Category Archives: Blog

Highlights of Spending Package’s Tax Law Changes

December 26, 2019

The federal government spending package titled the Further Consolidated Appropriations Act, 2020, does more than just fund the government. It extends certain income tax provisions that had already expired or that were due to expire at the end of 2019. The agreement on the spending package also includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
Let’s look at some of the highlights.

Extenders

Here are some of the most widely relevant breaks that have been extended through 2020:

• The exclusion from gross income of discharge of qualified principal residence indebtedness,
• The treatment of mortgage insurance premiums as qualified residence interest for itemized deduction purposes,
• The reduction in the medical expense itemized deduction floor to 7.5% of adjusted gross income,
• The above-the-line deduction for qualified tuition and related expenses,
• Empowerment zone tax incentives,
• The New Markets credit,
• The employer tax credit for paid family and medical leave, and
• The Work Opportunity credit.

Some of these extensions might open up year-end tax planning opportunities if you can act before December 31. And the extension of some breaks that had expired at the end of 2017 but that now have been retroactively revived means that some taxpayers should consider filing amended returns for 2018.

Retirement Plans

The SECURE Act is primarily intended to encourage saving for retirement, though it’s not entirely favorable to taxpayers. Most provisions take effect January 1, 2020. Here are some of the most significant provisions:

• Elimination of the age 70½ limit for making traditional IRA contributions, so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs,
• Increase of the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72,
• An exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 within one year of the birth of a child or an adoption becoming final,
• Elimination of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies,
• Expansion of access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties.
• Elimination of employers’ potential liability when it comes to selecting appropriate annuity plans, and
• A new requirement that employers allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.

Learn More

This is just a brief overview of some of the most relevant provisions. Please contact your tax advisor to learn more about these and other changes that may affect you.

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Sales Tax After Wayfair: How Will it Affect Your Business?

December 9, 2019

If your business sells its products or services across state lines, the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair may have a significant impact on your sales tax obligations. Previously, states could not require out-of-state sellers to collect sales tax unless they had a physical presence in the state, such as retail outlets, offices, employees, manufacturing facilities, or distribution centers.

In Wayfair, the Court ruled that even a “virtual” presence is enough. The South Dakota law reviewed in that case applies the state’s sales tax laws to sellers that 1) deliver more than $100,000 in goods or services into the state annually, or 2) engage in 200 or more separate transactions for the delivery of goods or services into the state. According to the Court, this level of activity is sufficient to demonstrate that “the seller availed itself of the substantial privilege of carrying on business in South Dakota” and, therefore, is within reach of the state’s sales tax laws.

What Does This Mean for Your Business?

The Wayfair decision doesn’t necessarily require you to begin collecting sales tax from customers in every state in which you sell your products or services. Your obligations in a particular state depend on whether 1) the state has passed a law similar to South Dakota’s, and 2) your business’s sales in the state exceed applicable thresholds. Note, however, that in the wake of Wayfair, most states have passed such laws or are considering them.

Even if you don’t do business in other states, Wayfair may have an impact on your purchases of equipment, materials, or supplies from out-of-state sellers. Why? Because if your state has passed a law imposing sales tax obligations on sellers without a physical presence in the state, your out-of-state vendors may begin collecting sales tax from you. And if your purchases qualify for a sales tax exemption — such as a manufacturing or resale exemption — then you’ll need to present your vendors with an exemption certificate in order to avoid the tax.

Next Steps

All businesses should review their interstate sales and purchases to determine whether their sales tax obligations have changed as a result of Wayfair. If you do business in states that have expanded the reach of their sales taxes, pay attention to the effective or enforcement dates of any applicable laws to ensure that your business complies with them on a timely basis. If that date has already passed, investigate whether the state offers voluntary disclosure agreements or other procedures for limiting your liability for past sales.

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Charitable IRA Rollover Eases Tax Pain of RMDs

December 3, 2019

One downside of contributing to a traditional IRA is that, once you reach age 70½, you must begin taking required minimum distributions (RMDs) — and pay taxes on those distributions — whether you need the money or not. But if you’re charitably inclined, you can use a qualified charitable distribution (QCD) to avoid taxes on up to $100,000 in RMDs per year.

Also known as a “charitable IRA rollover,” a QCD is a direct transfer from your IRA to an eligible charity. It counts as a distribution for RMD purposes, but it’s excluded from your income. And it has certain tax advantages over traditional charitable contributions.

Advantage of QCDs over Ordinary Donations

When you receive an RMD, it is taxable to the extent it’s attributable to deductible contributions and earnings on those contributions. (Amounts attributable to nondeductible contributions are tax-free.)

One strategy for reducing these taxes is to donate the taxable portion (or an equivalent amount) to charity. If the donation is fully deductible, it will offset the taxable income that’s generated by the distribution. Depending on your tax situation, however, this strategy may be less effective than a QCD:

• A charitable deduction will benefit you only if you itemize. And that’s less likely now that the Tax Cuts and Jobs Act (TCJA) has nearly doubled the standard deduction.
• Even if you itemize, adjusted gross income (AGI) limits may reduce your charitable deductions. For instance, deductions for cash gifts to public charities are currently limited to 60% of AGI.
• By boosting your income, IRA distributions may trigger AGI-based rules that punch up certain taxes or deflate the benefits of certain tax breaks.

A QCD avoids these issues because it bypasses your income altogether. It allows you to take the equivalent of a charitable deduction — regardless of your income level or whether you itemize — and it won’t increase your AGI. Another advantage of QCDs is that they’re deemed to come from the taxable portion of your IRA first, increasing the portion of the remaining balance that’s nontaxable.

QCD Requirements

If you’re considering a QCD, you must meet several requirements:

• You must be at least 70½ at the time of the distribution. (Reaching that age during the tax year isn’t enough.)

• The IRA must distribute the funds directly to an eligible charity — generally, a public charity, private operating foundation or “conduit” private foundation.

• The donation must be “otherwise deductible.” In other words, it would have been fully deductible (disregarding AGI limits) had you funded it with non-IRA assets. If you receive something of value in exchange for your gift (tickets to an event, for example), it’s not a QCD.

• The distribution must be “otherwise taxable.” It’s not a QCD to the extent it would be tax-free if distributed to you directly.

In addition, QCDs are subject to the same substantiation requirements as other charitable donations.

A Tax-Efficient Strategy

If you don’t need your IRA funds for living expenses and you plan to donate to charity anyway, a QCD offers a tax-efficient strategy for satisfying your RMD requirements. The TCJA may enhance the advantages of QCDs because it increased standard deduction amounts, but keep in mind that these amounts are scheduled to return to their previous levels in 2026. Contact us for help determining the best RMD and charitable giving strategies for you.

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