816-741-7882
Professional services with a personal touch.

Wealth Accumulation

11/03/2017

Details of House Tax Reform Bill

As you may know the House Ways and Means Committee has released the Tax Cut and Jobs Act (H.R. 1) providing some new tax reform provisions while incorporating many of the details included in the Republican-backed tax reform package submitted in September. There are a number of tax issues that may affect you, should they be approved following the budget debate process in Washington. Those details include changes, updates and protections for various business and individual tax rates, deductions and retirement plan contributions.

Tax-Reform with flagThe Journal of Accountancy has published an article with a review of the provisions of the new tax proposal draft (as submitted before debate and possible amendments) that offers a review of many of the details that we hope will be informative and helpful to you as you begin thinking of year-end tax planning.

 Note: his article has been published by the Journal of Accountancy, a professional’s resource for information regarding accounting and taxation issues.  It is the primary publication, as edited and released by the Association of International Certified Professional Accountants. It is one of many resources we use at McRuer CPAs to keep us informed about issues that affect the businesses and individuals we serve.  This particular news information article regards the consideration of a legislative proposal. Such initial legislation is subjected to debate and amendments. Therefore, this first review of the tax reform legislation draft is to be considered as a preliminary summary and first look at the new tax reform proposal and may not be the actual legislation approved by lawmakers over time.

For a look at the actual bill itself, noting that the language will likely be edited in several ways before passing, click here.

Details of Tax Reform Legislation Revealed

By Sally Schreiber, J.D.; Paul Bonner; and Alistair Nevius, J.D.

The House Ways and Means Committee released draft tax reform legislation on Thursday. The Tax Cuts and Jobs Act, H.R. 1, incorporates many of the provisions listed in the Republicans’ September tax reform framework while providing new details. Budget legislation passed in October would allow for the tax reform bill to cut federal government revenue by up to $1.5 trillion over the next 10 years and still be enacted under the Senate’s budget reconciliation rules, which would require only 51 votes in the Senate for passage. The Joint Committee on Taxation issued an estimate of the revenue effects of the bill on Thursday showing a net total revenue loss of $1.487 trillion over 10 years.

The bill features new tax rates, a lower limit on the deductibility of home mortgage interest, the repeal of most deductions for individuals, and full expensing of depreciable assets by businesses, among its many provisions.

Lawmakers had reportedly been discussing lowering the contribution limits for Sec. 401(k) plans, but the bill does not include any changes to those limits.

The Senate Finance Committee is reportedly working on its own version of tax reform legislation, which is expected to be unveiled next week. It is unclear how much that bill will differ from the House bill released on Thursday.

Individuals

Tax rates: The bill would impose four tax rates on individuals: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The current rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 25% bracket would start at $45,000 of taxable income for single taxpayers and at $90,000 for married taxpayers filing jointly.

The 35% bracket would start at $200,000 of taxable income for single taxpayers and at $260,000 for married taxpayers filing jointly. And the 39.6% bracket would apply to taxable income over $500,000 for single taxpayers and $1 million for joint filers.

Standard deduction and personal exemption: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019. However, the personal exemption would be eliminated.

Deductions: Most deductions would be repealed, including the medical expense deduction, the alimony deduction, and the casualty loss deduction (except for personal casualty losses associated with special disaster relief legislation). The deduction for tax preparation fees would also be eliminated.

However, the deductions for charitable contributions and for mortgage interest would be retained. The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on deductibility would be reduced to $500,000 of acquisition indebtedness from the current $1.1 million. The overall limitation of itemized deductions would also be repealed.

Some rules for charitable contributions would change for tax years beginning after 2017. Among those changes, the current 50% limitation would be increased to 60%.

The deduction for state and local income or sales taxes would be eliminated, except that income or sales taxes paid in carrying out a trade or business or producing income would still be deductible. State and local real property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

Credits: Various credits would also be repealed by the bill, including the adoption tax credit, the credit for the elderly and the totally and permanently disabled, the credit associated with mortgage credit certificates, and the credit for plug-in electric vehicles.

The child tax credit would be increased from $1,000 to $1,600, and a $300 credit would be allowed for nonchild dependents. A new “family flexibility” credit of $300 would be allowed for other dependents. The $300 credit for nonchild dependents and the family flexibility credit would expire after 2022.

The American opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017. Contributions to Coverdell education savings accounts (except rollover contributions) would be prohibited after 2017, but taxpayers would be allowed to roll over money in their Coverdell ESAs into a Sec. 529 plan.

The bill would also repeal the deduction for interest on education loans and the deduction for qualified tuition and related expenses, as well as the exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs.

Other taxes: The bill would repeal the alternative minimum tax (AMT).

The estate tax would be repealed after 2023 (with the step-up in basis for inherited property retained). In the meantime, the estate tax exclusion amount would double (currently it is $5,490,000, indexed for inflation). The top gift tax rate would be lowered to 35%.

Passthrough income: A portion of net income distributions from passthrough entities would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates, effective for tax years after 2017. The bill includes provisions to prevent individuals from converting wage income into passthrough distributions. Passive activity income would always be eligible for the 25% rate.

For income from nonpassive business activities (including wages), owners and shareholders generally could elect to treat 30% of the income as eligible for the 25% rate; the other 70% would be taxed at ordinary income rates. Alternatively, owners and shareholders could apply a facts-and-circumstances formula.

However, for specified service activities, the applicable percentage that would be eligible for the 25% rate would be zero. These activities are those defined in Sec. 1202(e)(3)(A) (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees), including investing, trading, or dealing in securities, partnership interests, or commodities.

Business provisions

A flat corporate rate: The bill would replace the current four-tier schedule of corporate rates (15%, 25%, 34%, and 35%, with a $75,001 threshold for the 34% rate) with a flat 20% rate (25% for personal services corporations). The corporate AMT is repealed along with the individual AMT.

Higher expensing levels: The bill would provide 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (with an additional year for longer-production-period property). It would also increase tenfold the Sec. 179 expensing limitation ceiling and phaseout threshold to $5 million and $20 million, respectively, both indexed for inflation.

Cash accounting method more widely available: The bill would increase to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the uniform capitalization (UNICAP) rules. The exemption from the percentage-of-completion method for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.

NOLs, other deductions eliminated or limited: Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses. Carryforwards for losses arising after 2017 would be increased by an interest factor. Other deductions also would be curtailed or eliminated:

  • Instead of the current provisions under Sec. 163(j) limiting a deduction for business interest paid to a related party or basing a limitation on the taxpayer’s debt-equity ratio or a percentage of adjusted taxable income, the bill would impose a limit of 30% of adjusted taxable income for all businesses with more than $25 million in average gross receipts.
  • The Sec. 199 domestic production activities deduction would be repealed.
  • Deductions for entertainment, amusement, or recreation activities as a business expense would be generally eliminated, as would employee fringe benefits for transportation and certain other perks deemed personal in nature rather than directly related to a trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).

Like-kind exchanges limited to real estate: The bill would limit like-kind exchange treatment to real estate, but a transition rule would allow completion of currently pending Sec. 1031 exchanges of personal property.

Business and energy credits curtailed: Offsetting some of the revenue loss resulting from the lower top corporate tax rate, the bill would repeal a number of business credits, including:

  • The work opportunity tax credit (Sec. 51).
  • The credit for employer-provided child care (Sec. 45F).
  • The credit for rehabilitation of qualified buildings or certified historic structures (Sec. 47).
  • The Sec. 45D new markets tax credit. Credits allocated before 2018 could still be used in up to seven subsequent years.
  • The credit for providing access to disabled individuals (Sec. 44).
  • The credit for enhanced oil recovery (Sec. 43).
  • The credit for producing oil and gas from marginal wells (Sec. 45I)

Other credits would be modified, including those for a portion of employer Social Security taxes paid with respect to employee tips (Sec. 45B), for electricity produced from certain renewable resources (Sec. 45), for production from advanced nuclear power facilities (Sec. 45J), and the investment tax credit (Sec. 46) for eligible energy property. The Sec. 25D residential energy-efficient property credit, which expired for property placed in service after 2016, would be extended retroactively through 2022 but reduced beginning in 2020.

Bond provisions: Several types of tax-exempt bonds would become taxable:

  • Private activity bonds would no longer be tax-exempt. The bill would include in taxpayer income interest on such bonds issued after 2017.
  • Interest on bonds issued to finance construction of, or capital expenditures for, a professional sports stadium would be taxable.
  • Interest on advance refunding bonds would be taxable.
  • Current provisions relating to tax credit bonds would generally be repealed. Holders and issuers would continue receiving tax credits and payments for tax credit bonds already issued, but no new bonds could be issued.

Insurance provisions: The bill would introduce several revenue-raising provisions modifying special rules applicable to the insurance industry. These include bringing life insurers’ NOL carryover rules into conformity with those of other businesses.

Compensation provisions: The bill would impose new limits on the deductibility of certain highly paid employees’ pay, including, for the first time, those of tax-exempt organizations.

  • Nonqualified deferred compensation would be subject to tax in the tax year in which it is no longer subject to a substantial risk of forfeiture. Current law would apply to existing nonqualified deferred compensation arrangements until the last tax year beginning before 2026.
  • The exceptions for commissions and performance-based compensation from the Sec. 162(m) $1 million limitation on deductibility of compensation of certain top employees of publicly traded corporations would be repealed. The bill would also include more employees in the definition of “covered employee” subject to the limit.
  • The bill would impose similar rules on executives of organizations exempt from tax under Sec. 501(a), with a 20% excise tax on compensation exceeding $1 million paid to any of a tax-exempt organization’s five highest-paid employees, including “excess parachute payments.”

Foreign income and persons

Deduction for foreign-source dividends received by 10% U.S. corporate owners: The bill would add a new section to the Code, Sec. 245A, which replaces the foreign tax credit for dividends received by a U.S. corporation with a dividend-exemption system. This provision would be effective for distributions made after 2017. This provision is designed to eliminate the “lock-out” effect that encourages U.S. companies not to bring earnings back to the United States.

The bill would also repeal Sec. 902, the indirect foreign tax credit provision, and amend Sec. 960 to coordinate with the bill’s dividends-received provision. Thus, no foreign tax credit or deduction would be allowed for any taxes (including withholding taxes) paid or accrued with respect to any dividend to which the dividend exemption of the bill would apply.

Elimination of U.S. tax on reinvestments in U.S. property: Under current law, a foreign subsidiary’s undistributed earnings that are reinvested in U.S. property are subject to current U.S. tax. The bill would amend Sec. 956(a) to eliminate this tax on reinvestments in the United States for tax years of foreign corporations beginning after Dec. 31, 2017. This provision would remove the disincentive from reinvesting foreign earnings in the United States.

Limitation on loss deductions for 10%-owned foreign corporations: In a companion provision to the deduction for foreign-source dividends, the bill would amend Sec. 961 and add new Sec. 91 to require a U.S. parent to reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from its foreign subsidiary, but only for determining loss, not gain. The provision also requires a U.S. corporation that transfers substantially all of the assets of a foreign branch to a foreign subsidiary to include in the U.S. corporation’s income the amount of any post-2017 losses that were incurred by the branch. The provisions would be effective for distributions or transfers made after 2017.

Repatriation provision: The bill would amend Sec. 956 to provide that U.S. shareholders owning at least 10% of a foreign subsidiary will include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent that E&P have not been previously subject to U.S. tax, determined as of Nov. 2, 2017, or Dec. 31, 2017 (whichever is higher). The portion of E&P attributable to cash or cash equivalents would be taxed at a 12% rate; the remainder would be taxed at a 5% rate. U.S. shareholders can elect to pay the tax liability over eight years in equal annual installments of 12.5% of the total tax due.

Income from production activities sourced: The bill would amend Sec. 863(b) to provide that income from the sale of inventory property produced within and sold outside the United States (or vice versa) is allocated solely on the basis of the production activities for the inventory.

Changes to Subpart F rules: The bill would repeal the foreign shipping income and foreign base company oil-related income rules. It would also add an inflation adjustment to the de minimis exception to the foreign base company income rules and make permanent the lookthrough rule, under which passive income one foreign subsidiary receives from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, provided that income was not subject to current U.S. tax or effectively connected with a U.S. trade or business.

Under the bill, a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder for purposes of determining CFC status. The bill would also eliminate the requirements that a U.S. parent corporation must control a foreign subsidiary for 30 days before Subpart F inclusions apply.

Base erosion provisions: Under the bill, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on 50% of the U.S. parent’s foreign high returns—the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7% plus the federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense.

The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110% of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization (EBITDA).

Payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved.

Exempt organizations

Clarification that state and local entities are subject to unrelated business income tax (UBIT): The bill would amend Sec. 511 to clarify that all state and local entities including pension plans are subject to the Sec. 511 tax on unrelated business income (UBI).

Exclusion from UBIT for research income: The act would amend the Code to provide that income from research is exempt from UBI only if the results are freely made available to the public.

Reduction in excise tax paid by private foundations: The bill would repeal the current rules that apply either a 1% or 2% tax on private foundations’ net investment income with a 1.4% rate for tax years beginning after 2017.

Modification of the Johnson Amendment: Effective on the date of enactment, the bill would amend Sec. 501 to permit statements about political campaigns to be made by religious organizations.

Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) and Paul Bonner (Paul.Bonner@aicpa-cima.com) are JofA senior editors, and Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

03/07/2016

Money Fights and Millennials

A new survey of Millennial couples says choices about finances are among the top reasons they argue. There are 80 million Millennials in the U.S. alone, and they are expected to be spending up to $200 billion annually by 2017. This is the reason business, political and social experts are keeping a close eye on their habits and lifestyle choices.

Millennials are the generation generally born in the mid 1980s and up to the early 2000s.  In a joint effort, the American Institute of CPAs (AICPA) and the Ad Council surveyed couples who were between 25 to 34 years of age, employed, and married or living with a partner.  The results revealed 88% say financial decisions cause tension. Of that number, 31% say they argue about money weekly, and 20% say they argue about finances daily.

Couple fight over moneyExperts define Millennials as racially diverse, sociable (especially active on social networks), community-minded, health conscious and more liberal politically. They are apt to spend money on higher-priced goods if the products or services are connected to a “good cause” or a “healthy standard.” The problem, the survey shows, is that while Millennials seem to enjoy discussing and supporting important issues with their dollars, they fail to share their feelings and habits about money with the person they are closest to and who would be the most affected. When asked, less than 50% said they had discussed finances in detail with their loved one before marriage.

Many Millennials today enter into long-term relationships already burdened with high monthly expenses connected to credit card bills and higher education loans. Even though the survey results showed nearly half of the couples paid an equal share of household expenses, the couples said their partner had different financial habits and debt issues that made saving difficult.

The National CPA Financial Literacy Commission warns Millennials that greater spending power comes with a greater responsibility to understand a potential partner’s financial values and beliefs. A news release emphasizes, “We encourage couples to have a serious conversation about their financial hopes and dreams and the steps they need to take to get there.”

The AICPA features a “Feed the Pig” website that provides tips for Millennial couples to help them think beyond the honeymoon phase to daily money matters. If you are thinking about getting married or want to confirm financial choices to build a better financial future as a couple, contact us at McRuer CPAs.

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.

04/07/2015

Social Security Disability In Trouble

Officials report the Social Security Disability Insurance (SSDI) program is in trouble financially and in less than two years is expected to not be able to pay full benefits.

Social-security-disabilitySSDI provides supplemental income to the mentally or physically disabled who cannot work full-time.  The Social Security Administration reports that more than 11 million Americans receive SSDI payments each year.

The SSDI has petitioned lawmakers to access funds in the broader, less financially stressed Social Security retirement program until its own funding deficit can be solved.

It’s not surprising that positions about this issue divide along party lines. Republicans want the SSDI to fix its underlying costly administration structure that drains funds, which could otherwise be paid as benefits.  They also want to change eligibility requirements to limit benefit payments to those who are most needy. 

Democrats claim the Republicans had already targeted SSDI for budget cuts and are using the current fiscal crisis as a way to cut benefits overall creating "a crisis where none exists.”  They say Republicans are refusing for political reasons to accept a proposal supported by President Obama that they claim could fix the problem.  A number of Democrats are pushing for increases in both disability and social security retirement benefits.

Financial and political analysts agree the issue will be a major debate topic and will be one of the first action items the next President must address in early 2016.

The health of the larger Social Security retirement fund remains unclear.  Annual reports predict the fund will be depleted by 2033.  The Heritage Foundation confirms the cash-flow deficit began in 2010 when $51 billion in benefits were paid above what was received in payroll taxes, and numbers show the deficit is getting worse each year.  An effort to reallocate funds from one resource to another is considered a temporary fix.  At the present payment rate all reserve funds may dry up in 20 years.

Some proposed solutions include increasing the Social Security tax from 6.2% to 7% of earnings, changing the cost-of-living adjustment, enacting a means test that would reduce or eliminate social security for retirees with higher incomes, and raising the retirement age to 68.

If you have questions about how your retirement plans may be affected by Social Security funding issues, contact McRuer CPAs for a review of your strategies and goals.

03/27/2015

Income Taxes When You Sell Your Home

With so much debate over taxes on assets and capital gains, many taxpayers are confused about the tax rules on gains or losses when selling their personal home.

House soldIf you sold a home in the 2014 tax year, you may be able to exclude part or all of the profit from your income.  This tax rule generally applies if you’ve owned and used the property as your main home for at least two out of five years before the date of sale.

A capital gain or loss is measured against the “basis” of the property; that is, the price that you paid for it when you purchased it originally plus the amounts you paid for any improvements.  Note that you cannot add the value of your own labor.  You can use an IRS worksheet called Publication 523 to calculate the gain (or loss) on the sale.

You are allowed to exclude from your income up to $250,000 of capital gains from the sale of a personal residence ($500,000 on a joint return).  Additionally, to be clear, any gain on the sale of a personal residence is not subject to the new Net Investment Income Tax that was enacted in 2013.

If you can exclude all of the gain, you don’t need to report the sale of the home on your income tax return.  But, know that you can exclude a gain from the sale of only one main home per two-year period.  If you own more than one home, the “main” home is the one where you reside most of the time.  You must pay tax on the gain from selling any other home.

If you can’t exclude all of the gain on your home’s sale, you’ll need to report the home sale on your individual income tax return.  In that case, you will probably also receive a Form 1099-S indicating you have earned proceeds from a real estate transaction. You must submit that form with your income tax return.

If you sell your main home for which you received a first-time homebuyer credit, special rules may apply on any gains that may redirect the funds to repay the credit you previously received.

What if you sell your home at a loss?  If the money that you receive from selling your home is less than your cost basis, there is no tax benefit.  Even though it may be a loss, you cannot deduct the loss from your income.

If you sold a home, or are planning to sell your main home, and want to better understand the tax consequences, contact us at McRuer CPAs for an analysis.

03/18/2015

Divorce, Death, Benefits and Taxes

The emotional stress and damage of divorce can have even more lasting consequences if personal finances and assets are not updated to reflect your changed situation.

It’s particularly important to address what will happen after your death, when certain assets and benefits may unintentionally be passed to your former spouse or his or her family.

Divorce-money-fightFor example, a current New York court case involving the assets of a woman who died at age 43 has now reached that state’s appellate court.  The woman’s family is battling her former in-laws who stand to inherit her home that her family has owned for generations, all because she did not update her will.  New York divorce laws automatically prevent her ex-husband from inheriting the property, but her secondary beneficiaries remain her ex-in-laws; so they are fighting over the property now.

It may be emotionally difficult to address your financial assets in the midst of divorce, but if you are going through a divorce or have even been divorced several years, it will pay off in the long run for you and your family to review and update your financial documents.

Be sure you have updated your estate plans, check insurance and other beneficiary designations and beneficiary deeds.  Also provide your loved ones with copies of the updated documents, or let them know where to find them.  Divorcing couples should also consider individually seeking a new financial adviser to avoid any conflicts of interest. 

Make certain your will clearly states your intentions, and that your powers of attorney, health-care proxy, and beneficiary designations on IRAs, insurance policies, bank accounts, brokerage accounts, and annuities name the people that you wish.  Remember, no matter what a will says, these financial accounts and policies will pass to the individuals named on them, so having updated directives for each account is extremely important.

As we have detailed in our blog IRAs Need Updated Beneficiary Forms, changes in beneficiaries for annuities and IRAs must be submitted in writing and require a signed and dated document be sent to the financial institution handling the account or policy.

For some accounts, the original financial agreements stipulate the ex-spouse cannot be removed as a beneficiary, so the beneficiary may want to take steps to clarify the arrangements to ensure his or her name remains on the account.

When a divorce is final, the final divorce decree may be sent to the plan administrator directing how money in IRA accounts should be divided and transferred into separate accounts.  Company-sponsored qualified retirement plans will need additional steps.  In those cases, the court must issue a Qualified Domestic Relations Order (QDRO) properly apportioning retirement plan assets between the former spouses.

However you wish to change your beneficiary status or account information, it’s also a good idea to request a written confirmation notice from your insurance company, financial planner and/or banker confirming they have received and acted on your changes.  Then, keep all the updated documents in a secure location that can be found in the event that you may become incapacitated or die.

Divorce may also affect a person’s current and future income tax obligation, and may affect future taxes owed on assets and retirement accounts.  Receiving or paying alimony payments or child support may also have tax consequences.

Divorce is painful.  Planning your next steps both personally and financially can help ease concerns as time passes.

Consider meeting with a McRuer CPAs expert who will help you identify and act upon the best financial strategy to help you now and in the years ahead.  Contact us online or call 816.741.7882 for a consultation.

03/31/2014

Actual Taxes for Virtual Money

Virtual currency is the latest product of the global internet-connected marketplace we live and work in today.  The most popular form of virtual currency is called Bitcoin. Now the IRS has issued new guidance ensuring the same old tax rules apply to this new kind of money.

Bitcoins are under scrutiny for a variety of reasons.  First, let’s look at what virtual money is and how it works.  Bitcoin is a payment network where a user can anonymously use their country’s currency to quickly purchase any amount of bitcoins on an exchange.  The digital bitcoins may then be used to buy any kind of product or service that accepts virtual money payments.

Bitcoin_bigToday, everything from webhosting services, to pizza and even manicures can be purchased with bitcoins. Bitcoins make international payments easy and cheap because this kind of currency has not yet been subject to any country’s regulations nor is it controlled by a Central Bank.

Think about how you and your family may attend a local fair.  In order to ‘purchase’ a seat on the latest spinning carnival ride, you must use your cash to purchase a ticket at a booth.  Then you give the ticket to the ride’s operator in order to take your seat.  Some rides cost more tickets than others and price adjustments can be made seamlessly and quickly.  Virtual money operates in the same way. 

When you exchange your currency for bitcoin, you have proof of the bitcoin value in what is called a “digital wallet” which you can choose to set up on your own computer, mobile device or in the cloud. You may now use the virtual account to send or accept bitcoins for selling or buying products and services.  The wallet ID is all a buyer or seller sees, so the purchase is virtually anonymous.

More merchants nationwide are beginning to accept these kinds of virtual currency payments, because they avoid paying the 2% to 3% credit card transaction fees or other transaction costs charged by their ‘middle man’ bank.  The bitcoins received can be exchanged right away for deposit as the business’ currency of choice.  This kind of payment is rapidly growing in popularity for companies who provide technical and online services to a worldwide client base.

Bitcoins are becoming so popular that even money market investors are buying and selling the bitcoins as a commodity.  In fact, speculators are now fueling price volatility because they are buying and selling bitcoins at a far greater rate than the rate of general commercial use.

That leads us to the downside.  Because of the anonymous nature of purchases, bitcoins have become the currency of choice for the online purchase of illegal drugs, illicit activities and paying for legitimate services with the provider expecting to be able to avoid taxes.  There is also a warning about investing in currencies like this that have no Central Bank authority to guarantee or insure values.  

Now, as bitcoins are making a noticable impact in the marketplace, the IRS is issuing new warnings to end any questions about the taxability of bitcoins and virtual money payments.  In a new IRS guidance, the agency makes it clear that, for U.S. federal tax purposes that the same general tax principles that apply to property transactions also apply to transactions using virtual currency.

The Journal of Accountancy explains that “in computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value (FMV) of the virtual currency (measured in U.S. dollars) as of the date the virtual currency was received.”

There are also several tax rules affecting virtual currency transactions and income.  For example, some people participate in what’s called “mining” to earn bitcoins.  It is a type of reward system for solving complex math problems.  This kind of bitcoin income is reportable.

Some global service providers and contractors are accepting bitcoins for payments to employees or themselves.  Wages paid to employees are taxable to the employee and independent contractors also face the same self-employment tax rules with payers required to issue Form 1099.

Experts say some form of virtual money is here to stay as our internet-connected world provides global accessibility 24 hours a day.  Your decision about how and when you choose to use virtual money should be carefully considered, especially if you are considering whether to accept bitcoins as payment for goods or services.  For more information on how this issue may affect you or your business, please contact us at McRuer CPAs for a review of your goals and the possible tax consequences.

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.

06/13/2013

Taxes and the Second Home Dream

Federal tax provisions affecting residential real estate are being reviewed for possible cuts. The National Association of Realtors has recently defended the tax deductions associated with home ownership in testimony before the U.S. House Ways and Means Committee.

Tax deductions make home ownership financially attractive.  New tax laws provide updated guidelines on mortgage availability and regulations on lenders.  These and other benefits have helped increase the purchase rate of “second” homes.   But as tax laws continue to change, homebuyers may need to more carefully consider the tax consequences of their purchase.

Nationally, about one third of home purchases today are for second homes.  Second homes are most often purchased as an investment, a vacation home, or a rental property. 

Real estate professionals say more homeowners today are purchasing a home for their elderly parents or their adult children who cannot otherwise afford to pay for a home during the economic downturn.  These relatives may have few or no resources of their own to make down payments or pay for home repairs. Some may pay rent and/or utilities for the residence.

Should you consider purchasing a second home, there are tax advantages and a few warnings.

Keys to second home

First, a warning: there’s a potential pitfall for higher income taxpayers who are subject to the alternative minimum tax (AMT).  Those who must pay AMT cannot deduct real estate taxes, they must pay tax on any gain on the sale of the property, and should there be a loss on the sale of the property later, the loss is not deductible.

There are several tax deduction benefits though, that make the purchase of a second home attractive, such as:

Mortgage interest: Mortgage interest paid on a loan used to finance the price of the purchase, improvements made to the home, or the building of a second home is typically 100 percent deductible, just as it is on a primary residence.

Rental income:  If you rent the property no more than 14 days a year, you can pocket the rental income tax free.  If you rent the property for more than 14 days you must report all rental income, but you can deduct a portion of the mortgage interest, property taxes, insurance premiums, utilities and other rental expenses.

Investment:  If you buy a property and expect that you may sell it again when property values go up, you are allowed to earn a certain amount of profit tax free.  But the practice is not as lucrative as it used to be.  Congress has changed the tax law to give the greater benefit to those who have lived in the second house for a time as a permanent residence before they sell it.  Tax rules on losses have also changed; though losses collectively over time may be deducted from taxable profit when you sell the property.

As you review the financial considerations, remember that much of the tax benefit depends upon how high your overall income is and how much you may use the property yourself.

Each taxpayer’s story is unique, so the purchase of a second home should be deliberated carefully and with the assistance of not only a real estate professional, but also a tax professional you trust.  For more information, contact us at McRuer CPAs.


RSS Feed

Welcome from Scott McRuer
& the McRuer CPAs Team

Scott McRuer
Learn more about Scott

Follow Scott and his team on your favorite social media

Facebook LinkedIn YouTube