In the early morning of December 2, the Senate passed by a 51-49 vote their version of the Tax Cuts and Jobs Act. Sen. Susan Collins (R-ME) agreed to a yes vote when several amendments she offered were incorporated into the bill, including the restoration of a $10,000 deduction for property taxes and a lower threshold for deducting medical expenses.
Previous Republican holdouts — Senators Jeff Flake (R-AZ), Steve Daines (R-MJT) and Ron Johnson (R-WI) threw their support behind the bill once they were assured their concerns were addressed – including increasing the deduction for pass-through entities from 17.4 to 23 percent and a gradual phase-out of §179 expensing. Also included was the return of the alternative minimum tax provisions for individuals and corporations. Thresholds would be increased and adjusted for inflation.
The Senate bill includes the repeal of the individual mandate clause of the Affordable Care Act, which requires most to have health insurance or pay a penalty. If the Senate's proposal remains in the final version, then beginning in 2019, there would be no penalty if taxpayers go without coverage. The penalty would remain for 2018.
The House and Senate are expected to work out the differences between the two proposals over the next weeks in joint committee. Several key differences remain. Once an agreement is reached between both chambers of Congress, the bill will go to the president for signature.
Sometimes other Professional's Articles are written so well, I feel like sharing them. This is from http://www.bakertilly.com
Paying your child for services performed in your family business can reduce your overall family tax bill, while shifting assets to your child without gift tax implications. As a business owner, you can take a deduction for the wages paid to your child, while your child can utilize his or her standard deduction (up to $6,300 in 2016) to offset those wages making them income tax-free (and possibly payroll tax-free). Additionally, the deduction might lower your adjusted gross income, which might favorably impact other deductions and credits that get phased out due to high adjusted gross income.
For example, a business owner in the 35 percent tax bracket hires their 14-year-old son to work in the office on weekends to help with filing, shredding, cleaning, etc. The child earns $6,300 in wages throughout the year and has no other earnings/income. Ideally, the child should receive a Form W-2 for the work performed. Since the full amount of the wages will be deductible as compensation paid by the business, the tax savings to the business owner is $2,205 ($6,300 x 35 percent), and the income tax to the child is $0, since all of these wages are offset by the child’s standard deduction. In addition, if the business income is subject to self-employment tax, there would be additional tax savings by way of reduced self-employment income.
Even if the wages exceed the standard deduction, the child is allowed to make an IRA contribution up to $5,500 in 2016 which, as an “above the line” deduction, could substantially reduce the child's taxable income. If the maximum traditional IRA contribution is made, the first $11,800 of the child's taxable wages will result no income tax liability ($6,300 standard deduction + $5,500 IRA deduction). And again assuming the parents’ 35 percent income tax bracket, the child's wages would produce an income tax savings of $4,130 to them.
If wages are paid to the child in excess of the $6,300 standard deduction, and a Roth IRA contribution is desired as opposed to a traditional IRA, any income in excess of the standard deduction will be taxed at the child’s tax rate. The lowest tax bracket of 10 percent applies to taxable income up to $9,275 for 2016. Assuming a traditional IRA contribution is not made, the child could earn up to $15,575 ($15,575 - $6,300 standard deduction = $9,275 10 percent bracket limit) before being pushed into the next tax bracket, assuming he or she earns no other income. Please talk to your financial advisor before deciding on whether a traditional IRA or Roth IRA is right for you.
In addition to the income tax savings, you may be able to save on payroll taxes if your business is unincorporated. If you operate as a sole proprietor or a husband-wife partnership without other partners, services provided by your child under the age of 18 would not be considered employment for FICA purposes; therefore, you would not be required to pay FICA and FUTA taxes on the child’s wages. Additionally, FUTA is not imposed in this situation if your child is under age 21. If your business is a corporation (or a partnership that contains non-parent partners), FICA and FUTA taxes are still required to be paid on your child’s wages (note, the reduction in income tax is still achieved). However, there is no extra cost to the business owner, as these taxes would be required to be paid if you would have hired someone for similar work anyway.
As a future planning concern in arranging for contributions made to an IRA established for a minor, it is important to keep in mind that once the child reaches the age of majority, he or she will be free to take funds from the IRA as he or she pleases, and can even close the IRA out. With a distribution from a traditional IRA, there will be taxable income to deal with and, most likely a 10 percent additional tax on the amount of the distribution on account of a premature distribution from the IRA. And, if the conditions applicable to a Roth IRA, including the holding requirements, are not met, penalties, in addition to tax on the investment earnings could apply, as well as that 10 percent additional tax on the amount of the distribution. Therefore, in establishing an IRA for a minor, it’s often best going into this strategy with the intention that the child is to maintain his or her IRA intact for a long, long time or that the IRA is to be used for a specific funding purpose.
One example of a specific funding purpose involves taking distributions from a traditional or Roth IRA for “adjusted qualified higher education expenses” (AQEE). In such a case, regular income taxes will be due on distributions from a traditional IRA but usually not from a Roth IRA. As to the application of the 10 percent additional premature distribution tax on account of AQEE, if the taxable part of the distribution is less than or equal to the AQEE, none of the distribution from the traditional or Roth IRA would be subject to the additional 10 percent tax; if the taxable part of the distribution is more than the AQEE, only the excess would be subject to the additional 10 percent tax. For purposes of this rule, AQEE include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Also included are expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the student is at least a half-time student, room and board would also be considered as AQEE.
In summary, there are good reasons to consider sheltering a portion of the child’s income in a traditional IRA or making after-tax contributions to a Roth IRA during the child’s minority period when presumably the exemption and the child’s income tax bracket are most favorable. In doing so, the parents/business owners will also want to consider the future strategy of the IRA as a basis for deciding whether to go with a traditional or Roth IRA, and that strategy should be communicated to the child. As a starting point, the strategy should involve steering clear of the application of the 10 percent additional income tax and maximizing any additional tax preference which would apply to a future distribution from the IRA.
Doing it the right way
When hiring your children, you need to be careful to treat them similarly to any other employee. This might include items such as:
Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
Issuing paychecks as you would a normal employee (e.g., bi-weekly)
Documenting that the services are legitimate and considered ordinary and necessary for the business
Ensuring the services provided do not include typical household chores
If your child is not treated like any other employee in a similar position, the IRS could potentially deem their wages as not ordinary and necessary, and disallow them as a deductible expense. In Patricia D. Ross v. Commissioner, TC Summary Opinion 2014-68, the IRS did exactly that.
Mrs. Ross operated several businesses, and hired her three children to perform services. The work performed by the children was mostly legitimate work and timesheets were prepared. Mrs. Ross filed the appropriate employment tax returns and the children’s income tax returns where required. While the above items were a good start, Mrs. Ross did not generally pay her children on a regular basis, but rather she often made payments to third parties for expenditures that her children “directed her to make” (most of which were meals at restaurants). Also, amounts "paid" to the children had no correlation to the amount of hours actually worked and there was no consistent wage rate (hourly rates ranged from $4-$30 per hour depending on the child and year). Based on all the facts and circumstances, the IRS determined that the arrangement between Mrs. Ross and her children was too dissimilar between that of a normal employer/employee relationship, and that all of the wages claimed as an expense were disallowed.
In no way should this case discourage a business owner from hiring their children and deducting the child's wages as an ordinary and necessary business expense. Rather, it should serve as a reminder on how to do it correctly. From an overall family tax standpoint, hiring your children is an effective tool in reducing taxes, but business owners should be mindful to treat them as they would other employees.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Why do our clients establish S corporations? Is it the flow through taxation or limited liability? Is it the decent (but not great) fringe benefit write-offs or the ability to avoid all surtaxes for active owners? Is it the savings on Social Security tax on distributions or the single level of income tax? Its usually all of the above.
All of this may change if the House version of the 2017 Tax Bill is passed. Interestingly no one is talking about the potential end of “S” corporations. Why may they end after this year?
A hard to decipher provision on pages 49-52 of the House bill requires active owners of “S” corporations to allocate 70% of their flow-through income to ordinary tax rates, and subjects that amount to self-employment tax. You think that isn’t enough to end “S” corporations? Try this on for size: “S” corporations that are personal service type businesses in the fields of healthcare, engineering, architecture, law, accounting, consulting, performing arts or actuaries will pay SE tax on 100% of flow-through income!
If you are thinking that an LLC may be the best tax choice now, think again! The House bill also removes the limited partner exemption from self-employment tax!
We are watching these developments closely and will keep our readers informed. If the law is passed with this provision we will provide additional information to our clients to ensure they have the best entity choice.
This morning, the U.S. House of Representatives' Committee on Ways and Means introduced the Tax Cuts and Jobs Act of 2017. There will certainly be many negotiations over the provisions in the bill, and we expect changes along the way.
Here are some of the highlights that would be effective beginning January 1, 2018:
Consolidate the seven current individual tax brackets into four at 12%, 25%, 35%, and 39.6%, using the following tax brackets:
Proposed Tax Rates
* A summary of the bill provisions lists the threshold for this bracket at $230,000, but the current text of the bill would leave this bracket at $200,000. At this point, it is unclear which amount is the correct proposed amount.
Increase the standard deduction:
Joint filers: $24,000
Single filers with at least one qualifying child: $18,000
Single filers (and surviving spouse): $12,000
Increase the child tax credit to $1,600, and add a nonrefundable credit of $300 for non-child dependents and a new nonrefundable $300 personal credit;
Eliminate itemized deductions other than mortgage interest deductions, charitable contribution deductions, and property tax deductions of up to $10,000. All other state and local tax deductions are eliminated;
For new home purchases, mortgage interest deductions would be limited to interest on $500,000;
Eliminate the AMT for individuals and corporations;
Lower the corporate tax rate to 20%, and create a 35% maximum rate on passthrough business income; and
Increase the estate tax exemption to $10 million, and repeal the estate tax after six years.
U.S. HOUSE TAX CHIEF SAYS STATE INCOME TAX DEDUCTION WILL NOT REMAIN
By David Morgan and Jonathan Oatis
WASHINGTON (Reuters) - Republican tax legislation due to be released this week in the U.S. House of Representatives will not include a deduction for state and local income taxes, the top House Republican on tax policy said on Tuesday.
House Ways and Means Committee Chairman Kevin Brady said in a radio interview with commentator Hugh Hewitt that the emerging bill will offer relief only on property taxes. Brady spoke as House Republican leaders sought to broker an agreement with Republican lawmakers who want the state and local income tax deduction to remain.
Asked if there would be relief on the income side of state and local taxes, Brady replied: "The answer is 'no.' ... Our lawmakers in those high-tax states really believe their families are being punished most by property taxes".
Client Question 1
How many years of my life is my benefit based upon? The answer is that your personal social security benefit is based upon your highest 35 years of earned income. So, for people playing the S corporation low wage game, or wiping out income every year with bonus depreciation, or whatever, they will see a tremendously reduced monthly check at retirement.
Client Question 2
What is the average benefit I can expect? Social Security tells us the average benefit in America in 2017 for a single person is about $1,360 monthly. Do you know what it took to get this benefit? Thirty-five years of an average annual inflation-adjusted income of $25,000.
Client Question 3
What is the earliest age I can draw my benefit? Nearly everyone knows the generic answer to this, which is age 62 but there are other circumstances where you can draw earlier.
Client Question 4
Shouldn’t I draw at age 62 and invest my money like my financial advisor suggests? Let’s see, the Social Security benefit increases by 8% every year you wait to draw after full retirement age. That increase is tax-free and that increase is risk-free. In your 60’s you cannot afford to take any risk, and an investment advisor suggesting this approach will need to earn 12% just to offset the tax difference, plus another 3-4% to offset the additional risk, meaning the investment advisor needs to earn 15% annually just to match the Social Security risk-free, tax-free increase. Since 1871 the S&P 500 has earned a little less than 6% annually. In my mind, taking the chance of obtaining a 15% return for a high-risk investment at retirement age is one of the single worst financial decisions that can ever be made.
Client Question 5
The biggest question of all is “When should I draw my own benefit?” That’s actually simple Madam client-just tell me what day you will die! This sarcastic answer is an answer to illustrate that there is no “one answer fits everyone”. There are three factors involved in the decision: first, what kind of average life expectancy do we have in America and in your ancestry?; second, what kind of personal health issues do you have that will affect your life expectancy?; and third, what kind of financial situation are you in and who will be drawing on this account besides you?
With the prospect of new lower individual tax rates on the horizon for 2018, the average taxpayer or business owner should generally accelerate deductions to 2017 and delay income until 2018. Often overlooked in the planning arena are the low capital gains rates experienced by many Americans.
2017 Capital Gain Rates (01/2013 Tax Act)
If net capital gain is from:
Then maximum capital gains rate is:
Gain on Qualified Small Business Stock Equal to the Section 1202 Exclusion
Un-recaptured Section 1250 Gain
Rate when taxpayer is in 39.6% personal bracket
Other gain & qualified dividends when the regular tax rate is higher than 15%
Other gain & qualified dividends when the regular tax rate is 15% or lower (Single <$37,650, MFJ <$75,300 taxable after exemptions)
When an individual is in the 15% or lower individual tax bracket in 2017, their capital gains rate is 0%, and if the capital gain is what causes their ordinary income tax bracket to go higher than 15%, only the excess capital gains are taxed at 15%.
With all of that in mind, in layman’s terms if an individual’s taxable income is less than the amounts below based on their filing status, their capital gains rate for 2017 is 0%.
Capital Gains Planning-2017 Amounts
Head of Household (+1 child)
Income at the top of the 15% bracket
Standard Deduction based on filing status
Personal exemptions based on filing status no children
Maximum taxable income (without itemizing) for 0% capital gains rate
Client Worksheet for Capital Gains Planning
Client Name: Filing Status: 2017
Filing status bracket limit
Filing status standard deduction
Additional Itemized deductions
# personal exemptions times $4,000
Maximum 0% capital gains taxable income limit
Less estimated taxable income
Equals amount of capital gains to recognize this year
Did you go green? You may get some back if you bought any of these:
Credit amounts for qualified vehicles. Following is a list of the credit amounts for qualified vehicles that are autos and are manufactured by well-known companies, using the latest data published by IRS (model years are in parentheses):
Audi A3 e-tron (2016-2017), $4,502
Audi A3 e-tron ultra (2016), $4,502
BMW i3 Sedan with Ranger Extender (2014-2017), $7,500
BMW i3 Sedan (2014-2017), $7,500
BMW i8 (2014-2017), $3,793
BMW X5 xDrive40e (2016-2018), $4,668
BMW 330e (2016-2018), $4,001
BMW i3 (60Ah) Sedan (2017), $7,500
BMW 740e (2017), $4,668
BMW 530e (2018), $4,668
BMW 530e xDrive (2018), $4,668
BMW 740e xDrive (2018), $4,668
MINI Cooper S E Countryman ALL4 (2018), $4,001
FCA North American Holdings, Fiat 500e (2013-2017), $7,500
Chrysler Pacifica PHEV (2017), $7,500
Ford Focus Electric (2012-2017), $7,500
Ford C-MAX Energi (2013-2017), $4,007
Ford Fusion Energi (2013-2018), $4,007
General Motors Cadillac ELR (2014, 2016), $7,500
General Motors Cadillac CT6 PHEV (2017), $7,500
General Motors Chevrolet Volt (2011-2018), $7,500
General Motors Chevrolet Spark EV (2014-2016), $7,500
General Motors Chevrolet Bolt (2017), $7,500
Kia Soul Electric (2015-2017), $7,500
Kia Optima PHEV (2017), $4,919
Mercedes-Benz smart Coupe/Cabrio EV (2013-2016), $7,500
Congress finally took action in late December and passed a tax extender bill formally known as the Protecting Americans from Tax Hikes Act of 2015 (PATH), which was then signed into law. Retroactive to January 1, 2015, many tax provisions were made permanent while others were extended through 2016 or 2019. Let's take a look at some of the tax provisions most likely to affect taxpayers when filing their 2015 tax returns. READ MORE -->