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Wealth Accumulation Planning for Business Owners

02/13/2018

Investors Eye Effects of New Transition Tax

International investingAs corporations determine the impact of the one-time new tax reform-mandated ‘transition tax’ on overseas earnings, it’s important for investors to consider how the tax may impact a public company’s cash flow when valuing its stock.

A Tax Cuts and Jobs Act (TCJA) provision assesses a one-time ‘transition tax’ on accumulated 2017 untaxed earnings held overseas by considering those earnings repatriated.  Generally, foreign earnings held as cash or cash equivalents are taxed at 15.5 percent.  Remaining earnings are taxed at 8 percent.

Many American corporations have held their foreign-earned profits overseas for years to escape the world’s-highest 35% U.S. corporate tax rate.  As the new tax reform package imposes this one-time tax, the U.S. will relinquish its right to tax foreign profits.  The U.S. will then switch its corporation taxation method to a “territorial tax” system.

Under a territorial tax system businesses must pay income taxes only on the income earned within the subject country’s boundaries.  The tax liability is determined by the subject country’s tax laws, and no other nation’s corporate tax may be charged.  European nations have followed this tax method for decades, and it avoids double taxation.  TCJA supporters say this tax change, coupled with the new flat 21% corporate tax rate, will return jobs and American investment dollars back home.

However, this TCJA tax payment may complicate traditional methods used to analyze a company’s financial statements and attractiveness as an investment.  Corporations may pay the new one-time tax in eight annual installments under a back-loaded schedule, with a maximum 25% tax payment expected in the 8th year.  While this TCJA provision offers corporate taxpayers a potential significant overall tax savings, The Wall Street Journal reports that huge household-name US corporations like Microsoft, McDonald’s and Johnson and Johnson may pay billions to repatriate these earnings they otherwise would not have.  Financial analysts advise investors that this change may impact these companies’ cash flow as a percentage of their earnings – which is an important measure of a stock’s market value.  Investors should consider the impact of the new lower US corporate tax rate on a subject business’s cash flow remembering that at the same time the subject company owes the final and largest one-time tax payment, which may also be partly offset by tax credits, deductions, deferred tax liabilities and more.

Tax reform and consumer confidence have lifted the stock market to record-breaking levels. Now investors and analysts following corporations with foreign profits must re-think how they value companies as they determine what to buy or sell.

If you have any questions or need more information, please contact one of our wealth accumulation experts at McRuer CPAs online, or call 816.741.7882.

12/19/2017

How Tax Overhaul Would Change Business Taxes

Although the exact details are not yet confirmed, we expect a number of changes in the new tax reform bill will affect both large and small businesses.   The Journal of Accountancy, a leading resource on legislative matters affecting accounting regulations, has issued the following summary of the tax bill's expected reforms. As a service to you, we are providing this summary in its entirety for your review.

How Tax Overhaul Would Change Business Taxes

The tax reform bill that Congress is expected to vote on this week contains numerous changes that will affect businesses large and small. The Tax Cuts and Jobs Act, H.R. 1, would make sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.

Here are many of the bill’s business provisions.

Corporate tax rate

The bill would replace the current graduated corporate tax rate, which taxes income over $10 million at 35%, with a flat rate of 21%. The House version of H.R. 1 had provided for a special 25% rate on personal service corporations, but that special rate does not appear in the final bill. The new rate would take effect Jan. 1, 2018.

Corporate AMT

The bill would repeal the corporate alternative minimum tax (AMT).

Depreciation

Bonus depreciation: The bill would extend and modify bonus depreciation under Sec. 168(k), allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation would then be phased down over four years: 80% would be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates would be pushed out a year.)

The bill would also remove the requirement that bonus depreciation is only available for new property.

Luxury automobile depreciation limits: The bill would increase the depreciation limits under Sec. 280F that apply to listed property. For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.

Sec. 179 expensing: The bill would increase the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increase the phaseout threshold to $2.5 million. These amounts would be indexed for inflation after 2018.

The bill would also expand the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It would also expand the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Accounting methods

Cash method of accounting: The bill would expand the list of taxpayers that are eligible to use the cash method of accounting by allowing taxpayers that have average annual gross receipts of $25 million or less in the three prior tax years to use the cash method. The $25 million gross-receipts threshold would be indexed for inflation after 2018. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross-receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

Farming C corporations (or farming partnerships with a C corporation partner) would be allowed to use the cash method if they meet the $25 million gross-receipts test.

The current-law exceptions from the use of the accrual method would otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities would continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of such method clearly reflects income.

Inventories: Taxpayers that meet the cash method $25 million gross-receipts test would also not be required to account for inventories under Sec. 471. Instead, they would be allowed to use an accounting method that either treats inventories as nonincidental materials and supplies or conforms to their financial accounting treatment of inventories.

UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test would be exempted from the uniform capitalization rules of Sec. 263A. (Current-law exemptions from the UNICAP rules that are not based on gross receipts are retained in the law.)

Expenses and deductions

Interest deduction limitation: Under the bill, the deduction for business interest would be limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction could be carried forward indefinitely (with certain restrictions for partnerships).

Any taxpayer that meets the $25 million gross-receipts test would be exempt from the interest deduction limitation. The limitation would also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses would be allowed to elect out of the limitation.

For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer’s gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).

Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.

Net operating losses: The bill would limit the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)

Taxpayers would be allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions would be repealed. However, farming businesses would still be allowed a two-year NOL carryback.

Like-kind exchanges: Under the bill, like-kind exchanges under Sec. 1031 would be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange is received on or before that date.

Domestic production activities: The bill would repeal the Sec. 199 domestic production activities deduction.

Entertainment expenses: The bill would disallow a deduction with respect to (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.

Qualified transportation fringe benefits: The bill would disallow a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Meals: Under the bill taxpayers would still generally be able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the bill would expand this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, would not be deductible.

Partnership technical terminations: The bill would repeal the Sec. 708(b)(1)(B) rule providing for technical terminations of partnerships under specified circumstances. The provision does not change the current-law rule of Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.

Carried interests: The bill would provide for a three-year holding period in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer. It would treat as short-term capital gain taxed at ordinary income rates the amount of a taxpayer’s net long-term capital gain with respect to an applicable partnership interest if the partnership interest has been held for less than three years.

The conference report clarifies that the three-year holding requirement applies notwithstanding the rules of Sec. 83 or any election in effect under Sec. 83(b).

Amortization of research and experimental expenditures: Under the bill, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.

Year of inclusion: The bill would require accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The bill would provide an exception for taxpayers without an applicable or other specified financial statement.

Credits

The bill would modify a number of credits available to businesses. The House version of the bill would have repealed a large number of business credits, but the final bill generally does not repeal those credits. Changes to business credits in the final bill include:

Orphan drug credit: The amount of the Sec. 45C credit for clinical testing expenses for drugs for rare diseases or conditions would be reduced to 25% (from the current 50%).

Rehabilitation credit: The bill would modify the Sec. 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit would be claimed over a five-year period.

Employer credit for paid family or medical leave: The bill would allow eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any tax year is 12 weeks. However, the credit would only be available in 2018 and 2019.

Compensation

Covered employees: Sec. 162(m) limits the deductibility of compensation paid to certain covered employees of publicly traded corporations. Current law defines a covered employee as the chief executive officer and the four most highly compensated officers (other than the CEO). The bill would revise the definition of a covered employee under Sec. 162(m) to include both the principal executive officer and the principal financial officer and would reduce the number of other officers included to the three most highly compensated officers for the tax year. The bill would also require that if an individual is a covered employee for any tax year (after 2016), that individual will remain a covered employee for all future years. The bill would also remove current exceptions for commissions and performance-based compensation.

The bill includes a transition rule so that the proposed changes would not apply to any remuneration under a written binding contract that was in effect on Nov. 2, 2017, and that was not later modified in any material respect.

Qualified equity grants: The bill would allow a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. An election to defer income inclusion with respect to qualified stock must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

Taxation of foreign income

The bill would provide a 100% deduction for the foreign-source portion of dividends received from “specified 10% owned foreign corporations” by domestic corporations that are U.S. shareholders of those foreign corporations within the meaning of Sec. 951(b). The conference report says that the term “dividend received” is intended to be interpreted broadly, consistently with the meaning of the phrases “amount received as dividends” and “dividends received” under Secs. 243 and 245, respectively.

A specified 10%-owned foreign corporation is any foreign corporation (other than a passive foreign investment company (PFIC) that is not also a controlled foreign corporation (CFC)) with respect to which any domestic corporation is a U.S. shareholder.

The deduction is not available for any dividend received by a U.S. shareholder from a CFC if the dividend is a hybrid dividend. A hybrid dividend is an amount received from a CFC for which a deduction would be allowed under this provision and for which the specified 10%-owned foreign corporation received a deduction (or other tax benefit) from any income, war profits, and excess profits taxes imposed by a foreign country.

Foreign tax credit: No foreign tax credit or deduction would be allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction.

Holding period: A domestic corporation would not be permitted a deduction in respect of any dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend.

Deemed repatriation: The bill generally requires that, for the last tax year beginning before Jan. 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. For purposes of this provision, a specified foreign corporation is any foreign corporation in which a U.S. person owns a 10% voting interest. It excludes PFICs that are not also CFCs.

A portion of that pro rata share of foreign earnings is deductible; the amount of the deductible portion depends on whether the deferred earnings are held in cash or other assets. The deduction results in a reduced rate of tax with respect to income from the required inclusion of preeffective date earnings. The reduced rate of tax is 15.5% for cash and cash equivalents and 8% for all other earnings. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The separate foreign tax credit limitation rules of current-law Sec. 904 apply, with coordinating rules. The increased tax liability generally may be paid over an eight-year period. Special rules are provided for S corporations and real estate investment trusts (REITs).

Foreign intangible income: The bill would provide domestic C corporations (that are not regulated investment companies or REITs) with a reduced tax rate on “foreign-derived intangible income” (FDII) and “global intangible low-taxed income” (GILTI). FDII is the portion of a domestic corporation’s intangible income that is derived from serving foreign markets, using a formula in a new Sec. 250. GILTI would be defined in a new Sec. 951A.

The effective tax rate on FDII would be 13.125% in tax years beginning after 2017 and before 2026 and 16.406% after 2025. The effective tax rate on GILTI would be 10.5% in tax years beginning after 2017 and before 2026 and 13.125% after 2025.

Definition of U.S. shareholder: The bill would amend the ownership attribution rules of Sec. 958(b) to expand the definition of “U.S. shareholder” to include a U.S. person who owns at least 10% of the value of the shares of the foreign corporation.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the Journal of Accountancy’s editor-in-chief, tax.

If you have questions about how the tax law changes will affect your business and what your next steps should be, please contact us online or call 816.741.7882 to set up an appointment to discuss details with one of our tax planning experts at McRuer CPAs. 

05/01/2017

Trump Tax Reform Goals: Press Release and Articles

Trump at microphonePresident Donald Trump has released a single-page summary of the goals and priorities of his tax reform package.  We have a copy of the document to share with you as well as links to various articles on the subject available online for your review. While specifics of an actual proposal are not yet available, we hope the information and various media reviews will help clarify the intended direction of a tax reform proposal from the perspective of the White House. Please contact one of our tax planning experts if you have questions as to how the proposed tax reforms may affect your individual and/or business tax planning strategies.

Click on the information lines below to download articles and postings:

Actual Media Release from the White House

White House Press Briefing on Proposed Tax Reform Goals

Various Media Articles With Responses and Opinions   (Postings of these links to articles should not infer that McRuer CPAs is in agreement with any or all of the following media responses. The list is simply a way to provide you more information from various views.)

Journal of Accountancy from the American Institute of CPAs (AICPA.org)

FOX Business News

Wall Street Journal

New York Times

Bloomberg Review

The National Review

CNN Money

Kansas City Star

St. Louis Post-Dispatch

Jefferson City News Tribune

04/12/2017

Tax Reform Timeline

Although Republicans appear to have more agreement on the specifics of tax reform than health care reform, experts predict we’ll be hearing more debate in committees and in the media before an actual tax reform bill makes it to the House or Senate floor.  Now many experts predict a tax reform or reduction bill will pass, but it may not happen in 2017.

Capitol-hill-washington-d_cThe White House and Republican lawmakers know they need a more unified front to sustain a push for major tax reform, especially in the wake of continued angst and division over health care reform. Treasury Secretary Steven Mnuchin is a key player in drafting and negotiating a tax reform proposal.  He says he is optimistic that a comprehensive plan should win approval by the Congressional recess this August. But President Donald Trump has been less specific. When asked recently whether he could “cut a deal on tax reform this year” by a Financial Times editor, Trump responded he did not want to talk about timing saying, “We will have a massive and very strong tax reform. But I am not going to talk about when.”

Leading House Republicans, including House Speaker Paul Ryan, have proposed tax code changes that include a much-debated border adjustment tax. CEOs of 16 U.S. companies including General Electric and Boeing support the proposal that would reduce corporate income tax from 35% to 20%.  It would also impose a 20% tax on imported goods while removing taxes on exported goods.  Critics claim such a tax structure would cause consumer prices to rise and unfairly burden retail and automotive manufacturing industries that purchase low-cost parts and supplies from overseas.

Trump has also expressed an interest in pushing simplified personal income and corporate tax reform through at the same time and may also include an infrastructure investment package in a comprehensive tax plan. Tackling big issues with a massive all-encompassing bill may provide opportunities to please all parties, but may also result in the same kind of partisan and intraparty fractures suffered by health care reform efforts.  

Democrats are also unlikely to support major income tax cuts at either the corporate or personal level.

Based on their recent disappointment over a failed attempt to repeal the Affordable Care Act, Republicans know they need to build and confirm support for significant tax reform.  Many financial experts say that means an agreement may not be reached until late 2017 or early 2018.

05/07/2015

Your Foreign Accounts Tax Deadline Alert

The global marketplace has round-the-clock worldwide Internet-enabled communications, sales and trading cycles. That has ensured more Americans than ever before work, live and/or do business in or with another country. Think about your accounts; you could be among the 4 out of 10 of Americans who have a bank account, brokerage account, mutual fund, trust or other type of foreign financial account or foreign asset. If so, a June 30th filing deadline approaches to meet updated tax reporting guidelines, even if your account has produced no taxable income.

Globe and calculator in blueThere are several different kinds of tax and crime-prevention documents that need to be filed depending upon whether you are an American working overseas; paying an American to work for your company overseas; a business owner selling and/or producing products and services overseas; an entity organized in a foreign jurisdiction; and/or someone who has international investments.

The Foreign Account Tax Compliance Act (FATCA) requires the filing of a Report of Foreign Bank and Financial Accounts (FBAR) annually for anyone with a foreign financial interest in types of foreign accounts by June 30th. This particularly affects Americans who work overseas and their employers, as well as those with interests in foreign accounts (including those with ownership interests in or signature authority over bank and certain investment accounts).

The FATCA was passed to ensure that income is reported and any applicable taxes are paid, though some American-based global companies claim the variety of tax and crime-fighting policies enacted by several government agencies are hard to keep up with and are creating an undue burden.

Ready for more acronyms? The FBAR filing is part of the Bank Secrecy Act (BSA) that requires you to report foreign financial accounts exceeding certain thresholds to the Department of Treasury. This report, FBAR Form FinCEN Report 114, must now be filed electronically through the BSA’s E-Filing System. Those individuals with only signature authority over these accounts have until next June in 2016 to begin the electronic filing of these annual reports.

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must also report those assets to the IRS on Form 8938 Statement of Specified Foreign Financial Assets. Again, this requirement is in addition to the FBAR filing requirement.

But wait, there's more... If you happen to be a U.S. citizen or resident who is an officer or director of a foreign corporation, you may also have additional filing requirements including a Form 5471  Information Return of U.S. Persons With Respect to Certain Foreign Corporations.  Filing a Form 5471 is required if an American has acquired (in one or more transactions) either stock which meets the 10% stock ownership requirement with respect to the foreign corporation or an additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation. A person is considered to have “acquired” stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued.  To find out more click here for the IRS Form 5471 information. 

FBAR-Reminder-840x440What if you don’t file? Delinquent, insufficient or improper FBAR filings have hefty penalties. The penalties for failure to file an FBAR include a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation – and each year you didn’t or don't file is counted as a separate violation.

While many commentators agree that income and asset holdings should be accountable, the method and overlapping reporting issues are so complicated that some experts argue it may be decreasing the will of Americans to look worldwide for employment and customers, hindering American competitiveness on the worldwide scale.

Some experts call the tax policies “inexplicably complex and overly intrusive”. One American lawyer working overseas writes that the “regulatory net applies so broadly that personal and business accounts of law-abiding Americans simply trying to comply with the rules are caught up in its paperwork net – and drowning.”

If you have questions about whether you must file a FBAR and/or other tax forms, contact us now at McRuer CPAs.  Reminder: If you need to file a report you should do so by the June 30th deadline to avoid a costly omission.*

*This information summarizes certain recent tax, legislative and/or regulatory developments that may interest McRuer CPAs clients and friends. This report is intended for general information purposes only, is not a complete summary of the matters referred to, and does not represent legal, regulatory or tax advice nor does it constitute a professional service offering to the recipient.  Recipients of this report are cautioned to seek appropriate professional advice regarding any of the matters discussed in this report considering the recipients' own particular situation. McRuer CPAs does not undertake to keep the recipients of this report advised of future developments or of changes in any of the matters discussed in this report.

 

 

04/13/2015

Financial Transaction Tax and How It May Affect You

Washington lawmakers are watching the Financial Transaction Tax (FTT) debate in Europe as Democrat party leaders have made enacting this kind of tax a central part of their economic proposals for 2015.  The effects of this debate could reach across international money markets into the pockets of common American taxpayers.

NYSEA FTT is a  monetary transactions tax usually associated with the financial sector as compared to consumption taxes that consumers pay on products and services.  Democrat Congressman Keith Ellison of Minnesota has introduced an even more specific “Inclusive Prosperity Act” which would tax the sale of stocks, bonds and derivatives.  It is part of the on-going party theme of supporting “Main Street over Wall Street.”  He claims the tax would reduce market speculation, discourage high-volume and high-speed trading, and slow down the proliferation of complex derivatives.

Republican FTT opponents argue these kinds of taxes would do little to harm Wall Street, even admitting they would raise badly needed revenue, but disagree about where the money would come from.  They claim FTTs would put financial stress on working Americans by increasing the costs of having individual, family and employee retirement accounts.  This would occur at a time when retirement plans operated by corporations are disappearing and Americans are already struggling with costs, both in time and money, associated with managing their own IRAs.  They say the new taxes would make it more difficult for common people to save and invest.

Financial transaction taxes in general are usually proposed at very small percentage rates, but they could affect all transactions, of which there may be dozens (or even hundreds depending upon the size and scope) per account every day.  Proponents believe the taxes would raise billions of dollars in new revenues.  While experts predict the debate will not lead to a specific action this year, the issue will remain on the burner ready to heat up in time for the 2016 Presidential race.

Worldwide, there are several types of financial transaction taxes being implemented by various organizations and regions.  Some are domestic meaning they are imposed only within one nation or financial region.  Others are multinational, and affect transactions made between countries.  Nearly 50 nations have some form of FTT today.

EU finance ministers have been fiercely debating the scope of the tax pushing for a wide tax base with low tax rates.  They have made a public commitment to start a EU FTT on January 1, 2016 with what’s called an “extra-territorial” reach across markets and nations.  Yet, the last meeting of the 28 Member States in February ended with little progress on key issues and they are not set to negotiate again until May.  Still to be worked out; who will collect the tax, the penalty for non-payment and who will be responsible for paying the penalty.

10/22/2014

2015 Tax Brackets Now Available

Federal tax return with penEstimated taxable income brackets and rates are now available for the 2015 tax year.  Each year, the IRS adjusts more than 40 tax provisions for inflation to prevent “bracket creep”.  Bracket creep is what happens when inflation causes taxpayers to be pushed into a higher income tax bracket or have a reduced value from credits or deductions even though they may have had no actual real income increase.

The IRS adjusts income thresholds, deduction amounts and credit values using the Consumer Price Index (CPI) to calculate the past year’s inflation. Yet, in a bit more complicated approach, each tax provision is also adjusted from a specified base year.

In 2015, the standard deduction will increase by $100 to $6,300 for single taxpayers and $200 to $12,600 for married couples filing jointly. The personal exemption for 2015 will be $4,000.

Also in 2015, the highest marginal income tax rate of 39.6% will be levied on single taxpayers whose adjusted gross income is $413,000 and higher and $464,850 and higher for married taxpayers.  The remaining federal income tax rates are:

  • $0-$9,225 single/$0-$18,450 married – 10%
  • $9,225-$37,450 single/$18,450-$74,900 married- 15%
  • $37,450-$90,750 single/$74,900-$151,200 married- 25%
  • $90,750-$189,300 single/$151,200-$230,450 married- 28%
  • $189,300-$411,500 single/$230,450 to $411,500 married- 33%
  • $411,500-$413,200 single/$411,500-$464,850 married- 35%

For more information on 2015 federal income tax rates, click here to see the Tax Policy Center’s Tax Facts chart.

Individual state and local income taxes are also complex and vary from state to state.  Their 2015 rates are harder to find and calculate.  To read more about 2014 state income tax rates, click here to see the latest review by a professional tax information organization.

02/18/2014

IRAs Need Updated Designated Beneficiary Forms

Individual Retirement Accounts have been around long enough now that many Americans are learning what happens when they inherit an IRA. It’s not always good news.  If the owner has not filed an up-to-date beneficiary form, the heir of the estate risks losing a major portion of the IRA value to taxes and fees. IRA-nest-egg

The Employee Benefit Research Institute (EBRI) reports the average IRA value is close to $94,000. The EBRI also says there are nearly 15 million IRA accounts held by more than 11 million people.  With total assets of more than $1 trillion, it’s important to make certain that, should the owner die, the IRA doesn’t lose its value upon transfer to a new owner.

Advisors warn that many IRA owners mistakenly believe because they have a will, the person(s) they list as their heir(s) will automatically receive the IRA to use as a savings tool or turn into cash in whatever manner they wish.  Yet, without a specific and up-to-date IRA beneficiary designation form for each IRA, the beneficiary may be forced to empty the account right away risking taxes and penalties; and may even be bumped into a higher income tax bracket.   Some states require the accounts to go through probate court when there is no beneficiary form.

IRA owners should fill out what is a very simple beneficiary form separate from their will.  That way, when the owner dies, the designated beneficiary is able to determine the best distribution strategy over his or her lifetime.  A new beneficiary form is needed any time an IRA account is changed or updated, or the account is moved to a new custodian.

Typically, IRA beneficiaries must take distributions during their lifetime.  Inherited traditional IRAs require taxes to be paid on distributions.  Rollover, SEP, and SIMPLE IRAs are treated the same way. Beneficiaries are not required to pay taxes on distributions from an inherited Roth IRA.

Generally, surviving spouses have several choices including even disclaiming up to 100% of the IRA assets, which, besides avoiding extra taxable income, enables their children to inherit the IRA assets.  But, if the spouse decides to take a lump sum distribution, or begins distributions on a traditional IRA, taxes must be paid.

Non-spouse beneficiaries have fewer choices.  Among them, including taking the lump sum amount and paying a large share in federal taxes; disclaiming all or part of the assets for up to 9 months after the previous owner’s death; or begin taking taxable distributions from the account.

If you inherit an IRA, you cannot roll it over into your own IRA. You must also make certain it is re-titled as an inherited IRA.  If you move the IRA to a new custodian, make certain it is made as a “trustee-to-trustee” transfer or it will be considered as a taxable total distribution, thereby, ending the account as an IRA.  There are deadlines for your actions and you can even face the dreaded 50% penalty if you don’t make a required withdrawal in time.

To ensure you leave as much of your IRA asset as possible to whom you choose, or if you inherit an IRA, consult your financial advisor for the best steps to take to lessen the taxes and maximize the advantages of these retirement accounts.

If you have any questions about your financial savings plans, beneficiaries and the tax consequences of your choices, please contact us at McRuer CPAs.

02/14/2013

Worst States for Tax Rates

New “tax climate” rankings have been released giving a state-by-state view of the overall impact of all types of taxes on your pocketbook.   The range of the tax impact in the Midwest goes from average to not-so-good.

The Tax Foundation’s 2013 State Business Tax Climate Index compiles information for Upside down money out of pockets lawmakers and economists who use the results to compare their state’s tax rates to other states as they debate the effects of tax rate increases. 

The numbers are also used to see how attractive one state may be compared to another as competition to lure job-producing businesses heats up.

The new report shows overall (with #1 being the best ranking and #50 the worst) Missouri ranks #16, Kansas #26, Nebraska #31 and Iowa #42.

The rankings include the combined impact of individual income taxes, sales taxes, unemployment insurance taxes, property taxes and corporate taxes.  Some states benefit by not charging one or more of the major taxes.

The top ten states with the lowest overall tax impact are: #1 Wyoming, #2 South Dakota, #3 Nevada, #4 Alaska, #5 Florida, #6 Washington, #7 New Hampshire, #8 Montana, #9 Texas, and #10 Utah.

The states with the worst overall tax impact are: #46 Rhode Island, #47 Vermont, #48 California, #49 New Jersey and #50 New York.

The numbers show the state with the most improved ranking is Maine, moving from #37 to #30, which benefited in part from a repeal of their alternative minimum tax.  Michigan jumped from #18 to #12 following the implementation of a flat 6% corporate income tax replacing a complicated system that was accused of offering unfair tax preferences. 

As debates rage over how to increase jobs and turn around sagging economies, the Tax Foundation warns attention needs to be paid to what’s happening across state borders.  The report says, “They need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, rather than from Detroit to New Delhi.”

To check out the overall tax ranking and an explanation of what you are paying in your state, click on these links for an individual summation:

Missouri

Kansas

Iowa

Nebraska

The Impact of State Taxes

Here's an interesting article from The Fiscal Times titled "The 10 Worst States for Taxes".  To find out more about specific tax rates in Midwestern states, check out our blog titled, "Worst States for Tax Rates" that details the states with the best and the worst overall tax impact.  We also provide you links to review data on Missouri, Kansas, Iowa and Nebraska.
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