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Tax Tip of the Week | No. 256 | People with High Incomes Paying Zero Federal Income Taxes June 25, 2014

Posted by bradstreetblogger in : Business consulting, Tax Planning Tips, Tax Tip, Taxes, Taxes , 1 comment so far

Tax Tip of the Week | June 25, 2014 | No. 256 | People with High Incomes Paying Zero Federal Income Taxes

Now that takes some tax planning…

The Internal Revenue Service has released the spring 2014 edition of its quarterly Statistics of Income Bulletin, with statistics up through 2011 indicating there are still people who earn over $200,000 a year who pay no federal income taxes, although the number of them has been decreasing. “For 2011, there were 4.8 million individual income tax returns with an expanded income of $200,000 or more, accounting for 3.3 percent of all returns for the year. Of these, 15,000 returns had no worldwide income tax liability,” according to one report in the bulletin by Justin Bryan. “This was a 6.7-percent decline in the number of returns with no worldwide income tax liability from 2010, and the second decrease in a row since reaching an all-time high of 19,551 returns in 2009.”

However, the advocacy group Citizens for Tax Justice pointed out that the numbers are still high when looked at over a longer period.

“From the report’s first publication in 1977 through 2000, the number of high-income Americans paying no tax never exceeded 3,000.  But the past four years have seen an explosion of high-end tax avoidance: in each of these years, the number of zero-tax Americans found in this report has exceeded 30,000. In 2011 (the latest year for which data are available), almost 33,000 people with incomes over $200,000 paid no federal income tax. For this group—less than one percent of all Americans with incomes over $200,000 in 2011—tax-exempt bond interest and itemized deductions are among the main tax breaks that make this tax-avoiding feat possible.”

In addition to the report on high-income tax returns through 2011, the spring 2014 Statistics of Income Bulletin also contains articles on individual income tax rates and sharesindividual noncash contributions and individual foreign-earned income and foreign tax credits for 2011.

The IRS noted that of the 145 million individual tax returns filed in tax year 2011, 91.7 million were classified as taxable returns or returns with a total income tax greater than $0. Adjusted gross income (AGI) for taxable returns was nearly $7.7 trillion, up 6 percent from the prior year. Total income tax was more than $1 trillion. To be included in the top 1 percent of returns for 2011 required an AGI of $388,905.

For tax year 2011, there were more than 22 million individual taxpayers who reported a total of $43.6 billion in deductions for noncash charitable contributions. About a third (7.5 million) of these taxpayers reported nearly $39 billion in deductions for charitable contributions of $500 or more. Nearly 450,000 U.S. taxpayers reported $54 billion of foreign-earned income for tax year 2011, representing growth in real terms of over 32 percent since the last study in 2006.

The Statistics of Income Bulletin is available for download at IRS.gov/taxstats.

Give us a call to see how the tax code can work for you!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 255 | What Kind of Tax Are You Talking About? June 18, 2014

Posted by bradstreetblogger in : General, tax changes, Tax Preparation, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Tax Tip of the Week | June 18, 2014 | No. 255 | What Kind of Tax Are You Talking About?

A quick look at the various layers of taxes…

There is more to the federal income tax system than just a single calculation. Upper-income taxpayers—especially those with investment income—must cope with six layers of taxation:  (1) ordinary income tax; (2) capital gains and losses; (3) the alternative minimum tax; (4) the net investment income tax; (5) the additional Medicare tax; and (6) a reduction of itemized deductions and personal exemptions.

We have looked into the details of these various layers of taxes in prior Tax Tips of the Week.  Today is a quick summary of these multiple layers on one page:

1.    Ordinary Income Tax.  This is the standard layer of tax most taxpayers are familiar with. Income is taxed using seven tax brackets:  10%; 15%; 25%; 28%; 33%; 35%; and 39.6%.  Tax deductions and credits can be used to offset your tax liability based on these ordinary rates, but certain rules may apply (see #6).

2.    Capital Gains and Losses.  The tax law provides a separate tax treatment for capital assets such as securities, mutual funds and real estate. During the year, gains and losses from the sale of such assets can offset each other.  Long-term gains from assets held over one year may qualify for a 0% tax rate; a 15% tax rate; or a 20% tax rate depending on your ordinary income tax bracket.  Qualified dividends also benefit from these preferential tax rates.

3.    Alternative Minimum Tax.  The alternative minimum tax (AMT) runs parallel to the ordinary income tax.  The AMT rules apply a complex calculation which involves certain additions and adjustments before subtracting an exemption amount based on your tax filing status. There are just two brackets—26% and 28%—for taxpayers with AMT liability.  At tax time, you compare your ordinary income tax result to the AMT result and pay the higher of the two liabilities.

4.    Net Investment Income Tax.  The “net investment income tax” (NII) is a new tax that started when you filed your 2013 tax return. Please see TTW # 237 for a detailed explanation of this tax.  In summary, it is a 3.8% Medicare surtax on the investment income of those with adjusted gross incomes over $200,000 for single filers and $250,000 for joint filers.

5.    Additional Medicare Tax.  This new tax also first appeared on your 2013 tax return.  Please see TTW # 238 for a detailed explanation of this tax.  In summary, it is a 0.9% tax on the earnings of those making over $200,000 for single filers and $250,000 for joint filers.

This means that the top tax rate could be as high as 44.3%! (39.6 + 3.8 + 0.9 = 44.3)

6.    Reduction of Itemized Deductions and Personal Exemptions.  These two tax law provisions were reinstated in 2013 after a long hiatus. Under these “Pease Rules” (named for the congressman who originated it), certain itemized deductions, including those for charitable donations, state income tax, and mortgage interest are reduced if your AGI exceeds the annual threshold.  For 2014, the threshold is $254,200 for single filers and $305,050 for joint filers.  Your itemized deductions will be reduced by 3% of the amount above the threshold, but not more than 80% overall.

A similar rule phases out the tax benefit of personal exemptions.  For 2014, the $3,950 personal exemption will be reduced by 2% for each $2,500 of your AGI that exceeds the threshold level.

Keep these rules in mind as you make financial and tax planning decisions throughout the year.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 254 | Filing Facts for Recently Married or Divorced Taxpayers June 11, 2014

Posted by bradstreetblogger in : Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Tax Tip of the Week | June 11, 2014 | No. 254 | Filing Facts for Recently Married or Divorced Taxpayers

Since so many marriages occur in June, we are rerunning this tip….

If you were married or divorced recently, there a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security
Administration.

1.     If you took your spouse’s last name or if both spouses hyphenate their names, you may run into complications if you don’t notify the SSA.  When newlyweds file a tax return using their new last name, IRS computers can’t match their Social Security Number.

2.      If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.

3.    To notify the SSA of a name change you’ll need to file Form SS-5. (http://www.socialsecurity.gov/online/ss-5.pdf    You can also file this form by visiting your SSA office.

4.    If you adopted your spouse’s children after getting married, you’ll want to make sure the children have an SSN.  For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number (ATIN).  This W-7A form http://www.irs.gov/pub/irs-pdf/fw7a.pdf) is filed with the IRS.

5.    It takes the SSA about two weeks to have the change verified—so be sure to do this prior to filing your tax return.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 253 | An Update on ROBS June 4, 2014

Posted by bradstreetblogger in : Business consulting, Business Consulting, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | June 4, 2014 | No. 253 | An Update on ROBS

Some recent court cases have shed more light on this risky funding plan.

A couple of years ago in TTW #109 we introduced ROBS as a strategy to fund a new business. The following is a recent article in Businessweek about this risky strategy.

Baby boomers are proving more likely to launch businesses in their 50s and 60s than members of past generations, in some cases risking retirement savings on the ventures. A small but growing number have adopted a complex strategy to use their retirement nest eggs early to buy or launch businesses—while avoiding taxes and penalties for early withdrawal.

The IRS has repeatedly warned that the strategy—known by the unfortunate acronym ROBS, for Rollovers for Business Startups—lies in a murky area of the law. Two recent tax court decisions show that the federal government may be looking to go after millions of dollars in back taxes.

The ROBS strategy has been around for decades and has gained popularity in recent years, especially with entrepreneurs buying franchise businesses. Guidant Financial, a Bellevue (Wash.) company that specializes in the transactions, handled $232 million in such rollovers in 2012.

Here’s one way the maneuver typically works: A would-be entrepreneur creates a shell company and sets up a 401(k) plan for it. She transfers some or all the savings from her personal retirement account into the new company’s 401(k). She uses the new 401(k) to invest in the shell company through an employee stock ownership plan. That gives the shell company cash to buy an existing business or to cover startup costs. The entrepreneur owns the company through shares held in the new retirement plan.

The IRS cast some doubt on ROBS in a 2008 memorandum (pdf) saying the strategy needed further study. “ROBS transactions may violate law in several regards,” the agency noted. In 2010, the agency called ROBS  “questionable” but provided the basis for continued use.

Last year the IRS won decisions against entrepreneurs who were found to have misused ROBS. In Peek v. Commissioner, filed in May, the tax court said two Colorado entrepreneurs owed more than $560,000 after they used their company’s retirement plan to guarantee a loan. In Ellis v. Commissioner, filed in October, the court ruled against a Missouri man who used a ROBS transaction to rent space for his business and pay himself a salary.

Proponents of the strategy say those decisions show the importance of hiring a company that knows what it’s doing to manage the transaction. Some tax experts, however, have warned recently that the cases show the IRS is preparing a crackdown on ROBS and could soon seek back taxes from other entrepreneurs.

A bigger question: Should anyone devote retirement savings to the inherently risky act of launching a business? Michele Markey, a vice president at the Kauffman Foundation, says older entrepreneurs should be more cautious about taking the plunge. “Boomers don’t have time to recover from failure like a 20-year-old does”.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.