TAX LETTERS 2019
Re: TCJA: Estate, Gift, and GST Tax Exclusions Increased
The Tax Cuts and Jobs Act doubles the basic exclusion amount for federal estate and gift taxes and the exemption amount for the generation-skipping transfer (GST) tax. For the estates of decedents dying and gifts made after 2017 and before 2026, the amount increases from $5 million to $10 million, as adjusted for inflation.
Estate and gift tax exclusion doubled
For the estates of decedents dying and gifts made after 2017 and before 2026, the basic exclusion amount for purposes of federal estate and gift taxes is doubled from $5 million to $10 million, as adjusted for inflation. Accordingly, the estate and gift tax basic exclusion amount applicable to the estates of decedents dying and gifts made in 2018 is estimated to be over $11 million, as adjusted for inflation. For a married couple using portability, the maximum applicable exclusion amount would be doubled again, estimated to be more than $22 million.
Example: Carol Cologne, a wealthy widow, dies in 2018 leaving a taxable estate of $20 million. Her late husband died earlier in 2018, having used only $2 million of his available estate tax exclusion amount. Her estate will owe no federal estate tax. However, if the couple had died under the same circumstances in 2017, the estate tax payable would have been $4,408,000.
Because the doubling of the estate and gift tax exclusion amount expires for decedents dying and gifts made after December 31, 2025, the next several years present a tremendous opportunity for wealthy individuals and married couples to make large gifts, including those that leverage the amount of the available exclusion, such as those to grantor retained annuity trusts (GRATs).
According to the IRS Statistics of Income tables presenting data on estate tax returns for tax year 2016, a total of 5,219 taxable returns were filed as compared to 7,192 nontaxable returns. Of the taxable returns, just over 2,400 fell within the $5 to $10 million gross estate range, with almost 1,300 in the $10 to $20 million range. Only 300 returns were filed with gross estates in excess of $50 million. These statistics primarily reflect data from the estates of decedents who died in 2015, when the basic exclusion amount was $5.43 million, but also include some returns for decedents who died in years prior to 2015, as well as a small number of estates with respect to deaths that occurred in 2016. The large increase in the basic exclusion amount after 2017 will no doubt lead to further decreases in the number of taxable estates.
GST tax exemption amount
Because the exemption from the GST tax is computed by reference to the basic exclusion amount used for estate and gift tax purposes, the GST exemption amount for GSTs occurring in 2018 is also estimated to be more than $11 million. Portability does not apply for purposes of the GST tax.
Corresponding adjustments with respect to prior gifts. In addition to the increase in the basic exclusion amount, the Tax Cuts and Jobs Act modifies the computation of gift tax payable and estate tax payable in cases where gifts have been made in prior years. With respect to the computation of gift tax payable, the tax rates in effect at the time of the decedent’s death are used rather than the rates that were in effect at the time the gifts were made
Inflation adjustments going forward. A separate amendment of the Tax Cuts and Jobs Act requires that future inflation adjustments mandated throughout the Internal Revenue Code be made using the “Chained” Consumer Price Index for All Urban Consumers (C-CPI-U) rather than the CPI adjustment used under current law. This change, effective for tax years beginning after December 31, 2017, will generally serve to slow down inflation adjustments to provisions throughout the Code, including the estate and gift tax exclusion amounts.
If you have any questions related to the increase of the exclusion amount for federal estate and gift taxes and the exemption amount for GST tax, or for estate planning in general, please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Tax Cuts and Jobs Act: Impact on Homeowners
Traditionally, tax law provides numerous incentives for home ownership by allowing the deduction for mortgage interest and real estate tax. The Tax Cuts and Jobs Act (TCJA) modifies these popular tax benefits.
Home mortgage interest is generally deductible if it is paid or accrued on acquisition indebtedness or home equity indebtedness secured by any qualified residence (i.e., a principal or second residence). The deduction for acquisition indebtedness is limited to interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return) and the first $100,000 on home equity loans ($50,000 for a married taxpayer filing a separate return).
Under the TCJA, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately) for tax years beginning in 2018 through 2025.
Transition relief. A taxpayer who has entered into a binding written contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, shall be considered to have incurred acquisition indebtedness prior to December 15, 2017.
Additionally, the TCJA suspends the deduction for interest on home equity indebtedness. For tax years beginning in 2018 through 2025, you may not claim a deduction for interest on home equity indebtedness.
Real Estate Tax
Under the TCJA, for tax years beginning in 2018 through 2025, you may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total amount of
1. state and local property taxes not paid or accrued in carrying on a trade or business, and
2. state and local income (or sales taxes in lieu of income taxes) for the tax year.
Foreign real property taxes cannot be deducted under this exception.
Caution. Under the TCJA, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years beginning after 2017.
In view of these tax changes, we urge you to contact us, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. We would like to assist you with home ownership as it applies to your overall tax plan. Please call our offices at your earliest convenience to arrange an appointment. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Re: Health Insurance Costs for Self-Employed Individuals Entitled to the Premium Tax Credit
Certain individuals who purchase qualified health care coverage through an American Health Benefit Exchange located in their state of residence are entitled to a refundable income tax credit equal to the premium assistance credit amount.
In general, you may be eligible for the credit if you meet all of the following:
- buy health insurance through the Marketplace;
- are ineligible for coverage through an employer or government plan;
- are within certain income limits;
- do not file a Married Filing Separately tax return (unless you meet certain criteria, which allows victims of domestic abuse to claim the premium tax credit); and
- cannot be claimed as a dependent by another person.
A self-employed individual may also be allowed a deduction for all or a portion of the premiums paid during the tax year for health insurance for the taxpayer, the taxpayer's spouse, the taxpayer's dependents, and any child of the taxpayer under the age of 27. This deduction is limited to the taxpayer's earned income from the trade or business with respect to which the health insurance plan is established.
The taxpayer must know the allowable health insurance premium deduction to compute the premium tax credit because the health insurance premium deduction is allowed in computing adjusted gross income and the adjusted gross income is necessary to compute the premium tax credit. A taxpayer who is eligible for both the deduction and a premium tax credit may have difficulty in making the determinations of those items.
Therefore, the IRS has issued guidance that is intended to provide taxpayers with calculation methods that resolve the circular relationship between the deduction and the tax credit. This guidance includes a special section for taxpayers who have a premium assistance amount with coverage months for which no health insurance premium deduction is allowed.
The use of the calculations provided by the IRS is optional; a taxpayer may determine the amounts of the deduction and the tax credit using any method that satisfies the requirements of the applicable tax law and regulations. We can help you determine how to get the greatest benefit from the deduction and credit available to you. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
The Tax Code imposes a "kiddie tax" on the unearned or investment income of children who are under 19 (under 24 if a student). Beginning after 2017, legislation has simplified the calculation of the kiddie tax on a child’s unearned income above a certain amount ($2,100 for 2018) by applying the tax rates applicable to trusts and estates.
Before 2018, if a child had unearned income above the threshold amount ($2,100 for 2017), the kiddie tax could be applied at the parents’ tax rate which was usually much higher than the child’s tax rate. The kiddie tax was created to lessen the effectiveness of intra-family transfers of income-producing property. Without the kiddie tax, families could shift income produced from income-producing property from the parents' high marginal tax rate to the child's generally lower tax bracket, thereby reducing a family's overall income tax liability.
The kiddie tax applies when at least one of the child's parents is alive at the close of the tax year, the child is not married, and the child falls in one of three categories. The categories are:
- the child has not attained the age of 18 by the close of the tax year;
- the child has not attained the age of 19 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year; or
- the child is a student who has not attained the age of 24 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year.
Please call our office to talk about the changes to kiddie tax and explore this opportunity to reduce taxes for your family. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Sale of a Residence with a Home Office
As someone who sees clients in an office located in your home, you're certainly aware of the tax breaks available for such usage. Although you have been claiming home office deductions for a number of years, you may not know about a potentially expensive tax trap that can hit you when the time comes to sell your home.
If you're planning to sell your home at a profit and "move up" to another one, you may be assuming that there won't be a tax to pay on the sale. Usually, that is a pretty good assumption because of the $250,000 exclusion of gain tax break on the sale of a principal residence (joint filers get a $500,000 exclusion). However, when you have a home office, or have taken the home office deduction in the past, you may have to pay "recapture" tax on the depreciation you have taken.
If your home office is not in the building in which you reside, you are treated as having sold two separate properties for purposes of using the home sale gain exclusion: a personal residence and a business building. The profit you realize on the sale of your home is entitled to the $250,000/$500,000 exclusion, but any profit you realize on the sale of the business part of your property is subject to tax.
If your home office is located in your dwelling unit (not, for example in a detached garage or other separate building), the amount of depreciation you have deducted in the past as a home office expense is subject to tax.
However, if the "simplified" option has been used the for the entire time you have had the home office (this method became available in 2013), no depreciation needs to be factored in when you sell your residence. The simplified option allows a deduction of $5 per square foot for home office space, up to a maximum deduction of $1,500 for the year.
Finally, please note that for employees, the home office deduction is a miscellaneous itemized deduction subject to the 2 percent of gross income limitation. These deductions are temporarily repealed in years 2018 through 2025. Thus, the home office deduction is not available as an employee expense in these years.
If you need any help in arranging things to save as much tax as possible on the sale of your home and office and plan for the home office in your next home, we will be happy to assist you. Please do not hesitate to call any time for a confidential discussion. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
TAX PLANNING 2019
2019 Alternative Minimum Tax for Individuals
As you know, the alternative minimum tax (AMT) system was originally enacted to ensure that all taxpayers, particularly higher-income taxpayers, pay at least a minimum amount of federal income tax. The AMT generally imposes a minimum tax on taxpayers who have substantially lowered their regular tax liability by taking advantage of tax-favored and preference items, including deductions, exemptions, and credits.
Essentially, the AMT system recalculates an individual's tax liability using a separate formula under which many of the otherwise available reductions to taxable income are disallowed. The alternative tax is then compared to the taxpayer's regular tax, and the higher amount must be reported as the tax due on the individual's return. Depending on the amount of your “taxable excess,” AMT rates of 26 or 28 percent may be imposed on tax preference and adjustment items.
The AMT exemption amounts are temporarily increased for individuals for tax years 2018 through 2025 by the Tax Cuts and Jobs Act. For those taxpayers who remain subject to the AMT, there is still an opportunity for tax planning. However, although the AMT is a significant concern, tax planning should not focus solely on eliminating AMT liability. Due to the complexity of the interrelationship of the AMT and regular tax systems, concentration on lowering minimum tax liability alone could easily result in an unwanted increase in your regular income tax liability.
In general, the best way to handle AMT liability is careful planning involving the coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability.
We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability. Please contact our office to make an appointment to discuss this important tax planning opportunity. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Charitable Giving - How to Benefit a Charity and the Family
Helping a charity and a family member at the same time, while achieving a tax break, is an attractive proposition. One such vehicle for doing this is the charitable remainder trust. With proper planning, it can provide you and your family with many tax and estate planning advantages.
Basically, you contribute cash to a trust. You designate your child to receive income from the trust for a fixed period of years or for life. When the child's income interest ends, the trust property is paid to a charity that you choose when you set up the trust.
One immediate tax advantage is that you get a substantial income tax deduction for a charitable contribution in the year you set up the trust. The amount of the deduction is the present value of the “remainder interest” (as it is technically called) that you gave to the charity. Furthermore, you do not have to pay gift tax for the charity's remainder. You also will save any estate tax that may have been due from the donated property because the property will not be included in your estate.
The income interest that you give to your child, however, is subject to gift tax. Even so, you may not have to pay any tax out-of-pocket. First, the annual exclusion can be used to reduce or eliminate gift tax. And, if the value of the income interest exceeds the annual exclusion amount, $15,000 for 2018 ($30,000 if your spouse consents to gift splitting), you still may not have to pay gift tax if you have not previously used all of your unified credit.
You cannot just set up any trust and gain the advantages outlined above. You must use a trust that satisfies the IRS requirements for a charitable remainder unitrust, a charitable remainder annuity trust or a pooled income fund. There is only one donor in the case of a charitable remainder annuity trust or unitrust, whereas pooled income funds involve commingling of funds from several donors. In that sense, pooled income funds offer better protection in the form of greater diversification.
The key difference between a unitrust and an annuity trust is how the income payment is computed. If you set up a unitrust, your child’s income payment each year will be a fixed percentage of the trust’s assets. This percentage must be at least 5 percent. With an annuity trust, the payment is a fixed amount, which must not be less than 5 percent of the initial value of the trust property. You cannot fix payments from a pooled income fund. They depend solely on the fund's earnings.
You don’t have to fund an annuity or unitrust with cash. You can transfer, for example, stock you own that has greatly appreciated in value from the amount you paid for it. An advantage of doing this, provided the transaction is properly structured, is that you would not pay tax on the gain like you would if you sold the stock. The trust could sell the stock without paying tax. A pooled income fund, however, is not exempt from tax and you would be taxed on property it sells at a gain.
Please do not hesitate to contact us to explore the proper vehicle for you, your family and your favorite charity. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Educational Savings Plans
As a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the high cost of a college education. However, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account. In addition, you might also want to invest in U.S. savings bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has their benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings.
Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified education expenses for a designated beneficiary. For tax years after 2017, $10,000 of distributions may be used for enrollment at a public, private, or religious elementary or secondary school. Qualified higher education expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.
Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.
Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.
Contributions are not deductible by the donor and distributions are not included in the beneficiary's income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings' account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.
U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years, therefore some planning is required.
The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.
Of course, in planning for higher-education costs, parents may also choose to use funds from an individual retirement account or a traditional form of savings. In addition, higher education costs may be supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child's life will make maximum use of a family's financial resources and may provide some tax benefit. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
2019 Estate and Income Tax Planning - Gift Tax Exclusions
If you’re like most people, you don’t like to think about planning your estate. But, it’s an important part of ensuring the financial security of your loved ones. One of the more common tools used in estate planning — and one to which everyone should at least give careful consideration — is a program of making gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth.
The 2017 Tax Cuts and Jobs Act doubles the basic exclusion amount for purposes of federal estate and gift taxes and the exemption amount for purposes of the generation-skipping transfer (GST) tax from $5 million to $10 million, before adjustment for inflation, for the estates of decedents dying and gifts and generation-skipping transfers made after 2017 and before 2026. For the estates of decedents dying and gifts made in 2018, the basic exclusion amount is $11,180,000, with a corresponding applicable credit amount of $4,417,800. In previous years, the exclusion amount was $5.43 million for 2015, $5.45 million for 2016 and $5.49 million for 2017. The maximum estate and gift tax rate is 40 percent.
Absent the immediate financial needs of a gift recipient, the main motivation for making large gifts during your lifetime rather than waiting to pass on your wealth at death is to remove the future appreciation from your eventual taxable estate. There is a certain degree of risk in this strategy since your donee receives a tax basis equal to what you paid for the asset while your heirs will receive a stepped-up tax basis equal to the asset’s value at your date of death. As a result, the loss of stepped- up basis and higher future tax rates on capital gains may diminish the benefits of current gift giving. Nevertheless, the planning consensus is that getting future appreciation out of a taxable estate still trumps worries about any potential tax issues for your donees if and when they eventually sell the gifted assets.
You can give away up to an “annual exclusion amount” per recipient per year free of gift tax and free of any future offset against any exclusion amount used to lower future gift or estate taxes. For 2018, the annual exclusion amount is $15,000.
There is a great deal of flexibility in the types of property that can be gifted. Gifts that qualify for the $15,000 annual exclusion can be made in money, property, such as stocks or bonds, or even a life insurance policy, so long as the recipient has the present right to possess or use the property. The gift may be in trust if the terms of the trust give the recipient the immediate right to the property or income from the property.
You can give up to $30,000 per recipient per year if you are married and your spouse consents to "split" your gifts. This is useful for spouses who do not own an equal amount of property. The spouse with less property can consent to gifts made by the wealthier spouse, thereby effectively doubling the amount that the wealthier spouse can give away tax free. To take advantage of "gift splitting," both spouses must be U.S. citizens or residents. The consent must be given on a gift tax return, so a return must be filed even if no gift tax is due. Don’t underestimate how an annual gift-giving plan using only the $30,000 split gift exclusion per donee can facilitate the tax-efficient transfer of family wealth.
As noted above in discussing large gifts, but equally applicable to smaller gifts, it is important to remember that when you make a gift, the recipient must take your basis in the property. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it. In contrast, if property is transferred to another at your death through your estate (and whether or not estate tax is owed), the recipient can use the value of the property at that time to measure any gain on the sale of the property. Consequently, choosing the right property to achieve your goals is an important aspect of any gift-giving program.
Another way to further the financial security of others without incurring gift tax is by payment of medical and educational expenses. You can pay an unlimited amount for these expenses tax free so long as the payments are made on behalf of the done and are paid directly to the medical services provider or educational institution. The person you benefit does not need to qualify as a dependent for tax purposes. Any medical expenses, however, must not be reimbursed by insurance, to either you or to the beneficiary.
If used properly, a program of gift giving can benefit everyone involved. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Independent Contractor vs. Employee
FOR ALL CRITERIA
Currently, the likelihood of your business being involved in a worker classification or employment tax audit is increased because the IRS is aggressively attempting to reduce the “tax gap,” which is the annual shortfall between taxes owed and taxes paid.
Because the existing worker classification rules are complex and ambiguous, much uncertainty surrounds their interpretation and application. The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem.
FOR ENTITIES WHO PAID INDEPENDENT CONTRACTORS – CRITERION 1, 2, OR 3
Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Failing to make the right classification could cost you money.
If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Of course, penalties for intentional worker misclassifications are harsher than they are for inadvertent mistakes.
Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. Since these employees have been excluded from plan participation, your retirement plan may lose its tax-favored status. The problem is compounded when excluded employees seek restitution for lost benefits not only due to their exclusion from the benefit plan, but also for health coverage and other employee benefits.
The IRS offers an amnesty program to eligible employers that have misclassified workers. This program, called the Voluntary Classification Settlement Program (VCSP), allows employers that are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees to prospectively treat the workers as employees, at a cost that is 10 percent of what would normally be owed in a worker misclassification situation. In addition, a safe harbor rule known as “Section 530” provides relief from employment tax obligations with regard to workers, even though those workers may be common-law employees, if certain requirements are met.
Since the potential liability is considerable, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the VCSP.
It is also important to review your employment tax records and procedures to ensure that they are in compliance with IRS guidelines, especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.
FOR ENTITIES WHO PAID STATUTORY NONEMPLOYEES – CRITERION 4
As you probably know, compensation paid to certain workers considered nonemployees is not subject to income tax withholding, FICA or FUTA taxes. Generally, qualified real estate agents and direct sellers are considered statutory nonemployees. For nonemployee classification purposes:
- Qualified real estate agents must be salespersons (or the person who recruits, trains or supervises salespersons); licensed real estate agents; and compensated based upon their sales or other output, rather than the number of hours they worked.
- Direct sellers must sell or solicit the sale of consumer products to a customer, or to a buyer for resale, in the home or other non-permanent retail establishment. Workers who perform services related to the delivery or distribution of newspapers or shopping news are also considered direct sellers.
Since your business currently employs statutory nonemployees, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the Voluntary Classification Settlement Program (VCSP).
It is also important to review your employment tax records and procedures to ensure that they are in compliance with IRS guidelines, especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.
FOR ENTITIES WHO PAID STATUTORY EMPLOYEES – CRITERION 5
As you probably know, sometimes workers are specifically designated as employees by the Internal Revenue Code even if the facts do not suggest an employer-employee relationship. Generally, the following types of workers are considered statutory employees:
- Full-time traveling or city sales representatives;
- Agent-drivers or commission-drivers;
- Life insurance sales representatives; and
- Home workers.
However, there are distinct rules for each worker type, and their employment tax treatment also varies. In addition, statutory employees must personally perform substantially all of the services required under your contract. These workers cannot have a material investment in your facilities, and your relationship with them must be ongoing.
Since your business currently employs statutory employees, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the Voluntary Classification Settlement Program (VCSP).
It is also important to review your employment tax records and procedures, to ensure that they are in compliance with IRS guidelines especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
2019 Life Insurance Trusts
Although not subject to federal income tax, life insurance death benefits can be subject to federal estate tax. Life insurance policies not only boost the value of your total estate, but the death benefit could also create an unexpected federal estate tax consequence. This, coupled with the uncertainty in the future of the federal estate tax, calls for careful planning. An irrevocable life insurance trust can be a very useful estate planning tool for this purpose.
Tax savings. The purpose of an irrevocable life insurance trust ("ILIT") is to remove your insurance policy from your estate, thereby reducing or eliminating federal estate tax on the death benefit if you survive three years after transferring the policy. In addition, cash contributions made to the ILIT to cover insurance premium payments can qualify for the annual gift exclusion ($15,000 in 2018).
Greater flexibility. A skillfully crafted ILIT not only can remove the death benefit proceeds from your estate for estate tax purposes, but also enhances your ability to direct how the insurance proceeds will provide for your loved ones. Once the ILIT instrument is drafted, your new or existing life insurance policy or policies are transferred to the trust. Cash can also be transferred to the trust to cover future premium payments. The trust owns the policy and is also designated as the beneficiary of the policy insuring your life. The trustee (someone other than yourself) makes sure that the insurance premiums are paid, properly manages the trust, and follows the directions you built into the trust regarding distribution of the insurance proceeds after your death.
Your ILIT provisions can be customized to distribute the insurance proceeds in a way that an insurance policy contract alone cannot. Whereas an insurance contract form generally only allows for a beneficiary designation, ILIT provisions can be specifically tailored. For example, an ILIT can direct that your spouse have the benefit of the income and the principal for his or her support during his or her lifetime, after which any remaining assets would be distributed to your children, either in trust or outright once the children reach a certain age that you choose.
Some ILIT caveats. Irrevocable life insurance trusts are, by definition, irrevocable: the trust cannot be changed once it is signed. Moreover, you must give up all ownership rights in the policy, including the right to modify the trust, change the insurance policy beneficiary designation, or borrow against the policy. In addition, someone other than you must serve as trustee in order to satisfy the irrevocability requirement. This irrevocability is necessary, however, in order to remove the insurance policy from your estate for estate tax purposes.
If you would like to discuss how an ILIT might enhance your estate plan, please contact this office. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
Rental Real Estate Activity Compliance
Rental real estate offers tremendous tax advantages and opportunities for tax planning. Taxpayers, such as you, can depreciate property far exceeding your actual investment, deduct interest on borrowed capital, exchange rather than sell properties to defer tax on gains, use installment sales to defer tax on sales, and profit from preferential rates on long-term capital gains. Most importantly, you can generate “positive cash flow,” or monthly income, with depreciation deductions that effectively turn actual income into tax losses.
In order to obtain these benefits, you must be able to navigate the tax limitations and take advantage of the exceptions. For example, real estate income and loss is generally considered passive income and loss for tax purposes. Taxpayers cannot use passive activity losses (PALs) to offset ordinary income from employment, self-employment, interest and dividends, or pensions and annuities.
However, you may be able to use one of two important exceptions to this rule:
- The rental real estate loss allowance. As one exception to the PAL rules, taxpayers with adjusted gross incomes of $150,000 or less can claim a rental real estate loss allowance of up to $25,000 for property they actively manage. Active management does not require regular, continuous, or substantial involvement. However, it does require that the taxpayer own at least 10% of the property. Also, to qualify for the exception, married taxpayers must file jointly.
- The election to be treated as a real estate professional. The second exception allows real estate professionals not to treat their rental activity as a passive activity. Therefore, their losses are not limited to passive income. This exception requires material participation by the taxpayer which is demonstrated by meeting one of seven tests. These tests are complex and include the number of hours of participation and the facts and circumstances of the participation in the activity.
If your rental property is a vacation home, the rental income and deductions are determined under one of three sets of rules depending on the number of days you rent the property.
- If you rent your vacation home for fewer than 15 days during the year, no rental income is includible in gross income and no deductions attributable to the rental are allowable.
- If you rent the property for 15 or more days during the tax year and it is also used by you for the greater of (a) more than 14 days or (b) more than 10% of the number of days rented, the rental deductions are limited. Under this limitation, the amount of the rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes.
- If you rent the property for 15 or more days during the tax year but do not use the property for personal purposes for the greater of (a) more than 14 days or (b) more than 10% of the number of days rented, the property may be treated as true “rental” property in which losses are not limited to income.
Therefore, as you consider your tax plan for this year, you should keep in mind the rules that will allow you to take full advantage of the tax benefit of rental real estate outlined here. Your strategy may be to limit your adjusted gross income to claim the real estate loss allowance; or it may include a conscious plan to increase the number of rental days and/or decrease the number of personal use days for a vacation home. Regardless of your situation, we can help review all of the alternatives and offer suggestions to reduce your tax liability for the year. Please do not hesitate to call for an appointment.
2019 Retirement Savings for the Self-Employed
Many tax-favored options are available to self-employed individuals to provide for their retirement. Tax planning for retirement can include deductible contributions to a Keogh plan, traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider implementing one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings.
Each of these plans has advantages and disadvantages, and some may not be applicable to your situation. For example, a sole-owner 401(k) retirement plan allows a contribution for you as both an employer and as an employee. Therefore, a sole-owner 401(k) plan may provide for the largest deductible contribution. However, a sole-owner 401(k) is not available to the self-employed with employees other than a spouse or relative. As an alternative, a Keogh plan provides more flexibility, but is more complicated to maintain than a SEP or SIMPLE plan and may have additional administrative costs. Ultimately, the choice of savings vehicle will depend on factors related to your business and your retirement needs. Regardless of which plan you qualify for or what your retirement needs are, it is important to begin planning now for your retirement.
Please call our office to arrange an appointment. We will be happy to discuss the various retirement plan options and how they might apply to your business. Please call our office at 303-900-7265 or text/call Jeanine at 616-430-5231. We are here to assist you at our earliest convenience but please leave your name, company, and contact information so that we may return your messages as quickly as possible.
TAX APPOINTMENTS AND ENGAGEMENTS 2019 TAXE
Please schedule a 15 minute appointment to go over annual interview questions and tax documents needed to upload
Allow at least 10 business days after the above to receive your uploaded tax returns for review and signature forms to return for e-filing.
Please note that all 2019 service fees must be paid in full before your signature forms will be processed for e-filing. We generally get federal confirmation within the day of e-filing, and state/local confirmation by the next morning.
Our general protool is to efile all tax returns (income, employer, sales & use, etc.). If you are required to or prefer to file paper coded tax returns, then you will receive uploaded review returns with preparer signature to sign and date as taxpayer(s) and to mail to the taxing authorities. Addresses and instructions will be included, but we recommend certify mail with return receipt requested when paper filing tax returns, tax payments, and anything important. Your only proof of mailing is if you send items with this delivery option.
Please note that urgent/emergency messages should be texted/voicemailed to Jeanine's cell number.
Thanks for all. We will see you for your 2019 year-end accounting and tax returns.