Student Loan Debt
OK folks, time for some personal commentary of my own here. <SOAPBOX MODE ON>
College and student loan debt. Apparently we are facing some sort of “CRISIS” with student loan debt.
I’ve basically only ONE statement on this issue.
THIS CRISIS IS A SELF-IMPOSED ONE. THEY (PARENTS AND STUDENTS) ARE DOING IT TO THEMSELVES. AANNDD I’VE LITTLE (THERE IS SOME BUT NOT MUCH) SYMPATHY FOR THEM.
Because they are UNINFORMED customers. Colleges AND parents do a very very exceptionally POOR job of educating their students/children in the “employability” of a college major. Try googling worst college majors and read. Something that someone should have told your student before selecting a major. Remember that I have put one thru college already and have one in college and two more coming soon.
Engineering and Business are obviously options that have high “employability” factors after a bachelors. BBUUTT let’s look at others - Midevil (spelling on purpose) French Literature - what demand is there for this in the business world? So you get a Masters and then a PHD and then you’re still trying to find a job BECAUSE the ONLY place for a job is at a college teaching it. HARD sciences such as Physics, Math, Chemistry, etc.. Same issue. They have learned the area fairly well BBUUTT what can you do? RESEARCH? Well there are people with masters and PHDs out there. Who is going to get hired? You’ve learned the theory and not the applications (think chemical engineering versus chemistry) and thus not really employable by a company working in that area. SSOO where does that leave you? Essentially, unemployable with just a bachelors.
I’ve a client whose son wanted to major in Political Science. This client owns a couple of fast food franchises. He argued with his son about this forever. SSOO he changed his hiring policies and for one year for one location and ONLY hired college graduates. History, Poly Sci, Math, Physics, etc. majors. Guess what? After a year about 85% of his workers had college degrees. He then took his son and introduced him to his employees and asked each their college major. After a quick talk and seeing living and breathing examples of his dad’s ADVICE his son is now majoring in business administration with a concentration in Marketing.
“everything I studied at the university turned out to be totally useless to the real world!” Unfortunately, this is all to common a situation with a liberal arts major or a hard science or math major.
The sad fact of the situation is that colleges ACTUALLY do recognize this. They take it into account in their financial aide awards. My son got accepted at Michigan State (Lymon Briggs - a STEM honors college at state) and Michigan (College of Engineering). Now Michigan State in the Financial Aide award wanted his parents to take out $19,000 in PARENTS loans for him to attend a STEM honors college. Michigan on the other hand gave him a $19,000 GRANT (free money) to attend their College of Engineering)!!!!!
I told him that he just became a Michigan Man.
WHY? Who is going to be employed upon graduation? Who is going to give back to the University (think donations) upon graduation? The engineer who is employed versus the chemistry OR Midevil French Literature major who is unemployed!!!!!
Higher education IS a business!
<SOAPBOX MODE OFF>
I work with parents all the time on financing college education for their children. Don’t let this happen to you.
While it was broadcast everywhere during the launch of the newest operating system from Microsoft, users of Windows 7 and 8.1 are nearing the end of the free upgrade period. The infamous “Get Windows 10” app has been hounding users for quite some time now and most will be happy to hear that it will be gone nearing the end of July.
That, however, is only after Microsoft ups the ante attempting to reach their goal of one billion Windows 10 devices within 2-3 years of launch. The question many users should be asking themselves is simple: what does this mean for me?
First and foremost is price. After July 29th, there will be no opportunity to obtain a free upgrade. Instead, home users will need to purchase a license for the new system that would run them $119.00. Businesses and those in need of a professional Windows license would look at a price tag of $199.00.
Neither of these seem like friendly numbers to your average user or business owner. Those who have upgraded and switched back to their previous operating system are in luck, however. Once upgraded, you obtain the Windows 10 key indefinitely. In the future, a fresh install of Windows 10 will automatically activate and update as per usual.
Before we get there however, we have one last hang-up from the software giant. It would seem that Microsoft wants to get as many free upgrades in the world as possible.
This is quite a feat when just over half of Windows-based computers are still running Windows 7. How do they plan access that user base? Automatic upgrades seem to be their answer.
While many have claimed to have experienced Windows 10 upgrading by itself, it seems to be a reality in the very near future. The actual update for Windows 10 comes through as any other update you may be familiar with.
The catch with 10 is that it was previously an optional update, yet Microsoft will be putting it in the “Recommended Updates” category. As such, many users will install the update files without their knowledge. In the meantime, the pre-mentioned “Get Windows 10” app will schedule the upgrade for them in a suspicious window. It looks similar to the previous screen but instead of having a cancel button, they have replaced it only with “OK”.
But what does a single button really cause? For some fast-paced users, they may misunderstand and click the new button thinking that it’s putting off the update.
Little do they know that within a day or two, they’ll find themselves mid-upgrade. There is one way around this once the update is scheduled: a link will appear on the same screen that will allow you to stop the automatic upgrade.
Microsoft leaves it to you to navigate to the link and pages beyond to stop your free upgrade. Luckily, the IT guys at Tech Experts are able to get past this or downgrade those that have recently updated against their will.
The lesson here is a plain one. Users need to keep a look out and understand what is happening to their PC if they hope to retain any control over it. Microsoft’s newest operating system does have many benefits and features that make it very appealing.
However, it isn’t for everyone. If you’re accustomed to what you’re using, the upgrade isn’t a necessity. That said, you should keep in mind that Windows 7 will experience end of life in 2020.
Owe Taxes? These Tips Can Help
The IRS offers many safe and easy ways to pay your taxes. These tips explain many of them:
BY DANIEL HOOD
Tax professionals are often more comfortable with amending a return than the average taxpayer – but even they can sometimes use a refresher on the subject.
With that in mind, we offer these 10 tips from the Internal Revenue on when, why and how to change a previously filed tax return.
1. Know when to amend. Possibly the best reason to amend a return is to claim a deduction or credit that wasn’t claimed on the original return. Among the other common reasons for amending a return are correcting filing status, changing a taxpayer’s number of dependents, or changing their total income.
More reasons are included in the Form 1040X, Amended U.S. Individual Income Tax Return.
2. Know when not to amend. Not everything requires an amended return. The IRS will make some corrections – such as fixing math errors – for the taxpayer. And if a required form or schedule isn’t included, they’ll mail out a notice about the missing item.
3. Use the right form. That would be the Form 1040X. It must be paper-filed, and the box at the top showing which year is being amended needs to be checked off. The three columns on the front of the form show the original amounts, the net increase or decrease for the amounts being changed, and the corrected amounts – the back is for explaining what’s being changed, and why.
4. Each year on its own. If returns from more than one year are being amended, each one should appear on a separate 1040X – and they should be mailed in separate envelopes.
5. More is more. If the changes on the amended return involve other tax forms or schedules, they should be attached to the Form 1040X when it’s filed.
6. Refund first, amend later. If the expected refund from the original return hasn’t arrived yet, don’t file an amended return until after the refund shows up. Amended returns take up to 16 weeks to process, after which the taxpayer will receive any extra refund that’s due.
7. Feel free to pay now. If an amended return will mean the taxpayer will owe more, the IRS recommended paying as soon as possible – and not just because it wants the revenue: It will also help limit interest and penalty charges.
8. Double-checking Obamacare. The IRS suggests considering an amended return for taxpayers who incorrectly claimed an Affordable Care Act Premium Tax Credit, or if they received a corrected or voided Form 1095-A.
9. Filing deadlines. Amended returns can be filed up to three years from the date of the original filing – or up to two years from the date the tax was paid, if that’s later than the original filing date.
10. Follow the return. Most amended returns can be tracked through the “Where’s My Amended Return?” tool or by phone at (866) 464-2050.
BY STEVEN P. KESSLER
All across America, hard-working people receive their personal income tax returns and wonder why they still owe money at tax time.
For some the answer is that they sacrificed adequate withholding to receive more money with each paycheck. For other dual income earners, both singles and married couples, they believe they are withholding the correct amounts based on their earnings, but they still owe money. There is a blind spot in their calculations. This article will explain the blind spot and how it can be fixed.
The purpose of IRS Form W-4, Employee’s Withholding Allowance Certificate, is to allow one’s employer to “withhold the correct federal income tax from your pay. Consider completing a new Form W-4 each year and when your personal or financial situation changes” (emphasis added). Every employer asks an employee to complete this form when they begin a new job. It is easy to remember to change one’s elections when a family grows or contracts or marital status changes. It is not an easy form to complete if one is trying to cover oneself for proper withholding.
Most people do not consult Publication 505, Tax Withholding and Estimated Taxes, a scintillating 61 pages designed to help one calculate and adjust one’s withholding. As a result, most people complete the W-4 with the same elections each year. They do not contemplate the impact of additional sources of income into the family unit, whether from a second job, a new job, or the employment of a spouse.
Here is the catch:
The withholding tables assume that the individual being paid is the only wage earner in the family unit.
To answer the question, “Why is this big deal?” we must look at how taxes are calculated. To keep things simple, we are looking only at the basic tax rates and earned income.
We are ignoring the impact of unearned income (e.g. interest, dividends, stock transactions, etc.) as well as exemptions and deductions. The tax rates are graduated from 10.0 percent on up to 39.6 percent. The different levels of tax are charged only to the amounts that fall within that tax bracket bucket. Someone in the 28 percent tax bracket is only paying 28 percent on the taxable income that is above the amounts that exceed the top end of the 25 percent bracket. If a family unit only has one wage earner who has only one job, then the tax withheld should be appropriate (assuming the W-4 was completed properly).
The troubles begin with the second source of earned income. Remember, the tables assume there is only one wage earner. Now you have two incomes being applied to the same tax bracket bucket, filling each more quickly. Consider a couple who each earns $125,000. They have a combined $250,000 of earnings. The tax on $125,000 for a married couple is $22,962.50 (($18,150 x 10%) + ($55,650 x 15%) + ($51,200 x 25%)). Following the W-4 instructions, each individual would have $22,962.50 of withholding for a combined total of $45,925 of withholding. But the income taxed is on the couple’s married filing joint tax return of $250,000. The tax on that amounts is $58,404.50 (($18,150 x 10%) + ($55,650 x 15%) + ($75,050 x 25%) + (78,000 x 28%) + ($23,150 x 33)). The couple would still owe $12,479.50 with their tax return. Individuals could run into this same problem if they switched jobs during the course of a year. It also applies to people who work multiple jobs at once.
So how do you address the problem for a client and avoid getting them buried at tax time? Be cognizant of each time they, or someone in their family group, has a new source of earned income. Be aware of the vertical impact of the tax brackets. Understand the need for the second or third source of earned income to assume a higher starting rate of tax and withhold accordingly.
BY DAVID VOREACOS
U.S. taxpayers who entered into an IRS program that made it easier to disclose their hidden offshore bank accounts may have thought they put their legal troubles behind them. Instead, prosecutors may try to put some of them in jail for not telling all.
Since 2012, 30,000 Americans avoided stiff tax penalties by declaring they had innocent reasons for failing to disclose offshore holdings. But under the program they received no guarantees that they wouldn’t be prosecuted in the future. And now the Justice Department and the Internal Revenue Service are combing through thousands of secret records obtained from 80 Swiss banks to determine whether the taxpayers were truthful.
We’re “taking all of that data and scrubbing it for leads,” Nanette Davis, a trial attorney in the Justice Department’s tax division, said at the New York University Tax Controversy Forum last month. The effort has been fruitful already, she said. With some taxpayers, “we say ‘we could indict this case tomorrow,”’ said Davis, who is overseeing the review.
The U.S. government got a trove of data from Swiss banks under settlements in which they disclosed how they helped Americans evade taxes. The banks handed over account information, as permitted by Swiss secrecy law, and recordings of phone calls with U.S. clients. In exchange for the cooperation, the U.S. agreed not to prosecute those banks, which paid penalties totaling $1.37 billion.
The risk of being scrutinized falls on those taxpayers who came forward under the government’s so-called streamlined program. Those living in the U.S. paid penalties of 5 percent of their undisclosed offshore assets, while overseas residents paid none.
Another 54,000 Americans took a more arduous route in voluntarily disclosing their offshore accounts to the IRS since 2009, including their dealings with bankers and advisers. They were hit with penalties of as much as 27.5 percent of their assets, in addition to the total of $8 billion in back taxes and other penalties. But the government agreed to never prosecute these taxpayers over the disclosures.
Some tax lawyers were critical of Davis’s warnings about possible prosecutions.
Those statements might have “a chilling effect” on people considering using the streamlined program, said tax attorney Barbara Kaplan, of Greenberg Traurig LLP. That “undermines the IRS interest in bringing as many people as possible” into tax compliance, she said.
But attorney Jeremy Temkin said it’s been clear to tax advisers for the last year that the Justice Department might prosecute people who lied in their declarations. His advice: Clients should disclose any bad facts to the IRS.
“It is important to present both the positive and negative facts and let the IRS decide,” said Temkin of Morvillo Abramowitz Grand Iason & Anello PC.
IRS trial attorney John C. McDougal suggested at the conference that the review of the streamlined submissions isn’t as dire as Davis made it sound because they’re being looked at in the same way as other tax returns. The IRS has begun formal examinations in some of the cases, he said.
Still, the threats to taxpayers who lied may be mounting as more financial institutions step forward. Davis said offshore entities not yet under investigation are voluntarily approaching the U.S. to cooperate.
“We’re getting spreadsheets with U.S. client names, account numbers, details, entity names, account balances,” she said. “It’s a little bit of a dangerous time if you are an offshore account holder and have not gotten right, because there’s just been an avalanche of information that’s come to the department and the IRS.”
BY ERIK LARSON
Former billionaire entrepreneur Samuel Wyly will have to move out of his $12 million Texas mansion unless he miraculously wins a "home run" appeal of a fraud case in Manhattan, a federal judge ruled.
The ruling Wednesday by U.S. Bankruptcy Judge Barbara Houser in Dallas was a victory for the U.S. Securities and Exchange Commission and the Internal Revenue Service, which challenged Wyly’s attempt to keep the property under a Texas homestead law intended to keep people from winding up homeless after filing for Chapter 11 protection. Houser also rejected Wyly’s attempt to shield $249 million in offshore annuities, perhaps a bigger setback, as the 81-year-old seeks to avoid becoming destitute when the case eventually ends.
Wyly’s lawyer, Josiah Daniel, said the ruling wasn’t significant and declined to comment further.
Wyly and his brother’s widow, Caroline “Dee” Wyly, filed for bankruptcy after the SEC in 2014 prevailed in a federal trial in New York accusing the brothers of using a web of offshore funds to hide hundreds of millions of dollars as they got rich building companies including the arts-and-craft chain Michaels Stores Inc. Charles died in a car accident in 2011.
Houser, tasked with setting the amount of the agency’s claims after the SEC victory, ruled earlier this week that Wyly and his late brother’s estate owe the IRS a total of $1.1 billion.
The agencies in March had balked at Wyly’s attempt to keep the "urban homestead" property, which is under 10 acres, calling it "astonishing" that he’d cling to a home worth 57 times the average cost of a single-family house in Dallas.
The parties agreed Wyly can keep about $155,000 once the property is sold, which is about what he paid for the mansion when he bought it in 1966, according to the ruling. The parties were ordered to try to reach an agreement in the next 10 days on how long Wyly, who got rich building businesses including the Michaels Stores Inc. arts-and-crafts chain, can remain in the home.
As for the annuities, the agencies argued Wyly’s offshore funds at the center of the dispute were specifically set up to protect assets he was hiding from the authorities, and that he shouldn’t be allowed to benefit from the process after losing the fraud trial.
The case is In re Samuel Evans Wyly, 14-35043, U.S. Bankruptcy Court, Northern District of Texas (Dallas).
BY JOHN P. NAPOLITANO
The biggest mistake that both clients and planners make is not realizing that the client needs guidance. Wealth and a healthy cash flow mask many problems until something happens.
There are many occasions where I’ve met with very wealthy clients who confidently look at me with the following lines playing in their head: “Who needs you, Mr. Advisor? Can’t you see that I have enough money to do whatever I want? That I’ll never want or need for anything? How can you possibly make things better for me?”
They sometimes really do have all the money and cash flow that they need to do whatever the heck they want. But then my suspicions are also confirmed when I see their investments titled in joint name, or that their will has the most gravity when it comes to their dispositive documents, and if they have trusts that there is no legacy protection built in to protect generations against stuff like divorce, illness or reckless management of their hard-earned assets.
Here, unfortunately, I blame the advisor more than the clients. The clients are surrounded by bright people, including their CPA (you), an attorney, an investment professional, insurance agent and so on. Yet each professional is so content with their individual domain and subject matter area, that they really don’t appear to care about making sure that all the loose ends and gaps are properly covered, as long as their bills get paid.
One such mistake that is in plain sight each and every month is the client’s spending habits. Whether a client is still in accumulation mode or in retirement, the entire foundation of any financial plan is built around cash flow, so these numbers need to be reliable. From the planner’s perspective, not understanding and planning your client’s cash flow to the level of detail needed may hide future problems. Assumptions about retirement or accumulation needs may be completely off base if you are starting with inaccurate information about spending.
The common mistake made by clients is not asking for help with cash flow today and in the future. Clients frequently work with rules of thumb regarding how much they’ll need to retire comfortably or pay for major life expenses such as university educations and weddings. The planner needs to help them get a better handle on the costs of both their wish list and their need list.
Common areas that bust a family’s budget are gifts to kids and grandkids, and large unexpected purchases such as boats, second homes or remodeling of an existing home. It would be beneficial to have an unwritten agreement with your clients to set a spending limit above which they should consult with you regarding the best way to fund that purchase.
The next issue where mistakes persist is in the area of insurance. Starting with the client side, the first mistake that I see is clients responding to direct advertising offerings to lower their insurance premiums. Any agent can get your clients lower premiums by avoiding or lowering the limits of their coverage. When a client buys insurance with 100 percent of the buying decision made based on the lowest cost in the marketplace, they frequently find themselves with higher odds of having inadequate protection. This is most frequently seen in auto insurance, and in homeowners coverage you frequently see the same thing.
A client who buys solely based on the minimum to satisfy the mortgage holder at the absolute lowest rate may be asking for trouble. This client is also frequently underinsured for something. Whether it is exclusions for valuable artifacts, no flood or earthquake coverage, or no coverage for the office in the home, something is often missing and they don’t know it until they file a claim and are informed that their claim is denied.
This do-it-yourselfer low-price shopper is often terribly exposed to liability. Sometimes they have no umbrella or catastrophe insurance, and sometimes they’ve got too little. It’s tough to say how much is enough, but this coverage is so affordable that we often see risk professionals recommend an amount of umbrella liability coverage that matches the client’s liquid net worth.
And last, but not least by any stretch, on the property and casualty spectrum is that clients forget to inform their agent or carrier of changing circumstances. For example, the vacation cottage that is now used less by the family than in the past may be rented out for brief periods during the year. If that property is not properly insured as rental property, and suffers a big loss, especially one with a significant liability claim, it can take the wind right out of you.
A few other common changes that frequently go unreported are changes in the title or improvements to the property. If you do a significant addition or upgrade to your home, and you have replacement cost coverage, you want to make sure that your insurer is aware of the additional value that you’ve added to the home.
A title change can be as simple as taking the home out of joint name and putting it into one name or a trust. The insurer needs to know who the owner is because they need to be a named insured under the policy. It gets even riskier if mom put her home with no mortgage into one or more of her children’s names without informing the insurer.
The planners’ mistake with their clients’ property & casualty coverage is that most planners do not do a thorough P&C review for their clients. I’ve reviewed financial plans prepared by reputable planners where the advice in the risk management section was limited to encouraging replacement cost coverage for the home, adding flood and earthquake coverage, obtaining umbrella liability insurance, and checking with your agent to be sure that there are no gaps in coverage.
To me, this leaves the planner exposed to a ton of liability. If a client hires a planner, whether there is a separate planning fee or not, that planner has a fiduciary liability to review the risk side of the client’s life.
The investment world also has its share of mistakes from clients and planners alike. Clients’ most common mistake with investments is their emotional reactions to volatile markets. Let’s face it, people are not institutions. People have emotions, a finite time span on this earth and cannot invest in perpetuity, riding out long and enduring bull and bear market cycles like institutions can. People are often constrained, unlike institutions, and cannot simply put more money into the fund to support it during times of stress or need.
As a result of these quite real frailties, individual investors sometimes fail to achieve their desired results over a long period of time as they emotionally react to both good times and bad times. Frequently your emotionally charged clients buy when euphoria strikes in any particular market, and sell or capitulate when that market declines in value and the sky seems to be falling.
The mistake manifests itself as poor market timing, but the real culprit is knowledge. The clients often mistake luck or headlines for knowledge. They feel because they made a good pick, or a lucky pick, that they are the next investment prodigy. The knowledge that clients need is a lesson in history and volatility. If a client wants to hang their neck out to obtain equity-like returns from their portfolio, then they need to understand standard deviation, probability and mean reversion. If your client went to cash during the last market decline, and still sits there today, the same education may be called for.
The planner’s mistake with investing is not communicating enough with their clients. It’s not good enough to send out a quarterly performance report or to set an annual or quarterly investment meeting. Clients want to communicate with you when they feel that something significant is happening that may impact them. That could be market volatility, new tax laws or world unrest.
Another common error of planners is to ignore investment assets not managed or overseen by you. Whether it is a 401(k) plan not yet eligible for rollover or money that they have somewhere else, keeping those assets in the conversation and being mindful of their overall allocation can be helpful.
Estate planning is probably the area with the most mistakes of any. Clients err in their estate plans in many cases by simply having old or obsolete documents. I see clients all the time with documents over 20 years old that are absolutely useless for their current facts and circumstances. Even more shocking is the high percentage of the population with no estate documents.
For those with current documents, a common problem is not fully utilizing these documents. It is disheartening to see a client with well-drafted living trusts who still holds title to their assets in joint name. I find it equally irresponsible when these old documents leave large sums of money to their children outright. Do you think that your life would have turned out differently if someone put a huge sum of money in your checkbook at age 21?
Planners frequently make this same mistake. After all, it is frequently the planner who opens up investment accounts for clients. That same planner asks the questions and fills out the applications for IRA rollover accounts and knowingly acquiesces when the client suggests that the children become the outright contingent beneficiaries of this large retirement account. For the CPA who hasn’t yet conducted a financial planning engagement for the client, shame on you. You see the 1099s every year and should realize that a single owner or joint ownership is not the most efficient way to plan an estate.
Neither clients nor planners make these mistakes on purpose; they are typically errors of omission. Maybe that’s why they call it errors and omissions coverage for professionals. But who cares what they call the protection that planners need to own? The successful fiduciary-minded planner is more concerned about being the proactive and holistic financial head coach that their clients need.
John P. Napolitano CFP, CPA, is CEO of U. S. Wealth Management in Braintree, Mass. Reach him through JohnPNapolitano on LinkedIn or (781) 884-2390.
One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.
To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.
The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.
But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Questions? Please give us a call.
Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.
Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.
Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.
Social Security and Medicare taxes
If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:
The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).
Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.
Unemployment and federal income taxes
If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.
The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.
You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).
As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).
After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.
Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.
About Your IRS Notice or Letter
The IRS normally sends correspondence in the mail. We mail millions of letters to taxpayers every year. Keep these important points in mind if you get a letter or notice:
If you agree, you don’t need to reply unless a payment is due.
If you don’t agree, it’s important that you respond. Follow the instructions on the notice for the best way to respond to us. You may be able to call us to resolve the issue. Have a copy of your tax return and the notice with you when you call. If you choose to write to us, be sure to include information and any documents you want us to consider. Also, write your taxpayer identification number (Social Security number, employer identification number or individual taxpayer identification number) on each page of the letter you send. Mail your reply to the address shown on the notice. Allow at least 30 days for a response.
Watch Out for Scams. Don’t fall for phone and phishing email scams that use the IRS as a lure. We will contact you about unpaid taxes by mail first – not by phone. Be aware that the IRS does not initiate contact with taxpayers by email, text or social media.
Tax Breaks for the Military
If you are in the U. S. Armed Forces, there are special tax breaks for you. For example, some types of pay are not taxable. Certain rules apply to deductions or credits that you may be able to claim that can lower your tax. In some cases, you may get more time to file your tax return. You may also get more time to pay your income tax. Here are some tips to keep in mind:
BY EDWARD MENDLOWITZ
I like to wear shirts with my firm’s logo. We have an arrangement with Land’s End where we can order what we want from their catalog and have the Withum logo applied. It is a very easy process.
When I had my own firm we let staff freely choose what they wanted from the Land’s End catalog, and we ordered it for them. It shows pride in the firm, is a walking billboard advertising your firm, and presents an appearance of a “together” firm. It is a low-cost method of promoting your firm and strengthening your brand and culture. In instances where clients asked for shirts, we willingly provided them. There are other vendors, including local suppliers, and this is not restricted to Land’s End.
Another thing you can do is send wall or desk calendars, teddy bears and other promotional products. These all create goodwill and are long-lasting symbols of your firm.
Another form of promotion is informative trifold brochures explaining a service you perform, providing reminders that you can be called for further information. These lead to additional revenue and added client awareness of services you perform. This is very inexpensive advertising. I suggest including one with everything sent to a client, including bills. Each month you can send a flyer for a different service.
For the past few years we have included a three-page client survey with every client deliverable. The first two pages ask about the client’s satisfaction with our service, personnel, performance and value received. The third page lists additional services the client might need. When these are checked, the client gets an immediate call from a partner to discuss the client’s additional needs. This is a very successful way to get feedback about our service and to garner additional business.
Marketing is the totality of your efforts to get additional business. There are many novel ideas, but these are some tried and true methods you can easily and inexpensively adopt. Try some of them—they work!
I used all of these, and many more!
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or firstname.lastname@example.org.
BY DANIEL HOOD
With more and more people expected to be self-employed and working from home, knowing the ins and outs of the home office deduction can make all the difference between a refund – or an audit.
The Illinois CPA Society offered a number of helpful tips to help home-business-owners (and their advisors) be sure they’re getting everything back that they can. (A slideshow version of this story is available here.)
One of the most important things to be sure of before you try to claim the deduction is that some part of the home has to be exclusively and regularly used as the principal place of business. A mixed-use area, like a kitchen, won’t qualify.
The simplified option
Self-employed folks with an office in their home don’t need to do a lot of calculations and add up all their home-office-related expenses – the IRS now offers a simplified option based on the size of the office: You take a standard deduction of $5 per square foot of workspace, up to 300 square feet.
You can go with individual expenses or the simplified option, whichever is larger, and you can change from year to year.
Some of the business owner’s heating, electric and utility bills can be deducted, and phone, Internet and other information services may qualify, too. The ISCPA notes that separate Internet connections and phone numbers can help keep track of expenses.
An office isn’t an office without office supplies -- which is why computers, printers, toner, paper, paper clips, staplers, staples, staple removers and other critical equipment may also qualify.
Furniture and upgrades to the home itself, if related to the office, may also be deductible.
Many of those with home offices will find themselves travelling for business purposes – even if it’s just driving across town to a client. Parking, tolls and mileage (at 54 cents a mile for business-related travel) may all be deductible, to say nothing of airfare and hotel rooms.
The Illinois society recommends keeping expense records for at least three years after filing, or two years after paying taxes, whichever is later. Among the records home-business-owners should be holding onto are cancelled checks, bank statements, vendor invoices, bills, receipts and mileage logs.
More information on having a home office is available in IRS Publication 587.
BY PAUL L. MANCINONE AND ALISON WALSH
Most tax practitioners occasionally find themselves in the position of having to deal with clients who have received penalties for late filing of tax returns or late payment of income taxes.
As both a CPA and attorney, our office always has penalty abatement requests in process. Most penalty provisions of the Internal Revenue Code have reasonable cause language, so the penalty can at least be addressed with a good reasonable cause argument, assuming one exists. Those penalties involving “intentional” or “willful disregard” language, with considerably higher dollars at stake, tend to involve a more extensive plan of attack.
It’s safe to say most taxpayers who tend to heed the advice of quality preparers don’t find themselves in penalty situations very often. But wouldn’t it be great if there was a simple streamlined tool to abate penalties for otherwise diligent and responsible taxpayers? Well there is, and it’s been around since 2001! It’s an administrative waiver called “First Time Abate.”
A while ago, we wrote about Form 8275, Disclosure Memo, as a safety tool to avoid penalties by disclosing a position on a tax return for which the preparer and taxpayer believe they have reasonable basis, but are nonetheless not quite sure (see IRS Penalties: Speak Softly and Carry Form 8275). We were, and continue to be, astonished by the lack of use of this most valuable resource. First Time Abate is another penalty tool that we are surprised hasn’t yet become mainstream in tax practice.
In 2001, the Internal Revenue Service began granting penalty relief under an administrative waiver known as First Time Penalty Abate. It’s not in the Internal Revenue Code; it comes under the “Reasonable Cause Assistant” (RCA) of the IRS and it’s in the Internal Revenue Manual (IRM 188.8.131.52.6.1). Like many provisions of the Internal Revenue Manual (repetitive examination procedures, for example), First Time Penalty Abate availability is not well publicized by the IRS.
Here’s how it works. The IRM basically states that First Time Abate applies to penalties for late income tax filings (including partnerships and S corporations) and late income tax payments (including late deposits of tax). Such abatement may be granted as long as the taxpayer has a clean history (no penalty assessments) for the previous three years. The purpose behind First Time Abate relief is to reward past compliance and promote future compliance by utilization of this “get out of penalty free card.”
A clean history means a clean history, but some areas of the Internal Revenue Manual or other research are worthy of note. For example, the criteria includes “if current taxes are paid, or arranged to pay.” Well, “arranged to pay” means the IRS will consider the taxpayer current if an installment agreement is in existence, as long as the payment plan is in good standing. Thus, an installment agreement in good standing does not negate the possibility of relief under the First Time Penalty Abate administrative waiver. In addition, if there was a prior penalty in the previous three years, but it was removed due to reasonable cause, that activity should not count as a “prior penalty.” Thus the opportunity to be awarded this first time abatement is still applicable in that situation.
Our office simply requests this waiver by responding to the address on the penalty assessment letter, stating the taxpayer’s “good three year history” and a request that the “penalty be waived under First Time Penalty Abate Administrative Waiver.” Frankly, we try it with a whole variety of penalties, not just late filing and late payment of income tax returns, since First Time Abate is not quite “the law” and clearly discretionary. In addition, if one of the prior three years had an insignificant penalty, there is language in the IRM that suggests consideration, so we’d try in that case too, especially if we lack reasonable cause. Try.
In 2012, the Treasury Inspector General for Tax Administration pointed out that the IRS failed to inform about 1.45 million taxpayers that they qualified for this relief, resulting in $181 million in waivable penalties. TIGTA recommended the IRS ensure taxpayers are aware of this potential waiver. However, from what we see, this has not been the case. Most practitioners, as well as the vast majority of taxpayers, are not familiar with this most welcome opportunity.
Paul Mancinone is a CPA and attorney at law, and represents businesses and individuals before the IRS. Alison Walsh is an accountant and manager at his firm, Paul Mancinone Company, P.C., in Springfield, Mass.
BY MICHAEL COHN
A left-leaning advocacy group has filed a complaint against Donald Trump with the Internal Revenue Service accusing the presumptive Republican presidential nominee of violating the law for using money from his tax-exempt charitable foundation to buy an autographed football helmet and jersey from NFL player Tim Tebow.
Trump reportedly bought the Denver Broncos helmet and jersey for $12,000 at a fundraising auction in 2012 to benefit the Susan G. Komen breast cancer charity, according to theWashington Post. However, the money came from Trump’s own charitable foundation, the Donald J. Trump Foundation, which he founded in 1987 but has not personally contributed to since 2008. Trump’s foundation is predominantly funded by contributions from outside donors and he frequently passes out checks from the foundation to various charities.
The American Democracy Legal Fund, a liberal watchdog group that was established to hold candidates for political offices accountable for possible ethics or legal violations, has filed a series of complaints and legal challenges against Trump and other Republicans in recent years, mostly with the Federal Election Commission. In the latest complaint, the group filed a complaint with the IRS against Trump.
“In clear violation of the law prohibiting private foundation managers from sanctioning self-dealing, Mr. Donald J. Trump, president of the Foundation and unmistakably a ‘disqualified person,’ engaged in self-dealing with the Foundation when he used Foundation assets to ‘furnish goods’ for himself,” said a letter from the group Monday. “Specifically, Mr. Trump purchased a football helmet for himself at a charity auction in 2012. Thus, Mr. Trump erred not only in allowing the foundation to engage in self-dealing, but was himself the self-dealer in the transaction.”
The group argues that Trump is liable for excise taxes for the act of self-dealing even if he “had no knowledge at the time of the act that such act constituted self-dealing.”
Tebow-autographed football gear has since declined in market value after his team was defeated in the NFL playoffs by the New England Patriots on the same night as the January 2012 auction, and a similar helmet and jersey would sell together today for approximately $415 online, according to the Post. Trump’s son Eric told the Post he believes his father probably ended up giving away the Tebow gear to a child.
BY DANIEL HOOD
Social media giant Facebook is being investigated by the Internal Revenue Service over the value of intangible property it transferred to a unit in Ireland, according to published reports.
CNN Money and Law.com reported that on Wednesday the Justice Department filed a petition to force Facebook to comply with the investigation into whether the company significantly undervalued the assets, which include worldwide rights to some of its businesses.
According to the DoJ petition, the IRS investigation concerns the company’s federal tax liability for calendar 2010, when the transfers took place, and the IRS had send issued summonses to Facebook on June 1, 2016, requiring the company to bring in certain records and data to an examination on June 17, which it failed to do.
In a statement, a Facebook spokesperson said, “Facebook complies with all applicable rules and regulations in the countries where we operate.”
The report noted Big Four firm Ernst & Young had valued the assets in question, and that the IRS believed that the firm may have understated their value by billions of dollars.
The Cadillac tax is a 40 percent excise tax on “high cost” health plans set in place by the Affordable Care Act. However, despite the familiarity tax professionals have with its name, the details surrounding the Cadillac tax can be complicated and confusing, according to Brad Knox, vice president of federal relations at Aflac.
“Employers, especially those running small businesses, have many questions. For starters, who is responsible for the Cadillac tax?” he asked.
“For businesses that are fully insured, meaning the insurance provider assumes the coverage risk and sets the premiums, the insurance provider—not the employer or employee—will be responsible for paying the tax,” Knox said.
“But if an employer is self-insured, meaning the employer retains its coverage risk, or if account-based benefits are offered through a flexible spending account, a health savings account or an Archer medical savings account, the employer or the plan administrator will generally be responsible for paying the tax,” he said. “And if employers have both types of arrangements, the responsibility for paying any tax will be proportional, based on the value of the various coverages or account-based plan benefits offered.”
All businesses providing excess benefits to employees can expect to be taxed, Knox cautioned. “The 40 percent tax will be applied to the value of an employer’s plan that exceeds certain thresholds,” he explained. “The thresholds are currently set to $10,200 for individual coverage and $27,500 for coverage other than individuals, but these limits will be increased for inflation and change before the tax is finally implemented in 2020.”
Voluntary insurance products generally do not count toward the Cadillac tax calculation, Knox noted. “But oddly, specified disease and hospital indemnity policies are included in the calculation, but only if they’re paid for with pretax dollars, such as through a cafeteria plan or with excludable employer contributions,” he said. “In other words, as long as an employer offers these two products after tax, they don’t count toward the tax calculation.”
That raises the question as to whether employers should move their pretax voluntary insurance products to after tax. “It’s important to understand that employers and their workers receive significant tax advantages for retaining pretax voluntary products,” said Knox. “Only employers with benefits plans that are considered to be high cost should contemplate after-tax strategies. Most voluntary insurance benefits won’t trigger the Cadillac tax, regardless of whether they’re offered before or after taxes. And there is no reason for employers to make any changes to their voluntary benefits offerings at this point, since implementation of the tax is several years away.”
“The bottom line is that the anticipation of the Cadillac tax may have made it seem scarier than it really is,” Knox suggested. “Considering that the implementation of the tax is several years away and regulations will likely evolve, employers can wait before making changes to the benefits they make available to employees. With the cost of health care continuing to rise and employees sharing more of the burden, the coverage that voluntary insurance provides is more important than ever before.”
BY MICHAEL COHN
A self-styled tax watchdog group has launched an effort to independently audit the Internal Revenue Service, with the help of taxpayers.
The Tax Revolution Institute— a Washington, D.C.-based nonprofit that says it promote "justice and integrity in the tax system"—has created a new website,AuditIRS.com, where it hopes to collect personal experiences from taxpayers about their encounters with the IRS.
The group plans to conduct an “audit” of the IRS’s treatment of individual taxpayers and small businesses and the agency’s own employees, work culture and finances. It will also examine the taxpayer advice given by the IRS along with IRS policies and enforcement.
"For decades, the IRS has failed to live up to the standards of transparency that it enforces on the American public," Tax Revolution Institute executive director Dan Johnson said in a statement.
The group issued a report in April claiming the IRS lacks independent oversight following the suspension of operations of the IRS Oversight Board after it failed to enlist enough members to make up the necessary quorum.
Nevertheless, the IRS’s finance and operations are frequently audited by the Government Accountability Office and the Treasury Inspector General for Tax Administration. The IRS has also come under fire in recent years from Congress, following revelations in 2013 that the IRS gave extra scrutiny to political groups applying for tax-exempt status, and the agency’s expenses, employee bonuses and performance are the subjects of frequent congressional hearings. Lawmakers are currently weighing a possible impeachment resolution against IRS Commissioner John Koskinen.
The Tax Revolution Institute is asking any taxpayers, business owners, government employees to submit information about their experiences with the IRS, either positive or negative, to AuditIRS.com. The group said it will never publish any personally identifying information, unless it is invited to do so by the person who provided it.
TRI plans to research the submissions it receives, file Freedom of Information Act requests, and examine IRS policy to determine how the IRS treats the American people.
Ride-sharing Apps Overtake Taxis on Expense Reports
BY MICHAEL COHN
The increasing popularity of ride-sharing apps such as Uber and Lyft has vaulted them ahead of traditional taxi and car rental services on corporate expense reports, according to one expense management software vendor.
Uber and Lyft now account for 48.7 percent of the overall ground transportation category nationwide, according to the Certify Q2 SpendSmart Report, a 3 percent increase from the previous quarter. Car rental receipts for the second quarter represent 37 percent of the total, while taxi receipts account for 14 percent, with taxi receipts declining 51 percent since 2014.
Uber dominated over Lyft and taxis, accounting for 73 percent of ground transportation transactions in Q2 (with over 10 million receipts and expenses analyzed by Certify, a provider of travel and expense management software.
The mobile apps have provided stiff competition for traditional taxi drivers, many of whom now have been forced to sign up with the apps to get customers.
“Our data shows the real-time transformation of the ground transportation category and how modern business travelers have wholly embraced ride-hailing services like Uber and Lyft,” said Certify CEO Robert Neveu in a statement. “The market continues to grow at an incredible pace, and competition is getting sharper and more sophisticated. I think what we’re seeing now is really the emergence of the kind of market forces you find in more mature industries, forces that will invariably drive downward pressure on pricing, as well as an increased demand for new and better services in the future. Ride hailing was bent on disruption from the beginning, and by the looks of it there’s a lot more change to come.”
Prices do seem to be dropping for fares in many cities, although Uber continues to attract criticism for its surge pricing policy, inviting increased competition from rival apps such as Gett. The average price of an Uber fare dropped in Q2 to $25.48, a decline of 15 percent since the second quarter of 2015. In contrast, taxi fares rose 15 percent over the same time period. But while Lyft captured only 5 percent of all ride-hailing transactions in the second quarter of this year, it appears to be growing faster than Uber since the second quarter of 2014 (145 percent for Uber, compared to 176 percent for Lyft), according to Certify’s figures.
Certify also tracks other types of expenses that traditionally show up on T&E reports, such as hotel bills, meals and airline fares. Some of the other results for Q2 are below:
Starbucks: 4.81% of expenses, averaging $11.55 per receipt
McDonald’s: 2.83%, averaging $8.75
Panera Bread: 1.65%, averaging $39.52
Subway: 1.6%, averaging $16.09
Dunkin’ Donuts: 1.31%, averaging $12.38
Most Expensed Restaurants by Meal
Breakfast: Starbucks 16.18%
Lunch: Subway 3.49%
Dinner: McDonald’s 1.81%
Top Rated Restaurants (on a scale from 1 to 5, rated by travelers)
Panera Bread 4.3
Jimmy John’s 4.2
Most Expensed Airlines
Delta: 21.14%, averaging $427.41
American Airlines: 19.94%, averaging $306.83
Southwest Airlines: 14.46%, averaging $297.22
United Airlines: 13.42%, averaging $413.02
Alaska Airlines: 1.39%, averaging $252.93
Top Rated Airlines
Alaska Airlines 4.4
Southwest Airlines 4.3
American Airlines 3.7
Hampton Inn: 9.29%, averaging $227.03
Marriott: 8.54%, averaging $244.87
Courtyard by Marriott: 6.87%, averaging $179.04
Holiday Inn Express: 4.73%, averaging $221.27
Hilton Garden Inn: 4.59%, averaging $201.54
Top Rated Hotels
Westin Hotels 4.3
Courtyard by Marriott 4.2
Hilton Garden Inn 4.2
Most Expensed Car-Rental Services
National: 24.61%, averaging $187.11
Enterprise: 16.34%, averaging $218.60
Hertz: 15.38%, averaging $201.25
Avis: 13.14%, averaging $190.99
Budget: 4.20%, averaging $196.12
Top Rated Car-Rental Services
For the complete report, http://www.certify.com/CertifySpendSmartReport.aspx
BY GEORGE G. JONES AND MARK A. LUSCO
Multiple retirement accounts owned by any given individual has become the norm these days as IRAs and defined-contribution accounts accumulate over the years from an often diverse collection of employment and contracting opportunities. With this trend comes additional complexity in managing retirement savings. This complexity arises not only because of the number of accounts to be addressed but also because of the applicable rules that vary sufficiently so that a one-size-fits-all approach often does not work well.
Our latest Tax Strategy column covers some of the typical considerations that need to be weighed on the distribution of retirement savings. It also looks at some planning opportunities that may be ending sometime in the future if Congress, or a future administration, has its way.
REQUIRED MINIMUM DISTRIBUTIONS
Once a retirement account holder reaches age 70-½, annual distributions generally must be made based upon life expectancy. The consequence for not making a full requirement minimum distribution, also sometimes called a minimum required distribution, is a 50 percent penalty on any shortfall. While the IRS has discretion to lower this penalty in any given case, this route — even if successful — can be expensive.
For most qualified retirement account owners, the initial RMD generally must take place by April 1 following the calendar year in which the participant reaches age 70-½. An exception may apply, however, if a qualified employer-sponsored plan specifies that the RMD may be delayed past age 70-½ until actual retirement. In any event, however, an employee who is a 5 percent owner cannot delay RMD by staying on after age 70-½.
For IRA owners, postponement until actual retirement if beyond age 70-½ is not allowed under any circumstances. However, as a strategy that remains open so far, rollovers to qualified employer-sponsored plans that allow deferment may be made, provided that the plan allows it. Rollovers from either IRAs or qualified plans apparently count under this exception.
First RMD option. Although making a retiree’s first RMD on April 1 following the year in which they turn age 70-½ is usually the option most retirees take, they may opt for an earlier distribution in the actual year of turning 70-½. This latter alternative follows the general pattern for subsequent RMDs: valuation of retirement assets on December 31 of the prior year, to which the retiree’s life expectancy factor is applied, and then distribution of that computed amount by December 31 of the current year.
If the delayed April 1 distribution is selected for the first RMD, the participant then must receive two RMDs that year: one that is “delayed” from the prior year and one for the current year. A decision regarding the timing of the initial RMD usually depends upon how much other taxable income is realized by the individual in each of those years, since the underlying goal is to even out the level of income between those two years as much as possible for tax-rate efficiencies.
Working the RMD rules. The RMD for each account is determined separately, based upon each account’s value as of the end of the prior calendar year. That RMD, however, need not be satisfied from that particular account, as long as it is accounted for through a taxable distribution from any other qualified retirement account owned by the taxpayer. This allows a greater share of RMD to be taken from an account that perhaps is not performing well or that has an inefficient fee structure. Roth IRAs must be kept separate in determining what is distributed, however, as must IRAs to which the taxpayer is a beneficiary.
Gains or losses during the year of distributions do not change the RMD during that year, which is based on value at the end of the prior year. Further, overpayment in one year does not reduce the payment for the next year by such amount. It only reduces the available balance, which is then redistributed based on life expectancy.
Qualified annuities. RMD payouts over a life expectancy can be satisfied, in whole or in part, through use of a qualified annuity (single or joint life and survivor annuity or a qualified annuity from an employer-sponsored plan). An alternative to the traditional annuity that has become recently available, qualifying longevity annuity contracts, or QLACs, may be purchased to start as late as immediately after the taxpayer’s 85th birthday. To prevent longevity annuities from being used disproportionately to shelter assets for the next generation, premiums cannot exceed the lesser of $125,000 (indexed for inflation) or 25 percent of an owner’s traditional (non-Roth) IRAs.
The Obama administration’s FY 2017 revenue proposals, released this past February, contain certain reforms to the tax rules surrounding retirement plans that may suggest certain strategies before they are considered in Congress. Although the chances of a major tax law during this year of presidential politics is slim to none, use of certain of these proposals to fund “one-off” tax provisions might still be possible.
Roth RMDs. Although no tax is due on distributions from Roth accounts, Roth account holders continue to benefit from the accumulation of tax-free earnings as long as the funds are not withdrawn. While designated Roth accounts held in a 401(k) or other employer-sponsored plans are subject to the RMD rules during the account holder’s life, no RMD is required during the life of the Roth IRA holder. (The RMD rules do apply, however, to any Roth account after the death of the holder.)
The Obama administration has proposed that the same RMD rules apply to Roth IRAs “to support the purpose of the accounts in providing resources for retirement.” In addition, the administration reasons that such a rule would close the current loophole that permits Roth accounts within an employer-sponsored plan to be rolled over into Roth IRAs, which currently have no RMD requirement.
Existing Roth accounts would not be grandfathered in under this proposal. Instead, the proposal as currently written would be effective for taxpayers attaining age 70-½ on or after Dec. 31, 2016, and for taxpayers who die on or after Dec. 31, 2016, before attaining age 70-½.
Five-year payout for non-spouse beneficiaries. If a plan participant or IRA owner dies on or after the required beginning date and there is a non-spouse individual designated as beneficiary, the distribution period under existing rules is the beneficiary’s life expectancy, calculated in the year after the year of death. Under the administration’s proposal, non-spouse beneficiaries of retirement plans and IRAs would generally be required to take distributions over no more than five years. Exceptions would exist for any beneficiary who, as of the date of death, is disabled, a chronically ill individual, an individual who is not more than 10 years younger than the participant or IRA owner, or a child who has not reached the age of majority.
This change would prevent a current estate planning technique under which some much younger, non-spouse beneficiaries are enjoying tax-favored accumulation of earnings over long periods of time. The proposal would be effective for distributions with respect to plan participants or IRA owners who die after Dec. 31, 2016.
DIRECT CHARITABLE DONATIONS
The Protecting Americans from Tax Hikes Act of 2015 (P.L. 114-113) provides an exclusion from gross income for qualified charitable distributions of up to $100,000 each year received from an IRA. The exclusion from gross income of such an IRA distribution effectively provides three benefits to the taxpayer not ordinarily available: the exclusion effectively reduces adjusted gross income, and resulting deduction limitations; the exclusion effectively realizes the benefit of an itemized charitable deduction without having to itemize; and the qualified charitable distribution also counts toward satisfying a taxpayer’s RMDs from a traditional IRA.
The top $100,000 contribution limit each year (per spouse) may hide the fact that any amount up to $100,000 qualifies. For example, a retiree who normally donates $2,000 each year might save a few tax dollars using this benefit, especially if the retiree does not ordinarily itemize deductions. RMD is also effectively lowered by the amount of the donation, potentially allowing the taxpayer to keep more within the tax-deferred environment of the IRA.
Although most retirees no longer will simply make ends meet by way of a monthly check from a defined-benefit plan, retirement assets within qualified defined-contribution plans and a variety of IRAs can still promise to provide for a comfortable retirement. The tax law is now structured, however, to leave certain decisions and compliance actions up to each individual taxpayer. Within that structure, mistakes can happen and opportunities to maximize their savings can be lost. Nevertheless, the current state of affairs also provides tax practitioners with still another way to provide service to their clients.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer US, Tax & Accounting.
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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