Whereas the proposed Republican tax reform has limited, if any, impact upon commercial real estate, it does have a negative impact on residential real estate, lowering values by approximately 10 percent. To reduce future fiscal deficits resulting from lower corporate and individual tax rates and other provisions, the proposed changes to homeowner deductions will reduce the tax incentives for buying and owning a home.
The following changes, if passed, will negatively impact home ownership:
- Home mortgage interest will be deducted on mortgages up to $500,000, down from mortgages of up to $1.1 million
- The interest deduction on second or vacation homes will be eliminated
- Upon the sale of a personal residence, to avoid up to $500,000 of gain for married taxpayers, the homeowner must have lived in the home for at least five of the last eight years—the current rule is two of the last five
- The gains exclusion will be restricted to one sale every five years, rather than one every two
- The gains exclusion will be reduced according to adjusted gross income
- Residential real estate tax deductions will be capped at $10,000
- State and local taxes will not be deductible, which will reduce the number of taxpayers who itemize
Congress is expeditiously moving forward with a comprehensive tax reform package. The stated objectives are as follows:
- Prove that lower income tax rates on ordinary income generate economic growth
- Simplify the tax code
- Provide tax relief for middle class families
- Cut business taxes
- End narrowly focused special tax benefits
- Make more efficient the allocation of economic resources by encouraging more consumption of goods and services receiving preferential treatment
Whereas many of the current proposals are somewhat ambiguous, and will be aggressively challenged by lobbyists on behalf of special interest groups, you can implement several year-end strategies to maximize economic and financial opportunities.
The top taxation rate for individuals will remain at the current 39.6 percent, even though very few pay that rate because of tax breaks. But eliminating certain tax breaks for the rich can allow for a broader reduction of rates. There is also limited talk of taxing both ordinary income and capital gains at the same tax rate, a change supported by many economists, which could eliminate a number of tax shelters that take advantage of the current rate differential.
The Tax Policy Center analysis and several nonpartisan analysts indicate that reforms will include the following:
- A reduction of the tax bracket thresholds and percentages (12 percent, 25 percent, and 35 percent), although certain taxpayers will still be subject to a rate of 39.6 percent
- An elimination of the alternative minimum income tax
- Preferential rates for long-term capital gains
- New lower tax rates of 25 percent on flow-through entities
- A new higher standard deduction of $24,000
- The repeal of personal exemptions and deductions for moving, adoption, alimony, medical, and tax preparation expenses
- An elimination of the deductibility of state and local income taxes and a cap on real estate tax of $10,000 and mortgage interest of $500,000
- An expansion of child care credits that may be refundable or applicable against both income and payroll taxes (a modest benefit to lower-income families from $1,000 to $1,600)
- A cut in the corporate income tax rate to 20 percent
- Unified gift and estate tax will be increased to $11 million (capital gains will continue to go untaxed at death)
- A 10 percent tax on global profits and taxes on offshore liquid and illiquid assets of 12 percent and 5 percent, respectively
- An excise tax of 20 percent on payments from domestic corporations to foreign affiliates
Note that carried interest tax rates and deductions for 401K plans will not be changed. Also, some of the major proposed corporate tax cuts are in the form of higher capital income, such as dividends and returns on investments.
Currently, analysts expect that for current homeowners, mortgage interest deductions will remain the same. For new home buyers, however, deductions for home mortgage interest may be limited for high-income taxpayers from $1 million to $500,000. Charitable contributions will survive reform attempts. Also, passive loss issues for real estate developers and carried interest for hedge fund managers and private equity portfolio investors/managers will remain unchanged.
In consideration of the potential changes set forth above and if you expect your income tax rates to be lower in the future, we recommend the following:
- Talk with your tax advisor now
- Prepay state and local taxes
- Accelerate the payment of employee business expenses and business operating expenses while deferring ordinary income
- Maximize the contribution to your 401K plan
- Make capital business expenditures—bonus depreciation and Section 179 tax deduction
- Accelerate annual charitable gift giving and create a charitable lead trust
Unfortunately, many tax preparers misunderstand the rules of the home-office deduction. And after receiving inaccurate advice from tax preparers, taxpayers often fear taking advantage of the tax deduction for the use of a home office.
If you have only a home office—your employer does not provide you with a work space—or are an outside salesperson, you are eligible to take the home-office deduction. And since more and more employees today work solely from home or remotely, the opportunity to use home-office deductions has increased.
Depreciation applicable to a home office includes two components: (1) the tangible personal property (the office contents, including furniture, fixtures, and equipment) and (2) the real estate (the office space itself along with related operating expenses, such as the cost of utilities, insurance, property taxes, etc.). There is no limitation on the allowable depreciation of tangible personal property. There may be a limitation, however, on the deduction permitted for real estate expenses. For 2013, the home-office deduction for real estate has been simplified; deduct $5 per square foot, up to a maximum of $1,500.
When starting a new company, it’s important to evaluate and understand how the pros and cons of the standard C corporation (C corp.), an S Corporation (S corp.), or a limited liability company (LLC) impact your business objectives. Each of these entities has limitations, flexibility, and income and capital gains tax implications that are important to your business. You must consider the length of time you expect to own and operate the business and your ultimate exit strategy. Many states tax each of the above entities differently. Here are just a few of the issues you should think about when deciding on a business entity:
Fiscal versus calendar year
- A C corp. can use any month as the start of the fiscal year if it is not a personal-service company.
- An S corp. and LLC must use December only, which causes a loss of flexibility.
Flow-through income (loss)
- LLC income is subject to self-employment tax (SE tax).
- S corp. income is not subject to SE tax; only salaries are subject to SE tax.
- The IRS may recharacterize such income, but that possibility is remote.
- C corp. income doesn’t flow through to the shareholders and is taxed at the corporate level.
Sale of the company
- A C corp. could be subject to double taxation.
- Both an LLC and S corp. are subject to a one-time capital gains tax.
- Neither the LLC nor the S corp. is subject to a capital gains tax at the entity level.
Distributing appreciated assets
- LLC distribution of appreciated assets is tax free.
- S corp. distribution of such assets is taxable at the current fair market value.
- Conversion from an S corp. to an LLC creates taxable issues.
- C corp. assets are taxed to the recipient as a dividend at the current fair market value.
Allocations of tax benefits (depreciation and other), income, and losses
- An LLC is flexible in regards to economic versus beneficial ownership interests.
- An S corp. must follow shareholder ownership pro rata.
- A C corp. is taxed at the entity level only, not at the owner’s level.
- LLC debt increases the owner’s, or member’s, deductible “cost” basis.
- S corp. debt must be handled correctly to increase basis; otherwise, basis does not include company debt.
- C corp. debt does not add to the cost basis of a shareholder.
Number of owners of the entity
- The number of C corp. and LLC shareholders or members is unlimited.
- The number of S corp. shareholders may be limited.
- LLC and S corp. perquisites are limited.
- C corp. employee and shareholder benefits are more flexible, extensive, and comprehensive.
Contact Alan Schiffman to discuss which is the best business entity for you.
Banks are in business to make money on your money. But bankers also should be looking after the interests of their customers by providing more-comprehensive services. If you are maintaining deposits at your local branch, your bank should be providing services to help you earn income on your deposits. Such services may include sweep accounts that earn interest overnight, the purchase of products with an interest yield such as short-term bank and commercial paper, repurchase and reverse repurchase agreements, and more. In addition, bankers should provide free wire services, preferred lending rates, investment advisory services, private banking privileges, mortgages, and insurance services. Discuss these services with your banker to earn more income with virtually no risk.
People today often communicate via emails, texts, and other methods that allow lightning-fast responses. Responding to messages immediately can be risky, however, as communications sent without thought and review can be ambiguous to and misunderstood by the receiver. Further, such communications become a permanent record subject to discovery. These communications may not reflect tone, expression, or the intention of humor. They sometimes can become a contest to see who will have the last word. Developing relationships and a profound sense of trust is achieved through time using careful communication, ideally in person.
Income and estate taxes can represent a significant expense. But a proactive financial advisor can advocate for you and help mitigate your tax liabilities. Operating a successful business requires revenue enhancement and expense control. The same is true for individuals. However, many people overlook planning to minimize income tax expenses. Virtually each time a financial decision is made, it is likely to include important income tax ramifications. Accordingly, contacting your financial advisor prior to entering into a financial transaction can help to maximize your income tax benefits and mitigate your income tax expense.
Insurance mitigates risks against perils. Insurance needs are constantly changing. Therefore, your insurance coverage requirements periodically should be reviewed and discussed with your financial advisor. If you operate a business with employees, the federal and state government requires you to provide health insurance and workers’ compensation. In addition, you may need the following insurance products: property and casualty, umbrella coverage, fidelity bonds, business interruption, kidnap and ransom, key person, disability, accounts receivable, and more. Contact Alan Schiffman to discuss your needs.
On November 26, 2013, the IRS issued final regulations on the §1411 Medicare tax and the 0.9 percent Additional Medicare Tax that applies to high earners with a modified adjusted gross income of greater than $200,000 for an individual and $250,000 for married couples filing jointly. Please note the following:
- Net investment income (NII) is subject to a Medicare surtax of 3.8 percent.
- The IRS implemented a Medicare payroll tax add-on of 0.9 percent.
- Personal exemptions may be reduced or eliminated if adjusted gross income exceeds $250,000 ($300,000 for married couples), and itemized deductions may be reduced by 3 percent to a maximum reduction of 80 percent in value.
- Dividends and capital gains are now subject to a 20 percent tax instead of a 15 percent tax.
- The IRS implemented a new tax rate of 39.6 percent for taxpayers with taxable income greater than $400,000 ($450,000 for married couples).
- The sale of S Corporation stock in an active business that the taxpayer materially participates in should not be subject to the 3.8 percent Medicare tax.
- Net losses are allowed against the Net Investment Income Tax (NIIT).
- Self-charged interest and self-charged rental income will not be subject to NIIT.
- A safe-harbor provision is available to real estate professionals who can satisfy the 500-hour test.
- More expenses are identified as allowed investment expenses.
- The method for determining the amount of various itemized deductions that are allowed to offset NII has been simplified.
In 2013 and 2014, the estate and gift tax exemptions are $5,250,000 and $5,340,000 respectively. Annual exclusion amounts will be $14,000 for both 2013 and 2014. ATSCPA often explores estate tax planning opportunities available under the current federal tax laws. Please note that certain estate planning strategies may be treated differently by the states where you reside. To reduce the assets in your estate by using multidiscounting techniques, now is the time to consider gifts to (1) estate-reduction trusts for spouse and family, (2) dynasty trusts for multiple-generation skipping, (3) family limited partnerships, (4) qualified personal residence trusts (QPRT), (5) grantor retained annuity trusts (GRAT), (6) intentionally defective grantor trusts (IDGT), (7) grantor trusts, and other devices. Why act today? Congress can change the laws at any time and (1) restrict discounting for fractional interests in assets, (2) severely limit the use of family limited partnerships and grantor trusts, (3) extend the minimum terms of certain trusts and restrict remainder interests, and (4) impose longer limits on the protection from generation-skipping taxes (GST) for trusts than the GST exemption that is currently allowed.
The Cook Islands offer a unique form of protection from creditors as compared with the Cayman Islands, Jersey, the Isle of Man, and other more traditional countries that provide tax havens. If you are in need of protecting your assets from creditors and others, please contact Alan Schiffman to discuss.
Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, two new tax benefits are available to employers who hire certain previously unemployed workers (“qualified employees”). The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010, through December 31, 2010. In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000. Reprinted from IRS GuideWire
The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from Oct. 1, 2013, through March 31, 2014. If you are seeking information about how to obtain health care coverage or financial assistance to purchase health care coverage for you and your family, visit the Health and Human Services website, HealthCare.gov.
Effect of Sequestration on Small Business Health Care Tax Credit
Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued to certain small tax-exempt employers claiming the refundable portion of the Small Business Health Care Tax Credit under Internal Revenue Code Section 45R, are subject to sequestration. This means that refund payments processed on or after Oct.1, 2013, and on or before Sept. 30, 2014, to a Section 45R applicant will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent, irrespective of when the original or amended tax return was received by the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change. Affected taxpayers will be notified through correspondence that a portion of their requested payment was subject to the sequester reduction and the amount.
IRC §7216, Disclosure or Use of Information by Tax Return Preparers
Final Treasury Regulations on rules and consent requirements relating to the disclosure or use of tax return information by tax return preparers became effective Dec. 28, 2012. For additional information about how these apply to services and education related to the Affordable Care Act, please see our questions and answers [on irs.gov].
Medical Loss Ratio (MLR)
Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. For information on the federal tax consequences to an insurance company that pays an MLR rebate and an individual policyholder who receives an MLR rebate, as well as information on the federal tax consequences to employees if an MLR rebate stems from a group health insurance policy, see our frequently asked questions [on irs.gov].
Reporting Employer Provided Health Coverage in Form W-2
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement. The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits. More information about the reporting can be found on Form W-2 Reporting of Employer-Sponsored Health Coverage.
Net Investment Income Tax
A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. The IRS and the Treasury Department have issued proposed regulations on the Net Investment Income Tax. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Net Investment Income Tax, see our questions and answers [on irs.gov].
Additional Medicare Tax
A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. The IRS and the Department of the Treasury have issued proposed regulations on the Additional Medicare Tax. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Additional Medicare Tax, see our questions and answers [on irs.gov].
On April 26, 2012, the Department of the Treasury and IRS issued Notice 2012-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Additionally, on April 30, 2013, the Treasury Department and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. The proposed regulations solicit public comments. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibility payment.
Information Reporting on Health Coverage by Employers
On Sept. 5, 2013, the Department of the Treasury and IRS issued proposed regulations (REG-136630-12) on employer health insurance coverage information reporting. The information reporting relates to health insurance coverage that is offered by certain employers, referred to as applicable large employers, and reporting is to be provided by each applicable large employer member. Comments on the proposed regulations may be submitted electronically, by mail or by hand delivery. Additionally, on July 9, 2013, the Department of the Treasury and the IRS announced transition relief for 2014 from this annual information reporting. Notwithstanding this transition relief, once the information reporting rules have been issued, employers and other reporting entities are encouraged to voluntarily comply with the information reporting provisions for 2014. For more information, please see Notice 2013-45.
Information Reporting on Health Coverage by Insurers
On Sept. 5, 2013, the Department of the Treasury and IRS issued proposed regulations (REG-132455-11) on minimum essential coverage information reporting. The information reporting is to be provided by health insurance issuers, certain sponsors of self-insured plans, government agencies and certain other parties that provide health coverage. Comments on the proposed regulations may be submitted electronically, by mail or by hand delivery. Additionally, on July 9, 2013, the Department of the Treasury and the IRS announced transition relief for 2014 from this annual information reporting. Notwithstanding this transition relief, once the information reporting rules have been issued, insurers and other reporting entities are encouraged to voluntarily comply with the information reporting provisions for 2014. For more information, please see Notice 2013-45.
Disclosure of Return Information
On Aug. 13, 2013, the Department of the Treasury and the IRS issued final regulations with rules for disclosure of return information to the Department of Health and Human Services that will be used to carry out eligibility determinations for advance payments of the premium tax credit, Medicaid and other health insurance affordability programs. For additional information on the final regulations, see our questions and answers [on irs.gov].
Small Business Health Care Tax Credit
This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. On Aug. 23, 2013, the Department of Treasury and the IRS issued proposed regulations which include information on the transition of eligibility for the credit and requiring the purchase of insurance coverage through an Exchange. Comments may be submitted electronically, by mail or hand delivered to the IRS. Learn more by browsing our page [on irs.gov] on the Small Business Health Care Tax Credit for Small Employers.
Application of the Affordable Care Act to Health Reimbursement Arrangements, Health Flexible Spending Arrangements and Certain Other Employer Health Care Arrangements
The Affordable Care Act’s market reforms apply to group health plans. On Sept. 13, 2013, the IRS issued Notice 2013-54, which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer health care arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. The notice also provides guidance on employee assistance programs, or EAPs, and on section 125(f)(3), which prohibits the use of pre-tax employee contributions to cafeteria plans to purchase coverage on an Affordable Insurance Exchange (also called a Marketplace). The notice applies for plan years beginning on and after Jan. 1, 2014, but taxpayers may apply the guidance provided in the notice for all prior periods. DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03, and HHS will shortly issue guidance to reflect that it concurs with Notice 2013-54. On Jan. 24, 2013, DOL and HHS issued FAQs that addressed the application of the Affordable Care Act to HRAs.
Health Flexible Spending Arrangements
Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers [on irs.gov]. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5. Additionally, Notice 2013-57 provides information about the definition of preventive care for purposes of high deductible health plans associated with HSAs. In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules. On Oct. 31, 2013, the Department of the Treasury and IRS issued Notice 2013-71, which provides information on a new $500 carryover option for employer-sponsored health care flexible spending arrangements. Learn more by reading the news release issued by the U.S. Department of the Treasury.
Reprinted from IRS GuideWire