from the passive activities to offset nonpassive activity income, so if he’s got book royalties or accepts a presidential salary, those wouldn’t be offsettable.”
Trump has said he won’t accept the $400,000 annual presidential salary while in office.
What If He Divests?
Another route Trump could take is to divest, or sell, his business holdings.
If he decided to do so, Trump could receive a significant tax break. Tax code Section 1043 says that “an officer or employee of the executive branch, or a judicial officer, of the Federal Government” who is compelled by federal law to sell property or business holdings in order to comply with conflict-of-interest requirements can get a “certificate of divestiture.”
The certificate acts as a waiver, allowing the eligible person to defer paying capital gains tax on any sale as long as the money is reinvested in any obligation of the U.S. or diversified investment fund approved by regulations issued by the Office of Government Ethics, according to the statute. Permitted investments include U.S. treasuries or highly diversified mutual funds.
The Office of Government Ethics in a series of Nov. 30 tweets said it had informed the president-elect’s attorneys that divesting his business holdings is the best option to resolve ethical concerns about conflicts of interest as Trump assumes the presidency.
A Dec. 7 New York Times article said that the president-elect intends to keep a stake in his business and resist calls to divest.
During a daily conference call with reporters, Trump transition team spokesman Jason Miller said Wednesday that issues regarding Trump’s business holdings will be addressed at the Dec. 15 news conference. “Regarding the Trump organization and the president-elect’s transfer away from that, that will be something that will be talked about in more detail in a week,” he said.
“The president-elect will be transferring from running his business to being solely focused on his job as president of the United States,” Miller said.
OK – I admit it. I hold a bias in favor of law enforcement, particularly when it comes to taxes. Thirty years of litigating civil tax cases for the U.S. Department of Justice, and seeing the myriad ways that taxpayers use to avoid paying what they owe, will do that to a person. While abuse of the tax laws cuts across most income levels and demographics, I found that the wealthiest people often came up with the most “creative” explanations for why they didn’t follow the tax laws.
And President-elect Donald Trump is no exception. His private foundation just admitted what the press has been reporting for months: that in 2015 it engaged in what the tax code calls “prohibited transactions” and what the rest of us call self-dealing. More importantly, Trump’s foundation admitted that it had engaged in self-dealing in years before 2015. This will require the filing of additional tax returns reporting those prohibited transactions, and the payment of excise taxes to the IRS on them. It could also require the insiders to repay the foundation, and require the foundation to undo those transactions, or face a 200 percent excise tax.
No big deal, right?
Wrong. You see, the foundation filed tax returns for earlier years in which it claimed that it had not engaged in self-dealing. The people who signed those returns for the foundation did so under penalty of perjury. And knowingly signing a materially false tax return is a felony that is punishable by a prison sentence and a hefty fine. The foundation’s admission – also made under penalty of perjury – that those earlier returns were false raises a legitimate question about whether the signers knew they were false at the time.
This is not the same thing as a wage-earner who mistakenly relies on a local tax return preparer to claim a deduction for eating lunch at a restaurant. Organizations like the Trump Foundation are run by sophisticated business people and advised by highly qualified tax and legal professionals. When they check the yes or no box for self-dealing on the foundation’s tax returns, they are supposed to know whether the foundation did, in fact, engage in self-dealing. And it is reasonable to believe that they did know.
One might respond that all of this is a bit inside baseball. After all, a bunch of nerdy tax people made a mistake on a tax form no one ever heard of, and they will fix it. No harm, no foul.
But whether or not the IRS ever investigates and prosecutes the people who signed the foundation’s false tax returns, there is a bigger crime here. And that is the crime of secrecy, of privileged people who will soon be running our nation’s government, deciding that they can do whatever they want on their taxes, the laws be damned – and that their tax dealings are none of the public’s business.
On January 20 Donald Trump will take essentially the same oath of office that I took when I joined the civil service in 1977. He will swear to preserve, protect, and defend the Constitution and laws of the United States against all enemies, foreign and domestic. One way to assure the American people that he is fulfilling that oath is to open his tax returns to public scrutiny. Failing to do that would be the real crime.
BY LYNNLEY BROWNING
Koch Industries Inc., the influential private firm headed by billionaire Republican supporters Charles and David Koch, slammed a key element of the House Republicans’ plan to overhaul corporate taxes, saying it would raise prices for American consumers and “could be devastating” to the economy.
In a statement, Koch objected to the plan’s proposal to replace the current corporate income tax with a 20 percent levy on U.S. companies’ domestic sales and on their imports of foreign goods and materials. Exports under the plan would be tax-free.
The proposal, which is generally known by the term “border adjustments,” would “adversely impact American consumers by forcing them to pay higher prices on products produced in and goods imported to the U.S. that they use every single day,” the company said in the statement.
Koch’s statement made clear that the company supports a comprehensive overhaul of the U.S. tax system. But its opposition to border adjustments is the most politically prominent yet in a swelling chorus of corporate voices concerned that the proposal would damage companies such as Wal-Mart Stores Inc. that rely on imported goods to sell products at low cost. For Republicans, buoyed by Donald Trump’s surprise electoral victory last month, the opposition demonstrates that their call for a tax overhaul early in Trump’s administration may hit some speed bumps.
Trump hasn’t signed on to the border-adjustments plan, but has embraced other elements of a blueprint for tax policy that House Republicans released last summer: Both would cut tax rates for individuals and businesses, eliminate the estate tax and offer a corporate tax break designed to bring to the U.S. roughly $2.6 trillion in untaxed profits now held by American companies’ offshore subsidiaries.
House Republicans have been working with Trump’s transition team to meld their tax proposals as they try to pass the biggest tax overhaul in three decades next year. Trump’s plans for corporate taxes include a major rate cut—to 15 percent from 35 percent—and ending companies’ ability to defer taxes on their overseas earnings. Economist Stephen Moore, an adviser to Trump during the campaign, has said several times recently that the border-adjustment provision is the biggest difference between the two plans.
Border adjustments would mark a seismic shift in U.S. corporate taxation. Under current law, U.S. companies face a statutory tax rate of 35 percent on their global profits, regardless of where they’re earned. They can use credits for foreign taxes they pay to reduce their U.S. taxes—and they can defer U.S. levies indefinitely by leaving the earnings overseas.
The House’s corporate tax plan moves from that “origin-based” approach to a “destination-based” system. U.S. companies would no longer be taxed the profit they earn all over the world, a feature of the current system that makes the U.S. an anomaly. Instead, companies would be taxed based on their sales inside the U.S. The blueprint says that such a system, combined with the 20 percent rate, would remove the incentive for companies to shift profit overseas to low-tax countries like Ireland.
Koch Industries, a Wichita, Kansas-based conglomerate with interests ranging from oil and ranching to farming and the manufacturing of electrical components, would benefit from the change because it produces many products domestically, according to its statement, which was released by Koch’s lobbying arm, Koch Companies Public Sector LLC. However, “the long term consequences to the economy and the American consumer could be devastating,” the statement said.
House Ways and Means Chairman Kevin Brady, a Texas Republican, said he was glad to get Koch’s input.
“This pro-growth idea is a key provision that improves our global competitiveness and helps level the playing field for exports and imports,” Brady said in an emailed statement. “It also meets our shared goal to eliminate any tax incentive to move our jobs, headquarters and innovation offshore. I look forward to working with Koch Industries and all job creators as we continue to turn our blueprint into legislation.”
The border adjustments provision may face another hurdle: The World Trade Organization, whose members include the U.S., might conclude that the new approach is applying the adjustments to a direct tax, which isn’t allowed, rather than to an indirect tax, like a value-added tax, which is permitted.
That concern has diminished somewhat since Trump’s victory—and his threats to renegotiate trade agreements and slap tariffs on products of companies that send U.S. jobs offshore. “The idea that it might not be legal is now less important,” said Rachelle Bernstein, a tax lobbyist for the National Retail Federation, a powerful lobbying group whose members include Wal-Mart, Macy’s Inc. and Neiman Marcus Group Inc.
But that doesn’t mean the retailers approve. “We want tax reform that spurs economic growth, but this one particular provision is very negative,” Bernstein said.
Economists Alan Auerbach and Douglas Holtz-Eakin, both proponents of border adjustments, argued in a recent paper that “unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead, they are paired and equal adjustments that create a level tax playing field for domestic and overseas competition.”
Curt Beaulieu, a tax policy lawyer at Bracewell LLP in Washington, said that the adjustments “are not a tariff” and instead are a so-called “destination-based cash flow tax”—what he called “mumbo jumbo” for taxing companies on revenues from sales in the U.S.
Retailers, who rely heavily on imports from China and elsewhere, are particularly concerned about the provision. Bernstein said that specialty apparel stores that import 90 percent or more of their inventory could face tax bills that are much larger than their actual profits.
“It’s going to slam clothing manufacturers hugely,” said Peter Barnes, an international tax lawyer at Caplin & Drysdale in Washington and a former senior tax lawyer at General Electric Co. Prices for U.S. consumers on everything from t-shirts to imported cars would increase by 15 percent to 20 percent, he said.
U.S. companies that are net exporters “could end up in a perpetual tax loss position” under the provision, wiping out their tax bills permanently, accounting firm EY, formerly Ernst & Young, wrote in a Nov. 9 research note.
House Republicans argue that the provision, combined with a lower corporate rate of 20 percent, will end the current incentive for U.S. companies to shift profits to their overseas subsidiaries and will boost manufacturing—and exports—at home.
Still, many issues weren’t spelled out in the House Republicans’ blueprint. For example, it doesn’t indicate whether flows of financial assets out of the country would count as exports. Nor does it define precisely when a sale would be deemed to have taken place.
Big multinationals are neither purely importers nor exporters; as such, the provision would introduce complex accounting issues over what percentage of a sold product came from taxable imported materials. Under the provision, companies like Apple Inc. and Pfizer Inc., which use sprawling global supply chains to make iPhones and prescription drugs for sale in the U.S., would pay the 20 percent rate on their domestic sales—but not on their foreign ones, though they’d still pay the tax on any imported materials.
The proposed system “is a game-changer,” said Kenneth Kies, a Washington tax lobbyist whose clients include General Electric, Microsoft Corp. and Pfizer. “It’s a really big deal.”
BY CRAIG W. SMALLEY
We have all heard that the definition of insanity is to repeatedly do the same thing expecting different results. Using that definition, the U.S. Congress can now be considered officially insane. Seven years after it proved to be a disaster, the use of outside debt collectors has again been approved by Congress for use by the IRS. You may be asking yourself, “Haven’t we been here before?” Sadly, you would be right.
In September of 2006, the IRS decided to use private debt collection agencies to collect on its inventory of past due accounts. I was an opponent of this practice and I was not alone. Our opposition rallied around the fact that the IRS would be handing over personal information to debt collection agencies who were being paid a percentage of what they collected, about 25 percent.
Our concern at the time was that these agencies would use their infamous tactics of collecting debt by intimidation and other methods because the amount that they could potentially receive would be astronomical. At the time, IRS spokesman Terry Lemons responded to our claims saying the new system "is a sound, balanced program that respects taxpayers' rights and taxpayer privacy."
The practice of using private debt collectors was a complete catastrophe and, in 2009, the IRS ended it entirely, and instead beefed up its own collections staff.
In December 2015, the President signed into law the FAST Act. The bill was known as the Highway Bill but embedded inside it was a requirement for the IRS to use private agencies to collect tax debts. The Commissioner of the IRS has put off this change for as long as possible, but beginning in the spring of 2017, the IRS will begin using private debt collectors for the second time.
According to last month's announcement:
“As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act.
“These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working them. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.
“The IRS will give taxpayers and their representative written notice that the accounts are being transferred to the private collection agencies. The agencies will send a second, separate letter to the taxpayer and their representative confirming this transfer.”
The IRS has selected these four collection agencies to carry out its debt collection:
Per the announcement, the IRS will not use debt collectors to collect from the following individuals:
The problem that I see with the use of collection agencies is the number of brazen scammers who are already calling taxpayers, making up amounts of taxes owed and fleecing innocent people.
This is an issue that has grown in scale since the first time the IRS outsourced debt collection (although recent arrests in India and the U.S. of dozens of call center scammers appear to be curbing reports of this crime in the last few weeks). We are on the front lines of this because our clients see us as trusted advisors. If they receive a suspicious call, we are able to at least inform them of the telltale signs that it’s a scammer on the other end of the phone.
For starters, the IRS doesn’t usually call taxpayers out of the blue. The debt collectors will. Secondly, they will state they are a contractor for the IRS. Finally, they will be demanding payment with their aggressive schemes. How are we supposed to discern if these calls are legitimate or not? If we are reading this announcement, I can assure you that the scammers are reading it as well and may even be devising new scams as a result.
The IRS has included a provision requiring that taxpayers and their listed representatives be notified by official letter that an outside collector will be contacting them to collect debt. However, given the antiquity of the collection inventory, it’s highly doubtful that all address changes will be up to date. While this is a step in the right direction, it by no means provides an accurate way to protect taxpayers from scammers.
We haven’t yet discussed that the taxpayer has rights. Will the collection companies be aware of those rights? In 1997, taxpayers testified before Congress about the aggressive nature of IRS debt collectors. Out of that came the Taxpayer Bill of Rights and the “kinder, gentler” IRS. Now we are doing a complete 360-degree turn and allowing these collection agencies with their notorious tactics to take over these accounts. Will the Taxpayer Advocate be able to stop these companies when they are out of line like they do with the IRS?
We were told in high school that we studied history because “those that don’t know history are doomed to repeat it.” Here we are doing the same thing that we did once before and expecting it to go differently. Last time this was just a policy of the IRS so it could easily be reined in. Now, it will literally take an act of Congress to reverse this lunacy.
Craig W. Smalley, MST, EA, has been admitted to practice before the Internal Revenue Service. He has a Masters in Taxation from UCLA, and is the founder and CEO of CWSEAPA, LLP, and Tax Crisis Center, LLC, with locations in Florida, Delaware, and Nevada. He has been in practice for 22 years.
2017 Standard Mileage Rates for Business, Medical and Moving Announced
WASHINGTON — The Internal Revenue Service today issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements are described in Rev. Proc. 2010-51. Notice 2016-79, posted today on IRS.gov, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
Monumental changes’ in store for tax policy in new year
Bloomberg BNA’s Daily Tax Report released its 2017 Outlook, forecasting major changes to tax and accounting policies under the incoming Trump Administration and a Republican Congress.
“There is no doubt that 2017 will be a milestone year for tax policy along the lines of 1986 and 1954,” said George Farrah, editorial director of tax and accounting at Bloomberg BNA. “Every area of tax is going to be impacted, not only by a tax overhaul but also by the likely repeal of Obamacare, potential elimination of some major tax regulations, and changes in evolving state tax laws and policies.”
“These are monumental changes,” he said, noting that the federal area could see a rewrite of the entire Tax Code. “Some of the pieces of that which seem likely are changes in tax rates, the elimination of the corporate minimum tax, border adjustments, IRS restructuring, a move towards a territorial tax system, and repeal of the estate tax,” he said.
“Not only do we have tax overhaul, but potential repeal of Obamacare, which would have many significant tax ramifications,” he said. “Moreover, tax practitioners are grappling with the partnership audit rules and how to plan for them.”
The IRS budget will likely be “miserable” for 2017 and beyond, according to the report. “The IRS is down 5,000 revenue agents and criminal investigators from six years ago, and the IRS commissioner has recently warned that the agency could fail if it doesn’t get more funding,” it notes.
The survivability of the estate tax valuation rules is tied to two things in the new administration, the report notes – what happens to the rules themselves and what happens to the estate tax as a whole.
“Clearly, international tax is in the eye of the storm and there seems to be a growing consensus to change tax laws to prevent companies from relocating offshore,” Farrah noted. “A lot of money is being held offshore that an one-time repatriation would allow back into the U.S. The issues that a tax overhaul would address would be a reduction in the corporate income tax rate to make it more in line with other countries, a move to a territorial tax system, and border adjustments. In addition to these, there are other major tax issues that could happen, such as the elimination of some major tax regulations, including the earnings stripping regulations.”
State and local governments will continue to grapple with applying tax to emerging technologies in the next year, the report indicates. Emerging platforms, such as Airbnb and Uber will face considerable scrutiny from states that are hunting additional revenue sources.
There is not a lot of guidance on the federal level on nexus, with the result that there is a lot of uncertainty in that area. “Frustration after another year of congressional inaction will mobilize more stats to reach for remote sales taxes in 2017,” Farrah predicted. “There will be more states adopting economic nexus,” he said.
By Michael Cohn
The chairman of the House Ways and Means Social Security Subcommittee, Rep. Sam Johnson, R-Texas, has introduced legislation to make changes in Social Security, including raising the retirement age.
The Social Security Reform Act of 2016 would gradually update the full retirement age at which workers can claim benefits. It would raise the age to 69 for those who qualify for "early retirement age" after Dec. 31, 2029.
It would also change how benefits are calculated to increase benefits for lower-income workers while slowing the growth of benefits for higher-income workers. Other changes would alter the formulas for calculating the annual cost-of-living adjustment and Social Security benefits.
The bill would also eliminate the Retirement Earnings Test for everyone to enable workers to receive benefits without a penalty while they are working, or fully delay retirement and wait to receive benefits. For those who delay claiming benefits, they can receive increases in a partial lump sum or add it all to their monthly check.
“For years I've talked about the need to fix Social Security so that our children and grandchildren can count on it to be there for them just like it’s there for today’s seniors and individuals with disabilities,” Johnson said in a statement Thursday. “My commonsense plan is the start of a fact-based conversation about how we do just that. I urge my colleagues to also put pen to paper and offer their ideas about how they would save Social Security for generations to come. Americans want, need, and deserve for us to finally come up with a solution to saving this important program.”
Democrats saw drawbacks in the Republican proposal. Rep. Richard Neal, D-Mass., the incoming ranking member of the House Ways and Means Committee, criticized the legislation, saying it would ultimately cut benefits.
“Less than one week after Speaker Paul Ryan told 60 Minutes that he had no plans to change Social Security, the Republican Chairman of the Social Security Subcommittee introduced a bill that would dramatically cut Social Security benefits,” Neal said in a statement Friday. “As Congressional Republicans prepare to dismantle Medicare and Medicaid, it now appears that Social Security has been added to the Republicans’ chopping block. America’s seniors will be alarmed to hear that the top Republican on this important Subcommittee quietly put forward a plan to drastically cut Social Security benefits for millions of seniors. Instead of honoring the promises made to our seniors, the Republican plan would amount to a massive cut in Social Security benefits for working Americans through cuts to the cost-of-living adjustment (COLA), raising the retirement age to 69 and cuts to the benefit-computation formula. Ultimately, this translates to a 30 percent or more cut in benefits for middle-class retirees. Social Security is the bedrock of retirement security—a benefit that seniors have earned through contributions over a lifetime of work. We should be strengthening Social Security, not cutting it. Democrats will fight any effort to undercut Social Security, just as we will fight any plan to replace Medicare with a voucher.”
An adviser was barred from the industry for steering millions of dollars entrusted to him by pro-athlete clients into unsuitable investments that would benefit him personally and falsely claiming to be a CPA, according to the SEC.
The commission reached a settlement with Ash Narayan, the former managing director of the Orange County, California-office of RGT Capital Management, under which Narayan will be barred from associating with any broker-dealer or adviser.
An attorney for Narayan did not immediately respond to a request for comment.
Dallas Cowboys quarterback Mark Sanchez and other pro athletes had millions of their funds steered into a fledgling online sports entertainment and ticketing firm that counted Narayan as a board member, according to the SEC.
Narayan, an adviser to Mark Sanchez, a quarterback for the Dallas Cowboys, and baseball pitchers Jake Peavy of the San Francisco Giants and Roy Oswalt of the Colorado Rockies, as well as other pro athletes, ran into trouble when he began funneling his clients' funds into the Ticket Reserve, a fledgling online sports entertainment and ticketing firm that counted Narayan as a board member, according to the SEC.
Representatives for Sanchez, Peavy and Oswalt were not immediately available for comment.
When the SEC announced a court order freezing Narayan's assets in June, the commission said that the adviser had transferred more than $33 million of clients' money — often without their knowledge and through the use of forged signatures — into the Ticket Reserve in what amounted to a Ponzi-like scheme.
According to the SEC's complaint, Narayan's athlete clients had instructed him to place their money in safe and conservative investments to preserve their principal. Instead, Narayan was alleged to have moved their assets into the Ticket Reserve, while failing to disclose blatant conflicts of interest — the fees that he would receive, his spot on the firm's board, and his ownership of more than 3 million Ticket Reserve shares, the complaint shows. Further, Narayan falsely held himself out to be a CPA. Ticket Reserve executives were said to have covertly made finder's fee payments to Narayan under the guise of director's fees and loans.
The SEC alleged that Ticket Reserve "became dependent on the fraudulent cash infusions from Narayan's unsuspecting clients to stay in business." For his part, Narayan pocketed nearly $2 million in compensation from Ticket Reserve, "most of it directly traceable to funds stolen from his clients," according to the SEC. All the while Ticket Reserve was sustaining heavy losses.
Ticket Reserve, the commission further alleged, "made Ponzi-like payments to existing investors using money from new investors," and that Narayan, after he was fired from RGT, continued to move money that he had bilked from clients toward the ticketing firm.
RGT, for its part, has said that when it discovered how Narayan had been handling his clients' accounts, it promptly notified the SEC and took corrective action, including terminating Narayan in February of this year. The Dallas-based firm has since been engaged in its own litigation against individuals affiliated with Ticket Reserve.
Last month, in a final judgment issued by a federal court in Texas, Narayan was ordered to pay $1.498 million in disgorgement, along with $350,000 in civil penalties.
Kenneth Corbin is a Financial Planning contributing writer in Boston.
GOP readies swift Obamacare repeal with no replacement ready
The first major act of the unified Republican government in 2017 will be a vote in Congress to begin tearing down Obamacare.
But the euphoria of finally acting on a long-sought goal will quickly give way to the reality that Republicans—and President-elect Donald Trump—have no agreement thus far on how to replace coverage for about 20 million people who gained insurance under the health-care law.
“They haven’t come to a consensus in the House and the Senate about the possible replacement plans,” said Douglas Holtz-Eakin, a conservative economist and former adviser to Senator John McCain’s 2008 presidential campaign. “They don’t know Point B.”
Demonstrators outside the Supreme Court in advance of the court's ruling that the ACA was constitutional.
Republicans are debating how long to delay implementing the repeal. Aides involved in the deliberations said some parts of the law may be ended quickly, such as its regulations affecting insurer health plans and businesses. Other pieces may be maintained for up to three or four years, such as insurance subsidies and the Medicaid expansion. Some parts of the law may never be repealed, such as the provision letting people under age 26 remain on a parent’s plan.
House conservatives want a two-year fuse for the repeal. Republican leaders prefer at least three years, and there has been discussion of putting it off until after the 2020 elections, staffers said.
In nearly seven years since Obamacare passed, dozens of comprehensive health-care alternatives have been introduced, but none has gotten off the ground. The most developed plan so far is legislation by House Budget Chairman Tom Price of Georgia, Trump’s nominee to run the Department of Health and Human Services, which he introduced in every Congress since 2009. It had 84 cosponsors in the House.
But that bill—centered on age-based refundable tax credits to buy insurance—didn’t receive a hearing in committee, nor was it included in Price’s budget that was adopted by the House last year.
If Republicans stick together, repeal could happen quickly. The Senate plans to move first on a nonbinding budget resolution instructing committees to draft repeal legislation, with the House approving it next. The resulting proposals would be sent for final votes under a process known as reconciliation, which is used to bypass the 60-vote threshold in the Senate.
Key players tasked with executing the plan will be Senate Finance Chairman Orrin Hatch of Utah and Health Chairman Lamar Alexander of Tennessee, and on the House side, Ways and Means Chairman Kevin Brady of Texas and incoming Energy and Commerce Chairman Greg Walden of Oregon.
Replace with What?
To cushion the political blow of upending the system, party leaders are putting out a stream of statements portraying Obamacare as collapsing on its own.
But the Department of Health and Human Services reported that signups reached 6.4 million by the Dec. 19 deadline, an increase of 400,000 over the previous year’s number at this time. Earlier, President Barack Obama said that more than 670,000 Americans signed up for coverage on Dec. 15, "the biggest day ever for Healthcare.gov."
“The overarching challenge is that the Affordable Care Act is the status quo, and disrupting the status quo in health care is always controversial,” said Larry Levitt, a health policy expert at the Kaiser Family Foundation and former adviser to President Bill Clinton’s health-care efforts. “There are so many moving pieces to this effort involving lots of money and lots of interest groups. So piecing together the votes is daunting.”
Trump and House Speaker Paul Ryan of Wisconsin have been vague on what they want to see, but both released blueprints calling for expanding the use of tax-advantaged Health Savings Accounts, allowing the sale of insurance across state lines and turning Medicaid over to states. Republicans are seeking recommendations from governors and industry leaders on what to do.
“We need to put patients in charge of their health-care choices with a free-market solution that increases access and lowers the overall spiraling costs of health care, which Obamacare did nothing to address,” Republican Senator David Perdue of Georgia, a close Trump ally, wrote Thursday in an op-ed for the Daily Caller, a conservative website.
Translating slogans and white-papers into legislation will create problems. Undoing Obamacare would increase the number of non-seniors who are uninsured by 24 million over a decade, according to the Congressional Budget Office. Republican aides privately acknowledge that would give Democrats a potent political weapon to fight their efforts, but say their focus will be on lowering costs and expanding choice.
Trial and Error
Unifying the party may require trial and error, said Rodney Whitlock, a former health policy aide to Republican Senator Chuck Grassley of Iowa, adding that Ryan will be a key figure to watch. He may have to get the Congressional Budget Office to provide estimates for how multiple proposals would affect the budget deficit, Whitlock said.
“That’s the pathway to get his folks to understand the cost and coverage consequences of their policy decisions,” Whitlock said. “That’s not going to be easy, but I don’t see how he gets his conference to consensus without an exercise like that.”
Some Republican aides say they may pursue a replacement through a series of small bills as opposed to one big measure. Leading Republicans such as Senate Majority Whip John Cornyn of Texas have said they want Democratic buy-in on a replacement plan. Breaking a filibuster would require the support of at least eight Democrats.
Obamacare continues to be viewed unfavorably by Americans, but the politics of undoing the law are complicated. A Kaiser Family Foundation poll after the election showed 26 percent want to repeal it, while 17 percent want to scale it back. Nineteen percent want to move forward with implementation and 30 percent want to expand it.
‘Bring It On’
Democrats have made clear they won’t go along with Republican attempts to repeal Obamacare. Some are taunting the GOP as it attempts to write a replacement.
“Bring it on,” incoming Senate Democratic Leader Chuck Schumer of New York said this month. “They don’t know what to do. They’re like the dog that caught the bus.”
Several of the law’s provisions are popular, most notably the regulations prohibiting insurers from denying coverage or raising costs on people with pre-existing conditions. And of the 14 states with the largest percentage of non-elderly people with pre-existing conditions in 2015, Trump carried 12, according to a Kaiser Family Foundation study released last week. He also got one electoral vote in Maine, the 13th state in that group.
Congressional Republican aides say they’re likely to soften those rules by limiting their protections to people who maintain continuous coverage.
“The pre-existing condition provisions in Republican proposals are less protective,” Levitt said. “With fewer protections you could piece together other mechanisms to keep the market stable.”
Trump has proposed high-risk pools to cover sick uninsured people, but financing them will be a challenge. A 2010 estimate in National Affairs by conservative health-care experts Tom Miller and James Capretta pegged the cost at $150 billion to $200 billion over a decade to insure up to 4 million people; House Republicans have been reluctant to spend anything close to that.
Republicans are considering setting up a fund to address the cost, perhaps with savings from repealing Obamacare’s subsidies.
The funding challenges are substantial. Repealing the law would increase the deficit by $353 billion over a decade, or $137 billion under favorable macroeconomic assumptions, according to the Congressional Budget Office.
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As they chart the path ahead, Republicans are trying to calm fears.
“The new big lie, after ‘if you like your health care plan you can keep it,’ is that 20 million Americans will lose their health care. That’s simply not true,” Brady told reporters Dec. 15. “Republicans will provide an adequate transition period to give people peace of mind that they will have those options available to them as we work through the solutions.”
- Sahil Kapur, Bloomberg News
The Internal Revenue Service has issued a notice alerting taxpayers and practitioners that it considers certain syndicated conservation easement transactions to be tax avoidance transactions.
In Notice 2017-10, the IRS said it is identifying the transactions, and substantially similar transactions, as “listed transactions,” meaning they could be considered abusive. The notice also alerts people involved with the transactions that “certain responsibilities” may arise from their involvement with them.
Section 170(e)(1) of the Tax Code allows a deduction for a qualified conservation contribution, which is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. The contribution should include a restriction, granted in perpetuity on the use that can be made of the real property.
The issue of conservation easements came up during the presidential campaign this year when reports emerged that Donald Trump was likely claiming tax deductions for property on some of his golf courses and estates, including his Mar-a-Lago complex in Palm Beach, Florida. The Wall Street Journal speculated the conservation easements could be one reason for the continuing IRS audits that Trump claimed prevented him from releasing his tax returns to the public.
The transactions described in the IRS notice, however, appear to be a different matter and are described in terms of an investment scheme. The IRS and the Treasury Department have become aware that some promoters are syndicating conservation easement transactions that purport to give investors the opportunity to obtain charitable contribution deductions in amounts that significantly exceed the amount invested. In those transactions, a promoter offers prospective investors in a partnership or other pass-through entity the possibility of a charitable contribution deduction for donation of a conservation easement.
The promoters first identify a pass-through entity that owns real property, or they form a pass-through entity to acquire real property. Additional tiers of pass-through entities may then be created. The promoters then syndicate ownership interests in the pass-through entity that owns the real property, or in one or more of the tiers of pass-through entities, using promotional materials suggesting to prospective investors that they could receive a share of a charitable contribution deduction equaling or exceeding an amount two and a half times the amount of the investment. The promoters also receive what purports to be a qualified appraisal, greatly inflating the value of the conservation easement, based on unreasonable conclusions about the development potential of the property.
After an investor puts money in the pass-through entity—either directly or through one or more tiers of pass-through entities—the entity then donates a conservation easement encumbering the property to a tax-exempt entity. According to the Tax Code, investors who have held direct or indirect interests in the pass-through entity for a year or less may rely on the entity’s holding period in the underlying real property to treat the donated conservation easement as long-term capital gain property. Meanwhile, the promoter receives a fee or other consideration for the transaction, which may be in the form of an interest in the pass-through entity.
The IRS said it intends to challenge the purported tax benefits from such transactions based on the overvaluation of the conservation easement. The IRS said it may also challenge the purported tax benefits from the transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.
Democrats plotting 'collision course' with Trump's tax plan
Congressional Democrats say they’ll try to thwart Republican plans to overhaul the U.S. tax code by portraying them as a boon for the rich that betrays President-elect Donald Trump’s campaign promise to fight for working Americans.
“There’s going to be opposition if these tax cuts are directed to the people at the top again,” said Representative Richard Neal, the Massachusetts Democrat who represents his party’s first line of defense as the next ranking member of the House’s tax-writing Ways and Means Committee. “We’re going to be pretty united.”
Neal and others say they’ll zero in on upper-income tax breaks pitched by Trump and House leaders in an attempt to make it politically difficult for Republicans to support large parts of the emerging plans. Their initial comments suggest that the 115th Congress, which convenes Jan. 3 with a Republican-led agenda of instituting a broad tax overhaul and repealing Obamacare, will be peppered with debate over income inequality.
Trump and House Speaker Paul Ryan of Wisconsin have endorsed across-the-board cuts in individual income tax rates. After Republicans took the White House and held onto majorities in Congress in November’s elections, both say they aim to achieve the most far-reaching overhaul of the U.S. tax system in a generation. Details remain to be filled in; for example, Ryan and others envision dramatic changes for corporate taxation that Trump’s economic team has yet to embrace.
Trump has sought to portray his plan as a pro-growth simplification of the tax code that would benefit the middle class. In a “Contract with the American Voter” published before the election, his campaign said of his proposal: “The largest tax reductions are for the middle class.”
Democrats plan to challenge this claim. “His populist image and the reality of his policies are on a collision course,” said Representative Keith Ellison of Minnesota, a candidate for Democratic National Committee chairman. “And they’re going to crash.”
Consider two major provisions on which Trump’s and Ryan’s plans agree: First, they’d compress the existing seven individual tax brackets to three, cutting rates generally across the board. Yet the largest cut would be in the top rate, to 33 percent from 39.6 percent. That rate applies only to those with incomes well within the top one percent. Second, their plans would abolish the estate tax, which currently applies only to estates worth more than $5.45 million for individuals and $10.9 million for couples. Data from the Internal Revenue Service and the U.S. Census Bureau show that far less than one percent of the people who die each year pay any estate tax.
An independent analysis of House Republicans’ “blueprint” found that while households at all income levels would pay less tax, “the highest-income households would receive the largest cuts, both in dollars and as a percentage of income.” The very rich—the top 0.1 percent of U.S. earners, or those with incomes over $3.7 million—would see after-tax incomes rise by almost 17 percent. At the same time, the bottom three-fifths of households would see average gains of 0.5 percent or less, according to the analysis by the Tax Policy Center, a Washington think tank that’s a joint venture of the Urban Institute and the Brookings Institution. Three quarters of the total tax cuts would go to the top 1 percent, that study found.
Another study of the House Republicans’ plan, by the more conservative Tax Foundation, came to a similar, if less pronounced, conclusion: On a “static” basis—that means, without accounting for the tax plan’s effects on the larger economy—the bottom 80 percent of taxpayers would see an increase in after-tax income of no more than 0.5 percent, while the top 1 percent would see a 5.3 percent increase. After factoring in macro-economic effects, the Tax Foundation found that all taxpayers would see an increase in after-tax income of at least 8.4 percent—but the top 1 percent would see a jump of 13 percent.
Democratic leaders haven’t put forth a tax plan of their own to counter the House Republican proposal; Neal said Democrats intend to introduce alternatives soon but didn’t provide details, saying only that any tax breaks should be targeted at the middle class.
The party will draw lessons from earlier fights when it was able to block changes despite lacking control of the White House and Congress, said Drew Hammill, the deputy chief of staff for House Minority Leader Nancy Pelosi of California. He cited the example of Democrats defeating Republican efforts to privatize Social Security in 2005.
Replicating that feat may prove difficult. In the prior instance Democrats successfully framed the privatization push as one that would imperil the wildly popular safety-net program and hurt senior citizens’ benefits, while their opponents struggled with internal divisions over the plan. Republicans today are more united, at least in principle, when it comes to reducing taxes—as well as undoing Obamacare.
Moreover, the tax plan’s promise of rate cuts for all may be attractive enough to survive arguments that it favors those with higher incomes.
In response to questions during a “60 Minutes” interview this month about the fairness of his party’s plan, Ryan emphasized that “everyone gets lower tax rates, but we plug loopholes to pay for it.”
Steve Mnuchin, Trump’s planned nominee for Treasury Secretary, made a similar argument in November, telling CNBC that any tax cuts for those with the highest incomes would be offset by a reduction in the number of deductions they can claim. Consequently, he said, there’d be no “absolute” tax cut for the upper class.
Experts have questioned whether that kind of trade-off is possible. Howard Gleckman, a senior fellow at the Tax Policy Center, wrote that Mnuchin’s assertion bore “little resemblance to any of the multiple plans that Trump proposed during the campaign.”
Potential lines of attack focused on investors and investment managers emerged in a Dec. 8 memo authored by Democratic staff members on the Senate Finance Committee. House Republicans’ plan to cut the top tax rate on long-term capital gains to 16.5 percent from 20 percent, while abolishing a 3.8 percent investment-income tax that was part of Obamacare, would be a major benefit for high earners, it said.
“The top 0.1 percent realize about half of all capital gains,” the memo said, arguing that the primary effect of cutting the rate would be “rewarding rich people for investments they would have made (or already have made) anyway.”
The memo also noted that by lowering capital gains taxes, the House plan might provide a tax benefit for many investment-fund managers, who are paid via “carried interest,” a portion of their funds’ returns. Trump has said carried interest should be taxed as if it were ordinary income, not capital gains. “Hedge fund guys are getting away with murder,” he said in August 2015, some two months after launching his presidential bid. But the House’s tax blueprint doesn’t recommend changes in the tax treatment of carried interest.
Asked to respond to Democrats’ initial criticisms, a spokeswoman for the lawmaker who will lead the Republicans’ tax-overhaul fight signaled that the party will cast its plans as being good for everyone.
“We are working on a tax code built for growth that will improve the lives of all Americans,” said Emily Schillinger, a spokeswoman for Representative Kevin Brady, the Texas Republican who chairs the Ways and Means committee. Republicans have three main goals for tax policy, she said: speed economic growth, simplify the rules and laws, and redesign the IRS “to focus on customer service.”
- Sahil Kapur, Bloomberg News
The Tax Court has disallowed a $64 million charitable contribution because there was no written acknowledgment from the recepient at the time.
The donation was of a façade easement to a historic trust where there was no contemporaneous written acknowledgment, or CWA, from the donee organization, as required by Code Section 170(f)(8)(A). (15 West 17th Street LLC v. Commissioner, 147 T.C. No. 19.)
Among other things, the CWA must state whether the donee provided the donor with any goods or services in exchange for the gift.
15 West 17th Street LLC claimed the charitable contribution deduction on its 2007 partnership return. The substantiation requirements of Code Section 170(f)(8)(A) do not apply to a contribution “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary [of the Treasury] may prescribe,” that includes the information specified in Subparagraph (B). However, until now the Treasury has declined to issue any such regulations.
The LLC’s 2007 return was audited and the deduction was disallowed. After the case was docketed in the Tax Court, the donee organization submitted an amended Form 990, Return of Organization Exempt from Income Tax, that included a statement that the donee had provided the LLC with no goods or services in consideration for the gift. The LLC filed a motion for partial summary judgment, contending that the action by the donee eliminated the need for a CWA to substantiate the LLC’s gift.
The Tax Court held that the discretionary delegation of rulemaking authority spelled out in Code Section 170(f)(8)(D) is not self-executing in the absence of the regulations to which the code section refers. Since the CWA requirement was not met, the deduction was denied.
A dissenting opinion would allow the deduction, since “in the absence of regulations from the Secretary, a donee filing a return that contains the information described in Section 170(f)(8)(B) satisfies the requirements of Section 170(f)(8)(D).”
Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.
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