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Tax Tip of the Week | Should You Gift Land (or Anything Else) in 2019? November 20, 2019

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes – nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     –    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state’s rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark C. Bradstreet, CPA

–until next week.

Tax Tip of the Week | “Transfer on Death” Designation – Be Vigilant!! October 9, 2019

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

Using the “transfer on death” or “payable on death” beneficiary designation is very easy to set-up for your investments. This type of designation allows the account owner to choose a beneficiary to whom the assets would quickly pass upon the owner’s death. Often your broker, banker or financial planner will suggest using these designations as a means to avoid probate court on these assets.

The “transfer on death” or “payable on death” beneficiary designation is also easy to change. BUT you have to remember to make the necessary changes “in the event of changing circumstances such as births, deaths or divorces – or for no reason at all.” Failure to add a new child, lack of consideration for the tax bracket that your beneficiaries are in, a beneficiary death, or your death “before beneficiaries reach adulthood” are a few of those life events which necessitate a beneficiary update.

The “transfer on death” or “payable on death” beneficiary designations are not always a good quick fix for estate planning. “Experts advise monitoring (them) periodically. Consider (them) a part of estate planning, not a substitute for it.”

Excerpts from the WSJ article below, titled “Pitfalls of “Designated Beneficiaries” for Mutual-Fund Accounts was published in the WSJ on July 9, 2019.

                                                                                                         -Mark Bradstreet

Sometimes what seems to be simple isn’t really so simple at all.

Consider investment accounts with a “transfer on death” or “payable on death” designation. This type of account, which can be set up easily at brokerage firms and may contain mutual funds, stocks, bonds or other investments, allows the owner to designate a beneficiary or beneficiaries to whom the assets will pass quickly once the owner dies.

The advantage most often cited with these accounts is that whatever funds are in them go directly to beneficiaries, without having to go through the probate process. Beneficiaries typically only have to present proof of identity and a certified copy of the account owner’s death certificate to the investment company and the account passes to them.

Another advantage is that the designated beneficiaries can be changed at any time, and without consequence, up until the account owner’s death. The owner has the right to add or remove names in the event of changing circumstances such as births, deaths or divorces—or for no reason at all.

But there also are pitfalls associated with these types of accounts, which is why financial experts recommend people do their homework before establishing one. A few of the issues:

Life changes

As noted, one of the advantages of these accounts is that they can be changed at any time. But one of the disadvantages is that people may not change them when they should.

These accounts need to be carefully coordinated with your overall estate plan—and updated as life changes. If you fail to do this, family discord and litigation among your heirs could ensue. For example, if two children are named as beneficiaries of a transfer-on-death account, and a third child is born later, that child won’t be entitled to share in the distribution even if all three are named as heirs of the estate.

Similarly, if one of your beneficiaries is in a high tax bracket and another in a low one, an even distribution of a transfer-on-death account might result in an uneven distribution of your assets—even if that wasn’t your intention when you set it up originally. And if your beneficiary dies before you do, and you fail to update the designation listed on the account, the assets will go into your estate upon your death.

“People never get around to changing their accounts” says Ralph M. Engel, senior counsel in the trusts, estates and wealth-management group of Dentons US LLP. “When there are uneven amounts and you aren’t treating your kids equally, it could break up families.”

Another reason these accounts should be coordinated with your overall estate plan: If most of your assets are in one of these accounts, there may not be enough money left over to pay taxes, debts and other expenses associated with your estate. Your executor may then have to negotiate or go through legal proceedings with the account beneficiaries to access the necessary funds for these expenses.

“If an estate is more complicated, you don’t have as much flexibility with a transfer-on-death account as you do with a will or trust,” says Roger Young a senior financial planner at T. Rowe Price in Baltimore.

Spousal rights

Naming minors as beneficiaries of transfer-on-death accounts also can lead to problems if you die before your beneficiaries reach adulthood. That’s because investment firms won’t release assets to minors without a court order or evidence of a guardianship, indicating that an adult has the legal authority to make financial decisions for the child. As such, bequeathing funds through a will or trust may be preferable if your beneficiaries are young children.

Married couples can create joint transfer-on-death accounts, but it is important to remember that if one spouse dies the other generally receives full control of the account under the right of survivorship. That means the surviving spouse could revoke or modify the beneficiary designation at any time. It also means beneficiaries won’t receive the account until the surviving spouse also dies.

Of course, you can’t shortchange your spouse by creating a transfer-on-death account in your name only because your spouse may have rights to some or all of the money upon your death, regardless of who is named as the account’s beneficiary. Although details vary by state, a surviving spouse can make a spousal election, which gives him or her the right to receive a certain percentage of the estate’s assets. This percentage is generally between one-third and one-half of the assets. If you live in a community-property state, the surviving spouse may even own half of any account that is in your name only. The value of the transfer-on-death account would be included in this calculation.

Finally, keep in mind that your beneficiary has no right to the transfer-on-death account while you are still alive—unless you have a power of attorney granting that right.

If you decide to establish a transfer-on-death account despite these pitfalls, experts advise monitoring it periodically. Consider it a part of estate planning, not a substitute for it.

Credit Given to:  Leonard Sloane. Mr. Sloane is a writer in New York. He can be reached at reports@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | How Divorce Affects Social Security Benefits?? October 2, 2019

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

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Should Uncle Sam Be A Consideration – When or If We Marry September 25, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , 1 comment so far

The new tax law passed in 2017 eliminated some of the so-called “marriage tax penalty.”  But, significant differences still exist when comparing the tax burden of a married couple versus two single taxpayers. One rule of thumb is when both spouses have about the same taxable income; their combined income tax is typically more than had they stayed single. When one spouse has significantly more taxable income than the other spouse then often their combined income tax is less than if they had stayed single. We often cringe when we see weddings near the end of the year. Often, had the couple waited just a few days until after the 1st of the year, significant tax dollars may have been saved. It is difficult explaining to a newly married couple who both received refunds as single taxpayers for the prior year but now have a tax liability as a married couple. Some things in the tax law just simply don’t make sense.

                                -Mark Bradstreet

More than two million American couples will get married this year. Many of them will pay more in taxes because they tied the knot.

The Republican tax overhaul passed in 2017 lowered the cost of being married for many couples. Even so, being married is often more expensive than being two single filers come tax time. If a couple has children and both spouses earn income, they can owe Uncle Sam thousands of dollars every year just for being married.

These marriage penalties, as they’re called, prompt some committed couples to leave the knot untied. Some even have big weddings but don’t marry legally.

While most couples choose to keep this decision private, one famous (well, famous for economists) couple has been pretty open about the decision.

Betsey Stevenson and Justin Wolfers, economists with international reputations at the Gerald R. Ford School of Public Policy at the University of Michigan, have been together for years. They are the parents of two children. But they aren’t married and say one reason is taxes.

Filing as two single people provides the couple with significant tax savings, according to Ms. Stevenson, though she declined to say how much.

By being public, the couple hopes to stimulate policy discussion.

A common complaint about the current tax structure is a difference between couples that have similar incomes and couples in which one partner earns much more. Under the law, a couple whose incomes are far apart often pay less if they’re married, while couples whose earnings are more evenly split often pay the same as or more than two singles.

“Any household where one earner is generating the same income that Justin and I generate together is better off than we are, because of the value of the stay-at-home spouse’s time,” says Ms. Stevenson. She has proposed a tax credit for the second-earning spouse.

Here’s how marriage bonuses and penalties work in practice, based on examples computed on the Tax Policy Center’s 2019 Marriage Calculator. It’s free and useful for what-if calculations.

Marriage Penalties

Many tax provisions penalize married joint filers because the benefit for them isn’t twice the amount that single filers receive.


Maximum deduction for student-loan interest       Single $2,500   Joint  $2,500 

Maximum capital losses deductible from ordinary income  Single  $3,000   Joint  $3,000

Maximum deduction for state and local taxes      Single  $10,000  Joint  $10,000

Traditional IRA deduction disallowance begins      Single  $64,000   Joint $103,000

Roth IRA contribution disallowance begins     Single  $122,000   Joint  $193,000

3.8% tax on net investment income begins     Single  $200,000  Joint  $250,000

Additional 0.9% Medicare tax on wages begins    Single  $200,000  Joint  $250,000

20% rate on certain capital gains and dividends begins  Single  $434,550  Joint  $488,850

37% rate on taxable income begins        Single  $510,300  Joint  $612,350

Mortgage debt eligible for interest deduction      Single  $750,000  Joint  $750,000

Say that two couples each have total income of $225,000 and no children or itemized deductions.

In the first couple, one partner earns $210,000 and one earns $15,000. If they marry, they’ll save about $8,400 compared with filing as two singles.

In the second couple, one partner earns $145,000 and the other earns $80,000. Being married will save them about $300 compared with filing as two singles.

Things change if each couple has two young children and typical deductions for mortgage interest, state taxes and charity. The couple with one high and one low earner has a marriage bonus, although it drops to about $3,200.

The second couple now has a big marriage penalty.

They owe about $4,000 more than they’d pay as two single filers—just for one year. Having a $50,000 capital-gain windfall would add nearly $1,000 to their penalty.

The reasons for these disparities are complex, says Roberton Williams, a tax economist at the University of Maryland.

He says that in a system that imposes higher rates as income rises, like America’s, it’s impossible to tax married couples based on their total income regardless of who earns it while also taxing married couples so they owe the same as two single people.

“The U.S. system creates marriage bonuses and penalties. Other countries avoid this by taxing married couples as two individuals,” Mr. Williams adds. Shifting to such a system could be difficult in the U.S., in part because of community-property laws in some states.

The tax code also has marriage penalties in specific provisions.

For example, singles can’t directly contribute the maximum amount to a Roth IRA for 2019 if they earn more than $122,000. For married couples the limit is $193,000—not $244,000.

The 2017 tax overhaul repealed some marriage penalties and broadened some tax brackets, helping many two-earner married couples. But it retained other marriage penalties and added more.

One is the new $10,000 limit on deductions for state and local taxes, or SALT. This limit is per return, so married joint filers who list deductions on Schedule A get only a $10,000 write-off, while two single filers living together get a $20,000 write-off.

Affluent married couples hoping to buy a home in expensive areas like San Francisco, Washington, D.C., or New York could also feel a pinch. The overhaul dropped the maximum mortgage debt that’s eligible for an interest deduction on new purchases to $750,000 from about $1 million, and the limit is per return.

So an unmarried couple can deduct interest on $1.5 million of mortgage debt, while the limit for a married couple is $750,000.

For couples contemplating marriage, estimating the tax cost can be hard.

One reason is that marriage penalties often vary over time. For example, a two-earner couple may not owe a penalty when they are first married. If they become a one-earner couple when they have children, they may get a marriage bonus.

If both spouses work and prosper, however, their penalty could grow.

Says Ms. Stevenson: “People tell me, ‘I didn’t mind paying more tax when we were first married, but now it’s enough to put a dent in college tuition.’”

Laws also change. Marriage penalties removed by the 2017 overhaul will return after 2025 if Congress doesn’t act.

Yet another complication is that the U.S. tax code provides marriage bonuses, even to couples who owe marriage penalties. For example, a spouse who inherits a traditional IRA or 401(k) account has better options than a non-spouse heir.

Unmarried couples face other costs and issues, of course. They may pay more for health coverage, and they have to prepare two tax returns. They’ll need to take special care with health proxies, powers of attorney and other legal documents giving them decision-making powers over each other and children.

Married couples who currently owe penalties have options for lowering them, but not many. One is to reduce reported  income where possible, say by contributing to tax-deductible retirement plans or spreading taxable capital gains over more than one year.

Also consider the “married, filing separately” status. This choice doesn’t allow couples to file as two singles, and it usually raises taxes. But sometimes it lowers them, as when one partner has a small business that qualifies for a 20% deduction if a higher-earning spouse’s income is excluded. It could also help if one partner has high medical expenses.

How about getting divorced? That’s a lot harder than getting married. And the Internal Revenue Service for decades has had the power to disregard divorces that are solely for tax reasons.

Credit given to:  Laura Sanders.  This was published July 20-21, 2019 in the Wall Street Journal. You can write to Laura Saunders at laura.saunders@wsj.com

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week

Tax Tip of the Week | A Retirement Plan Too Often Ignored September 11, 2019

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

If your business fits the definition of an owner-only employee business then a Solo 401(k) retirement plan may be a great idea for you.  And, oh yeah, another caveat – you are not allowed to have any employees other than you and your spouse. If your sole proprietorship, partnership, S corporation or C corporation fits the necessary parameters then you may make contributions to a Solo 401(k) plan.

This type of retirement plan allows higher contribution amounts and more investment options than many other retirement plans. The Solo 401(k) even has ROTH options and its account holder may borrow against the plan assets. They are also inexpensive to setup and maintain. Even though created by Congress in 2001 – we still don’t see as many of these plans as I think we should.

If you think you may qualify for the Solo 401(k), please remember that this plan must be formed by year-end for the contributions to be deducted for that same year.

The below WSJ article by Jeff Brown was published on July 9, 2019 and contains additional details.

                                                                                                            -Mark Bradstreet

Millions of U.S. workers rely on employer-sponsored 401(k)s to save for retirement. But what about freelancers, sole proprietors and workers in the mushrooming gig economy, or people who want to leave the corporate cocoon and strike out on their own?

Financial advisers say that far from being left out in the cold, these workers have access to an often-overlooked retirement-savings vehicle that offers some distinct advantages: an “individual” or “solo” 401(k).

Available to self-employed people, as well as business owners and their spouses, solo 401(k)s allow participants to make contributions as both an employer and employee. That means individuals can sock away large sums that dramatically reduce income taxes, among other perks.

Although enrollment data is hard to come by, financial advisers say solo 401(k)s have been slow to get the respect they deserve since they were created by Congress in 2001. Many financial-services firms waited years to start offering the plans, and many business owners who could have them don’t know they exist.

“You’d be surprised how many people don’t know about solo 401(k)s, especially accountants,” says Sean Williams, wealth adviser with Sojourn Wealth Advisory in Timonium, Md.

Perks advisers like

Solo K’s, as some call them, allow participants to avoid the complex rules covering corporate 401(k)s. Not only do solo K’s permit virtually unlimited investing options, they allow participants to choose between making traditional tax-deductible contributions or after-tax Roth contributions. Some advisers prefer them over better-known options for people who work on their own, such as SEP-IRAs (simplified employee pension individual retirement arrangements) and Simples (savings incentive match plan for employees).

“Solo 401(k)s are better than the other options,” says Vincenzo Villamena, a certified public accountant with Online Taxman in New York, “because of the ability to contribute to a Roth and the higher contribution limits.”

Like corporate 401(k)s, the maximum contribution this year for solo K’s is $56,000, including up to $19,000 in pretax individual income, plus an employer contribution. (For people age 50 or older, the maximum is $62,000, due to a catch-up provision.) By comparison, Simples limit employee contributions to $13,000 this year ($16,000 for investors age 50 or over), and employer matches to 3% of compensation up to a maximum of $5,600. SEPs, meanwhile, limit annual employer contributions to $56,000 or 25% of income, whichever is less, and there is no employee contribution.

Contributions to solo K’s cannot exceed self-employment income, which is counted separately from any income earned by working for others.

According to Donald B. Cummings Jr., managing partner of Blue Haven Capital in Geneva, Ill., contributions can come from other sources if regular income from the business is needed to pay ordinary expenses. “Say a 50-plus-year-old business owner inherits $500,000 from a deceased relative. She now has access to better cash flow and can theoretically contribute 100% of her compensation” up to the limit, he says.

An investor also can move cash into a solo K from a taxable investment account, reducing taxable income and getting tax deferral on any future gains.

Opening one up typically takes only a few minutes of paperwork with a financial firm such as Vanguard Group, Fidelity Investments or Charles Schwab Corp. SCHW 1.03% Providers typically don’t require a minimum contribution to open an account, or minimum annual contributions.

Business owners who set up the solo plan as a traditional 401(k) get a tax deduction on contributions, tax deferral on gains and pay income tax on withdrawals after age 59½. (If they withdraw before 59½, they generally will pay both income tax and a penalty.) If they choose to go the Roth route, contributions are after taxes but qualified withdrawals are tax-free, which can be a plus for those who expect to be in a higher tax bracket later in life. And unlike ordinary Roth IRAs, which are available only to people with incomes below certain thresholds, anyone who opens a solo K can pick the Roth option. “The single largest benefit of a solo 401(k) is the ability to contribute Roth dollars,” says Brandon Renfro, a financial adviser and assistant finance professor at East Texas Baptist University in Marshall, Texas. “Since you are the employer in your solo 401(k), you can simply elect that option,” he says. “This is a huge benefit over the other types of self-employed plans.”

Another plus is that account holders can borrow against the assets in a solo 401(k), says Pedro M. Silva, wealth manger with Provo Financial Services in Shrewsbury, Mass. That isn’t allowed with alternatives such as SEPs.

“Business owners often write large checks, and having access to an extra $50,000 for emergencies or opportunities is a valuable feature of the plan,” Mr. Silva says.

Words of caution

A solo 401(k) must be set up by the end of the calendar year for contributions to be subtracted from that year’s taxable income. But, as with an IRA, money can be put in as late as the tax deadline the following April, or by an extension deadline.

Investors who want to change providers can transfer assets from one solo 401(k) to another with no tax bill, as long as the investments go directly from the first investment firm to the second. But if the assets go to the investor first there may be tax consequences, even if they are then sent to the new provider.

Business owners should be aware that the hiring of just a single employee aside from a spouse would require the plan to meet the tricky nondiscrimination test that applies to regular 401(k)s, says Stephanie Hammell, an investment adviser with LPL Financial in Irvine, Calif. That test is designed to make sure executives don’t get a better deal than employees.

Business owners in that situation might do better with a SEP or Simple plan, which don’t have the nondiscrimination hurdle, according to Dr. Renfro.

And as with all financial products, it pays to shop around for the best combination of investment offerings, fees and customer service, experts say.

“Set up your account with an investment provider that either doesn’t charge fees for the administration of the account, or charges very minimal fees,” says Natalie Taylor, an adviser in Santa Barbara, Calif. “Choose an investment provider that offers high-quality, low-cost investment options inside of the individual 401(k) account.”

Credit Given to:  Jeff Brown. This appeared in the July 9, 2019, print edition of the Wall Street Journal as ‘The ‘Solo’ 401(k) Is Often Overlooked.’ Mr. Brown is a writer in Livingston, Mont. He can be reached at reports@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | A Need to Know on Capital Gains Taxes September 4, 2019

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

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA & Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Ohio Small Business Deduction – TAKE IT! August 28, 2019

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

We work with many attorneys for a myriad of reasons. Some specialize in business dealings such as mergers, acquisitions, etc. Mr. Jeff Senney, a prominent business attorney with Pickrel, Schaeffer and Ebeling, wrote the following article which discusses a deduction that owners, or equity investors, of an Ohio business who file an Ohio individual income tax return may be eligible to take each year. The deduction is commonly known as the Ohio Small Business Deduction (SBD) and began in its earliest form in 2013. The SBD allowed the taxpayer to deduct 50% of up to $250,000 of Ohio business income, for a maximum deduction of $125,000. In 2014, the deduction increased to 75% of $250,000 for a maximum deduction of $187,500. Adjustments were required also, such as add-backs for retirement contributions, the self-employment tax deduction, and the self-employed health insurance deduction that were reported on the taxpayer’s federal return for both 2013 and 2014. The deduction remained at 75% for 2015 and the requirement to add back the above-mentioned adjustments was eliminated. In its current form, the deduction is for 100% of $250,000. We hope you enjoy Jeff’s article as reproduced below.

      – Norman S. Hicks, CPA

For 2016 (and subsequent years), each individual small business owner filing single or married filing jointly is eligible for a “small business” income tax deduction (SBD) against their state income tax liability equal to 100% of the first $250,000 of business income the owner receives or is allocated from a sole proprietorship or pass-through entity (“PTE”). Married filing separate taxpayers will be able to deduct 100% of business income in 2016 but only up to $125,000. Any remaining business income above these threshold amounts is taxed at a flat 3% rate.

For tax years 2014 and 2015, the SBD percentage for all taxpayers was only 75%.

PTEs include partnerships, “S” corporations and limited liability companies (“LLCs”). Income generated by the business and passed through to the owners/investors is subject to personal income tax. The deduction was originally applicable only for Ohio-sourced business income. But beginning in tax year 2015, the deduction was expanded to include eligible business income from all sources.

Individuals who directly or indirectly through a tiered structure own at least a 20% interest in profits or capital of a PTE may also include their wages and guaranteed payments from that PTE in the calculation of the SBD. It was not originally clear whether the direct or indirect ownership included constructive ownership from family members. But the Ohio Department of Taxation has recently made clear that stock attribution among family members (such as husband to wife) does not count in determining whether the individual owns the requisite 20% interest.

Taxpayers who failed to claim the SBD on their originally income tax returns should give serious thought to filing amended returns to claim the SBD for all open years. While the SBD is referred to as the “small business deduction,” there is no limit on gross receipts or assets that the PTE can have.

The SBD can be taken not only by Ohio residents on all their business income received, but also by Ohio nonresidents and part-year residents.

While electing to be included in a composite tax return makes financial sense in most states, taxpayers could be missing out on the SBD tax savings available in Ohio. A PTE cannot deduct the SBD on a composite tax return filed on a taxpayer’s behalf, and the SBD cannot be claimed on any other non-individual tax return, such as a trust return and even a nonresident withholding return. Accordingly, if an individual taxpayer has been included in a composite return or has had withholding performed by a PTE, the taxpayer may be paying more Ohio tax than necessary.

Many taxpayers may not have taken the SBD because they mistakenly thought they were required to own 20% or more of a PTE in order to qualify for the SBD. But that is not the case. The 20% ownership requirement only applies to deduction of compensation and guaranteed payments. Taxpayers owning less than 20% are still eligible to claim the SBD on their share of other qualifying business income.

Many taxpayers also do not realize that the 20%-or-more requirement only needs to be met once during a tax year. If an individual owner meets the 20% ownership test at any point during the calendar year, the individual’s entire year of compensation or guaranteed payments may qualify as business income. While not entirely clear, it is likely the Ohio Department of Taxation would try to deny the SBD where a husband and wife transferred ownership back and forth during a year in order to make them both 20% owners on at least one day during the year.

Credit given to Jeff Senney. He can be reached at 937-223-1130 or Jsenney@pselaw.com or https://www.pselaw.com/attorneys/jeffrey-senney. Jeff’s article can be found at: https://www.pselaw.com/ohio-small-business-deduction-take-it/ 

Thank you for all of your questions, comments and suggestions for future topics. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.  

This Week’s Author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Can S Corporations Save Taxes? Apparently, Some Politicians Think So. August 21, 2019

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

In an effort to save federal income taxes, many people and not just some politicians route their business income through S corporations.  Their profits which may be retained by the S corporation and/or distributed to the shareholder(s) are typically the result of keeping the shareholder’s reasonable wages at a level that assures a corporate profit.  Keeping these reasonable wages below the FICA ceiling ($132,900 for 2019) may save taxes of 15.3% from FICA and Medicare, combined.  If, these wages exceed the FICA ceiling then the potential tax savings drop to only the Medicare tax of 2.9% plus another .9% if individual’s wages are over $200,000 ($250,000 married filing jointly).

The point to be made here is that at the right income levels, significant tax savings may exist with the proper use of an S corporation.  However, these savings come along with the possibility of additional IRS scrutiny.  And, since you may be paying less social security taxes, your future social security benefits may be dinged ever so slightly; but these tax savings are now in your own pocket.

The below WSJ article authored by Richard Rubin covers a portion of this age-old tax saving strategy along with some interesting commentary.

               -Mark Bradstreet

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% net investment income tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Biden’s would have owed if paid directly or if the Obama proposal had become law.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Biden’s are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

“We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

Credit given to: Richard Rubin. This article was written July 10, 2019. You can write to Richard Rubin at richard.rubin@wsj.com—Ken Thomas contributed to this article.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Health Care Plans Gain More Flexibility August 14, 2019

Posted by bradstreetblogger in : General, Healthcare, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

On June 13, 2019, the IRS issued final regulations regarding health reimbursement arrangements (HRAs).  These types of plans were radically changed and restricted by the Affordable Care Act. The new regulations reinstate the ability of employers to use HRAs to reimburse employees who buy their own health insurance, but the rules can be fairly complicated in certain situations. The full set of rules can be found in the federal register at https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans. In pdf form (and in typical IRS fashion), this article is 140 pages long. It appears to be a collaboration between the IRS, the Employee Benefits Security Administration, the Department of Labor, the Centers for Medicare & Medicaid Services, and the Department of Health and Human Services, and is titled “Health Reimbursement Arrangements and Other Account-Based Group Health Plans”. 

Following is a nice (and much smaller) article published on June 24, 2019, by Jessica Kuester of Taft Stettinius & Hollister, LLP, which helps explain some of the provisions of the new rules, such as who can and cannot be covered, types of HRAs, effective dates, and other features and restrictions of the new HRA regulations.

                                                   –Norman S. Hicks, CPA

Final Regulations Allow Employers to Pay For Employees’ Health Insurance Premiums

Health reimbursement arrangements (HRAs) are a very flexible type of group health plan—they allow employers to reimburse employees for certain medical expenses on a pre-tax basis. Based on the IRS’s interpretation of changes in law that were enacted by the Affordable Care Act (ACA), these arrangements lost most of the flexibility that they had been able to provide for over 50 years. Although HRAs could be integrated with major medical plans offered by employers (i.e., a so-called “integrated HRA”), they could not be offered on a stand-alone basis without the employer incurring a $36,500 per year per participant excise tax. In effect, this meant that employers could no longer reimburse employees for the cost of premiums incurred when purchasing health insurance. New regulations (issued on June 13, 2019) bring back some of the flexibility of HRAs.

What is the new type of HRA?

In a so-called “individual coverage HRA,” employers can reimburse employees for medical expenses (including premiums) that they incur on a pre-tax basis. For each month that they are covered by the individual coverage HRA, employees must be covered by individual health insurance (either offered on the ACA Exchange or not), and employers must substantiate such coverage.

Who can be covered by an individual coverage HRA?

An individual coverage HRA cannot be offered to any employee offered a traditional employer-sponsored group health plan. This means that employees cannot be given a choice between the employer’s traditional group health plan and an individual coverage HRA—employers can only offer one or the other. However, employers can decide to offer an individual coverage HRA to one or more class of employees and a traditional group health plan to the other classes. The acceptable classes are full-time employees, part-time employees, seasonal employees, employees working in the same geographic location (such as the same state or same insurance rating area), collectively bargained employees, salaried employees, hourly employees and newly-hired vs. existing employees. These are only a few examples: there are other types of classes identified in the regulations and additional classes can be formed by combining any of the acceptable classes. In addition, minimum class size rules (generally, 20 class members) apply to employers offering a traditional group health plan to some classes and an Individual Coverage HRA to other classes.

How much can employers reimburse under an individual coverage HRA?

Just like with other types of HRAs, employers can reimburse as much or as little as they want. However, the individual coverage HRA must be offered on the same terms to all employees in the class. So although the amount of reimbursement can vary between classes, they generally cannot vary among the class members (except for variations based on an employee’s age or the number of dependents).

How do employers offer an individual coverage HRA?

Employers offering an individual coverage HRA must notify eligible participants about the individual coverage HRA and its interaction with the premium tax credit that is available to certain individuals under federal tax law. Although the individual coverage HRA itself is considered an employer-sponsored group health plan, the underlying health insurance coverage purchased by the employee is not, so long as the employee’s purchase of the insurance coverage is voluntary, the employer does not select or endorse any particular insurance carrier or coverage, the employer does not receive any kickbacks for an employee’s selection of any particular individual health insurance and each employee is notified annually that the individual health insurance they select is not subject to ERISA.

What about the employer mandate?

The good news: an employer’s offer of reimbursement through an individual coverage HRA counts as an offer of coverage for purposes of the ACA’s employer mandate. The bad news: although the new regulations offer guidance on when an individual coverage HRA will be considered “affordable” for purposes of the premium tax credit, the IRS has not yet issued rules describing when the coverage will be considered “affordable” for purposes of the employer mandate. These rules are likely coming soon.

Are there any other types of new HRAs available under the new regulations?

The new regulations also create an excepted benefit HRA. The excepted benefit HRA is different than the individual coverage HRA in that it only reimburses the employee for costs incurred in connection with “excepted benefits” (such as dental and vision benefits). This new excepted benefit HRA is an HRA offered as part of an employer’s traditional group health program and can reimburse medical expenses even when the employee opts out of the group health plan itself. This is a departure from the current rules that apply to integrated HRAs, which only permit reimbursement of medical expenses when the employee actually enrolls in the group health plan.

The excepted benefit HRA:

When can employers start offering these new types of HRAs?

The new types of HRAs can be offered beginning on Jan. 1, 2020. Note that, in order to start offering coverage under the individual coverage HRA on that date, employers will need to take action before then.  Most notably, the required notice must be provided prior to Jan. 1, and employees will need to take part in the 2020 open enrollment period for individual coverage, which typically occurs in late 2019.

Jessica E. Kuester is an attorney with Taft Stettinius & Hollister, LLP and represents employers in all of their employee benefit needs. She can be reached at jkuester@taftlaw.com. Her article, as reproduced above, can be found at https://www.taftlaw.com/news-events/law-bulletins/final-regulations-allow-employers-to-pay-for-employees-health-insurance-premiums.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | IRS Audit Rate Falls – Should You Relax? July 24, 2019

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

I cringe every time the newspaper headlines read that the IRS audit rate is falling. My worries are that our clients may become lazy on their record keeping along with the retention of appropriate supporting business documentation (e.g. receipts, cancelled checks, deposits slips, paid bills, invoices, etc.). Thankfully, my fears have remained unfounded as the stakes are too high with the IRS to become complacent.

As a side note, many taxpayers fail to realize that if your record keeping is poor – the IRS simply won’t use your records. Instead, the IRS may consider all of your deposits as taxable income whether they were otherwise taxable or not. And, if no supporting documentation was retained then all of your expenses may be disallowed. Ouch!

On May 21, 2019, the WSJ ran an article authored by Richard Rubin, IRS’s Audit Rate Continues to Fall. This article below shares further insights on who is being audited and to what extent the IRS budget is being increased.  

                                                                    -Mark Bradstreet

WASHINGTON—The Internal Revenue Service audited just 0.59% of individual tax returns last year, marking the seventh consecutive annual decline as the tax agency copes with smaller budgets and fewer workers.

That total was down from 0.62% the year before and hit the lowest mark since 2002, according to data released Monday.

Audits of the highest-income households dropped sharply, to their lowest levels since the IRS began reporting that data in 2008. In fiscal 2018, the IRS audited 6.66% of returns of filers with more than $10 million in adjusted gross income, down from 14.52% in 2017. Among households with income between $1 million and $5 million, the audit rate dropped from 3.52% to 2.21%.

The IRS released the data as it is trying to persuade Congress to make long-run investments in the agency’s technology and enforcement staff. So far, however, key Republicans in Congress remain skeptical, and there are mixed signals about whether the government will reverse the steady decline in tax enforcement.

“I’m not averse to beefing up their budget a little bit but I want to see results,” said Sen. John Kennedy (R., La.), who heads the subcommittee that oversees the IRS budget. “I’ve got a lot of confidence in the new commissioner and in the new secretary, but I’m not into just throwing money at the wall because the bureaucracy says we need more.”

President Trump has proposed boosting the IRS’s budget by 1.5% for the fiscal year that starts Oct. 1, to $11.5 billion from $11.3 billion, including a down payment on improving the agency’s technology.

The administration also is proposing a $15 billion, decadelong increase in IRS enforcement funding, which the agency says would generate $47 billion in additional federal revenue. That net gain of more than $30 billion would come from enforcing existing laws.

The IRS has been shrinking steadily, partly because electronic filing has increased its efficiency. But many of the recent changes have stemmed from Republican spending cuts after they took control of the House in 2011 and after the IRS said in 2013 that it had improperly scrutinized some conservative nonprofit groups.

Adjusted for inflation, the 2019 IRS budget is smaller than in 2000 and is 19% below peak funding in 2010, according to the Government Accountability Office. The agency’s workforce declined 4% in 2018 and is now 21% below where it was eight years ago, and the number of examiners that performs audits shrunk 38% from 2010 to 2017, according to the agency’s inspector general. Those cuts came as Congress handed the IRS more responsibility to administer the Affordable Care Act and police offshore bank accounts.

Declining IRS resources contributed to the decline in audits but weren’t the only cause, said David Kautter, assistant Treasury secretary for tax policy, who was acting IRS commissioner for much of fiscal 2018.

“In this age of technology, it’s easier to identify areas of noncompliance,” he said Monday.

Democrats say the IRS budget cuts are disproportionately benefiting high-income households.

“Republicans in the Senate and the House have been very much geared towards a policy that has produced lots of poor people being audited and lots of well-off people basically getting off the hook,” said Sen. Ron Wyden (D., Ore.), the top Democrat on the Senate Finance Committee. “It takes more resources. There’s no way around it.”

Mr. Kennedy said he wants more details on the IRS modernization plans, pointing to the agency’s difficulties overhauling its technology.

Sen. James Lankford (R., Okla.) said he wants more updated information on the tax gap—the difference between taxes owed and taxes paid—which should be released in the coming months.

“We need to be able to see it and know what we actually could get a return on, from enforcement,” he said.

The Congressional Budget Office estimates that an extra $20 billion spent on IRS enforcement could yield $55 billion over the next decade and more beyond that as audits generate revenue. Once the IRS completed staff training and computer upgrades, the government could get as much as $5.20 in additional revenue for every $1 spent, according to CBO.

The agency started 2,886 criminal investigations in 2018, down from 5,234 just five years earlier, according to the agency’s inspector general. The IRS criminal investigations unit had 26% fewer special agents than it did in 2012.

The IRS also has fewer employees working to collect taxes from people who already owe. Each collections officer generates about $2 million a year, which means the smaller IRS is leaving $3.3 billion a year on the table, just from collections, according to the agency’s inspector general.

Tax experts say the agency’s performance could be improved through better taxpayer service and a simpler tax system. So would rules that gave the IRS more information about sources of income—such as profits from cash businesses—that they lack now.

Taxpayers are extremely likely to comply with tax rules when the IRS independently has access to information about their finances. Wages reported on Form W-2 almost always show up on tax returns. When the IRS doesn’t have withholding payments or information, people are more likely to underreport their income.

“I don’t believe the solution is more agents, more audits and more intrusive government into taxpayers,” said Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee. “I think it’s smarter audits.”

But the drops in enforcement and the IRS budget have run in tandem, and the nonpartisan estimates from CBO, GAO and the IRS inspector general say reversing the spending cuts would generate money.

“We’re just in never-never land here. The IRS has had its capacity to do its job attacked. There’s no other way to say it,” Rep. Earl Blumenauer (D., Ore.) said at a recent hearing. “They can’t keep pace with what they’re up against.”

Credit given to:  Richard Rubin. This article was written May 20, 2019. You can write to Richard Rubin at richard.rubin@wsj.com

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark Bradstreet, CPA

–until next week.