Category: Tax Services

Posted on Nov 1, 2017

If you’ve reached age 70½, and you’re philanthropically inclined, you can make cash donations to IRS-approved charities out of your IRA. These so-called “qualified charitable distributions” (QCDs) can save taxes, but you must take action by December 31, 2017, to benefit for 2017.

Tax Benefits of Making QCDs

Qualified charitable distributions (QCDs) can help you save taxes four ways:

1. QCDs aren’t included in your adjusted gross income (AGI), lowering the odds that you’ll be affected by various unfavorable AGI-based rules. This includes rules that can cause more of your Social Security benefits to be taxed, less of your rental estate losses to be deductible and more of your investment income to be hit with the 3.8% Medicare surtax. Also, QCDs are exempt from the rule that says your itemized charitable write-offs for the year can’t exceed a specified percentage of your AGI (50% in most cases) and the rule that phases out up to 80% of itemized charitable deductions for higher-income individuals.

2. A QCD from a traditional IRA counts as a distribution for purposes of the required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2017 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to withdraw and pay taxes on.

3. Suppose you own one or more traditional IRAs to which you’ve made nondeductible contributions over the years. Your IRA balances consist partly of a taxable layer (from deductible contributions and account earnings) and partly of a nontaxable layer (from nondeductible contributions). Any QCDs are treated as coming straight from the taxable layer (even though you pay no tax). Any nontaxable amounts are left behind in your account. Later on, those nontaxable amounts can be withdrawn tax-free by you or your heirs.

4. QCDs reduce your taxable estate.

How Do these Donations Work?

QCDs come out of your traditional IRA free of any federal income taxes. In contrast, other IRA distributions are taxable. Unlike garden-variety cash donations to charities, you can’t claim itemized deductions for QCDs.

However, the tax-free treatment of QCDs equates to a 100% deduction, because you’ll never be taxed on those amounts. In addition, you won’t have to worry about the aforementioned percent-of-AGI limitations that apply to itemized deductions for charitable contributions.

But there’s a $100,000 limit on total QCDs for any one year. If you and your spouse have separate IRAs, each of you is entitled to a separate $100,000 limit, for a combined total of $200,000, whether you file jointly or separately.

If you inherited an IRA from the deceased original account owner, you too can do the QCD drill if you’ve reached 70½.

Tax Law Requirements

A QCD must meet all of the following tax law requirements:

  • It must be distributed from an IRA, and the distribution can’t occur before the IRA owner or beneficiary reaches 70½.
  • It must meet the requirements for a 100% deductible charitable donation. If you receive any benefits that would be subtracted under the normal charitable deduction rules, such as tickets to a sporting event, the distribution can’t be a QCD.
  • It must be a distribution that would otherwise be taxable.

A Roth IRA distribution can meet the last requirement if it’s not a qualified (meaning tax-free) distribution. However, making QCDs out of Roth IRAs generally isn’t advisable.

Why? It’s generally best to leave Roth balances untouched for as long as possible rather than taking money out for QCDs, because the tax rules for Roth IRAs are so favorable. For example, you can take tax-free Roth IRA withdrawals after at least one Roth account owned by you has been open for more than five years and you’re age 59½ or older. Your heirs can take tax-free withdrawals from inherited Roth IRAs if at least one Roth account owned by you has been open for more than five years.

Also, for original account owners (as opposed to account beneficiaries), Roth IRAs aren’t subject to the required minimum distribution rules until after you die.

Want more information? Contact your tax advisor to see whether this strategy would be beneficial in your situation.

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Posted on Oct 30, 2017

Tax reform has taken many twists and turns since April. It appears that any iteration of a tax reform bill will be far from business as usual. Simplification of tax rate tiers and nearly doubling the standard deduction have an overall aim of making individual tax filing easier. However, certain provisions for eliminating deductions are a valid concern among both business owners and individuals. There are good ideas that align with historic tax reform, and others that stray far from it. The best course is to look at your own tax situation from the previous year and consider ways to improve it, while sitting tight on tax news from the Hill. It’s only a framework, so far.

What we Know So Far About the New Tax Legislation

Earlier in 2017, our tax experts at Cornwell Jackson were anticipating what to recommend to clients about a possible change in business structure to manage corporate tax impacts. Initially, both the Trump and Republican tax plans proposed a large federal corporate/business tax rate reduction, putting the new rate for C Corps at 15 or 20 percent. It was a key campaign promise, and comments made by President Trump in March regarding a tax reform package emphasized that he wants to lower the overall tax burden on businesses, regardless of business structure.

Moving into the fourth quarter, President Trump is still promising significant tax cuts and simplification of the tax code. The “United Framework for Fixing Our Broken Tax Code” calls for lower individual tax rates under a three-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate. The framework outlines changing the tax treatment of pass-throughs, expanding child and dependent incentives, and eliminating both the alternative minimum tax and the federal estate tax.

According to a report by Wolters Kluwer, a tax reform package moving through Congress under the reconciliation rules would require only a Senate majority. Any tax cuts would likely have to sunset after 10 years. But 10 years is significant to live with any actual changes.

I will attempt to point out proposed impacts to business owners and individuals in this article, along with how such changes align with historical tax reform and what that may represent for the next decade if we see new legislation for the 2017 tax year.

To drill down to a specific area of the tax reform bill, click on a link below.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

 

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Posted on Oct 12, 2017

When investing for retirement, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. But investments such as municipal bonds and passively managed index mutual funds may be better for traditional taxable accounts. This article unpacks why the more tax efficient an investment, the more benefit investors get from owning it in a taxable account, and vice versa.

Where you hold your investments matters

When investing for retirement or other long-term goals, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. Certain assets are well suited to these accounts, but other investments make far more sense for traditional taxable accounts. Knowing the difference can help bring you closer to your financial goals.

Understand how they’re taxed

Where you own assets matters because of how they’re taxed. Some investments, such as fast-growing stocks, can generate substantial capital gains, which generally occurs whenever you sell a security for more than you paid for it.

When you’ve owned that investment for over a year, you recognize long-term gains, taxed at a maximum rate of 20%. In contrast, short-term gains, recognized when the holding period is one year or less, are taxed at your ordinary-income tax rate — maxing out at 39.6%.

Meanwhile, if you own a lot of dividend-generating investments, you’ll need to pay attention to the tax rules for dividends, which belong to one of two categories:

Qualified. These dividends are paid by U.S. corporations or qualified foreign corporations. Assuming you’ve met the applicable holding period requirements, qualified dividends are, like long-term gains, subject to a maximum tax rate of 20%.

Nonqualified. These dividends — which include most distributions from real estate investment trusts (REITs) and master limited partnerships (MLPs) — receive a less favorable tax treatment. Like short-term gains, nonqualified dividends are taxed at your ordinary-income tax rate.

Taxable interest (such as from corporate bonds and most U.S. government bonds) also is generally subject to ordinary-income rates.

Finally, there’s the 3.8% net investment income tax (NIIT) for higher-income taxpayers to consider. But the NIIT might be repealed under health care or tax reform legislation. (Contact us for the latest information.)

Tax-efficient investments

Generally, the more tax efficient an investment, the more benefit you’ll get from owning it in a taxable account.

Consider municipal bonds (“munis”), either held individually or through mutual funds. Munis are particularly attractive to tax-sensitive investors because their income is exempt from federal income taxes and sometimes state and local income taxes as well. Because you don’t get a double benefit when you own an already tax-advantaged security in a tax-advantaged account, holding munis in your 401(k) or IRA would result in a lost opportunity.

Passively managed index mutual funds or exchange-traded funds, and long-term stock holdings, are also generally appropriate for taxable accounts. Over time, these securities are tax efficient because they’re more likely to generate long-term capital gains, whose tax treatment is relatively favorable. Securities that generate more of their total return via capital appreciation or that pay qualified dividends are also better taxable account options.

Investments that generate ordinary income

What investments work best for tax-advantaged accounts? Taxable investments that tend to produce much of their return in ordinary income, for one. This category includes corporate bonds, especially high-yield bonds, as well as REITs, which are required to pass through most of their earnings as shareholder income. Most REIT dividends are nonqualified and therefore taxed at your ordinary-income rate.

Another tax-advantaged-appropriate investment may be actively managed mutual funds. Funds with significant turnover — meaning their portfolio managers are actively buying and selling securities — have increased potential to generate short-term gains that ultimately get passed through to you. Because short-term gains are taxed at your higher ordinary rate, these funds would be less desirable in a taxable account.

Think beyond taxes

The above concepts are only general suggestions for taxable and tax-advantaged accounts. You may, for example, need more liquidity in your taxable account than you do in your IRA account. In this case, you might decide to hold a high-turnover equity fund or high-yield bond investments in the taxable account because you value flexibility more than favorable tax treatment.

Just keep in mind the benefits and risks — including the risk that your investments will lose value — associated with any investment decision, and know that tax issues can be complex. We can help you make the best choices for your situation.

Download the 2017 – 2018 Tax Planning Guide

 

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Posted on Oct 11, 2017

The process of submitting and approving expense reports for business travel can be an administrative hassle if your business reimburses employees for actual travel expenses. Fortunately, the IRS offers simplified alternatives that can save time and reduce recordkeeping.

Per Diems vs. “High-Low” Rates

Instead of reimbursing employees for their actual expenses for lodging, meals and incidentals while traveling, employers may pay them a per diem amount, based on IRS-approved rates that vary from locality to locality. If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by law.

Receipts of expenses generally aren’t required under the per diem method. Instead, the employer simply pays the specified allowance to employees, although they still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2.

Important note: Per diem rates can’t be paid to individuals who own 10% or more of the business.

Under the “high-low method,” the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren’t listed as “high-cost” automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There is also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

Slight Increases for 2018

The IRS recently updated the per diem rates for business travel for fiscal year 2018, which starts on October 1, 2017. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $284 for post-September 30, 2017, travel (consisting of $216 for lodging and $68 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $191 for post-September 30, 2017, travel (consisting of $134 for lodging and $57 for meals and incidental expenses). Compared to the prior simplified per diems, both the high- and low-cost area per diems have increased $2.

The following costs aren’t included in incidental expenses:

    • Transportation costs between places of lodging or business and places where meals are taken, and
  • Mailing costs of filing travel vouchers and paying employer-sponsored charge card billings.

Accordingly, eligible taxpayers using per diem rates may separately deduct, or be reimbursed for, transportation and mailing expenses.

The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:

  • Oakland, Calif.,
  • Lewes, Del.,
  • Fort Myers, Fla.,
  • Hyannis, Mass.,
  • Petoskey, Mich.,
  • Portland, Or., and
  • Vancouver, Wash.

On the other hand, these areas have been removed from the previous list of high-cost localities:

  • Sedona, Ariz.,
  • Los Angeles, Calif.,
  • Vero Beach, Fla., and
  • Kill Devil, N.C.

Note: Certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:

  • Aspen, Colo.,
  • Denver/Aurora, Colo.,
  • Telluride, Colo.,
  • Vail, Colo.,
  • Bar Harbor, Maine,
  • Ocean City, Md.,
  • Nantucket, Mass.,
  • Philadelphia, Pa.,
  • Jamestown/Middletown/Newport, R.I., and
  • Jackson/Pinedale, Wyo.

Rules and Restrictions

Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.

For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:

1. The rates and high-cost localities in effect for the first nine months of the calendar year or

2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.

Company Deductions

In terms of deducting amounts reimbursed to employees on the company’s tax return, employers must treat meals and incidental expenses as a food and beverage expense that’s subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.

Example: A company reimburses its marketing manager for attending a June trade show in Philadelphia based on the $284 high-cost per diem. It may deduct $250 ($216 for lodging plus $34 for half of the meals and incidental expense allowance).

Need Assistance?

Could using travel per diems work for your business? Contact us to discuss the pros and cons of per diem substantiation methods. We can help you implement travel expense reimbursement policies and procedures that will pass IRS scrutiny.

The High-Cost Area List for 2018

State

Key City
California Mill Valley/San Rafael/Novato (October 1-October 31; June 1-September 30)
Monterey (July 1-August 31)
Napa (October 1-October 31; May 1-September 30)
Oakland (October 1-October 31; January 1-September 30)
San Francisco
San Mateo/Foster City/Belmont
Santa Barbara
Santa Monica
Sunnyvale/Palo Alto/San Jose
Colorado Aspen
Denver/Aurora
Grand Lake (December 1-March 31)
Silverthorne/Breckenridge (December 1-March 31)
Steamboat Springs (December 1-March 31)
Telluride
Vail (December 1-March 31; July 1-August 31)
Delaware Lewes (July 1-August 31)
District of Columbia Washington, D.C.
Florida Boca Raton/Delray Beach/Jupiter (January 1-April 30)
Fort Lauderdale (January 1-April 30)
Fort Meyers (February 1-March 31)
Fort Walton Beach/DeFuniak Springs (June 1-July 31)
Key West
Miami (December 1-March 31)
Naples (December 1-April 30)
Illinois Chicago (October 1-November 30; April 1-September 30)
Maine Bar Harbor (October 1-October 31; July 1-September 30)
Maryland Ocean City (July 1-August 31)
Massachusetts Boston/Cambridge
Falmouth (July 1-August 31)
Hyannis (July 1-August 31)
Martha’s Vineyard (June 1-September 30)
Nantucket (June 1-September 30)
Michigan Petoskey (July 1-August 31)
Traverse City/Leland (July 1-August 31)
New York Lake Placid (July 1-August 31)
New York City
Saratoga Springs/Schenectady (July 1-August 31)
Oregon Portland (October 1-October 31, March 1-September 30)
Seaside (July 1-August 31)
Pennsylvania Hershey (June 1-August 31)
Philadelphia (October 1-November 30; April 1- September 30)
Rhode Island Jamestown/Middletown/Newport (October 1-October 31; June 1-September 30)
South Carolina Charleston (October 1-November 30; March 1-September 30)
Utah Park City (December 1-March 31)
Virginia Virginia Beach (June 1-August 31)
Wallops Island (July 1-August 31)
Washington Seattle
Vancouver (October 1-October 31; March 1-September 30)
Wyoming Jackson/Pinedale (June 1-September 30)

– Source: IRS

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Posted on Oct 10, 2017

School is back in session. So, it’s time for a refresher on tax breaks for work-related education expenditures. Here’s what individual taxpayers need to know.

Are You Self-Employed?

Self-employed individuals may be eligible to deduct qualified work-related education expenses on their business tax forms. Self-employeds don’t have to worry about the 2%-of-adjusted-gross-income limit for itemized deductions or the alternative minimum tax rules. But they should heed the warnings about undergraduate degrees and MBAs provided in the main article.

American Opportunity Credit

The American Opportunity credit equals 100% of the first $2,000 of qualified postsecondary education expenses plus 25% of the next $2,000 of qualified education costs (subject to certain income-based phaseouts). The maximum annual credit is $2,500, and it’s potentially available regardless of whether your classes are work-related.

Qualified expenses include:

  • Tuition,
  • Mandatory enrollment fees, and
  • Books and other course materials.

What costs are not eligible? You can’t claim the American Opportunity credit for the costs of student activities, athletics, health insurance, or room and board.

You’re ineligible for the American Opportunity credit if you’ve already completed four years of undergraduate college work as of the beginning of the tax year. You’re also ineligible for the credit if you’re married and don’t file jointly with your spouse. On a more favorable note, you can claim the credit for your own expenses and additional credits for your spouse and dependent children if they also have qualified expenses.

To qualify for this credit, you must attend an eligible institution. Fortunately, most accredited public, nonprofit, and for-profit postsecondary schools meet this definition, and some vocational schools do, too. The two main criteria are that 1) the school must offer programs that lead to a recognized undergraduate credential, such as Associate of Arts, Associate of Science, Bachelor of Science (BS) or Bachelor of Arts (BA), and 2) the school must qualify to participate in federal student aid programs. Additionally, the American Opportunity credit is allowed for only a year during which you carry at least half of a full-time load, for at least one academic period beginning in that year.

You do have to be a fairly serious student to be eligible for the credit, but you don’t have to go to school full time or actually intend to complete a degree or credential program.

Finally, the American Opportunity credit may be partially or completely phased out if your modified adjusted gross income (MAGI) is too high. For 2017, the MAGI phaseout ranges are:

  • Between $80,000 and $90,000 for unmarried individuals, and
  • Between $160,000 and $180,000 for married joint filers.

Lifetime Learning Credit

The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses, with a maximum credit amount of $2,000. In addition to applying this credit to the costs of the first four years of full-time undergraduate study, you can use this credit to help offset costs:

  • When you’re carrying a limited course load or after the first four years of undergraduate study (when the American Opportunity credit is unavailable),
  • For part- or full-time graduate school coursework, or
  • For miscellaneous courses to maintain or improve your job skills.

The credit is potentially available regardless of whether your classes are work-related. Only one Lifetime credit can be claimed on your return, even if you have several students in the family. You also can’t claim both the American Opportunity and Lifetime Learning credits for the same student for the same year. However, you can potentially claim the American Opportunity credit for one or more students and the Lifetime Learning credit for another.

The requirements for the Lifetime Learning credit are similar to the requirements for the American Opportunity credit. Qualified expenses are tuition, mandatory enrollment fees, and course supplies and materials (including books) that must be purchased directly from the school itself. Other expenses — including optional fees and room and board — are off limits.

In addition, the school you attend must be an eligible institution. If you are married and don’t file jointly with your spouse, you are ineligible for the Lifetime credit, and the credit is phased out if your modified adjusted gross income (MAGI) is too high. However, the ranges for the Lifetime credit are lower than for the American Opportunity credit, which means they’re more likely to affect you. For 2017, the MAGI phaseout ranges are:

  • Between $56,000 and $66,000 for unmarried individuals, and
  • Between $112,000 and $132,000 for married joint filers.

Employer-Provided Educational Assistance Plan

If you’re fortunate enough to work for a company that offers an educational assistance plan, you can potentially receive up to $5,250 in annual tax-free reimbursements for your education costs. These plans are also called Section 127 plans. The tax rules permit Sec. 127 plans to cover just about anything that constitutes education, including graduate coursework, regardless of whether it’s job-related. However, some plans only reimburse for education that is, in fact, job-related. That’s up to your employer.

There are only two restrictions under the tax rules:

  1. The education must be for you, the employee, rather than a family member, and
  2. The plan can’t pay for courses involving sports, games or hobbies unless they relate to company business.

Employer Reimbursements for Job-Related Education

Your employer can also give you an unlimited amount of tax-free reimbursements to cover qualified education expenses. In a nutshell, you have qualified expenses if the education:

  1. Is required by your employer or by law or regulation in order for you to retain your current job, or
  2. Maintains or improves skills required in your current job.

Qualified expenses don’t include the cost of education that sets you up for a new occupation or profession. If your employer pays for that kind of education, the payments count as taxable compensation — unless they’re run through a Sec. 127 educational assistance plan.

Deductions for Job-Related Education Costs

If your employer doesn’t provide any financial assistance, you still may be able to write off all or a portion of your qualified education expenses as a miscellaneous itemized deduction for unreimbursed employee business expenses. These expenses are combined with other miscellaneous itemized deduction items, such as union dues, investment expenses, and fees for tax preparation and advice. If the sum total of all your miscellaneous expense items exceeds 2% of your adjusted gross income (AGI), you can write off the excess.

The IRS says an undergraduate degree automatically prepares you for a new profession, so costs to obtain a BA or BS aren’t qualified education expenses, and you can’t deduct them. The IRS makes the same argument about Master of Business Administration (MBA) degrees, but several U.S. Tax Court decisions disagree. Those decisions say MBA costs are qualified expenses if the extra degree simply maintains or improves skills needed in your current job, which is often the case.

The IRS also says the cost of a law school degree can’t be deducted because law school prepares you for a new profession, even if you don’t actually intend to practice law.

Finally, the cost of any other advanced degree that prepares you for a new profession isn’t deductible. For instance, if you’ve been working as a car rental agency representative since you graduated with a BS in chemical engineering, you can’t deduct the cost of going back to school to obtain a master’s degree or doctorate in chemical engineering to prepare you to enter that field.

Unfortunately, under the current alternative minimum tax (AMT) rules, you get no write-off for miscellaneous itemized deduction items. So if you’re subject to AMT, you may be ineligible for any work-related education deductions.

Lessons Learned

The issue of tax breaks for education expenses can be confusing. There are multiple breaks with multiple sets of rules, and several breaks may potentially be available for the same expenses. Your tax professional can sort out the rules and advise you on how to get the most tax savings from your work-related education expenses.

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Posted on Oct 9, 2017

The U.S. Department of Labor’s Wage and Hour Division (WHD) has announced that the minimum wage rate for federal contractors will increase from $10.20 per hour to $10.35 per hour, effective January 1, 2018.

Background Information

On February 12, 2014, President Obama signed Executive Order 13658 which established a minimum wage rate for federal contractors. The executive order required parties who contract with the federal government to pay workers performing work on or in connection with covered federal contracts at least:

  • $10.10 per hour beginning January 1, 2015; and
  • An amount determined by the Secretary of Labor in accordance with the methodology in the executive order, beginning January 1, 2016, and annually thereafter. The rate was increased to $10.15 per hour, effective January 1, 2016 and $10.20, effective January 1, 2017.

Tipped Employees

The executive order also requires annual adjustments to the minimum cash wage rate for tipped federal contract employees. The WHD has announced that the minimum cash wage for tipped employees performing work on or in connection with a federal contract will increase from $6.80 per hour to $7.25 per hour, effective January 1, 2018.

The contractor must increase the cash wage paid to a tipped employee to make up the difference if a worker’s tips combined with the required cash wage of at least $7.25 per hour don’t equal the hourly minimum wage rate for contractors as noted above. Certain other conditions must also be met.

Minimum Wage for Other Employees

The minimum wage amount  listed above is only for federal contractor employees. Under the Fair Labor Standards Act (FLSA), the federal minimum wage for covered non-exempt employees who aren’t employed by federal contractors is $7.25 per hour. Many states and municipalities also have their own minimum wage laws. If your business operates in a state or municipality that has a higher minimum wage than the federal level, your employees are entitled to the highest rate.

What Employers in Some States Must Pay

Some examples of states with minimum wage per-hour rates currently higher than the federal rate are Washington ($11.00), Massachusetts ($11.00), Oregon ($10.25), Connecticut ($10.10), Vermont ($10.00), Arizona ($10.00), Rhode Island ($9.60), New York ($9.70), Colorado ($9.30), Maryland ($9.25), Maine ($9.00), Michigan ($8.90), West Virginia ($8.75),South Dakota ($8.65), New Jersey ($8.44), Illinois ($8.25), Florida ($8.10) and New Mexico ($7.50).

Some states have different minimum wage rates for large and small employers and impose other requirements. For example:

  • In California, the minimum wage is $10.00 for employers with less than 25 employees and $10.50 for those with 26 or more.
  • Large employers in Minnesota (defined as enterprises with annual receipts of $500,000 or more) have a minimum wage rate of $9.50 per hour while small employers (enterprises with annual receipts of less than $500,000) have a minimum wage rate of $7.75 per hour.
  • In Ohio, employers with annual gross receipts of $299,000 or more must pay $8.15 per hour and those with annual gross receipts under $299,000 must pay $7.25 per hour.
  • In Nebraska, employers with four or more employees have a minimum wage of $9.00 per hour.
  • Nevada requires employers that provide no health insurance benefits to pay $8.25 per hour and employers that do provide health insurance benefits to pay $7.25 per hour.

Federal and State Tipped Employee Rules

An employer of a tipped employee is required to pay $2.13 an hour in direct wages if:

  • That amount plus the tips received equals at least the federal minimum wage,
  • The employee retains all tips and the employee customarily, and
  • The employee regularly receives more than $30 a month in tips.

Many states also have their own laws related to tipped employees. Again, if an employee is subject to both federal and state laws, he or she is entitled to the law that provides the greater benefits. Some states (including California, Oregon, Nevada, Montana, Minnesota and Alaska) require employees to pay tipped employees the full state minimum wage.

Contact your Cornwell Jackson payroll advisor if you have questions about minimum wage issues in your situation.

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Posted on Oct 6, 2017

Per IRS rules, people generally must begin taking required minimum distributions (RMDs) from their retirement plans and IRAs (except Roth IRAs) beginning after age 70½. And they must continue taking RMDs year in and year out without fail. This article answers the questions of when to begin taking RMDs, the penalties for not taking them and why it’s best not to wait until year end to take them.

Arrange your RMDs before year end

During the course of your career, you may have managed to build up a tidy nest egg, most likely augmented by tax-favored saving devices. For instance, you may have accumulated funds in qualified retirement plans, like 401(k) plans and pension plans, and traditional and Roth IRAs. If you don’t need all the funds to live on, your goal likely is to preserve some wealth for your heirs.

Can you keep what you want? Not exactly. Under strict tax rules, you generally must begin taking required minimum distributions (RMDs) from your retirement plans and IRAs (except Roth IRAs) after age 70½. And you must continue taking RMDs year in and year out without fail. Don’t skip this obligation for 2017, because the penalty for omission is severe.

When should you begin taking distributions?

RMD rules apply to all employer-sponsored retirement plans, including pension and profit-sharing plans, 401(k) plans, 403(b) plans for not-for-profit organizations and 457(b) plans for government entities. The rules also cover traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE-IRAs. But you don’t have to withdraw an RMD from a qualified plan of an employer if you still work full-time for the employer and you don’t own more than 5% of the company.

The required beginning date for RMDs is April 1 of the year after the year in which you turn age 70½. For example, if your 70th birthday was June 15, 2017, you must begin taking RMDs no later than April 1, 2018. This is the only year where you’re allowed to take an RMD after the close of the year for which it applies. (Keep in mind that delaying the first RMD will result in two RMD withdrawals during that tax year.) The deadline for subsequent RMDs is December 31 of the year for which the RMD applies.

If you’ve inherited a retirement plan, contact us for information on when you must begin taking RMDs. And if you inherited a Roth IRA, be aware that you will be required to take RMDs.

How much is your RMD?

To calculate the RMD amount, you divide the balance in the plan account or IRA on December 31 of the prior year by the factor in the appropriate IRS life expectancy table.

Although you must determine the RMD separately for each IRA you own, you can withdraw the total amount from just one IRA, or any combination of IRAs that you choose. However, for qualified plans other than a 403(b), the RMD must be taken separately from each plan account.

What’s the penalty for failing to take RMDs?

The penalty is equal to a staggering 50% of the amount that should have been withdrawn, reduced by any amount actually withdrawn. For example, if you’re required to withdraw $10,000 this year and take out only $2,500, the penalty is $3,750 (50% of $7,500). Plus, you still have to pay regular income tax on the distributions when taken.

Keep in mind that with the additional income there are other tax issues, such as the net investment income tax (NIIT). RMDs aren’t subject to the NIIT but will increase your modified adjusted gross income for purposes of this calculation and thus could trigger or increase the NIIT. The NIIT might, however, be repealed under health care or tax reform legislation. (Contact us for the latest information.)

Don’t procrastinate!

Typically, taxpayers wait until December to arrange to take RMDs from qualified plans and IRAs. But that could be dangerous. It’s easy to be distracted during the holiday season and forget about the obligation. Furthermore, it can take several days, if not longer, for trading and settling funds. And haste can lead to errors and miscalculations that could cost you.

A better approach is to take your time. Make arrangements for RMDs well in advance of the December 31 deadline.

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Posted on Oct 4, 2017

Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.”  This article looks at applicable taxes, such as Social Security, Medicare, unemployment and federal income.

Have a household employee? Be sure to follow the tax rules

Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.” If you employ a domestic worker, make sure you know the tax rules.

Important distinction

Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, you must first determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.

Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.

Social Security and Medicare taxes

If a household employee’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2017, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the employee. (If you and the employee share the expense, you must withhold his or her share.) But don’t count wages you pay to:

  • Your spouse,
  • Your children under age 21,
  • Your parents (with some exceptions), and
  • Household employees under age 18 (unless working for you is their principal occupation).

The $2,000 domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax that’s also adjusted annually for inflation ($127,200 for 2017).

Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain commuting costs.

Unemployment and federal income taxes

If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.

The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal income tax — or, usually, state income tax — unless the employee requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except:

  • Meals you provide employees for your convenience,
  • Lodging you provide in your home for your convenience and as a condition of employment, and
  • Certain reimbursed commuting costs.

Excludible commuting costs include transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace.

Other obligations

As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).

After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.

The details

Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

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Posted on Oct 2, 2017

Taxpayers who are planning on making significant charitable donations should consider a donor-advised fund (DAF). Such a fund offers many of the tax and estate planning benefits of a private foundation, but at just a fraction of the cost. This article explains how a DAF works and its benefits, such as the ability to deduct DAF contributions immediately but make gifts to charities later. A sidebar discusses how private foundations can offer important advantages for those who can afford them.

Deduct now, donate later
Donor-advised funds offer significant benefits

If you’re planning to make significant charitable donations, consider a donor-advised fund (DAF). A DAF offers many of the tax and estate planning benefits of a private foundation, at a fraction of the cost. Most important, a DAF allows you to take a significant charitable income tax deduction now, while deferring decisions about how much to give — and to whom — until the time is right.

What is a DAF?

A DAF is a tax-advantaged investment account administered by a not-for-profit “sponsoring organization,” such as a community foundation or the charitable arm of a financial services firm. Contributions are treated as gifts to a Section 501(c)(3) public charity, which are deductible up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for contributions of appreciated property (such as stock).

Like other gifts to public charities, unused deductions may be carried forward for up to five years. And funds grow tax-free until they’re distributed.

Although contributions are irrevocable, you’re allowed to name the account and recommend how the funds will be invested (among the options offered by the DAF) and distributed to charities over time. You can even name a successor advisor, or prepare written instructions, to recommend investments and charitable gifts after your death.

Technically, a DAF isn’t bound to follow your recommendations. But in practice, DAFs almost always respect their donors’ wishes — otherwise, they’d have a hard time attracting contributions. Generally, the only time a fund will refuse a donor’s request is if the intended recipient isn’t a qualified charity.

What are the benefits?

DAFs offer a variety of valuable benefits, such as:

Immediate tax deduction. The ability to deduct DAF contributions immediately but make gifts to charities later is a big advantage. Consider this scenario: Rhonda typically earns around $150,000 in AGI each year. In 2017, however, she sells her business, lifting her income to $5 million for the year. Rhonda decides to donate $500,000 to charity, but she wants to take some time to investigate charities and spend her charitable dollars wisely. By placing $500,000 in a DAF this year, she can deduct the full amount immediately and decide how to distribute the funds in the coming years. If she waits until next year to make charitable donations, her deduction will be limited to $75,000 (50% of her 2018 AGI).

Even if you have a particular charity in mind, spreading your donations over several years can be a good strategy. It gives you time to evaluate whether the charity is using the funds responsibly before you make additional gifts. A DAF allows you to adopt this strategy without losing the ability to deduct the full amount in the year when it will do you the most good.

Another benefit of making donations in a big income year is that the higher the donor’s tax bracket, the more valuable the deduction.

Capital gains avoidance. An effective charitable-giving strategy is to donate appreciated assets — such as securities, real estate or interests in a business. You’re entitled to deduct the property’s fair market value and you can avoid the capital gains taxes you would have owed had you sold the property. But not all charities are equipped to accept and manage this type of donation. Many DAFs, however, have the resources to accept contributions of appreciated assets, liquidate them and then reinvest the proceeds.

Ease of use. DAFs can greatly simplify the estate planning and charitable giving process, substantially reducing your costs. Once you’ve established a DAF, making a charitable gift is simply a matter of sending instructions to the sponsor. The sponsor takes care of confirming the charity’s tax-exempt status, sending the contribution and obtaining necessary acknowledgments.

A DAF also enables you to streamline your estate plan by setting up a single vehicle for all of your charitable bequests. By naming a DAF, rather than individual charities, as a beneficiary of your will, trusts, retirement accounts or life insurance policies, you avoid the hassle and expense of modifying these documents if your charitable priorities change.

Anonymity. Making anonymous gifts to individual charities, while obtaining IRS-required acknowledgments, can be a challenge, particularly for noncash donations. But, when you use a DAF, the sponsor handles the transaction, making it easy to protect your privacy if you so desire.

Do your homework

If you’re contemplating a DAF, be sure to shop around. Fund requirements — such as minimum contributions, minimum grant amounts and investment options — vary from fund to fund, as do the fees they charge. So, work with your financial advisor to find a fund that meets your needs.

Sidebar: DAFs vs. private foundations

Donor-advised funds are similar to private foundations in that they allow you to make tax-deductible contributions while retaining the right to make charitable gifts over time. But foundations are expensive to set up and administer, and they’re subject to excise taxes, minimum distribution requirements and lower deduction limits (30% of AGI for cash; 20% for appreciated property).

Private foundations offer important advantages, however, for those who can afford them. For example, they give you complete control over investments and gifts, they’re permitted to compensate family members who work for the foundation, and they’re allowed to make gifts to individuals (such as scholarships or grants) under certain circumstances.

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Posted on Sep 28, 2017

Many collectibles are more sought after, and more valuable, than ever. But that value has tax consequences when collectibles are sold at a profit, donated to charity or transferred to the next generation. This article explains those tax consequences and some of the applicable IRS rules.

One person’s trash is another person’s treasure. That’s never truer than when dealing with collectibles — those seemingly innocuous objects for which many people will pay good money. In fact, many collectibles are more sought after, and more valuable, than ever. But that value comes with tax consequences when you sell collectibles at a profit, donate them to charity or transfer them to the next generation.

Sales

The IRS views most collectibles, other than those held for sale by dealers, as capital assets. As a result, any gain on the sale of a collectible that you’ve had for more than one year generally is treated as a long-term capital gain.

But while long-term capital gains on most types of assets are taxed at either 15% or 20% (or 0% for taxpayers in the 10% or 15% ordinary-income tax bracket), capital gains on collectibles are taxed at 28% (or your ordinary-income rate, if lower). As with other short-term capital gains, the tax rate when you sell a collectible that you’ve held for one year or less typically will be your ordinary-income tax rate.

Determining the gain on a sale requires first determining your “basis” — generally, your cost to acquire the collectible. If you purchased it, your basis is the amount you paid for the item, including any brokers’ fees.

If you inherited the collectible, your basis is its fair market value at the time you inherited it. The fair market value can be determined in several ways, such as by an appraisal or through an analysis of the prices obtained in sales of similar items at about the same time.

Donations

If you want to donate a collectible, your tax deduction will likely depend both on its value and on the way in which the item will be used by the qualified charitable organization receiving it.

For you to deduct the fair market value of the collectible, the donation must meet what’s known as the “related use” test. That is, the charity’s use of the donated item must be related to its mission. This probably would be the case if, for instance, you donated a collection of political memorabilia to a history museum that then puts it on display.

Conversely, if you donated the collection to a hospital, and it sold the collection, the donation likely wouldn’t meet the related-use test. Instead, your deduction typically would be limited to your basis.

There are a number of other rules that come into play when making donations of collectibles. For instance, the IRS generally requires a qualified appraisal if a deduction for donated property tops $5,000. In addition, you’ll need to attach Form 8283, “Noncash Charitable Contributions,” to your tax return. With larger deductions, additional documentation often is required.

Estate planning

Transfers of collectibles to family members or other loved ones, whether during life (gifts) or at death (bequests), may be subject to gift or estate tax if your estate is large enough. And you may be required to substantiate the value of the collectible.

For estate tax purposes, if an item, or a collection of similar items, is worth more than $3,000, a written appraisal by a qualified appraiser must accompany the estate tax return. Gifts or bequests of art valued at $50,000 or more will, upon audit, be referred to the IRS Art Advisory Panel.

Even if your estate isn’t large enough for gift and estate taxes to be a concern (or the federal gift and estate taxes are repealed, as has been proposed), it’s important to include all of your collectibles in your estate plan. Even an item with little monetary value may have strong sentimental value. Failing to provide for the disposition of collectibles can lead to hurt feelings, arguments among family members or even litigation.

Proper handling

Collecting can be addictive. But the tax implications are difficult to sort out. We can help you determine how to properly handle these transactions.

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