Reaper

What is the Estate Tax and why do we have it!

Ok, so this tax seemed to be getting an awful lot of bad press lately.  Certain VERY Wealthy Think Tanks have been doing their best to get you to believe that this tax is unfair and needs to be abolished.  But does it really?

First, you need to understand exactly who and how this tax is calculated.  I’m going to be throwing a lot of numbers at you to help show how this works so try to stick with me.  Now I admit, when I was younger and not doing this for a living, I thought this was a horrible tax too, but then I learned how it worked.

The Estate Tax, intentionally misnamed the Death Tax by it’s opponents, only affects about 0.2% of the population.  Most American’s (and their heirs) will NEVER, EVER pay this tax so long as the current exemption limit stays where it is at.    In December 2010, President Obama signed the “Unemployment Insurance Reauthorization and Job Creation Act” which permanently (well, permanently until congress changes it) set the Personal Estate Tax Exclusion amount to $5,450,000 if the taxpayer is Single or $10,900,000 if married.  When a spouse passes, the spouses exemption can pass to the surviving spouse allowing the surviving spouse to take the entire $10.9M exemption in his/her estate upon their passing.

So how does this work then?  Ok… let’s say you are a single person with 1 child (this is also an important piece).  You own a house which you bought for $25,000 (it was your childhood home).   When you passed, your home was worth $200,000.  You also had the following additional assets:  Stocks worth $1,000,000 (which you paid $100,000 over your lifetime); Land purchased for $50,000 now has a Fair Market Value (FMV) of $2,000,000.

When her final tax return is completed, her Assets are Revalued at the FMV at the Date of Death.  In this example, this person’s Assets are valued at $3,200,000 with a cost of $175,000 – not too bad right.  Her assets have a GAIN of $3,025,000.   When her final tax return is done (form 1041) she will report $3,200,000 of Asset Value less the cost of $175,000 and the Capital Gain on those assets is $3,200,000 LESS the $5,490,000 exemption leaving NOTHING to tax for the Estate Tax.   Why because the FMV of those Assets is LESS than the Exemption.   Her child will inherit these assets at the FMV of those assets at the date of death and His/Her Gain on these assets (for their Final Return) starts upon their parent’s death or the date they inherited the property.

So far, this all seems fair and makes sense right.  The parent never really used or touched those assets they just stayed in some account or the parent used the home and land like they have since they purchased it.  Now let’s look at why the Anti-Estate tax people want to eliminate this.  Simply put – because they will end up paying taxes on any Gain on those assets over the Exemption Amount (remember that’s upto $11 Million).  So you’re probably saying well that’s not fair.  But wait.. here’s why it’s important.

Let’s say you are an uber wealthy Real Estate developer who has Buildings all over the world.   One building in particular you bought for only $500,000 but it’s now worth an FMV of $5,000,000.  A couple years ago you decided you wanted the Equity from that building (Equity is defined as FMV Less any loans on that Asset).   You go to the bank and take out $3,000,000 and enter into Mortgage on that building – Cash in Hand – NO TAX IMPACT ON YOUR TAX RETURN THAT YEAR but you just got $3,000,000 to spend any way you want to!!  So why no tax impact?  Because you still own the building and it’s a LOAN, something you contract to pay back.   Unexpectedly you pass away before you pay back the loan.   Now, here is why estate tax is so important.  Remember this person already received the cash equity from this building, maybe even gave some to their children but NEVER paid taxes on that $3,000,000.  By eliminating the Estate tax they never would pay taxes on it either!!  They have literally just received $3,000,000 in FREE MONEY!   Their kids could just stop paying the Mortgage and the bank takes the property… but the money, it’s gone.   The Tax Code says their children inherit the Building at the $5,000,000 FMV at the date of their parent’s death.   And let’s say they decide to just sell the building for $4,950,000 – which represents a LOSS on their taxes; the children would still end up with another $1,450,000 of TAX FREE MONEY because they sold the building at a loss and that free money, well that was part of their parent’s estate.

So what the Estate tax actually does is RECOGNIZE the PASSIVE INCOME (or Appreciation) that was locked up in ASSETS during the Taxpayers lifetime.  Think of it as a “GAP” Tax rather than an Estate or Death Tax. As this tax catches all the Passive Earnings that you’ve never been taxed on.  Most of us only get paychecks or maybe we run a small business and get Earnings from that business but that money is literally taxed every year on our tax returns.   If we are among those fortunate enough to buy Investment Assets, we still get an Exemption on that value but only when we exceed that Exemption do we pay taxes on those Investments.   Everyone gets the same exemption – EVERYONE GETS $5,490,000.

So, have I convinced you yet why having the Estate tax is Fairer than NOT having the estate tax?  And don’t take to the argument that the money was worked for…  it’s not, that money has already been taxed.  This is a tax on the PASSIVE or better yet, APPRECIATION of the asset that each of us would recognize if we sold it BEFORE we passed away… only then, it’s called CAPITAL GAIN!

I hope this helps shed some light on how this tax works.  I hope it helps explain how eliminating this allows only those seriously wealthy people to avoid paying taxes while the vast majority of us will pay tax on almost every dime we make.

Summer Camp

Summer Camps & Tax Credits!! No Really :)

Parents are stressed in so many ways now-a-days, work, school and summer – what to do with the kids while I work!  However there may be at the least, some tax relief available.   And if you haven’t yet filed your 2016 taxes… don’t forget last summers camps!

Here’s the  IRS Special Edition Tax Tip 2014-16, June 11, 2014

Many parents pay for childcare or day camps in the summer while they work. If this applies to you, your costs may qualify for a federal tax credit that can lower your taxes. Here are 10 facts that you should know about the Child and Dependent Care Credit:

  1. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see Publication 503, Child and Dependent Care Expenses.
  2. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.
  3. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return. Refer to Publication 503 for more details.
  4. As a rule, if you’re married you must file a joint return to take the credit. But this rule doesn’t apply if you’re legally separated or if you and your spouse live apart.
  5. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.
  6. The credit is a percentage of the qualified expenses you pay. It can be as much as 35 percent of your expenses, depending on your income.
  7. The total expense that you can use for the credit in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
  8. Overnight camp or summer school tutoring costs do not qualify. You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent. Special rules apply if you get dependent care benefits from your employer.
  9. Keep all your receipts and records. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your tax return.
  10. Remember that this credit is not just a summer tax benefit. You may be able to claim it for care you pay for throughout the year.
Coffee Couple

Claiming your Boyfriend or Girlfriend on your return? Yes, You can!! (Maybe)

Did you know that you can claim your Boyfriend or Girlfriend (Partner) on your Personal Tax return!!   However there are a few criteria you must meet in order to take advantage of this little known rule.

In order to take advantage of this, your partner must meet the following tests…

  1. The Partner must be a U.S. Citizen, Resident Alien or a Resident of Canada or Mexico
  2. Can not be the Qualifying Child of the taxpayer
  3. You must have lived together the entire year as a member of your family and cohabitation must not be against the law in your state (FYI in Wisconsin, it’s not, I just looked)
  4. She/He can’t have earned over $4,050
  5. You must have paid more than ½ her/his living expenses during 2016
  6. And, he/she must not be able to be claimed by anyone else (ie his/her parents, grandparent, etc)

 

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Worst year EVER collecting TIN information?

Well.. Once again, we made it through the 1099 filing season without too many issues.   But it does seem that EVERY year there is one or two vendors that outright REFUSE to provide the Tax Payer Information so that you, as a business, can get your 1099s out by the January 31st filing deadline.   Having completed these information returns for over 20 years, it always surprises me when I get that one vendor that becomes belligerent about providing the information.  The first thing that pops in my head is that they don’t want the IRS or the State Revenue Department knowing that they are getting income from someone.   Now, if it’s on a personal level, the IRS doesn’t require INDIVIDUALS to issue 1099s to the Plumber, the Carpenter or the Landlord that you pay in your personal life.  But if you are a BUSINESS, in order to deduct those same expenses on your business tax return, you AS A BUSINESS, are required to issue those pesky 1099-MISCs indicating that you paid someone $600 or more during the calendar year.

 

So, what do you do when you encounter one of these vendors.

First and foremost – CHANGE YOUR INTERNAL POLICY!!   Make it a policy in your business that if you issue payment to ANYONE for services, that you do not issue a check until you collect the W-9 Form from them!   It’s so much easier to just tell them that your system doesn’t allow for payments to be issued UNLESS this information has been entered into the software.  And you can of coarse use the “My accountant won’t let me issue checks without this” excuse.   Let us take the heat if that’s easier.  But get the W9 form upfront!  It will also make the payee much less uncomfortable providing the info when it’s a payment they seek.  If/when you ask for that information a year later, they may not even remember doing business with you in the first place.
But ok, you’ve already paid them so now what? I typically use a 3 step process….

First attempt, I start with calling, emailing or faxing to collect the information from them.  99% of the time, this is all I need to do.  Most businesses understand that they are required to provide you with this information and don’t make a fuss about it.   Sometimes it may take 2-3 attempts, but normally they will send the information.   THAT BEING SAID… If you are the RECIPIENT… Don’t just send the W9 out because you get asked!  Be sure that you actually did do business with the Person/Business that is requesting the information.  Remember that ID thieves will try any number of methods to obtain your information so just take a bit of caution before you just send this out!!  And if, you don’t feel comfortable giving us, the accounting firm, the information, just indicate to the requester (if it’s not the business owner asking) that you gave it to your customer.  We, the accounting firm, will understand and can the get the information from our client.
Second attempt, I send another email or call indicating that if they don’t provide the information that the IRS REQUIRES the payee to withhold 28% of all payments because they failed to provide the information.  This is right on page 2 of the W9 form, and usually, this is more than enough of a deterrent for the provider to give in and provide the information – again, to the recipient… if you don’t feel comfortable giving it to someone just because they say they are an accounting firm… give it to your customer and tell the accounting firm you did so!
Third and final attempt, make my last communication much more stern.  I indicate to the recipient that this is something that they are required to do, that the IRS requires that they provide this information and if they don’t provide it, I am required to send a 1099 anyway to the IRS with the words “Refused to Provide” where the tax ID is supposed to go on the form.  Have I had to do this?  Yes unfortunately.  It amazes me to no end that someone would think that I’d waste my valuable time trying to collect something that I really truly didn’t need.   Now, back to my first step, do I get that they are being cautious when I, an outsourced accounting firm calls…. YES, but they could just give the info to their customer and let their client give it to me.   I’m good with that, just don’t outright refuse to do this!
Finally, when every attempt has failed and the supplier/vendor/service provider just outright refuses, I send the 1099 just as I indicated I would with the words “Refused to Provide” in the box labeled Recipient’s Identification number.  I then send this 1099 and a letter to the IRS explaining that this business refused to provide the tax identification number.   You may be wondering, why do I bother to do this?  I do this because the fines to my clients could be SO huge that I want to be sure that we have done everything that I am required to do to ensure that my client does not end up with the fines.  After all it wasn’t their fault that their vendor refused causing them to not have the information they needed.

Moral of the story…. Get the W-9 form before you even give them the check!  It’s so much eaiser.

16592718 - dollars with tighten belt - financial crisis 3d concept

Concerned about the Future?

So not to scare you.. ok, maybe to scare you a little bit, every time the Republican’s have had a Super Majority in American Government (House, Senate & Presidency) they have crashed the Economy.  So far in history that’s 3 for 3 or 100% of the time!  In 1907/1908 during the Banking Panics; 1928 when the GOP gained power, the Stock Market Crashed in October 1930 and created the Great Depression from 1929-1937; and finally the 2007/2008 credit crisis crash that lead to thousands losing their jobs and homes.   Honestly, there a lot of CPA’s out there keeping it neutral, but I’m thinking I’d rather go out on limb, be proactive to help people rather than reactive giving advice after the fact.  We could be headed for a fourth time in the next 2 years, some of the signs are already there (discussions about eliminating Dodd-Frank, reducing Banking Regulations, Trade rhetoric and fair pay/minimum wage) are just a few of the issues that cause alarms to go off for me.

Now I hope I’m reading the signs wrong, but I was correct about the housing crash and the indicators I saw then.  So, here’s my suggestions and you can take them for what they are worth, or not, it’s up to you.

1st, resist buying things you don’t need and pay off as much of your Credit Card debt as you can NOW! Currently your rates are protected by the Frank-Dodd Act which the GOP has whole-heartedly set out to dismantle which means we could be going back to the days of 29.99% credit card interest (that was just 8 short years ago btw).

2nd, Refinance you home if you don’t already have a low FIXED interest rate. Once you are locked in, unless you’ll need to refi for medical or other emergency reasons, you should be ok with your Mortgage with what could be another housing fiasco (again due to the Wall Street Lobbyists on the new Administration). If you have an ARM (Adjustable Rate Mortgage) refinance out of it into a Fixed Rate as soon as possible.  This will stabilize your cash flow and hold your payments steady in the event interest rates climb.  And if you are planning or buying a new home, shop for that best rate – and don’t take out more than 80% of the value of your home on the Mortgage and always find a FIXED RATE so that you can count on a steady repayment amount.  Otherwise, sit tight and enjoy your current home.

3rd, Don’t SPLURGE on spending, but don’t stop spending altogether either. Remember the economy is only sustainable if/when there is demand from consumers for products. Without demand, supplies increases, prices drop and layoffs happen which leads to less disposable income in the economy which will begin to spiral the economy into a downward spin.  This is one of the things that happened in the early 2000’s – Sunbeam comes to mind.

4th, BUY LOCAL WHENEVER POSSIBLE! One of the things that will help support our communities is to keep as much in the local economy as possible… Use SMALL LOCAL Credit Unions or Community Banks vs Large Corporate Banks (remember these guys are the ones who got drunk on Wall Street and taxpayers ended up needing to bail out). Buy American if you can’t buy local. Obviously we don’t have Car Manufacturers in all our neighborhoods but we can support other local communities by sticking to American Made goods.  This not only helps American Manufacturing plants but also helps the downstream suppliers and local businesses that depend on that plants employees.

5th, be cautious of Phantom Profits in the Stock Market.  Phantom Profits are essentially Speculative gains on the value of the Stocks and are not based on REAL earnings of an entity.  This was one of the things that happened during the Banking/Credit Crisis of 2007 where approximately 30% of some stock’s value was phantom earnings.  When the Market corrected, thousands lost their life savings.  Stick with a LONG-TERM strategy – there is no getting rich quick, but you can certainly gamble it all away overnight on something that’s not consistent and not a sound, tested long standing company.

Finally… if you have a good job with good benefits… consider whether or not now is a good time to change. Granted sometimes you can’t help it, but by keeping your life constant through the next couple years, you will have a better chance of getting through possible crises unscathed.

12-7-2016a

Don’t Skip These Business Year-Enders

“In The Loop” Magazine

Nov – Dec, 2016 Issue

Don’t Skip These Business Year-Enders

 It’s a fact, there’s only a few weeks left of the year, and they will likely be hectic for you and your business. Before you dive into the holiday season and relax, it’s important to get your business in good shape for tax season—or you’ll be feeling the pain come January. Here’s a list of business “year–enders” that you should tackle now so you can enter 2017 feeling in control and stress-free.

1. Determine employee bonus payments and withhold the required tax amounts.
If you’re rewarding your employees with bonuses, don’t forget about tax. Bonuses are subject to income tax withholding, FICA and FUTA taxes—just like regular pay.

2. Pay your vendors and contractors in full by year end.
For contractors, you may have to submit a W-9 form, and you’ll also need to give each contractor a 1099-MISC form by January 31.

3. Prepare your records for local, state and federal payroll.
Make sure you have everything up-to-date and comply with all payroll regulations, including any recent changes.

4. Review your balance sheet and profit and loss statement.
Taking a look at your assets, liabilities and equities will give you an idea of how well your business performed this year and help you identify any areas that you need to improve. In addition, your income statement will list each revenue-generating item, along with your tax-deductible expenses. This is a useful way to look at your profit and loss for the year.

5. Analyze your cash Flow.
Use cash reports to understand how much cash you have on hand. Cash flow is crucial, so if you’re having trouble controlling it, please reach out to our firm for help.

6. Tally up your estimated tax payments for the year.
If your business is like most small businesses, you’ve paid quarterly estimated tax payments throughout the year. Keep track of what you’ve paid, so that you have those numbers ready for your taxes and so you know how much you’ll owe after year end.

7. Review all of your payroll information.
Now’s the time to make sure that you have all of your employee information current and securely stored. In addition, make sure that you have the people who work for you correctly classified to avoid a payroll audit and penalties.

8. Take stock of how well you met your goals for the year.
Take some time to consider if you achieved everything you intended to last year. If so, great. If not, try to find out why. Making goals for the coming year can help keep you motivated as your business grows. Review them regularly to stay on track.

These “year-enders” are important steps to help you prepare to close out 2016 and look ahead to the coming year. Once you’ve checked off the list, enjoy some well deserved downtime.

Source: Xero.com

11-28-2016

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11-17-2016a

Important changes coming in 2017 to deadlines for business tax filings

Important changes coming in 2017 to deadlines for business tax filings including:

  1. W-2 and 1099 filings are due on January 31, 2017 – This is 30 to 60 days EARLIER than past years. These forms are still due to your employees and contractors by January 31, so it is still a good idea to prepare and file these early.
  2. Partnerships, LLPs and Multi-Member LLCs (filing Partnership Form 1065)  – Shorting filing period – Need to be filed by March 15 or the 15th day of the third month following the end of the organization’s fiscal year end. The previous deadline for this return was April 15. Extensions are available for up to six months, filed no later than September 15, 2017.
  3. S-Corporations Form 1120S – No change to filing deadline or extensions.  Returns for these entities are still due in March 15th or the 15th of the Third month following the organizations Fiscal year end.
  4. C-Corps filing Form 1120 Previously filed on March 15th now get an extra 30 days with the new Due Date of April 15th or the 15th day of the fourth month following the end of the organization’s fiscal year. Extensions can be filed no later than September 15. After 2026, C-Corporation extensions will be available for up to six months after the initial due date.
  5. Trust and Estate filing Form 1041 the extension due date has changed from September 15 to September 30.
  6. Exempt Organizations filing Form 990 now have only one extension until November 15.

If you have any questions about the above changes please do not hesitate to contact our office.