Category: Individual Taxes

Quick Notes on Education Expenses

Education Expenses Salt Lake City

Quick Notes on Education Expenses Salt Lake City

As the new school year approaches here are some things to remember regarding certain deductible and non deductible education expenses:

  1. The cost of private or parochial school tuition is not deductible. However for those children under age 13, some of the costs could be attributable to childcare and may qualify the taxpayer for a tax credit.
  2. Charitable contributions for school fundraisers are limited by the fair market value of any goods or services you receive in exchange for your donation.
  3. Earnings in 529 Plans are not taxable and can be withdrawn tax free if the money is used for eligible college expenses.
  4. Tax deferred accounts like Educational Savings Accounts can be used to pay for qualified educational expenses including books and computers for elementary, high school and for college expenses.
  5. Student loan interest is deductible as an above the line deduction, meaning you do not have to itemize in order to claim the deduction. You can deduct up to $2,500 of interest. The deduction is gradually reduced if your modified gross income is with a certain range.
  6. The American Opportunity Tax Credit is a very robust credit wherein you can get up to a $2,500 credit against your taxes per eligible student each year for the first four years of their college education. $1,000 of this credit can be refundable even if you owe no tax. Eligible expenses include tuition, books and supplies. Adjusted gross income limits also apply to this credit.
  7. A lifetime learning credit is also available for qualified education expenses paid for students enrolled in eligible educational institutions. The credit is a non refundable credit of 20% of qualified education expenses up to a maximum of $10,000 ($2,000 credit). This credit can not be taken in conjunction with the American Opportunity Tax Credit. There is no limit on the number of years this credit can be taken. Adjusted gross income limits apply.

Just some things to keep in mind as you eye the rising costs of education for your children.

Tax Strategies for Selling Business

Tax and Financial News

Tax Strategies For Selling Business Salt Lake City – A Family Affair?

Selling Business Salt Lake CityWhen it comes to selling your business Salt Lake City, finding an optimal tax strategy depends on the purchaser. Transferring a business inside a family requires very different tactics and treatment compared to a sale to an independent third party. There is no one-size-fits-all strategy; the best tax treatment is always determined by the unique circumstances of the situation Selling Business Salt Lake City.

The best tax strategy for an interfamily transfer largely depends on whether the owner has sufficient outside resources or if they are counting on the sale to fund their retirement or next venture.

In cases where the owner has sufficient resources, one option is to directly gift shares or interests in the business to family members. Gifting can trigger gift tax consequence but not income tax consequences, and the recipient assumes your cost basis in the transferred asset. Let’s look at a few scenarios to see how this could work out.

In the first example, assume that at the time of the owner’s retirement, the value of the company is $10 million. If you gift the company to family members at that time (assuming gift-splitting from a married couple), the $10 million value is assessed against your lifetime gift/estate tax unified credit), the current total unified credit in this situation is slightly less than $11 million. As a result, gifting in this scenario would not result in any tax owed and leave you with just under $1 million of unified credits to apply to other assets.

In a second scenario, assume the owner holds on to the company until death and then transfers it via their estate to family members. Also assume that the company has grown since it was worth $10 million and that at the owner’s death is now worth $40 million. In this scenario, there is now a substantial estate tax issue. So we can see that generally, if the value of a business is expected to increase substantially over time, it pays to transfer to subsequent generations sooner rather than later.

Next, let’s look at options under the opposite situation – where the owner needs to take out proceeds from the sale or transfer of the company to live on.

The first option here is that the owner could retain actual ownership and only transition management to the following generation. This allows the owner to keep an income stream from the business. The problem here is that eventually the family will end up in the same situation as discussed above, where waiting and passing the entity through the owner’s estate will result in substantial estate tax liabilities. So the question remains then, if the owner is dependent on the company for income, what can be done to avoid estate taxes upon transfer?

The second option is that the owner sells the company to the next generation. In this case assume the children do not have the cash to buy the business outright, so the owner issues a note to enable the purchase at the time that the business was worth $10 million. Here, issuing the promissory note would essentially freeze the transfer value at $10 million. The purchasing children would then pay deductible interest on the promissory note to the parents out of income from the acquired company. At the time of the issuer’s death, the children’s own promissory note would pass to back to themselves. The issue here is that upon the sale of the company, the parent would realize a capital gain and incur an income tax liability. Overall, it is likely (but not certain, dependent on the exact situation) that the capital gains tax on an early sale is likely to be far less than the estate tax incurred on a transfer at death after significant appreciation.

As you can see, there are many variables and options at play in transferring a company to the next generation, so it is best to plan ahead with the help of qualified professionals.

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Areas of Services: Selling Business Salt Lake City, Selling Your Business, CPA Firm Sandy UT, CPA Sandy UT, Accountant Sandy UT, Taxes Sandy UT

Estate Planning Sandy UT

Estate Planning Sandy UT

Same-Sex Marriage Can Be Taxing

Estate Planning Sandy UTIn the case Windsor vs. U.S., the Supreme Court struck down the main provision in the Defense of Marriage Act (DOMA) that defined marriage for federal purposes as between a man and women. Generally, the Windsor case was not viewed as a tax case; however, there are profound and far-reaching tax consequences of this ruling. Estate Planning Sandy UT. The Supreme Court’s decision now requires the federal government to treat same-sex couples the same as married heterosexual couples if they are legally married in one of the states that permits same-sex marriage. Many questions still remain unanswered, such as how to resolve conflicts between state laws and to what extent these changes will be applied retroactively. There are a number of clear and present issues that impact tax law right now.

There are three main tax effects that result from this ruling. First, there is the right to file a joint tax return. Filing a joint tax return might result in a lower total tax liability for the couple. Typically, this is advantageous when one spouse is a higher wage earner than the other; however, it can actually create higher taxes if both spouses earn similar amounts and are highly paid. Depending on an analysis of the situation, it could be advisable to file amended tax returns or protective refund claims. Favorable situations could be where the couple would have lower taxes as result of filing jointly or where one spouse had capital gains that would have been cancelled out by the capital losses of the other spouse. The general statute of limitations for refunds is the latter of three years from the date of filing or two years from payment.

While the Windsor case itself applied retroactively in granting an estate tax refund, it is currently uncertain how the IRS will apply the decision to individual tax returns; retroactively to all cases where the statute of limitations has not run, only prospectively or only where protective refund claims have been filed.

Second, employers need to make the necessary administrative tax changes and adapt for the new benefits that married same-sex couples now qualify for. Employees’ withholdings might need to be updated to reflect their new filing status. Health coverage provided to same-sex spouses could now be tax-free. Additionally, pension and other retirement plans might also require tax-related administrative changes.

Third, ESTATE PLANNING Sandy UT is subject to major changes as a result of this ruling. Married couples receive favorable treatment on many estate and gift tax provisions. Same-sex couples should update their plans to take advantage of these changes:

  • The ability for the estate of the first spouse to die to transfer any unused exclusion amount to the surviving spouse.
  • The opportunity to receive a marital deduction for amounts transferred to the surviving spouse.
  • The ability to make split gifts.
  • The opportunity for either spouse to use the marital deduction to transfer unlimited assets to the other spouse during their life gift-tax free.

While these three issues reflect the major changes of the DOMA ruling, many other more minor tax changes result as well such as the deductibility of alimony.

There are two major caveats to the Windsor ruling. First, there are currently no decisive regulations or laws for same-sex couples who were legally joined together under marriage-equivalents such as domestic partnerships or civil unions. In cases where these situations apply, it might be worth filing protective refund claims in hopes that this issue is resolved in favor of marriage-equivalent relationships. Second, it is unclear how the changes in the law will apply where a same-sex couple work and live in states where one recognizes their marriage and the other does not.

If you think these changes could a have significant impact on your tax situation, give us a call to discuss how we can help analyze your personal situation.

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CCH 2012 TAX BRIEFINGS – INDIVIDUALS – Salt Lake City Accountant

Salt Lake City Accountants

INDIVIDUALS

President Obama campaigned on a promise to extend the Bush-era tax cuts for lower and moderate income individuals, but to allow them to expire for higher-income individuals. The President is not expected to change his position after the election, but there could be some compromises on the income thresholds that trigger the higher rates.
Income Tax Rates

If Congress approves the President’s proposal, the individual income tax rates would be: 10, 15, 25, 28, 33, 36, and 39.6 percent for 2013 and subsequent years. Alternatively, Congress could extend all of the Bush-era tax rates through 2013 or, in a deadlock, take no action and allow the Bush-era tax rates to sunset. Full sunset for lower and middle-income taxpayers—which would reinstate a 15, 28, 31, 36 and 39.6 percent bracket structure—is highly unlikely from a political and economic standpoint.

IMPACT.
Under President Obama’s proposal, the 36 and 39.6-percent rates would start at a higher-income bracket level of $200,000 for single filers, $250,000 for joint filers, $225,000 for head-of-households, and $125,000 for married taxpayers filing separately. Since these thresholds were initially proposed in 2009, they would also be indexed for inflation. Also they would be keyed to adjusted gross income (AGI) rather than taxable income. Indexed 2013 projections for those AGI levels, based on the Administration’s FY 2013 Budget, are $213,200 / $266,500 / $239,850 / and $133,250, respectively.

For a married couple filing a joint return, the tax brackets under President Obama’s plan would be:

Tax Rate 2013 Taxable Income

10% $0-$17,850

15% $17,850-$72,500*

25% $72,500-$146,400

28% $146,400-$223,050

33% $223,050-$266,400

36% $266,400-$398,350

39.6% $398,350+

* Also assumes continuation of marriage penalty relief
For a single individual, the tax rates under President Obama’s plan would be:

Tax Rate 2013 Taxable Income

10% $0-$8,925

15% $8,925-$36,250

25% $36,250-$87,850

28% $87,850-$183,250

33% $183,250-$213,200

36% $213,200-$398,350

39.6% $398,350+

IMPACT.
As part of the automatic sunset of Bush-era tax benefits, after 2012 higher-income taxpayers also would once again be subject to the Personal Exemption Phaseout (PEP) and the Pease Limitation on itemized deductions (named for the member of Congress who sponsored the legislation). Alternatively, President Obama has proposed replacement of the PEP and Pease Limitation with a limit on the value of itemized deductions for higher-income taxpayers. The President would limit the value of otherwise allowable deductions to 28 percent of AGI for those in his proposed 36 and 39.6 percent tax brackets.

During the campaign, the President said he saw no way to accommodate Governor Mitt Romney’s plan to reduce the individual income tax rates by 20 percent across the board in exchange for a reduction in the number of deductions and loopholes currently available. Obama maintained that he would not support a proposal in which “the numbers don’t add up.”

Comment
The IRS has delayed issuing some 2013 inflation adjustments, including those affecting tax rate brackets, pending action by Congress. The IRS is expected to move quickly to release these inflation adjusted amounts as soon as legislation is passed by Congress and signed by the President.

Capital Gains/Dividends
President Obama campaigned on allowing the Bush-era tax cuts—including the reduced capital gains and dividend tax rates—to expire for higher income individuals, and he is not expected to change his position now. Under the President’s proposal, the current zero and 15 percent capital gains and dividend tax rates would be extended after 2012 for single individuals with incomes below $200,000 and families with incomes below $250,000.

The President’s proposal would increase the tax rate on qualified capital gains to 20 percent for single individuals with incomes over $200,000 and married taxpayers filing a joint return with incomes over $250,000. Regarding dividends, single individuals with incomes over $200,000 and families with incomes over $250,000 would pay tax on their dividends as ordinary income.

IMPACT.
For dividends, the increase in tax rate for higher-income taxpayers represents almost a 300 percent increase when a top 39.6 percent rate is combined with the new 3.8 percent Medicare contributions tax on net investment income (NII). Combined with a jump in the capital gains rate from 15 percent to 20 percent (23.8 percent with the NII tax), some economists are predicting a massive market sell-off at year end as taxpayers engage in basis-resetting strategies and reallocation of portfolio assets. To create a softer landing, one proposal would raise rates for taxpayers only with incomes above $1 million, at least for the 2013 period until a more permanent structure under the umbrella of tax reform could be enacted.

Comment
Under current law, taxpayers in the 10 and 15 percent income tax brackets pay zero percent tax on qualified capital gains and dividends.

Alternative Minimum Tax
If the alternative minimum tax (AMT) exemption amounts are not patched for 2012, they would be dramatically less than the exemption amounts for 2011. Under current law, the AMT exemption amounts for 2012 are $33,750 for single individuals, $45,000 for married couples filing joint returns and surviving spouses, and $22,500 for married couples filing separate returns. In comparison, the AMT exemption amounts for 2011 were $48,450 for single individuals, $74,450 for married couples filing joint returns and surviving spouses, and $37,225 for married couples filing separate returns.

In early 2012, President Obama proposed replacing at least a portion of the AMT with the so-called “Buffett Rule,” essentially the principle that millionaire taxpayers should not pay a smaller effective rate of income tax than middle-class families. Although the Senate voted on a version of the Buffett Rule, the proposal was never taken up by the House.
In announcing the Buffett Rule, President Obama asked Congress to pass measures that ensure individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent. The Senate approved the legislation that would subject taxpayers earning over $2 million to a 30 percent minimum federal tax rate. The tax would be phased in for individuals with incomes between $1 million and $2 million, with those taxpayers paying a portion of the extra tax required to get them to a 30 percent effective tax rate.

IMPACT.
The need for an AMT patch retroactive to the start of 2012 may force the lame-duck Congress to consider at least a small tax bill before 2013 in order to give the IRS time to finalize 2012 tax forms and start the 2013 tax return season on time.

Comment
Proposals for replacing or repealing the AMT appear to be made as long-term solutions. The AMT brings in a considerable amount of revenue and cannot be easily replaced. A tax on millionaires may not bridge that revenue gap. A solution that is rolled up into the umbrella of overall tax reform appears to be one focal point for tax policy now being pursued.

Child Tax Credit
After 2012, the $1,000 child tax credit is scheduled to revert to $500 per qualifying child. President Obama campaigned on the promise to make permanent the $1,000 child tax credit and is expected to support legislation that will do so.

Comment
Taxpayers who cannot take full advantage of the child tax credit because the credit is more than the taxes they owe may receive a payment for some or all of the credit not used to offset their taxes. The 2010 Tax Relief Act reduced the minimum earned income amount used to calculate the additional child tax credit to $3,000. President Obama has proposed to make permanent the $3,000 threshold.

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