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Israel now Taxing US Trusts with Israeli Beneficiaries

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If you have family living in Israel for whom you set up an irrevocable trust, Israel now wants its share. Until 2014, irrevocable trusts settled by foreign residents in favor of Israeli resident beneficiaries weren’t taxed by Israel unless the beneficiaries exercised “control or influence” over the trust. This is no longer the case.

Beginning January 1, 2014, Israel is taxing any trust anywhere in the world that has an Israeli resident beneficiary. There are two types of Israeli Beneficiary Trusts.

A Relatives Trust (or Family Trust) is a trust where the settlor is the parent, spouse, child, grandchild or grandparent of the beneficiary.

A Non-Relatives Trust is all other Israeli Beneficiary Trusts.

If the trust is a Relatives Trust, the trustee must choose between two possible tax regimes. Israel will impose a tax rate of 30% of income distributed to beneficiaries. Alternatively, it’s possible to elect to be taxed at a rate of 25% on annual trust income regardless of distributions.  An irrevocable election must be made by June 30, 2014 to choose the tax regime.

An exception applies to new and senior returning residents (who lived abroad 10 years) who arrived after 2006. They enjoy a 10-year Israeli tax holiday regarding overseas income, gains and asset reporting.

Thinking about excluding Israeli resident beneficiaries? It’s not so simple. The new 2014 rules impose Israeli tax on all trusts that ever had Israeli resident beneficiaries since inception. Consultation with qualified and competent U.S. and Israeli tax professionals is critical to deal effectively with the new tax liability.

 

 

Avoid NJ DOL Audits- S-Corp Owners Should Take Reasonable Compensation

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Wages vs. S Corp. Income

In an S-Corporation, a popular choice of tax entity among businesses, an owner who works for the company is required to take wages. How much of the company’s income is classified as wages versus S Corp. income (reported to the owner on Form K-1) is up to the owner. The net income will be taxed regardless of how it’s classified. The big difference lies in federal employment taxes, which are not paid on K-1 income. Another consideration is that K-1 income is exempt from the new 3.8% Medicare tax. So it would seem like a no brainer to take the lowest salary possible, right? Think again. There are significant downsides to consider before taking an unreasonably low compensation.

Risk of IRS Penalties

Let us assume Sam Success worked full-time as the manager of his staffing agency, which has net income of $200,000 this year. If he decides to avoid payroll taxes and classify $20,000 as wages and $180,000 as K-1 income, the IRS will probably notice. Using industry averages and other factors, it will argue that the compensation was unreasonable and will therefore impose steep penalties on top of the payroll taxes owed for the difference between the unreasonable $20,000 and what they determined is reasonable compensation.

Avoid NJ DOL Audits

Even if the IRS doesn’t take notice, the State of New Jersey has taken an aggressive stance with regard to unreasonable compensation. New Jersey is looking to collect state unemployment insurance (SUI), and if Sam Success’ salary is less than the SUI threshold ($31,500 in 2014) it will likely be scrutinized.  The number of such NJ DOL audits is on the increase. Moreover, New Jersey will inform the IRS after taking its share.

Less Disability Coverage

If Sam Success was injured by an insured party, he wouldn’t be able to argue that as manager of a staffing agency he deserves at least $100,000 for lost wages. Since he only classified $20,000 as wages, he cannot claim that his lost wages are greater.

Goodbye Social Security and Pension Benefits

The amount one receives from Social Security depends on one’s wage income or other income subject to Social Security tax. By minimizing his wages, Sam is also minimizing his potential benefits. In addition the company’s contribution to his pension is based on his wages. Lower wages equals lower pension benefits.

Keep it Reasonable

When it comes to determining wages from your S-Corporation, reasonable compensation is the way to go. Your tax professional can advise you in determining just the right amount to classify as wages in order to maximize the tax advantages, while avoiding the aforementioned pitfalls.  

How Does the IRS Find Foreign Account Owners?

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Do you have income overseas you forgot to report? Did Grandpa leave you his foreign bank account when he passed away? If you have foreign bank accounts holding more than $10,000 in the aggregate anytime during the year, you are required to file an FBAR (Report of Foreign Bank Accounts) by June 30th of the following year. It doesn’t matter whether the foreign accounts generate income or not; just owning them, or having signature authority, requires you to file. (For more information regarding the FBAR, click here: Foreign Asset Reporting)

If the thought has crossed your mind to not file and hope for the best, think again. With the increasingly aggressive tactics being taken by the U.S. Treasury and Justice departments, this has become a very risky proposition. The U.S. is entering into settlements with many foreign banks that provide for fines in exchange for nonprosecution agreements for banks that facilitated American tax evasion.  As part of these settlements, the foreign banks hand over the names of their U.S. customers. Moreover, in July 2014 the Foreign Account Tax Compliance Act (FATCA) will go into effect, requiring international financial institutions to turn over all the information on their US account holders.

In 2009, as the IRS became aware of increased offshore tax abuse, it initiated the formal Voluntary Disclosure Program for offshore accounts. While making a voluntary disclosure doesn’t guarantee immunity from prosecution, taxpayers making truly valid disclosures are rarely, if ever, prosecuted.

It’s important to realize that the Voluntary Disclosure Program essentially sets up a race between you and the IRS. In order to avoid criminal prosecution you must come forth before the IRS comes knocking. A growing number of foreign banks are sharing American accountholder information with the IRS, so time is of the essence.

While the current voluntary disclosure program is currently running indefinitely, the rules can change at any time. The FBAR penalty has been raised in 2012 to 27.5% of the largest balance during the period covered by the voluntary disclosure. Sounds like a steep price to pay? The penalties are far greater if you don’t “get with the program” and then get caught. In addition, disclosing now allows you to transfer the money to your American accounts as well as to implement gifting and many other estate planning strategies.

 

Upcoming UA Seminar: Do You Know the Real Value of Your Medical Practice?

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You probably think you already know the value of your business. After all, who would know it better than the owner? The reality is, however, that there are several factors that impact the value that many business owners are unaware of.  This topic will be addressed at the upcoming complimentary U&A seminar, the first installment in a four part series tailored to medical and healthcare professionals. Issues covered will include:

  • What elements and factors enter into the value of your healthcare practice?
  • How can you increase and maintain the value of your medical practice?
  • How and why CPT codes and RVUs impact value
  • Value for Divorce vs. Value for Buy-Ins/Buy Outs
  • Starker I and II: a brief overview of these fundamental laws 

 The seminar will take place in our office (1581 Route 27, Edison, NJ) on Tuesday morning, Dec. 10th, at 8:30 am to 10:00 am and will be presented by Jeffrey D. Urbach CPA/ABV (Accredited in Business Valuations). Jeff, who has co-authored Continuing Professional Education (CPE) courses in the field of business valuation, will explain the benefits of understanding your practice’s value. He will also highlight the various factors that can impact its value.

For more information, click here: Medical Seminar Flyer

 

 

Executors Beware: NJ Law Requires Child Support Search Prior to Distribution

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If you are executor of an estate in New Jersey and intend to make a distribution to the beneficiaries, there’s one important step you need to take first. NJ law requires an executor/administrator to initiate a child support enforcement order for any beneficiary receiving in excess of $2,000 prior to the distribution. The executor is personally liable for making a distribution without initiating the order, as the Child Support Judgment is a lien against the net proceeds of any inheritance in NJ.

The search must be conducted by a private judgment search company that will verify results. Urbach & Avraham’s estate administration services include the performance of Child Support Searches. If you would like assistance with your Child Support Search, call us at 732-777-1158 or email Pamela at pma@ua-cpas.com