News Archives - Page 3 of 5 - Pearson & Co., PC

19 Nov 2022

Anything, Estate Planning, News, Retirement, Tax Credits, Tax Law Pearson & Co, PC 0 comment

OPPORTUNITY TO ACCELERATE YOUR RETIREMENT SAVINGS

401(k) and IRA Contribution Limits Increased

Contribution limits for 401(k)s, 403(b)s, 457(b)s, IRAs, Roth IRAs, HSAs, FSAs, SIMPLE IRAs, and SEP-IRAs are all indexed to inflation. While the contribution limits don’t go up every year, you will generally see an increased contribution every year or two.

The inflation rate is now running at a 40-year high. That triggered the IRS to announce significant jumps in allowed contributions for tax year 2023. More specifically:

Taxpayers under age 50 can contribute to their 401(k), 403(b), most 457 and the federal government’s Thrift Savings Plan accounts … increases to $22,500 for 2023 … a $2,000 bump over 2022 limits.
Notably, taxpayers 50 and older win a further concession … a $3,000 boost to $30,000 annually. That number includes a $7,500 so-called catch-up contribution, up from $6,500 in 2022.

Participants in qualifying plans can reduce their 2023 tax bill by
increasing the amount they contribute pre-tax to retirement accounts.

Here’s a summary of the key provisions of the changes for 2023.

401(k) Plans – Annual Contribution Limits

Employees under age 50 – $22,500, up $2,000 from 2022.
Employees 50 and older – $30,000 (Includes $7,500 catch-up contribution, up from $6,500)
If the Plan permits, additional after-tax employee contributions may be made to top-out the total employer/employee contribution limits – employees under age 50, $66,000; 50 and older, $73,500.

IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $1,000 catch-up contribution.

Note: You can’t make a tax-deductible contribution to an IRA unless you have no workplace retirement plan, or your income is below certain limits. For 2023, the deduction will phase out for single taxpayers earning between $73,000 and $83,000 (up from $68,000 to $78,000) … and for married couples filing jointly earning $116,000 to $136,000 (up from $109,000 and $129,000 respectively).

If your spouse is covered by a workplace plan and you’re not, your deduction for an IRA phases out between $218,000 and $228,000 in 2023, up from $204,000 to $214,000 in 2022.

Roth IRA – Annual Contribution Limits

Increased to $6,500 from $6,000
Participants 50 and older can make an additional $3,000 catch-up contribution.

Note: The income phase-out for contributions to a Roth IRA for singles and heads of household will be $138,000 to $153,000 respectively in 2023, up from $129,000 to $144,000. For married couples filing jointly, the phase-out range will be $218,000 to $228,000, up from $204,000 to $214,000 this year.

Simple IRA Accounts – Annual Contribution Limits

Increased to $15,500, up from $14,000
If the Plan permits, employee participants 50 and older can make an additional $3,500 catch-up contribution, up from $3,000 in 2022.
Employee participation in other employer plans is limited to a combined annual contribution of $22,500.

Saver’s Credit

Low and moderate-income workers may add to their retirement fund value via federal tax credits that deliver a 100% reduction in the taxpayer’s tax-bill. Eligible workers may enjoy a tax credit in a range of 10% to 50% of contributions made to an IRA or employer sponsored retirement plan.

Note: The credit gradually reduces and phases out as a taxpayer’s income rises. In 2023, the credit will phase out at $73,000 for married couples filing joint tax returns (up from $68,000); $36,500 for singles and couples filing separately (up from $34,000); and $54,750 for heads of household (up from $51,000).

SEP IRAs – Annual Contribution Limits
(Self-employed & Small Business Owners)

Increased to $66,000 from 2022 limit of $61,000
Self-employed persons may contribute up to 20% of earnings up to $330,000, up from $305,000.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Sep 2022

Anything, Business, IRS, News, Tax Credits, Tax Form Guidance, Tax Law Pearson & Co, PC 0 comment

INFLATION REDUCTION ACT

Key Tax Provisions … a Summary

The Inflation Reduction Act, was signed into law on Aug. 16. It includes numerous tax provisions that relate to both businesses and individuals … including clean-energy-related tax incentives, and expanded funding for IRS enforcement.

This month’s article offers a summary outline of key provisions of the Act.

Business

Individuals

Internal Revenue Service

The foregoing outlines key provisions of the Inflation Reduction Act as it applies primarily to small businesses and individuals. There are many other provisions that apply to larger entities that are renewable energy oriented and measures to address potential climate change issues.

For more on how the above applies to your circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately

26 Aug 2022

Anything, Business, Employment, News Pearson & Co, PC 0 comment

EMPLOYERS … HOW TO CLAIM THE EMPLOYEE RETENTION CREDIT RETROACTIVELY!

How to Claim the Employee Retention Credit… Retroactively!

The Employee Retention Credit (ERC) is an $80 billion dollars tax savings program. Included in the CARES Act, the ERC offered tax credits to encourage employers to retain employees at the height of the COVID-19 pandemic in March 2020. The driving principle for Congressional adoption of the incentive was to help pandemic-impaired businesses and tax-exempts to retain jobs and trigger job creation.

Regrettably, many of those employer benefit candidates have ignored participation in the program. That triggered a major loss to willing workers who have been displaced or are about to be. Likewise, employers suffer when they are unable to maintain their pre-pandemic payroll which further impairs their success in recovering from the financial ravages of C-19 and prevail as viable enterprises.

Many employers were and are confused as to qualification requirements and application procedures. As noted above, the ERC was included as a provision in the CARES Act. Added fuel for the confusion is the Paycheck Protection Program (PPP) which was enacted in that legislation as well. The unintended consequence for a significant number of employers was and is the belief that it was an either/or choice … ERC or PPP.

Note: Employers who received a PPP) loan are eligible to claim the ERC. However, there are restrictions … e.g., the employer cannot claim the same expenses for both programs.

A second area of qualification-confusion surfaced. Many business owners and tax-exempt managers incorrectly interpreted the rules. The first misconception was that to qualify an enterprise must have suffered a 50 percent reduction in revenues … not so. There are two alternate tests to qualify:

a revenue test, or
demonstration that your operating entity was significantly and negatively impacted by government order, e.g., a partial or full shutdown due to a government order at the federal, state, municipality, county or other local level authority.

With this knowledge of qualification criteria, hundreds of businesses and tax-exempt organizations have applied for and been approved for ERC assistance under one or another of the above tests. Notably, for employers that have not yet applied, the ERC can be claimed for three years after the filing date of the original payroll returns.

For employers with 500 or fewer employees,
this presents an opportunity to retroactively claim these credits.

Takeaways
Employers who qualify and have not yet claimed their ERC are urged to adopt a sense of urgency to do so. The 3-year window after the filing date of the original payroll returns that ERC can be claimed is on the horizon.

Of considerable financial significance, the 2020 credit can be as much as $5,000 per employee … the 2021 credit up to $21,000 per employee.

Give Pearson & Co a call or drop an email to determine if you qualify
… and if so, how to submit a claim.

25 Aug 2022

Anything, Business, Employment, News Pearson & Co, PC 0 comment

WORKER CLASSIFICATION – WHAT’S IN A NAME?

Employee or Independent Contractor?

Legal and regulatory debates continue to rage at both the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?

A worker’s classification has real world financial and other consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.

Employers are often tempted to seek grounds to classify workers as independent contractors rather than employees. Doing so relieves the employer of paying its share of employment taxes … plus avoiding withholding and paying income, Social Security and Medicare taxes.

Employers are cautioned to be diligent in their research before classifying workers as independent contractors.

Misclassifying a worker may subject the business to significant financial penalties.

A prudent place to seek guidance is to review how the IRS determines whether a worker is an independent contractor or an employee. There are 3 relational categories to consider.

Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business

With the above as a guide, an employee is generally considered anyone who performs services under circumstances that the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed.

In contrast, independent contractors are typically people in an independent trade, business or profession in which they offer their services to the public. Workers often classified as independent contractors include truck drivers, home health workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.

For more on how the above applies to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Jul 2022

Covid-19, IRS, News, Tax Law, Uncategorized Pearson & Co, PC 0 comment

AVOID TAX SCAM VICTIMHOOD

IRS Annual List of Tax Scams –Taxpayers Beware in 2022!

Compiled annually for more than 20 years, the Dirty Dozen lists a variety of common scams that taxpayers can encounter anytime. The IRS identifies problematic transactions through taxpayer examinations, promoter investigations, whistleblower claims, data analytics, document matching, and marketing material review.

The objective of the agency is to raise awareness of threats by fraudsters to steal money and personal information from honest taxpayers.

The IRS warns taxpayers to be aware of these scams aimed at fleecing innocent victims. This year’s list is divided into five groups outlined below. The IRS reminds taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will cause taxpayers to legally compromise themselves.

“Taxpayers should stop and think twice before including these questionable arrangements on their tax returns,” said IRS Commissioner Chuck Rettig. “Taxpayers are legally responsible for what’s on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know they can trust.”

Note: The following is not intended as a complete description of each scam … just a heads-up to alert taxpayers when solicited to engage in certain tax avoidance schemes. Click here for in-depth detail.

1) Potentially Abusive Relationships

The 2022 Dirty Dozen begins with four abusive transactions that involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetized installment sales.

Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain.
Maltese (or Other Foreign) Pension Arrangements Misusing Treaty.
Puerto Rican and Other Foreign Captive Insurance.
Monetized Installment Sales.

2) Pandemic-related Scams

Taxpayers are still at risk from criminals who continue to use the COVID-19 pandemic to steal people’s money. Taxpayers should be alert to potential fake emails, phone calls or texts seeking your personal information. Note: The IRS will never initiate contact with taxpayers via email about a tax bill or refund.

Likely alerts to scams:

Tax refund frauds;
Unemployment fraud resulting in inaccurate filing of 1099-G forms
Fake employment offers
Fake charities seeking contributions.

3) Offer In-compromise “Mills”

Offer in Compromise or OIC “mills,” typically appear in local advertising heralding how they can settle a person’s tax debt for a fraction of what’s owed … for a fee of course. Often, the reality is that taxpayers could have worked directly with the IRS at no additional cost.

4) Suspicious Communications

Suspicious communications are crafted to trick or scare the recipient to respond before thinking … referred to as “phishing”. Phishing is the fraudulent practice of sending communications purporting to be from reputable companies to induce individuals to reveal sensitive personal financial information, money, passwords, Social Security numbers and more. The fraudsters’ intent is to use this information to file false tax returns and tap into financial accounts, among other schemes.

Four common phishing communication vehicles are:

emails
social media posts
phone calls
text messages

5) Spear Phishing Attacks

Spear phishing frauds are known to target specific individuals as well as distinct groups. As described in 4) above, the bad guys’ intent is to steal taxpayer data and identities to file fraudulent tax returns for refunds. Virtually any type of business or organization may be subject to a tailored spear phishing attack. Again, be highly skeptical of communications requesting your financial or personal information.

Take a look at this report of a recent spear phishing email sent to tax preparers. The IRS logo was prominently displayed along with a variety of subject lines such as “Action Required: Your account has now been put on hold”. The objective of the communication was to steal tax professionals’ software preparation credentials. Unwary recipients who clicked on a link were sent to a website requesting the tax preparer’s account credentials thus revealing sensitive client information.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help.
Give us a call or drop an email. We’ll respond immediately.

20 Jul 2022

IRS, News, Tax Credits, Tax Form Guidance, Tax Law, Uncategorized Pearson & Co, PC 0 comment

2 ENHANCED TAX BREAKS APPLY FOR REST OF THIS YEAR

Meal Deductions Extended & Mileage Rates Increased

The Internal Revenue Service has announced two tax savings benefits … the extension of the 100% deduction for the cost of business-related food and beverages purchased from a restaurant plus an increase in the allowable mileage rate deduction. Learn more below.

Enhanced Business Meal Deduction – Here’s What Businesses Need to Know

Beginning in 2021, businesses are permitted to deduct the full cost of business-related food and beverages purchased from a restaurant. That enhanced deduction is continued for tax year 2022 … a sizable increase in tax savings from the usual limit – 50% of the cost of qualifying meals.

Here are the qualification requirements to benefit from the enhanced deduction:

The business owner or an employee of the business must be present when food or beverages are
Meals must be from restaurants, which includes businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption.
The cost of the meal can include taxes and tips.
The cost of transportation to and from the meal isn’t part of the cost of a business meal.
Payment or billing for the food and beverages occurs after December 31, 2020, and before January 1, 2023
The expense cannot be lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances. Meal expenses won’t be disallowed merely because they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels, or resorts.

Note: Grocery stores, convenience stores and other businesses that mostly sell pre-packaged goods not for immediate consumption, do not qualify as restaurants. The same holds true for employer-operated eating facilities, even if they operate under contract by a third party.

Business owners may be able to deduct the costs of meals and beverages provided during an entertainment event if either of these apply:

the purchase of the food and beverages occurs separately from the entertainment
the cost of the food and beverages is separate from the cost of the entertainment on one or more bills, invoices, or receipts.

Mileage Rate Increased

Effective July 1, the standard mileage rate for the final 6 months of 2022 has been increased by 4 cents per mile to 62.5 cents per mile. Likewise, the new rate for deductible medical or moving expenses (available for active-duty members of the military) is increased by 4 cents to 22 cents for the remainder of this year.

“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

Additionally, other items comprise the calculation of mileage rates as well … such as depreciation, insurance and various fixed and variable costs.

Midyear increases in the optional mileage rates are rare. The last time the IRS made such an increase was in 2011.

Note: For travel from January 1 through June 30, 2022,
taxpayers should use the rates set forth in Notice 2022-03 PDF.

See the chart below for a quick reference to the increases described above.

For more on how these tax breaks apply to your specific circumstances,
be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

20 Jun 2022

Employment, IRS, News, Tax Credits, Tax Law, Uncategorized Pearson & Co, PC 0 comment

SMALL BUSINESS OWNERS AND HIRING MANAGERS

Tax Relief to Attract & Retain Qualified Workers

Work Opportunity Tax Credit

Attracting and retaining quality workers has never been more challenging. You may identify with the most recent statistics of the labor struggle faced by “Main Street” employers:

Fifty-two percent of small business owners who responded to a survey, report that it was harder to find qualified people to hire in Q1 2022 … a 50% jump from Q4 2021
Twenty-nine percent of small business owners said they have open positions vacant for at least three months, with no success in attracting workers.
Likewise 77% of small businesses with more than 50 employees anticipate turnover to likely be a significant problem by year-end.

OK. Enough of the recruiting and retention crisis facts. This article is not to rehash the obvious. Our intent is to offer a potential solution to attract and retain qualified workers … many of whom are demanding increases in compensation to consider accepting a position or remaining employed.

The Work Opportunity Tax Credit (WOTC)

WOTC Defined: The work opportunity tax credit (WOTC) is a federal business tax credit designed to increase employment opportunities for American job seekers who consistently experience barriers to employment. Said workers are deemed “targeted groups” such as veterans, public assistance recipients, or ex-felons.
(More detail in a bit.)

The Consolidated Appropriation Act, 2021 authorized the extension of the Work Opportunity Tax Credit (WOTC) until December 31, 2025.

Eligible Businesses: Any business, regardless of size or industry, may be eligible to claim tax credits under the WOTC program. Notably, there’s no limit to the number of individuals employers can hire as part of the program. That means there’s no cap on the amount of credits that they can claim.

The WOTC credit amount can be as much as $9,600 for each qualified new hire. The maximum credit is determined by the employee’s target group equal to a percentage of the eligible employee’s wages. Additionally, the employee must work at least 120 hours for the employer to receive the credit.

WOTC Target Groups: The new employee must belong to one of the following WOTC target groups:

Work Opportunity Tax Credit

Take These 3 Steps to Take Advantage of the WOTC

Click here for more details at the Department of Labor website.

Connect with a qualified job candidate. American Job Centers can help!
State Workforce Agencies (SWAs) are authorized to administer the WOTC certification process. SWAs coordinate with American Job Centers and partnering agencies – such as vocational rehabilitation agencies, city and county social service offices, the Veterans Administration and others – to help employers connect with skilled job seekers who may be members of WOTC targeted groups.
File a WOTC certification request with your state workforce agency.
Employers must apply for and receive a certification verifying that the new hire is a member of a targeted group before they can claim the tax credit. To verify whether a job applicant is a first-time, qualifying member of a targeted group, employers must submit IRS Form 8850, together with ETA Form 9061 or ETA Form 9062, to the state workforce agency in which your business is located within 28 calendar days after the new hire’s start date.
Receive a WOTC certification for eligible new hires and claim the credit after their first year of employment.
If the new hire meets the eligibility requirements for a WOTC targeted group, you will receive a certification (ETA Form 9063) from your state workforce agency. Taxable employers can claim the WOTC as a general business credit against their income taxes. Tax-exempt employers who hire qualified veterans can claim the WOTC against their payroll taxes. Generally, the credit is 40% of qualified wages for individuals who work 400+ hours in their first year of employment. For more information about claiming the credit, see the instructions on the IRS.gov website.

Claiming the Credit & Limitations

Employers claim the tax credit for the year that that the credit was awarded … not the year the employee was hired.
The business must have a tax liability against which to use the credit.
A taxable business may apply the credit against its business income tax liability.
For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the period the credit is claimed.
Unused credit can be carried back one year and carried forward for 20 years.

If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help. Give us a call or drop an email. We’ll respond immediately!

23 Jan 2022

IRS, News, Retirement Pearson & Co, PC 0 comment

RETIREMENT PLAN CONTRIBUTION LIMITS RAISED

RETIREMENT PLAN CONTRIBUTION LIMITS RAISED
IRS Announces Increases for 2022

Retirement Plan Contributions Limit Raised

Good news for participants in 401(k), 403(b) and most 457 plans and the federal government’s Thrift Savings Plan. If you participate in one or more of these plans, your tax year 2022 contribution limits will increase by an additional $1,000 … making annual deductible contributions capped at $20,500.

Limits on contributions to traditional and Roth IRAs remains unchanged at $6,000.

Note: There are conditions that must be met for contributions to traditional IRAs to be tax deductible.

If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated. The amount of the deduction depends on the taxpayer’s filing status and their income.

Traditional IRA income phase-out ranges for 2022 are:

$68,000 to $78,000 – Single taxpayers covered by a workplace retirement plan
$109,000 to $129,000 – Married couples filing jointly. This applies when the spouse making the IRA contribution is covered by a workplace retirement plan.
$204,000 to $214,000 – A taxpayer not covered by a workplace retirement plan married to someone who’s covered.
$0 to $10,000 – Married filing a separate return. This applies to taxpayers covered by a workplace retirement plan

Similarly, there are phase-out ranges of income in 2022 for Roth IRAs and Saver’s Credit participants.

Roth IRA contributions income phase-out ranges for 2022 are:

$129,000 to $144,000 – Single taxpayers and heads of household
$204,000 to $214,000 – Married, filing jointly
$0 to $10,000 – Married, filing separately

Saver’s Credit income phase-out ranges for 2022 are:

$41,000 to $68,000 – Married, filing jointly.
$30,750 to $51,000 – Head of household.
$20,500 to $34,000 – Singles and married individuals filing separately.

The agency also announced the possibility of cost‑of‑living adjustments that may affect pension plan and other retirement-related savings. No details have been released as of this writing.

Have Immediate Questions or Concerns?
Pearson & Co stands ready to help as needed.
A phone call or email is all it takes.

19 Oct 2021

IRS, News, Tax Credits, Tax Law Pearson & Co, PC 0 comment

ESTATE AND GIFT TAXES

ESTATE AND GIFT TAXES
Proposed vs Current … a Heads-up!

It’s been in the press for months … the Democrats unveiling of the Build Back Better Act. Within its 881 pages are significant changes to the tax code with drastic impacts on current estate planning strategies and gifting rules. High tax bracket and wealthy taxpayers will be the most affected class of taxpayers … assuming the proposed revisions are passed in current form.

Again, please note that what follows is a brief summary of proposed legislation. As such it is very likely to be altered as negotiations work through the House Rules Committee and the House of Representatives before a final bill is presented to the Senate. So, there may not be an impact on current 2021 rules.

Proposed Estate & Gift Tax Revisions

Federal estate tax exemption reduced from the 2021 amount of $11.7 million to $5 million effective January 1, 2022. (There are reports that this provision seems to be off the table. We’ll see.)
Gift tax exemption reduced from the 2021 amount of $11.7 million to $5 million effective January 1, 2022. (To accommodate questions received, we’ll cover Gifting in more detail below.)
Transfers of interests in a closely held entity … valuation discounts would be eliminated.
Maximum Estate Tax Rate remains capped at 40 percent.
Grantor Trusts established and funded before the enactment of the new law would be grandfathered.
Eliminate or constrain the use of:
- irrevocable life insurance trusts
- Grantor Retained Annuity Trusts (GRATs)
- Qualified Personal Residence Trusts (QPRTs), and
- Grantor Charitable Lead Annuity Trusts (CLATs).

Gifting … Exclusions and Taxation

Here’s a recap of the 4 key points as they exist today in making gifts:

What does the IRS recognize as a gift?
What are the gift tax rules?
Who pays gift taxes?
How do givers gain?

Note: All the following refers to federal gift tax rules. There is no Virginia Gift Tax.

What’s a Gift?

The IRS defines a gift as the transfer of money, property or other assets by one individual to another while receiving nothing, or less than full value, in return. Any type of property may be considered a gift to recipients.

Some examples:

Stocks
Land
Use of or income from property
New car
Sale of something at less than its full value
Interest-free or below-market interest loan

The value of completed gifts, that exceed excludable amounts, may result in a gift tax. More on that in a bit.

Note: A gift is completed when the donor no longer has “dominion and control” over it. Making a completed gift forfeits asset ownership and control by the donor.

There are two time-lines affected by gift tax exclusions: annual and lifetime.

Annual Gifting Limits

This year single taxpayers may make annual tax-free gifts of $15,000 per recipient.

The IRS considers a gift made by a married couple from joint property to be given half from each spouse. That means married couples enjoy an exclusion of $30,000 annually per recipient.

Please note the emphasis on per recipient. That means that a donor can give anyone up to $15,000 in assets a year, free of federal gift taxes. Married couples could give away $30,000 annually to each of an unlimited number of recipients.

If you give more than $15,000 ($30,00 for married couples) in a year to any one person, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.

Additionally, gifts to pay tuition or medical expenses are also free of gift tax. To qualify for this break, the donor must make the payment directly to the institution.

Lifetime Gifting Limits

The federal tax law provides for a lifetime gifting exclusion which sets the dollar limit of what you may gift during your lifetime. Again, the recipient or recipients are your choice.

Single taxpayers may now gift up to $5.49 million per recipient.

Married couples enjoy a lifetime tax-free gift limit of $11.7 million per recipient … $23.4 million combined.

Note: Gifts made that exceed the Annual Gifting Limits are subtracted from the donor’s Lifetime Gift exclusions.

Who Pays Gift Tax … Donor or Recipient?

The gift tax is only an issue for individuals that plan to gift very large amounts over their lifetime or will have big estates when they pass away. The reason … the gift tax exclusion is calculated on cumulative gift amounts

upon the death of the donor. Given the significant lifetime exclusion limits, the vast majority of Americans and their estates will never be faced with paying this tax.

Filing the gift tax return, IRS Form 709, discloses excesses of annual gifting limits. So, if you don’t gift anything in your life and don’t exceed the lifetime gifting limits, your whole lifetime exemption will apply against your estate when you die.

The person receiving the gift usually doesn’t need to report the gift. If you are a donor who is financially able and generous enough to use up your exclusions, you may indeed have to pay the gift tax … rates range from 18% to 40%.

Takeaways

The federal gift-tax exemption applies to the total of an individual’s taxable gifts made during life. Both the Annual and Lifetime Gifting Limits are substantial. The result is that relatively few American taxpayers are likely to exceed these amounts and be subject to the gift tax. That said, making gifts that don’t exceed the Gifting Limits can yield substantial estate tax savings … particularly if you keep at it for several years.

Note: If the revised Gift Tax exclusion were to pass as written, there will be no “clawback” for use of the current exclusion amounts if the donor passes away at a time when the applicable exclusion amounts have been reduced.

Have Immediate Questions or Concerns?
Pearson & Co stands ready to help as needed.
A phone call or email is all it takes.

21 Sep 2021

IRS, News, Tax Credits, Tax Law Pearson & Co, PC 0 comment

CRYSTAL BALL GAZING TO THE PAST

CRYSTAL BALL GAZING TO THE PAST
2 Proposals for Possible Retroactive Capital Gains Tax Hike

As a Certified Public Accounting firm, Pearson & Co. primarily serves our clients in a two-fold fashion:

A rear-view mirror assessment of tax-related activity, and
Forward-looking tax planning advice.

It’s important to note that all the above is conducted with a firm knowledge and understanding of the U.S. tax code for the tax year in question. Now, that frame-of-reference may be upended for upper-income taxpayers.

The following are two descriptions of proposed bumps in the capital gain rate retroactive for asset sales … one proposed by President Biden, the second more recently by the House Ways & Means Committee. We won’t speculate as to how either of those proposals may play out … just a heads-up for you to know what is being considered and how it may affect your taxes in 2021.

What Is the Capital Gains Tax?

Here’s a quick reminder. The capital gains tax applies to the profit from an investment that is incurred when the investment is sold. The emphasis is on “when the investment is sold”. At point of sale, profits (capital gains) are considered to have been “realized”, i.e. a sale price of the asset at a price higher than the original purchase price … often referred to as book value cost.

There is a further distinction between long-term and short-term capital gains. For our discussion we’ll focus on the former. Here’s a recap of this tax year’s current long-term capital gains rates.

While capital gains tax rates have fluctuated over time, they have always been a specific “known quantity” during each tax year. The current proposals point to a variance of what has been a given in past tax years.

Apparent Intent

Both Biden’s plan and that proposed by the Ways & Means Committee appear to seek wealthy Americans and corporations to pay higher taxes to help finance a $3.5 trillion budget that embraces multiple social spending programs. Included is funding for President Biden’s $1.8 trillion American Families Plan.

Biden’s tax plan would impact long-term capital gains significantly by nearly doubling the rate for high-income investors.
Experts agree that the Ways & Means Committee proposal is less dramatic than tax hikes proposed by President Joe Biden. As one source stated, “somewhat more taxpayer-friendly in some ways” and “a little less aggressive.” More detail in a bit.

Each proposal contains a retroactive “trigger-date” at which time the wished-for capital gains tax provisions would be initiated. An obvious question is, “Why a retroactive tax?”.

The purpose to make the tax retroactive is based on studies that show whenever a capital gains tax increase is announced, there is a rush by many investors to sell appreciated assets to realize tax savings. If a tax increase is structured so that the effective date already happened months ago, investors would clearly have no chance to unload assets at favorable tax rates before the new policy kicks in. So, a strategy to sell quickly before an anticipated new law takes effect is negated by the retroactive provision … if either proposal is enacted as currently worded.

The Proposals

Here’s a comparison of the key provisions of both proposals as they stand today.

Note: The 3.8% tax linked to the Affordable Care Act remains intact under both proposals.

Biden’s Proposal

President Biden asserts that rich taxpayers should pay as much on their stock sales and investment portfolios as they do on their income. Therefore:

Increase the maximum income tax rate to 39.6% from its current 37%.
Make the capital gains tax the same as the maximum income tax rate for taxpayers making $1 million or more annually.
The new rate would go into effect retroactively on April 28, 2021 … the day the president formally presented his ideas to Congress.

Ways & Means Proposal

Taxpayers who currently pay the 20% capital gains tax rate (see above illustration) would pay 25%.
The new rate would go into effect retroactively on September 13, 2021 … the formal date of the bill’s introduction.
Households earning more than $5 million pay an additional surtax of 3%.
A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to September 13, 2021.

In summary: Under Biden’s plans, millionaires would pay 43.4% … a 39.6% rate capital gains rate plus the 3.8% ACA-linked tax. Under the Ways and Means Committee proposal, a millionaire would pay 28.8% … a 25% capital gains rate, plus the 3.8% ACA-related rate. Households making more than $5 million would also have a 3% surtax, amounting to an effective 31.8% capital gains rate.

How Will American Taxpayers Be Affected

It’s clear from the foregoing that the overriding intent by legislators is to require wealthy Americans and corporations to pay higher taxes to help finance a proposed $3.5 trillion budget. While no similar story has been reported regarding the recent Ways & Means proposal, it is worth summarizing a recent Wall Street Journal article that indicates the Biden proposed retroactive capital gains tax increase may result in unintended consequences for the not-so-wealthy.

Paul Settle, a 64-year-old Kentucky man would see his savings cut in half by the proposal. Mr. Settle’s nest egg is five brick apartment buildings purchased the 27 years ago. Over the years, he has spent almost every day maintaining the grounds, repairing garbage disposals and collecting rent checks.

Mr. Settle pays himself about $75,000 a year. The idea was always to one day sell and retire off the proceeds. The President’s proposal would put the brakes to that plan.

So, the net effect of the proposal would have far-reaching effects for many American taxpayers. For example, consider homeowners (perhaps yourself) … who are a far cry from enjoying a $1 million plus income … but have profited from the surge in home prices in recent years. A home purchased 30 years ago that is today worth over $1 million could severely impact your retirement plans.

What’s Next?

Best guess is that enactment of either proposal will be a Congressional partisan battle … and likely receive little to no support from Republicans. If a final bill makes it to the Senate, Vice President Kamala Harris will need to cast the deciding vote in a 50-50 divided/balanced Senate … assuming all 50 Democrats are aboard with the measure.

And then if passed including the retroactive provision, the bill will most certainly be subject to major Constitutional scrutiny and debate.

Stay tuned!

← Previous 1 234 5 Next →