We are very excited to officially announce the two newest members of our Principal group, Danny Phipps, CPA and Cory Gallivan, CPA. Danny has been working in our Carrollton and Jerseyville offices since 1994, and Cory has been with our Alton office since 2000. They are both dynamic, passionate leaders in our firm and we look forward to all they bring to our leadership team.
For 2018, the lifetime gift and estate tax exemption is $11.18 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, no federal estate tax will be due.
Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But not every gift you make will use up part of your lifetime exemption. For example:
It’s important to be aware of these exceptions as you pass along wealth to your loved ones.
Here’s a simplified way to help project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.
You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).
If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.
Be aware that many states impose estate tax at a lower threshold than the federal government does. So, you could have state estate tax exposure even if you don’t need to worry about federal estate tax.
If you’re not sure whether you’re at risk for the estate tax, or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.
The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your current tax bill. You pay taxes on the funds when you make withdrawals. As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.
In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements). This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase.
Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of your Social Security benefits.
A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. Your contributions can continue after you reach age 70½ as long as you’re earning income, and the entire balance can remain in the account until your death. In contrast, beginning with the year you reach age 70½, you can’t contribute to a traditional IRA — even if you do have earned income. Further, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than April 1 of the year following the year you reach age 70½.
Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account. Further, the distributions they receive from the Roth IRA won’t be subject to income tax.
As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA may or may not be one of them. Please contact us for individualized help in determining whether it’s a beneficial choice.
The passage of the Tax Cuts and Jobs Act late last year had a marked impact on Roth IRAs: to wit, taxpayers who wish to convert a pretax traditional IRA into a posttax Roth IRA can no longer “recharacterize” (that is, reverse) the conversion for 2018 and later years.
The IRS recently clarified in FAQs on its website that, if you converted a traditional IRA into a Roth account in 2017, you can still reverse the conversion as long as it’s done by October 15, 2018. (This deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)
Also, recharacterization is still an option for other types of contributions. For example, you can still make a contribution to a Roth IRA and subsequently recharacterize it as a contribution to a traditional IRA (before the applicable deadline).
Donating to charity is usually a selfless act, but that good deed in many cases also translated to a tax deduction for those that itemized on their annual filings. However, since the TCJA nearly doubled the standard deduction, this may result in less taxpayers itemizing. If you are one of these people, there may still be a way to benefit from charitable contributions without itemizing.
The TCJA almost doubled the standard deduction for most taxpayers. As a result, fewer individuals will itemize their deductions. The cap on taxes that may be claimed as an itemized deduction has also been limited to $10,000 for joint filers. These factors will also result in fewer individuals receiving any tax benefit from their charitable contributions.
There is still a way for certain individuals who don’t itemize to benefit from their charitable contributions. Taxpayers who are at least 70.5 years old and receiving required minimum distributions from their IRA (but not SIMPLE IRAs or SEP-IRAs) may have up to $100,000 transferred directly from their IRA to a qualified charity. The amount transferred to the charity reduces the otherwise taxable IRA distribution. These transfers are referred to as Qualified Charitable Distributions (QCDs). QCDs effectively allow the taxpayer to deduct the charitable contribution since these amounts reduce the taxable IRA distribution.
This taxpayer is 72 years old and has a required minimum distribution of $12,000. He does not have enough to itemize deductions and has traditionally given $5,000 to his church. Also, assume he has a combined federal and state tax rate of 30%. If he directs $5,000 of his required $12,000 distribution to be paid directly to his church, he is only taxed on $7,000 of the IRA distribution. If the amount is not directly transferred, he has $12,000 of taxable IRA distributions with no offsetting charitable deduction. By taking advantage of a QCD, he has saved $1,500 ($5,000 x 30%).
All taxpayers at least 70.5 years old and taking required distributions from their IRA should consider using the QCD to make their charitable contributions. Please contact us if you would like to discuss the QCD and whether this method would benefit you.
Determining how your business is organized is often thought of as something you only do when your business is formed. In reality, changes in ownership, the business climate, and the passage of new tax laws are other important times to reevaluate whether your business is ideally organized. With the passage of the Tax Cuts and Jobs Act (TCJA), now is a good time to bring this subject to your attention.
Reading the headlines, one might think that with the top regular corporate income tax rate decreasing 40% (from 35% to 21%), every business should be organized as a regular corporation. However, the analysis is far from that simple. While it is true that the top rate decreased by 40% for some corporations, it is also important to note that many passthrough entities (partnerships and S corporations) also received a significant rate reduction through a newly created deduction. In fact, depending on where the business is located, it may be more beneficial to exit the regular corporate structure and move to a passthrough-type business.
Some factors that favor maintaining or switching to regular corporate status include low state corporate income taxes, a desire and ability of the corporation to maintain earnings in the corporation without paying those out to shareholders, and certain service type businesses (such as doctors, lawyers, accountants, consultants, etc.).
Some factors that favor maintaining or switching to passthrough status include higher state corporate income taxes, a need or desire to distribute most of the earnings on an annual basis, businesses that may be incurring losses, and businesses that hold appreciable assets such as real estate.
The above are just a few of the considerations in determining if your business is organized in the most tax-efficient manner. If you’re at all concerned about your current business and how its structured, we would be happy to discuss how the TCJA impacts your situation and if it makes sense to consider an alternative entity.
One of President Trump’s most vocal campaign promises was to eliminate the Affordable Care Act (ACA), or “Obamacare”. While some steps have been taken toward accomplishing this goal, the ACA still remains in tact for a few of its key provisions. One of these include Market Reforms, which imposes financial penalties on employers who choose to reimburse their employees for health insurance premiums as a way to circumvent providing group health insurance.
Even though some members of Congress are actively attempting to eliminate various provisions of the Affordable Care Act (ACA), there are many of the ACA provisions which currently remain in effect. The Market Reform provisions are one of those. One of the key provisions of the Market Reforms prohibits employers from reimbursing employees for health insurance premiums. Reimbursing employees for health insurance traditionally had been a way for employers to provide a tax-free fringe benefit to employees where the employer did not maintain its own group health insurance plan. Violations of the Market Reform provisions result in a harsh penalty of $100 per day per employee ($36,500 per employee per year!).
Fortunately, the 21st Century Cures Act created QSEHRAs as a remedy to this prohibition. Employers establishing a QSEHRA are exempt from the $100 per day penalty and can reimburse employees for the cost of health insurance premiums. Like most tax benefits, there are detailed requirements that must be followed to receive tax-free treatment. The following is a list of the major requirements.
In addition, the arrangement must be written and timely communicated to each eligible employee. While there are some additional minor details that must be followed, the QSEHRA has brought back a valuable employer and employee benefit that appeared to be dead immediately following enactment of the Affordable Care Act. Please contact us if you would like to discuss how this type of arrangement may benefit your business.
Over the past decade, more and more big-box stores are feeling the effects of online shopping. Sellers like Amazon have lured consumers in with free shipping and the ease of shopping from the comfort of their couch. However, since online shopping has become more and more prevalent, the question of how to tax these purchases has become a major topic of discussion. A recent Supreme Court decision will likely change the way some online marketplaces do business.
First, let’s define a term that you’ll hear a lot when discussing this case. “Nexus” for this purpose is often used to determine if a taxpayer has a sufficient connection with a state. It is the determining factor of whether an out-of-state business is required to collect sales tax on sales generated into that state. Each state has its own rules and guidelines for determining nexus. Some factors that might affect nexus include if the business has a physical location or employees working in the state in question, or how much revenue is generated in that state.
So why is this a topic of discussion now? On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, a landmark sales and use tax nexus case that will have implications for many online sellers and multistate businesses. In a 5-4 decision, the Court ruled that a state can require an out-of-state seller to collect sales tax on sales to customers in that state, even though the seller lacks an in-state physical presence.
In Wayfair, the Supreme Court considered the constitutionality of a South Dakota law that requires certain remote sellers to register for, collect, and remit South Dakota sales tax. Under that law, a remote seller has sales tax nexus with South Dakota if the seller in the current or previous calendar year met either of the two characteristics below:
The Commerce Clause of the U.S. Constitution requires that a seller have “substantial nexus” with a state before the state can require the seller to collect and remit sales and use taxes. Under a precedent affirmed in the 1992 case of Quill Corp. v. North Dakota, this nexus depended on whether the seller had a physical presence in the state. The Wayfair decision is considered an “economic” nexus, where states assert jurisdiction to impose sales tax collection based on certain sales thresholds. It’s not uncommon for states to find different ways to establish nexus. Some states have established this boundary based on the company’s activities and property, with others even harpooning digital mediums, such as “click throughs” and “cookies” to identify in-state customers which may create nexus.
The most immediate impact from Wayfair will be on sellers with a significant virtual or economic presence in a state that asserts economic nexus. Sellers delivering taxable products or services into South Dakota (and other economic nexus states) will need to determine if they surpassed the dollar amount or transaction volume thresholds for establishing nexus with the state. Sellers will need to do this analysis for each state that has adopted an economic nexus threshold policy and they should be prepared for states to adopt and aggressively enforce expanding nexus provisions. Our home state of Illinois recently adopted such a rule.
We expect state revenue departments to issue guidance regarding the Wayfair decision in the coming weeks and months, and we will be following those developments closely. In the meantime, if you would like to discuss how this decision may impact your business, please do not hesitate to contact us.
We are excited to share that we have three new CPAs roaming our halls! Patrick Stowe of Edwardsville, Taylor Jarvis of Highland, and Patrick Meyer of Highland all passed the CPA exam in the month of June.
Congratulations on this great accomplishment and we look forward to a bright future for you all!
July 31 — If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.
August 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax, and nonpayroll withholding.
September 15 — Third quarter estimated tax payments are due for individuals, trusts, and calendar-year corporations.
Keep in mind that, if you have employees, they generally must be allowed to participate in the plan, provided they work enough hours and meet other qualification requirements. Here are a few options to consider:
Profit-sharing plans. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions — provided your plan existed on December 31, 2018.
Simplified Employee Pensions (SEPs). A SEP is a defined contribution plan that provides benefits like those of a profit-sharing plan. But you can establish a SEP in one year and still make deductible contributions as late as the due date of your income tax return for the previous year, including extensions. Another benefit is that a SEP is easier to administer than a profit-sharing plan.
Defined benefit plans. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit generally is $220,000 for 2018 (up from $215,000 for 2017) — or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.
You can make deductible 2018 contributions until the due date of your 2018 income tax return, including extensions — provided your plan existed on December 31, 2018. Warning: Employer contributions are generally required and must be paid quarterly if there was a shortfall in funding for the prior year.
Serving St. Louis, the Metro-East and Southwestern Illinois since 1924.
