Tony Nitti is a regular contributor to Forbes.com, covering tax policy and key court decisions. He has recently written articles on the tax plans of the various Democratic candidates. Click here to view the article on Bernie Sanders’ tax plan.
President Trump has issued a budget proposal for fiscal year 2021. Among its provisions are an extension, through 2035, of the wealth transfer tax (i.e., estate, gift, etc.) cuts and individual income tax cuts contained in the 2017 Tax Cuts and Jobs Act.
The TCJA contained provisions that cut tax rates and made other changes to individual income tax rules; these provisions are scheduled to expire for tax years beginning before Jan. 1, 2026. The TCJA also increased the estate/gift tax exclusion to $11 million plus annual cost of living increases for estates of decedents dying and gifts made before Jan. 1, 2026.
President’s budget would extend TCJA provisions. The budget states that the administration supports the extension of the individual and estate tax provisions of the Tax Cuts and Jobs Act through 2035.
Other tax provisions in President’s budget:
The budget proposes $12.0 billion in fiscal year 2021 base funding for IRS. The budget provides $300 million to continue IRS efforts to modernize its information technology infrastructure and enhance taxpayers’ ability to interact with the IRS securely and electronically.
The budget includes funding to digitize more IRS communications to taxpayers so they can respond quickly and accurately to IRS questions; create a call-back function for certain IRS telephone lines so taxpayers do not need to wait on hold to speak with an IRS representative; and make it easier for taxpayers to make and schedule payments online.
The budget also proposes legislation enabling additional funding to expand tax enforcement. These additional proposed investments are estimated to generate approximately $79 billion in additional revenue at a cost of $15 billion, yielding a net savings of $64 billion over 10 years.
The budget also includes several compliance proposals, including: improving oversight of paid tax preparers; giving IRS the authority to correct more errors on tax returns before refunds are issued; requiring a valid Social Security Number for work in order to claim certain tax credits; and increasing wage and information reporting.
Congress recently passed, and the President signed into law, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.
Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact.
Repeal of the maximum age for traditional IRA contributions. Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.
Required minimum distribution age raised from 70½ to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.
For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.
Partial elimination of stretch IRAs. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).
However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant’s or IRA owner’s death (10-year rule). So, for those beneficiaries, the “stretching” strategy is no longer allowed.
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans. A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary’s qualified higher education expenses.
Before 2019, qualified higher education expenses didn’t include the expenses of registered apprenticeships or student loan repayments.
But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.
Kiddie tax changes. In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child.
Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.
There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.
The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.
Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child. Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income.
Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.
Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes. Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.
Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable students receiving those payments to begin saving for retirement without delay.
Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits. Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers did not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.
For contributions made to IRAs after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.
On Thursday, February 14, the Senate approved a budget measure (H.J. Res 31) that would avoid a government shutdown. The House was expected to take up and pass the measure in the evening of February 14, and President Trump has indicated he will sign the bill.
The bill includes $11.3 billion in funding for the IRS in fiscal 2019. The final vote was 83-16. The measure stipulates that $77 million must be used to implement tax reform. The bill also contains language that prohibits the Treasury Department from finalizing any regulation related to the standards used to determine the tax-exempt status of a 501(c)(4) organization.
In addition, the appropriations bill provides the IRS with $4.86 billion for enforcement, $3.7 billion for operations support, $2.5 billion for taxpayer services, and $110 million for business systems modernization.
On January 24, Senator Elizabeth Warren (D-MA) proposed an “Ultra-Millionaire Tax,” a proposal to tax the wealth of the richest 0.1% of Americans. The Ultra-Millionaire Tax would apply only to households with a net worth (i.e., the sum of all assets net of debts) of $50 million or more — roughly the wealthiest 75,000 households, or the top 0.1%.
Under the tax, there would be an annual 2% tax on household net worth between $50 million and $1 billion. In addition, there would be a 1% annual Billionaire Surtax (3% tax overall) on household net worth above $1 billion. No additional tax would apply to any household with a net worth of less than $50 million (99.9% of American households). A 40% “exit tax” on the net worth above $50 million would apply to U.S. citizens who renounce their citizenship.
It was estimated that the tax would raise around $2.75 trillion over ten years (i.e., the budget window 2019-2028), of which $0.3 trillion would come from the billionaire 1% surtax. The wealth tax would raise approximately 1.0% of GDP per year ($210 billion relative to a $21.1 trillion GDP in 2019).
The Treasury and IRS have proposed new regulations that will block high-tax states’ attempts to circumvent the new $10,000 cap on state and local tax (SALT) deductions.
The $10,000 limit on the SALT deduction was part of the Tax Cuts and Jobs Act, an overhaul of the tax code, which was passed last year.
New York, New Jersey and Connecticut — among the states with the highest property taxes — had put legislation in place to help taxpayers bypass the limit on the deduction.
Those plans included permitting municipalities to set up charitable funds and allowing taxpayers to contribute to them. This would allow taxpayers to donate to state-run charitable funds and receive a credit against their state tax bills while also deducting the charitable donation on the Federal income tax return.
However, the Supreme Court has held that a charitable contribution must be a transfer of money or property without adequate consideration. Meaning that there can be no benefit received with these transfers.
Therefore, under the proposed regs, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions would have to reduce its charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. For example, if a state grants a 70% state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer would have to reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return.
The rule would also not apply for tax credits of no more than 15% of the cash paid to the state. Thus, for example, a taxpayer who makes a $1,000 contribution to an eligible entity would not be required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received was no more than $150.
If you would like to discuss these new regulations in further detail or any other tax planning, please give us a call.
ARM is hiring full-time staff auditors, a summer audit intern and a winter tax intern to join our growing firm! Full-time employment opportunities are available upon completion of successful internships. Check out our job postings on our website at www.armcpa.com/careers.
ARM will also be attending the upcoming Ohio University 2018 Business Conference on September 6th from 3pm – 6pm. Please be sure to stop by our booth to learn more about our current employment opportunities.
Under the new tax law, many taxpayers find themselves receiving more benefit taking the standard deduction instead of itemizing. This is due to several reasons, but most notably the law has changed the standard deduction available to $24,000 for taxpayers who are married filing joint plus another $1,300 per taxpayer who is over the age of 65. Another important factor is the taxes portion of the itemized deductions (state and local tax payments and real estate taxes) now getting capped at $10,000. Because of these changes, many taxpayers who donate to charity won’t receive tax benefit for their donations because they will still benefit by taking the standard deduction. If you donate to charity every year and still find yourself taking the standard deduction, there may be a great tax planning opportunity for you to take advantage of known as a donor-advised fund.
Example: You’re filing a married filing joint return. Let’s say your state and local tax payments plus your real estate taxes are capped at $10,000 and you have $8,000 of mortgage interest. This puts you at $18,000 of total deductions. Since the standard deduction is now $24,000, you wouldn’t receive tax benefit for the first $6,000 of charitable contributions. In other words, if you gave $6,000 or less every year to charity, you wouldn’t receive any tax benefit for those contributions. This is where the donor-advised fund comes into play. You could, for example, donate five years of contributions (6,000 x 5 = $30,000) into a donor-advised fund all in one year. Doing this, you would receive the $30,000 deduction in the year you donated to the donor-advised fund. Here’s what your deductions would look like:
Not using donor-advised fund:
Year 1 – Year 5: $24,000 per year = $120,000
Total = $120,000
Using donor-advised fund:
Year 1: $18,000 (mortgage and taxes) + $30,000 (contributed to donor-advised fund) = $48,000
Year 2 – Year 5: $24,000 per year (giving $0 to charity) = $96,000
Total = $144,000
Once the contribution to the donor-advised fund is made, the funds now belong to the charity since donor-advised funds are components of a qualified charitable organization. The charity has ultimate control over the distribution, but you can still advise the charity on who to distribute to, how much to distribute, and the timing of the distributions to the ultimate recipient. The charity will generally follow your recommendations and must retain discretion regarding the use of the funds.
If you would like to discuss donor-advised funds in further detail or any other tax planning, please give us a call.
Under prior tax law an athlete was able to maximize tax savings by strategically planning the payment of unreimbursed employee expenses including items such as agent fees, players association dues, clubhouse dues, etc. Unfortunately, recent tax reform eliminated the deductibility of unreimbursed employee expenses for all individuals. Using retirement plans to reduce the tax on outside endorsement income is a planning strategy that still remains for athletes.
The fact that the athlete may have coverage under a qualified retirement plan with the team does not prevent the athlete from establishing their own retirement plans on any self-employment (SE) income. However, amounts contributed to an athlete’s qualified plan maintained by the team or the league may affect the amounts that can be contributed to a retirement plan related to SE income. The athlete will rarely have any employees, so the choice and administration of a plan can be quite simple. Self-employed individuals without employees can adopt a qualified retirement plan, with or without a salary deferral 401(k) feature, a simplified employee pension (SEP) plan, a salary-reduction incentive match plan (SIMPLE plan), or an individual retirement account (IRA). Under the new tax law the maximum Federal individual income tax rate is 37%, thus this planning strategy can result in significant tax savings!
Looking for a way to reduce your tax liability? How about not paying sales tax for a weekend? Ohio’s annual sales tax holiday is just around the corner. The holiday starts on Friday, August 3, 2018 at 12:00 a.m. and ends on Sunday, August 5, 2018 at 11:59 p.m.
During the holiday, the following items are exempt from sales and use tax:
Clothing priced at $75 per item or less;
School supplies priced at $20 per item or less; and
School instructional material priced at $20 per item or less.
Let us know if you have any questions. Happy shopping!