Category: Articles

Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.

Multiple types of taxes

Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.

Minimizing estate tax

If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.

Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.

Minimizing your beneficiary’s income tax

You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.

Minimizing your own income tax

Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.

Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.

Choose gifts wisely

No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any gifts you’d like to make.

© 2018

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.

Insurance

Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:

Health insurance. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.

Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.

Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.

Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.

Other types of tax-advantaged benefits

Insurance isn’t the only type of tax-free benefit you can provide — but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:

Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 though a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).

Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.

Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.

Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.

Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.

Varying tax treatment

As you can see, the tax treatment of fringe benefits varies. Contact us for more information.

© 2018

It’s easy to understand why more and more businesses are taking a “bring your own device” (BYOD) approach to the smartphones, tablets and laptops many employees rely on to do their jobs. BYOD can boost employee efficiency and satisfaction, often while reducing a company’s IT costs. But the approach isn’t without risk for both you and your staff. So, it’s highly advisable to create a strong formal policy that combines convenience with security.

Primary concerns

As an employer, your primary concern with BYOD is no doubt the inevitable security risks that arise when your networks are accessible to personal devices that could be stolen, lost or hacked. But you also must think about various legal compliance issues, such as electronic document retention for litigation purposes or liability for overtime pay when nonexempt employees use their devices to work outside of normal hours.

For employees, the main worry comes down to privacy. Will you, their employer, have access to personal information, photos and other non-work-related data on the device? Could an employee lose all of that if you’re forced to “wipe” the device because it’s been lost or stolen, or when the employee leaves your company?

Important obligations

A BYOD policy must address these and other issues. Each company’s individual circumstances will determine the final details, but most employers should, at minimum, require employees to sign an acknowledgment of their obligations to:

• Use strong passwords and automatic lock-outs after periods of inactivity,
• Immediately report lost or stolen devices,
• Install mandated antivirus software and other protective measures,
• Regularly back up their devices,
• Keep apps and operating systems up to date, and
• Encrypt their devices.

The policy also should prohibit the use of public wi-fi networks or require employees to log in through a secure virtual private network when connecting via public wi-fi. You may want to forbid certain apps, too.

In addition, you need to spell out your rights to access, monitor and delete data on employees’ devices — including the types of data you can access and under which conditions. In particular, explain your wiping procedures and the steps employees can take to protect their personal information from permanent erasure.

Protection now

Nearly everyone who works for your company likely has a smartphone at this point. As such devices integrate themselves ever more deeply into our daily lives, it’s only natural that they’ll affect our jobs. Establishing a BYOD policy now can help prevent costly mistakes and potential litigation down the road. We can provide further information.

© 2018

If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions. This break may be especially beneficial now because of Tax Cuts and Jobs Act (TCJA) changes that affect who can benefit from the itemized deduction for charitable donations.

Counts toward your RMD

A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)

So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid to you.

Doesn’t require itemizing

You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation.

And, with the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.

Doesn’t have other deduction downsides

Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.

First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.

Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60% of your adjusted gross income for the year. (The TCJA raised this limit from 50%, but if the cash donation is to a private nonoperating foundation, the limit is only 30%.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

A charitable IRA rollover avoids these potential negative tax consequences.

Have questions?

The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. So contact us to go over your particular situation and determine what’s right for you.

© 2018

Like many business owners, you probably created a business plan when you launched your company. But, as is also often the case, you may not have looked at it much since then. Now that fall has arrived and year end is coming soon, why not dig it out? Reviewing and revising a business plan can be a great way to plan for the year ahead.

6 sections to scrutinize

Comprehensive business plans traditionally are composed of six sections. When revisiting yours, look for insights in each one:

1. Executive summary. This should read like an “elevator pitch” regarding your company’s purpose, its financial position and requirements, its state of competitiveness, and its strategic goals. If your business plan is out of date, the executive summary won’t quite jibe with what you do today. Don’t worry: You can rewrite it after you revise the other five sections.

2. Business description. A company’s key features are described here. These include its name, entity type, number of employees, key assets, core competencies, and product or service menu. Look at whether anything has changed and, if so, what. Maybe your workforce has grown or you’ve added products or services.

3. Industry and marketing analysis. This section analyzes the state of a company’s industry and explicates how the business will market itself. Your industry may have changed since your business plan’s original writing. What are the current challenges? Where do opportunities lie? How will you market your company’s strengths to take advantage of these opportunities?

4. Management team description. The business plan needs to recognize the company’s current leadership. Verify the accuracy of who’s identified as an owner and, if necessary, revise the list of management-level employees, providing brief bios of each. As you look over your management team, ask yourself: Are there gaps or weak links? Is one person handling too much?

5. Operational plan. This section explains how a business functions on a day-to-day basis. Scrutinize your operating cycle — that is, the process by which a product or service is delivered to customers and, in turn, how revenue is brought in and expenses are paid. Is it still accurate? The process of revising this description may reveal inefficiencies or redundancies of which you weren’t even aware.

6. Financials. The last section serves as a reasonable estimate of how your company intends to manage its finances in the near future. So, you should review and revise it annually. Key projections to generate are forecasts of your profits and losses, as well as your cash flow, in the coming year. Many business plans also include a balance sheet summarizing current assets, liabilities and equity.

Keep it fresh

The precise structure of business plans can vary but, when regularly revisited, they all have one thing in common: a wealth of up-to-date information about the company described. Don’t leave this valuable document somewhere to gather dust — keep it fresh. Our firm can help you review your business plan and generate accurate financials that allow you to take on the coming year with confidence.

© 2018

For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.

Old rules

For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

New rules

The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:

• Singles:
  • 0%: $0 – $38,600
  • 15%: $38,601 – $425,800
  • 20%: $425,801 and up
• Heads of households:
  • 0%: $0 – $51,700
  • 15%: $51,701 – $452,400
  • 20%: $452,401 and up
• Married couples filing jointly:
  • 0%: $0 – $77,200
  • 15%: $77,201 – $479,000
  • 20%: $479,001 and up

For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

More thresholds, more complexity

With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us.

© 2018

If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.

Requirements

The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.

For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.

Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.

IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.

Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.

Maximizing your deduction

The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.

For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.

Plan carefully

Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules. Contact us to learn more.

© 2018

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

October 15

• If a calendar-year C corporation that filed an automatic six-month extension:
  • File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
  • Make contributions for 2017 to certain employer-sponsored retirement plans.

October 31

• Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)

November 13

• Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

December 17

• If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.

© 2018

Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.

Issues, what issues?

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute.

The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably.

Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.

What are our protocols?

At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:

• How “value” will be defined,
• Who will value the business,
• Whether valuation discounts will apply,
• Who will pay appraisal fees, and
• What the timeline will be for the valuation process.

It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.

Are we ready?

Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout issues when they arise. Our firm would be happy to help.

© 2018

To avoid interest and penalties, you must make sufficient federal income tax payments long before your April filing deadline through withholding, estimated tax payments, or a combination of the two. The third 2018 estimated tax payment deadline for individuals is September 17.

If you don’t have an employer withholding tax from your pay, you likely need to make estimated tax payments. But even if you do have withholding, you might need to pay estimated tax. It can be necessary if you have more than a nominal amount of income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets.

A two-prong test

Generally, you must pay estimated tax for 2018 if both of these statements apply:

1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2018 or 100% of the tax on your 2017 return — 110% if your 2017 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Quarterly payments

Estimated tax payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15 and September 15 of the tax year and January 15 of the next year, unless the date falls on a weekend or holiday (hence the September 17 deadline this year).

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Confirming withholding

If you determine you don’t need to make estimated tax payments for 2018, it’s a good idea to confirm that the appropriate amount is being withheld from your paycheck. To reflect changes under the Tax Cuts and Jobs Act (TCJA), the IRS updated the tables that indicate how much employers should withhold from their employees’ pay, generally reducing the amount withheld.

The new tables might cause some taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations.

Avoiding penalties

Keep in mind that, if you underpaid estimated taxes in earlier quarters, you generally can’t avoid penalties by making larger estimated payments in later quarters. But if you also have withholding, you may be able to avoid penalties by having the estimated tax shortfall withheld.

To learn more about estimated tax and withholding — and for help determining how much tax you should be paying during the year — contact us.

© 2018