Category Archives: Articles

New Lease Accounting Standard: Planning for Implementation

Posted on by

After years of deliberation, in February 2016 the Financial Accounting Standards Board (“FASB”) issued ASU 2016-2 – Leases (Topic 842) – that will change the accounting and reporting of leasing activities for nearly all entities that issue financial statements prepared in conformity with U.S. GAAP. The main focus of the new guidance is on lessees’ accounting and reporting for leases, and recognition of a lease asset, the right of use (“ROU”) asset, and a lease liability in the statement of financial position. While the income statement recognition will not significantly change under the new guidance, the recognition of ROU assets and lease liabilities may have a major impact on an entity’s financial ratios used by its lenders in financing arrangements. Understanding, and communicating, the impact on the financial statements and related financial covenants to lenders will be important to the entity’s financing and operations.

The FASB’s stated goal was to “… increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.”

In very summary form, for lessees the guidance requires:

  • For all lease contracts (other than short term leases) the present value of the stream of lease payments will need to be recognized as a lease liability and a right of use (“ROU”) asset (with certain adjustments) on the balance The income statement recognition will depend upon the type of lease involved.
  • For operating lease contracts (most property leases), an expense will be recognized in the income statement as the sum of the interest on the lease liability plus amortization of the ROU asset as a single lease cost in the income Amortization of the ROU asset will be the difference between the periodic lease cost and the interest on the lease liability.
  • For finance lease contracts (most equipment and other property leases), the income statement will recognize depreciation/amortization of the ROU asset and interest expense on the lease liability consistently with similar costs related to similar assets.

Implementation of this guidance will likely require significant effort. All existing  lease contracts must be inventoried, evaluated to determine how they each will be accounted for, and assessed for the overall impact on financial statements and financial covenants, etc. Communication with lenders about the financial impact and related financial covenants will likely also be necessary.

The evaluation will require analysis of all lease contracts (both existing and new) to determine the lease classification and term, to separate the lease component from any nonlease components, and to allocate the consideration to the lease and nonlease components based upon relative standalone prices observed in the market. Payments that are reimbursements of costs of the lessor are not components of the lease and will not be allocated any consideration.

In general, for non-public companies, the guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Transitional guidance requires recognition and measurement of the leases at the beginning of the earliest period presented using a modified retrospective approach.

Please contact us if you have any questions.

Summary of The House-Senate Compromise on Tax and Spending Bills

Posted on by

The Senate by a 65-33 vote gave final approval on December 18 to tax and spending compromise legislation that included a $622 billion package of tax extenders. The House approved the extenders legislation by a 318-109 vote on December 17. President Obama has said that he would sign the legislation. Below is an overview of important tax provisions from the package, which was negotiated by Congressional leaders and released on December 15.

Individual and Family Provisions

 The Bill contains numerous provisions that would benefit individuals and families. Some key tax provisions that have long been temporary would become permanent, while others would only get another temporary extension. Some of the key provisions that are being made permanent are:

  • the enhanced child tax credit,
  • the enhanced American opportunity tax credit,
  • the enhanced earned income tax credit,
  • the deduction of certain expenses for elementary and secondary school teachers, and
  • the deduction for State and local general sales taxes in lieu of State and local income taxes (Division Q, 101-§105).

The permanency of these provisions should provide more certainty for individuals and families, who will no longer have to wonder whether they will still be around from year to year.

There are also several temporary extenders that would benefit individuals and families. Three provisions that are particularly important to homeowners are being extended through 2016:

  • the exclusion from gross income of discharge of qualified principal residence indebtedness,
  • the provision allowing mortgage insurance premiums to be treated as qualified residence interest, and
  • the credit for nonbusiness energy property (Division Q, 151, §152, §181).

Health & Compensation Planning

 The congressional budget deal would provide relief from certain excise taxes under the Affordable Care Act. The Bill would:

  • Provide for a two-year delay on the excise tax on high-cost employer-sponsored health coverage (the “Cadillac” tax), meaning that the tax would first be effective in 2020 rather than 2018 as The Bill would also permit the tax to be deductible as a business expense and require a study on the benchmark for the threshold measurement of the Cadillac tax. (Division P, §101-103)
  • Provide for a one-year moratorium on the annual excise tax imposed on health insurance providers for calendar year (Division P, §201)
  • Prohibit the IRS and HHS from using the funds provided under the deal to support the Affordable Care Act (Division E, 113, Division H, §225, Division H, §226)

The tax extenders deal would provide additional tax relief and clarifications. The Bill would:

  • Permanently extend the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. (Division Q, 105)
  • Modify the filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve (Division Q, §201)
  • Permanently extend the ability of individuals at least 70 ½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts. (Division Q, 112)
  • Extend the special rule under current law for current benefits paid by accident or health plans of a public retirement system to such benefits paid by plans established by or on behalf of a state or political (Division Q, §305)
  • Allow a taxpayer to roll over amounts from an employer-sponsored retirement plan to a SIMPLE (Division Q, §306)
  • Clarifies the effective dates of Public Law 113-243 to allow certain airline employees to contribute amounts received in certain bankruptcies to an IRA without being subject to the annual contribution limit. (Division Q, 307)
  • Extends the relief providing an exception to the 10-percent penalty on withdraws from retirement accounts before age 50 to include nuclear materials couriers, S. Capitol Police, Supreme Court Police and diplomatic security special agents. (Division Q, §308)
  • Clarify certain rules governing church plans, including preventing the IRS from aggregating certain church plans together for purposes of the non-discrimination rules, and providing flexibility for church plans to decide which other church plans with which they (Division Q, §336)

General Business Provisions

The proposed Bill includes many business-friendly provisions. Most notably, the research and development credit would be made permanent (Division Q, §121), along with the enhanced limitations asset expensing under §179 (Division Q, §124). Numerous other provisions would get temporary extensions, some through 2016, and some through 2019.

Some of the noteworthy provisions that would be extended through 2019 are:

  • the new markets tax credit,
  • the work opportunity tax credit, and
  • “bonus” depreciation for qualified property. (Division Q, 141-§143)

Some of the noteworthy provisions that would be extended through 2016 are:

  • the Indian employment tax credit,
  • the special expensing rules for certain film and television productions, and
  • the energy efficient commercial buildings (Division Q, §161, §169, §190)

S Corporations

  • The S corporation holding period under 1374(d)(7) for recognition of built-in gains after conversion from a C corporation would be permanently extended to 5 years. Pre-existing installment sales would continue to be governed by the holding periods for the years of sale. (Division Q, §127)
  • The provision under 1367(a)(2) that upon an S corporation’s charitable contribution of property, the shareholder’s basis in the S corporation stock would be reduced by the shareholder’s pro rata basis in the donated property (rather than the pro rata fair market value of the donated property had the provision expired) would be permanently extended. (Division Q, §115)

Regulated Investment Companies

  • The provisions under 871(k) allowing a RIC to flow-through the character of qualified net interest income and qualified short-term gains to foreign shareholders by reporting such amount would be permanently extended. (Division Q, §125)
  • The treatment of RICs as qualified investment entities under FIRPTA would be permanently (Division Q, §133)
  • Interests in RICs would not be excluded from the definition of United States real property Interests in RICs would be excluded from the interests in domestic corporations, which are eligible to be excluded from the definition of United States real property interest. (Division Q, §325) (see also International, below)
  • Dividends derived from RICs would be ineligible for a deduction for the United States source portion of dividends from certain foreign corporations. Dividends from RICs would be excluded from the definition of post-1986 undistributed United States earnings for purposes of determining the amount of a dividend paid by a qualified 10-percent owned foreign corporation for which a deduction is (Division Q, §326) (see also International, below)

Qualified Small Business Stock

  • For taxpayers other than corporations, the exclusion from gross income under 1202 of 100% of the gain recognized on the sale or exchange of Qualified Small Business (QSB) stock held for more than five years would be permanently extended. (Division Q, §126)

Estates, Gifts, and Trusts

In the area of Estates, Gifts, and Trusts, the Bill would make permanent certain charitable deduction provisions which have been subject to one-year extensions in the past. The Bill would add some additional provisions which would either add, clarify, or enhance certain charitable contributions. The Bill would also make certain changes to the valuation of certain trusts. Finally, the Bill would make certain changes and additions with respect to the recognition, termination, and appeal rights of certain tax-exempt organizations. The following is a summary of those provisions.

  • The enhanced income tax charitable deduction for certain conservation easement donations under 170(b)(1)(E) would be made permanent. (Division Q, §111(a)(1))
  • The enhanced qualified conservation contribution for certain corporate farmers and ranchers under 170(b)(2)(B) would be made permanent. (Division Q, §111(a)(2))
  • Add new 170(b)(2)(C) which would permit Alaska Native Corporations to deduct donations of conservation easements up to 100% of taxable income beginning in 2016. (Division Q, §111(b))
  • The enhanced income tax charitable deduction for certain contributions of inventory of apparently wholesome food under §170(e)(3)(C) would be made permanent. (Division Q,113). The Bill would also increase the limitation on deductible contributions of food inventory and provide special rules for valuing food inventory.
  • Provide that charitable contributions made after the date of enactment to an agricultural research organization would be subject to the higher individual limits if the organization commits to use the contribution for agricultural research before January 1 of the fifth calendar year that begins after the date of the contribution. In addition, agricultural research organizations are treated as public charities per se, without regard to their sources of financial (Division Q, §331)
  • Clarify the valuation method for the early termination of certain charitable remainder unitrusts for the termination of trusts made after the date of (Division Q, §344).
  • Require the IRS to create procedures under which a 501(c) organization facing an adverse determination may request administrative appeal to the IRS Office of Appeals. The provision would apply to determinations made after May 19, 2014. (Division Q, §404)
  • Provide a streamlined recognition process for organizations seeking tax exemption under 501(c)(4). The IRS would be required to provide a letter of acknowledgement of the registration within 60 days after an application is submitted. (Division Q, §405)
  • Permit 501(c)(4) organizations and other exempt organizations to seek review in Federal court of any revocation of exempt status by the IRS. The provision applies to pleadings filed after the date of enactment. (Division Q, §405)
  • Treat transfers to organizations exempt from tax under §501(c)(4), 501 (c)(5), and §501 (c)(6) as exempt from the gift tax for transfers made after the date of enactment. (Division Q, §408)

Reforms to Real Estate Investment Trusts

The proposed Bill would curb real estate investment trust (REIT) spinoffs, beginning December 7, 2015. In a REIT spinoff, a corporation separates its business into a taxable operating company and a real property company whose income generally is not taxable at the corporate level. The spinoff itself also is tax-free. The IRS recently has drawn attention to what it perceives to be abuses of this practice, and proposed legislation would address those concerns. With two major exceptions, spinoffs where either the distributing corporation or the controlled corporation is a REIT would no longer be eligible for tax free treatment. The first exception would be for spinoffs of a REIT by another REIT. This exception would apply where both the distributing corporation and the controlled corporation are REITs immediately

after the spinoff. The second exception would apply to spinoffs of taxable REIT subsidiaries. In this case, the distributing corporation must have been a REIT for the prior three years and the controlled corporation must have been a taxable REIT subsidiary during the same time. Neither a distributing nor a controlled corporation can elect to be treated as a REIT for ten years after a tax-free spinoff.

While tightening the rules pertaining to tax-free spinoffs, the proposed Bill would relax the Foreign Investment in Real Property Tax Act (FIRPTA) rules, which are viewed as imposing a barrier to foreign investment in U.S. real property. FIRPTA imposes income tax on foreign persons disposing of a U.S. real property interest (USRPI) and requires purchasers of those interests to withhold 10% of the sales price. The proposed Bill would raise from 5% to 10% the stake a stockholder can own in publicly traded stock of a REIT without triggering the FIRPTA withholding taxes. The Bill would also allow certain publicly traded entities to receive distributions from a REIT without the distribution being treated as gain from the sale of a USRPI.

The proposed legislation would also make numerous other changes to the REIT provisions, including modifications of the calculation of REIT earnings and profits, the rules pertaining to the types of assets a REIT may own and permissible sources of income, and the rules governing services provided by taxable REIT subsidiaries. (Division Q, §311-§326)

Reforms to the IRS and the Tax Court

The proposed Bill also includes IRS reforms to protect taxpayer rights. Beginning on the date of enactment, the IRS Commissioner would be responsible for ensuring that all IRS employees are familiar with and act in accord with taxpayer rights. Additionally, the Taxpayer Bill of Rights, as proposed by the National Taxpayer Advocate and subsequently adopted by the IRS, would be codified in the Bill. Further, the legislation would create the ability for a taxpayer who suffered an unauthorized disclosure, unauthorized inspection of returns or return information, or other offense by an officer or employee of the United States, to ascertain whether an investigation occurred, the status of an investigation, its outcome, and whether action was taken against the offending individual.

The Bill would also change several items relating to the Tax Court. One of the most significant changes would permit a taxpayer to file a Tax Court case in interest abatement matters where the IRS has failed to issue a final determination within six months. Further, the Bill would permit a taxpayer to elect small case status for interest abatement cases where the abatement does not exceed $50,000. The legislation would also clarify provisions relating to the appeal of innocent spouse relief and collections cases. For petitions filed after the date of enactment, a Tax Court decision in these cases would be appealed to the

U.S. Court of Appeals for the circuit in which an individual’s legal residence is located or in which a business’ principal place of business or principal office of agency is located. Additionally, when a taxpayer has filed a bankruptcy case and is prohibited from filing a Tax Court petition in innocent spouse relief and collection cases, the period for filing a petition would be suspended during the prohibition period and for an additional amount of time. (Division Q, §421-§441)

International

The Bill would change some of the rules under the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980, §897 and §1445. The rate of withholding from dispositions of U.S. real property interests under 1445 would be increased from 10% to 15%, but would remain at 10% for residences sold for less than $1 million (Division Q, §324). The Bill also would add two new relaxations of FIRPTA. First, §897 would not apply to real property interests that otherwise would be U.S. real property interests (USRPIs) if they are held directly by qualified foreign retirement or pension funds, or if held indirectly by them through one or more partnership (Division Q, §323). Second, the Bill would increase from 5% to 10% the ownership percentage that under §897(c)(3) allows small interests in publicly traded corporations not to be considered to be U.S. real property interests (Division Q, §322). Collaterally, constructive ownership rules under §897(c)(6)(C) would not be applied to attribute ownership of public companies to or from associated persons in making this test unless shares owned by the associated person amounted to “more than 10 percent” (an increase from “more than 5 percent”) (Division Q, §322). A slight tightening of the rule treating companies that had disposed of all USRPIs as having “purged” their own shares of status as USRPIs would be implemented by requiring the company trying to purge itself of that status not to have been regulated investment companies (RICs) or real estate investment trusts (REITs) during the relevant measurement period. (Division Q, §325)

The Bill would deny a deduction for the U.S. source portion of dividends derived from RICs and REITs by adding a new paragraph (12) to §245(a). (Division Q, §326)

The Bill also includes several international-related extenders:

  • Permanent extension of subpart F exception for active financing income. (Division Q, §128)
  • Extension of RIC qualified investment entity treatment under FIRPTA. (Division Q, §133)
  • Extension through 2019 of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules. (Division Q, §144)

Payroll

Payroll provisions contained in the Bill include:

  • Permanent extension of qualified transportation fringe transit parity becoming permanent (and retroactive—which is not payroll-friendly). (Division Q, §105)
  • Permanent extension of the military active duty wage credit. (Division, Q, §122)
  • Extension and modification through 2019 of the work opportunity tax credit for first year wages paid. (Division Q, §142)
  • Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance. (Division Q, 201)
  • “Safe harbor” for incorrect information on Forms W-2 and 1099s. (Division Q, §202)

This information is derived from a summary provided by The Bureau of National Affairs, Inc.

Medicare Taxes on High-Income Earners and Investors Continue

Posted on by

In 2015, high-income taxpayers continue to be subject to Medicare surtaxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the two taxes and what they will mean to you.

3.8% Medicare Contribution Tax on Net Investment Income

This tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts aren’t indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

Your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus your adjustments to income, such as the IRA deduction. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Take, for example, a married couple that has AGI of $270,000 for 2015, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Now assume that the couple’s AGI was $350,000. Because their AGI exceeds their threshold amount by $100,000, they would pay a Medicare contribution tax on their full $100,000 of net investment income. Their Medicare contribution tax would then be $3,800 ($100,000 × 3.8%).

Net investment income: The “net investment income” that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

However, passive business income is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to it. Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with due regard to your income needs and investment considerations.

Home sales: Many people have asked how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, say that a married couple has AGI of $200,000 for 2015 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

But if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Retirement plan distributions: Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won’t be subject to the Medicare contribution tax.

Estimated tax: The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty. We can assist you in making this calculation.

0.9% Additional Medicare Tax on Wage and Self-Employment Income

In 2015, some high wage earners will continue to pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

For joint filers, the additional tax applies to the spouses’ combined wages. For example, suppose that a married couple earns combined wages of $300,000 in 2015. On a joint return, they will pay Medicare tax of $3,625 ($250,000 × 1.45%) on their first $250,000 of wages and $1,175 on their combined wages the excess of $250,000 ($50,000 × 2.35%), for a total Medicare tax of $4,800.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer. The extra withholding can then be applied to the liability for the additional 0.9% tax.

Self-employment tax: An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds will be reduced by the taxpayer’s wage income.

For example, if a married couple has combined self-employment income of $300,000 for 2015 (and no wages), they will pay Medicare tax of $7,250 ($250,000 × 2.9%) on the first $250,000 of that income and $1,900 on the excess of their combined self-employment income over $250,000 ($50,000 × 3.8%), for a total Medicare tax of $9,150.

While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9% tax won’t generate any income tax deduction.

As you can see, these two taxes will have a significant effect on your tax picture going forward. We would be happy to meet with you to discuss these taxes and how their impact can be reduced.

Medicare Taxes on High-Income Earners and Investors

Posted on by

In 2014, high-income taxpayers continue to be subject to Medicare surtaxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here’s an overview of the two taxes and what they will mean to you.

3.8% Medicare Contribution Tax on Net Investment Income

This tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts aren’t indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

Your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus your adjustments to income, such as the IRA deduction. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Take, for example, a married couple that has AGI of $270,000 for 2014, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

Now assume that the couple’s AGI was $350,000. Because their AGI exceeds their threshold amount by $100,000, they would pay a Medicare contribution tax on their full $100,000 of net investment income. Their Medicare contribution tax would then be $3,800 ($100,000 × 3.8%).

Net investment income: The “net investment income” that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

However, passive business income is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to it. Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with due regard to your income needs and investment considerations.

Home sales: Many people have asked how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, say that a married couple has AGI of $200,000 for 2014 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

But if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Retirement plan distributions: Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won’t be subject to the Medicare contribution tax.

Estimated tax: The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty. We can assist you in making this calculation.

0.9% Additional Medicare Tax on Wage and Self-Employment Income

In 2014, some high wage earners will pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately, and $200,000 for all others. The 0.9% tax applies only to employees, not to employers.

For joint filers, the additional tax applies to the spouses’ combined wages. For example, suppose that a married couple earns combined wages of $300,000 in 2014. On a joint return, they will pay Medicare tax of $3,625 ($250,000 × 1.45%) on their first $250,000 of wages and $1,175 on their combined wages the excess of $250,000 ($50,000 × 2.35%), for a total Medicare tax of $4,800.

Once an employee’s wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. However, this withholding may prove insufficient if the employee has additional wage income from another job or if the employee’s spouse also has wage income. To avoid that result, an employee may request extra income tax withholding by filing a new Form W-4 with the employer. The extra withholding can then be applied to the liability for the additional 0.9% tax.

Self-employment tax: An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds will be reduced by the taxpayer’s wage income.

For example, if a married couple has combined self-employment income of $300,000 for 2014 (and no wages), they will pay Medicare tax of $7,250 ($250,000 × 2.9%) on the first $250,000 of that income and $1,900 on the excess of their combined self-employment income over $250,000 ($50,000 × 3.8%), for a total Medicare tax of $9,150.

While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9% tax won’t generate any income tax deduction.

As you can see, these two taxes will have a significant effect on your tax picture going forward. We would be happy to meet with you to discuss these taxes and how their impact can be reduced.

Being vigilant will help protect your cash

Posted on by

Worcester Jewish Chronicle, May 2010

Being vigilant will help protect your cash

William E. Philbrick, CPA, MST, CVA, CFF

According to the American Bankers Association 2009 Deposit Account Fraud Survey Report check-related losses exceeded one billion dollars in 2008, up slightly from the $969 million reported in 2006. One significant threat is check washing, a low tech way to alter a check you have written, but it’s easy to minimize the risk through some simple steps.

The check washer begins by obtaining your check, usually by theft from neighborhood delivery-and-collection-box units by prying open locks or removing entire units from their metal anchor, stealing mail left in unsecured mailboxes, or waiting until U.S. Postal Service collection boxes fill up on weekends, and then reaching inside to retrieve letters that haven’t dropped down.

Washing a check is a fairly simple process, and checks that lack appropriate security features and are written in standard ballpoint or felt-tip pen make prime candidates for it. 
The check washer removes or alters the payee and/or amount. Often, only the payee is changed, allowing the check to pass by unnoticed when balancing your bank statement.

Many banks and merchants have developed procedures to protect against such frauds. For example, banks may require persons who are not bank account customers to affix their fingerprints to the face of each check they cash. If the check turns out to be a washed check, there is trace evidence. Tellers and clerks generally receive training to spot distinguishable characteristics of washed checks. The training is only effective to the extent it is practiced.

There are a number of steps you can take on your own to minimize you’re your risk.

  •  Minimize the number of checks you write. Pay bills online using a secure computer. Use a credit or debit card for purchases and bill payments. Set up automatic payment plans with creditors.
  • Only use checks that contain security features, including security ink and chemically sensitive paper. Also, do not have your driver’s license or Social Security number printed on your checks.
  • Use pens containing indelible black gel inks that can’t be easily removed with water or chemicals. These special gel pens are readily available at office supply stores.
  • Never use an unlocked mailbox for incoming or outgoing mail.
  • Don’t put mail in a mailbox overnight or drop it off for pickup on a weekend. Make sure that any mail deposited into a box actually drops down into the box so that no one can reach in and remove it.
  • Strictly monitor your bank account activity. Review your bank activity for suspicious transactions as often as possible. Through online banking, you can view most transactions in real-time. View the front and back of cleared checks to verify that both the amount and payee are what you intended.
  • Reconcile your bank account statement monthly and address any discrepancies, keeping in mind that most financial institutions will only accept fraud claims within 30 days after a statement has been mailed.
  • Don’t leave blank spaces on the payee or amount lines.
  • Retain only copies of cancelled checks you may need for documentation purposes and shred originals.
  • Follow up on any suspicious or unusual calls and/or notices you receive concerning any payments you have made by check.

In the unfortunate event you become the victim of check washing, take the following steps:

  • Report the crime to police, and obtain a copy of your police report and case number.
  • Notify your bank, place any necessary stop payments, close compromised accounts, and request a refund of lost funds.
  • Notify in writing any vendors or merchants that may have accepted a washed check from your account. Include copies of the police report and notice from your bank that the account has been closed.
  • Request confirmations from any vendor or merchant involved that state that you are not responsible for the charges, and retain them for at least ten years.
  • Contact each of the three credit reporting bureaus—Equifax, Experian, and TransUnion—and request that they place a fraud alert on your account.

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Don’t Miss the Boat on Important Tax Law Changes

Posted on by

Worcester Jewish Chronicle, January 2010

Don’t Miss the Boat on Important Tax Law Changes

William E. Philbrick, CPA, MST, CVA, CFF

While there is a lot of speculation as to the fate of tax rates for 2011 and beyond, there is certainty in the tax benefits provided for 2009 and 2010 by two important pieces of legislation.

In February, 2009, the American Recovery and Reinvestment Act was signed into law and was followed by the Worker, Homeownership, and Business Assistance Act in November. The first act earmarks nearly $300 billion in tax and relief assistance, while the second act is supposedly revenue neutral by offsetting $21 billion in various provisions and benefits which were slated to expire with a like amount of revenue raisers. Many of the changes are effective retroactively to January 1, 2009.

The number of tax changes and their effects are too many for this article, but we will look at some of the key items. You should consult with your tax preparer to make sure you make the most of the changes you are eligible for.

Inflation adjustments to more than three dozen provisions will result in approximately a 4.5% increase in benefits in adjusted deductions and a similar widening of tax brackets.

The first-time homebuyer credit is extended to April 30, 2010 and you don’t need to be a first-time homebuyer to qualify. A reduced credit is available to persons who lived in their personal residence for any five year consecutive period during the last eight years. The purchase price of the new residence is limited now to $800,000. Exceed the limit and no credit is available. Unlike the original credit, there is no payback provision. The income phase-out provisions have been broadened to $125,000 for single taxpayers and $225,000 for married taxpayers. Previously married couples need to be careful that their particular situation does not taint their ability to qualify for the tax credit.

There is a new American Opportunity Credit to help pay for college in addition to an expansion of the Hope credit for tax years 2009 and 2010. Up to $2,500 of the first $4,000 of qualifying college expenses can reduce income taxes on a dollar for dollar basis. Qualifying expenses now include tuition, books, supplies and materials. Unlike the Hope Credit, the American Opportunity Credit can be used for all four years of college and is refundable up to $1,000. If there is no tax owed, up to 40% can be refundable. The full credit is available for single taxpayers with modified adjusted gross income (MAGI) up to $80,000 and married filing joint taxpayers with MAGI of $160,000. Above these levels, the credit is subject to a phase-out. Which way to go is dependent on each individual situation and requires a careful analysis to maximize the benefit.

Qualified student loan interest may be deducted off the top without itemizing if your MAGI does not exceed certain thresholds. Single filers see the deduction phased out between $60,000 and $75,000, while married filing jointly see the phase-out between $120,000 and $150,000.

The Making Work Pay Credit allows a maximum credit of $400 for singles and $800 for married filing jointly who are reporting wages. The credit is subject to reductions based on income and requires a formula calculation and certain other taxpayers are not eligible such as nonresident aliens and persons claimed as dependents on another tax return. If you fail to claim the credit, don’t expect the government to be notifying you of your lapse.

The Residential Energy Property Credit has been increased to 30% of qualifying costs with a maximum of $1,500 for 2009 and 2010 in total. Be sure the upgrade or replacement meets the federal certification requirements. The credit applies to but is not limited to, insulation materials, exterior windows, exterior doors, certain metal roofs, central a/c, hot water boilers, skylights, natural gas, oil or propane furnaces and electric heat pump water heaters.

Watch for plug-in electric vehicles coming on line in 2010, depending on their specifications, credits may be available from $2,500 to $7,500.

Bonus depreciation has been extended through December 31, 2009 for business property and has been extended in part through December 31, 2010 for certain property with a useful life to 10 years or more, transportation property and certain aircraft.

Write-offs of qualifying equipment have been extended through December 31, 2009 and the maximum amount of the deduction has increased from $125,000 to $250,000.

These are only a few of the many possible benefits you as an individual or business may qualify for 2009 and 2010. Please be sure to consult your tax preparer to maximize your benefits as after 2010, the boat will have sailed without you.

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Local CPAs Offer Advice For Closing Out The Year

Posted on by

Worcester Business Journal – December 10, 2007

LOCAL CPA’S OFFER ADVICE FOR CLOSING OUT THE YEAR – Just ‘get your ducks in a row’

LIVIA GERSHON

The start of the New Year is the traditional time for self-contemplation.  But accountants say business owners had better not wait that long.  By taking a hard look at the books in the weeks before the year ends, people who run companies may be able to save some serious money on their taxes.

One way people in the manufacturing, construction and restaurant businesses may be able to save is the “domestic productions activities deduction.”  The deduction was created as part of the American Jobs Creation Act of 2004, but previously, it offered only a 3 percent deduction on qualified production.  This year that doubles to 6 percent.

“Clients should really watch out for that,” said Harold Shapiro, a tax partner in Carlin, Charron & Rosen LLP of Westborough.

 Debate Watch

Companies structured as LLPs, S Corporations, trusts or partnerships should be sure to follow the debate in the U.S. Congress over the alternative minimum tax.  Although the tax applies mainly to individuals, those types of business entities “flow through” to their owners’ personal finances, making the tax relevant to the businesses’ planning.

William E. Philbrick, a senior vice president at Greenberg, Rosenblatt, Kull & Bitsoli, PC in Worcester, said Congress failed to pass a “temporary fix” limiting the tax’s impact before Thanksgiving but may still pass it before the end of the year.

Business owners “should be watching and talking to their accountants right at the eleventh hour,” Philbrick said.

Business owners whose tax preparers try to squeeze every penny out of the law have another new law to think about.  A tax act passed this May substantially increases the penalties on preparers who take positions that the IRS ends up disputing, according to Timothy Sullivan, a partner at Sullivan, Shuman, Freeberg LLC in Natick.

“What businesses may be finding is an increased level of concern on the part of their tax preparers because of the significant penalties that can be assessed,” he said.

Businesses are also advised to look into an increase in the value of personal property that business taxpayers can expense.

In addition, there’s a tax credit available for energy-efficient improvements to buildings.  Companies should also be aware of requirements related to the new Massachusetts health care system and new federal documentation requirements aimed at discouraging the hiring of illegal immigrants.

Aside from any new issues this year, companies should also follow some basic guidelines for closing out any calendar year.

Most importantly, Philbrick said, they should make sure all records are current and they should fully understand their financial situation.  Owners may want to defer income or maximize expenses – stocking up on office supplies and paying bills in advance, for instance.

“The best advice is basically get your ducks in a row,” he added.  “Know what your financial situation is before the end of the year.”