Tuesday, June 11, 2019

Distributions from Traditional IRAs

Although advance planning is needed to help accumulate the biggest possible nest egg in your traditional IRAs, it is even more critical that you get help in planning for distributions from these tax-deferred retirement planning vehicles. There are three areas where knowing the ins and outs of the IRA distribution rules can make a big difference in how much you and your family will keep after taxes:

        (1) Early distributions. If you need to take money out of a traditional IRA before age 59-1/2 (e.g., for education expenses for children, to help make a down payment on a new home, or to meet necessary living expenses if you retire early), any distribution to you will be fully taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59-1/2 may be subject to a 10% penalty tax. However, there are several ways that the penalty tax (but not the regular income tax) can be avoided, including a method that is tailor-made for individuals who retire early and need to draw cash from their traditional IRAs to supplement other income.

        (2) Naming beneficiaries. The decision concerning who you wish to designate as beneficiary of your traditional IRA is critically important. This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70-1/2, who will get what remains in the account at your death, and how that IRA balance can be paid out. What's more, a periodic review of whom you've named as IRA beneficiaries is vital to assure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs, and in your personal, financial and family situation.

        (3) Required distributions. Once you attain age 70-1/2, distributions from your traditional IRAs must begin. If you don't withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been paid out, but wasn't. In planning for these required distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

If you think it seems easier to put money into a traditional IRA than to take it out, you're absolutely right. This is one area where expert guidance is essential.

If you would like assistance in reviewing your traditional IRAs or analyzing other aspects of your retirement planning, please contact us.

Friday, May 10, 2019

Election to Deduct/Amortize Start-Up and Organization Expenses

If you've recently started a business, or if you're in the process of starting one now, you should be aware that the way you treat some of your initial expenses for tax purposes can make a big difference in your tax bill.

Generally, expenses incurred before a business begins don't generate any deductions or other current tax benefits.

However, taxpayers, whether they are individuals, corporations or partnerships, are permitted to elect to write off $5,000 of "start-up expenses" in the year business begins, and the rest can be deducted over a period of 180 months that begins with the month business starts. The $5,000 figure is reduced by the excess of total start-up costs over $50,000.

You will be deemed to have made the election unless you opt out.

Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

A similar $5,000/180-month/over-$50,000-phase-out election is available to corporations and partnerships for their "organization expenses." To qualify as an organization expense, the expense must be incident to the creation of the corporation or partnership, be an expense that, in the absence of the election, would be capitalized, and be an expense that, if it had been incurred in connection with a corporation or partnership that had a limited life, would have been eligible to have been written off over that limited life. Examples of organization expenses are legal and accounting fees for services related to organizing the new entity (such as fees for drafting the corporate charter or partnership agreement) and filing fees (such as fees paid to the state of incorporation).

As you can see, it's important to keep a record of these start-up and organization expenses, and to make the appropriate decision regarding the write-off election. As mentioned above, if you opt out of the election, there is no current tax benefit derived from the eligible expenses covered by the election. Also, you should be aware that an election either to deduct or to amortize start-up expenditures, once made, is irrevocable.

Please contact us to work with you in making any of the elections discussed above and in all other aspects of starting a business.

Wednesday, April 17, 2019

ABLE Accounts for the Disabled or Blind

There is a tax-advantaged way for taxpayers to save for the needs of family members with disabilities, without losing eligibility for other government benefits to which those individuals are entitled. This can be done though an ABLE account, which is a tax-free account that can be used to save for disability-related expenses. Here are the key features of ABLE accounts:

       ABLE accounts can be created by eligible individuals to support themselves, by families to support their dependents, or by guardians for the benefit of their wards.

       Eligible individuals must be blind or disabled - and must have become so before turning 26 - and must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate for the individual is filed with IRS.

       ABLE accounts are established under state ABLE programs. An account may be opened under any state's program (where that state allows out-of-state participants), not just the program of the state where the eligible individual lives. A majority of states have passed legislation to sponsor ABLE programs. Some states that haven't established their own programs allow tax benefits for contributions to a program in another state.

       Any person may contribute to an ABLE account. While contributions aren't tax-deductible, the funds in the account are invested and grow free of tax. The account's investment directions can be changed up to twice a year.

       Distributions from an ABLE account are tax free if used to pay for expenses that maintain or improve the designated beneficiary's health, independence, or quality of life. These expenses include education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services; and other IRS-approved expenses.

       If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10% penalty tax.

       An eligible individual can have only one ABLE account. The total annual contributions by all persons to that account can't exceed the gift tax exclusion amount ($15,000 for 2018, adjusted annually for inflation). But for tax years beginning after Dec. 22, 2017, for contributions made before 2026, the designated beneficiary can make additional contributions, in excess of this limit, up to the lesser of the federal one-person poverty line or the beneficiary's compensation. To be eligible to make these contributions, the designated beneficiary must be employed or self-employed and must not be covered by an employer's retirement saving plan.

       There is also a limit on the total balance in the account. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition plans (Section 529 college savings accounts).

       ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual. But for distributions after Dec. 22, 2017, for transfers made before 2026, amounts from qualified tuition programs (529 accounts) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of that designated beneficiary's family. These rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

       ABLE accounts have no impact on an individual's Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the SSI program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.

       If an eligible individual dies, any amount remaining in the account after Medicaid reimbursements goes to the deceased's estate or to a beneficiary and will be subject to income tax on investment earnings, but not to a penalty.

       For tax years beginning after Dec. 22, 2017, for contributions made before 2026, the designated beneficiary of an ABLE account can claim the saver's credit for contributions made to his or her ABLE account.

We hope this information is helpful. If you'd like more details about establishing an ABLE account, please don't hesitate to contact us.

Saturday, March 16, 2019

Importance of Income Tax Planning as Part of your Estate Plan

As a result of the large estate tax exemption amount that was set in 2011 at $5 million (increased to $10 million for estates of decedent's dying in 2018 through 2025), which increases annually for inflation (the amount is $11,180,000 in 2018), many modest estates no longer need to be concerned with federal estate tax. Before 2011, the smaller estate tax exemption amount resulted in estate plans that attempted to avoid the estate tax, but were not concerned with minimizing income tax. Now, because many estates will not be subject to estate tax (thanks to that large exemption amount), planning for such estates can be devoted almost exclusively to saving income taxes. While saving both income and transfer taxes has always been a goal of estate planning, it was more difficult to succeed at both when the estate and gift tax exemption level was much lower. Below are some tax planning strategies you may want to revisit in light of the large exemption amount and other recent changes in the law.

Gifts that use the annual gift tax exclusion. One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor's estate. However, because the estate tax exemption amount is so large, estate tax savings may no longer be an issue. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the donee receives the donor's basis upon transfer. Thus, the donee could face an income tax cost, via a capital gains tax liability, on the possible sale of the gifted property in the future. If there is no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on factors other than estate tax savings. For example, gifts may be made to help a family member with making a purchase or starting a business. But a donor should not gift appreciated property because of the capital gain that could be realized on a future sale of the property by the donee. If the appreciated property is held until the donor's death, the heir will get a step-up in basis that will wipe out the capital gain tax on any pre-death appreciation in the value of the property.

Planning that equalizes spouses' estates. In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. Generally, a two-trust (a credit shelter trust and marital trust) plan was established to minimize estate tax. "Portability," or the ability to apply the decedent's unused exclusion amount to the surviving spouse's transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent's applicable exclusion amount (the deceased spousal unused exclusion (DSUE) amount) as calculated in the year of the decedent's death. So, if a spouse dies in 2017, when the estate tax exclusion amount is $5,490,000, without having used any exclusion amount over the course of the deceased spouse's life, the surviving spouse would be able to apply the DSUE amount of $5,490,000 to any taxable transfers made. If the surviving spouse were to die later in 2017, then the surviving spouse will be able to use an exclusion amount of $10,980,000 (both the DSUE and the surviving spouse's exclusion amount). In this example, if the surviving spouse dies in a later year, the DSUE amount remains fixed at $5,490,000, but the surviving spouse's basic estate exclusion amount will increase annually. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Estate exclusion or valuation discounts that do not preserve the step-up in basis. Some strategies to avoid inclusion of property in the estate may no longer be worth pursuing. It may be better to have the property be included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation - the valuation of qualified real property used for farming purposes or in a trade or business on the basis of the property's actual use, rather than on its highest and best use - may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property if the special use valuation is not applied. Also, estates where property was transferred to avoid estate inclusion by limiting the transferor's power or control over the property may now welcome that inclusion because that inclusion would mean a step-up in basis, saving potential future capital gain tax. The gap between the transfer tax rate and the capital gains tax rate has narrowed, making strategies that do not preserve the step-up in basis less desirable.

Keep in mind that the increase in the estate tax exemption is only temporary as of right now, effective for 2018-2025. There are many factors to consider when determining what steps to take when estate planning.

If you would like to discuss these strategies, and see how they may relate to your estate plan, please contact us.

Saturday, February 16, 2019

Deduction for Student Loan Interest

Can you deduct the interest you pay on your college loans? The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, as explained below.

The interest must be for a "qualified education loan," which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify. Thus, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.

It doesn't matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

For 2018, the deduction is phased out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 ($65,000 and $80,000 for single filers). The deduction is unavailable for taxpayers with AGI of $165,000 ($80,000 for single filers) or more.

Married taxpayers must file jointly to claim this deduction.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another's return. For example, in the typical situation where a parent is paying for the college education of a child whom the parent is claiming as a dependent, the interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child/student may pay on a loan the student may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.

The deduction is taken "above the line." In other words, it's subtracted from gross income to determine AGI. Thus, it's available even to taxpayers who don't itemize deductions.

Other requirements. The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers must keep records to verify qualifying expenditures. Documenting a tuition expense isn't likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees, and transportation.

Documenting room and board expenses should be straightforward for students living and dining on campus. Student who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.

Please contact us if you would like assistance in determining whether you qualify for this deduction or if you have any questions about it.

Tuesday, January 22, 2019

Child Tax Credit Changes & New Dependent Credit due to the Tax Cuts and Jobs Act

Under pre-Act law, the child tax credit was $1,000 per qualifying child, but it was reduced for married couples filing jointly by $50 for every $1,000 (or part of a $1,000) by which their adjusted gross income (AGI) exceeded $110,000. (The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers.) To the extent the $1,000-per-child credit exceeded your tax liability, it resulted in a refund up to 15% of your earned income (e.g., wages, or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer's social security taxes for the year over the taxpayer's earned income credit for the year was refundable. In all cases the refund was limited to $1,000 per qualifying child.

Starting in 2018, the Tax Cuts and Jobs Act, or TCJA, doubles the child tax credit to $2,000 per qualifying child under 17. It also allows a new $500 credit (per dependent) for any of your dependents who are not qualifying children under 17. There is no age limit for the $500 credit, but the tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned income threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The TCJA also substantially increases the "phase-out" thresholds for the credit. Starting in 2018, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the pre-Act threshold of $110,000). The threshold is $200,000 for all other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include that child's Social Security number (SSN) on your tax return. Under pre-Act law you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child does not have an SSN, you will not be able to claim the $2,000 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.

The changes made by the TCJA should make these credits more valuable and more widely available to many taxpayers. If you have children under 17, or other dependents, and would like to determine if these changes can benefit you, please contact us.