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Income Tax Planning

You can reverse a 2020 RMD by Aug. 31, 2020

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RMD Background

A required minimum distribution, or RMD, is the amount of money one is required to withdraw from most retirement accounts after he or she attains a certain age. Beginning in 2020 the Secure Act raised that age from 70½ to age 72. Almost all retirement accounts are affected by the RMD rules. The one major exception is Roth IRAs.

RMDs for 2020

The CARES Act suspended most RMD payments for 2020. Any taxpayer with an RMD due in 2020 from an IRA, an inherited IRA, a 401(k) or 403(b) or defined-contribution retirement plan may skip those RMDs this year. Defined benefit plans are not exempt from RMDs for 2020.

Owners of IRAs, 401(k) plans or beneficiaries of inherited IRAs who already received an RMD in 2020 have until August 31, 2020 to rollover or repay the distribution to the retirement plan. This reversal of the 2020 RMD is intended to benefit older Americans who can refrain from taking money out, making it easier for their balances to recover from the 2020 decline in security values.

Who will benefit?

The ability to reverse a 2020 RMD is not expected to help the majority of retirement account owners who rely on the retirement income to live from. This IRS provision will generally only help those who are less reliant on their retirement account funds for their living expenses. Taxpayers in high brackets stand to benefit from saving the steep income tax and keeping funds longer in a tax-deferred account.  Individuals with extremely high medical expenses in 2020, should not consider reversing the 2020 RMD. The steep medical expenses will shelter the RMD from taxes.

Don’t forget the withholding!

One must return the entire amount of the 2020 RMD to your retirement account by August 31, 2020 to qualify as a reversal. Many individuals have income tax withheld from the RMD. The income tax withheld also has to be returned – not just the amount received. The amount withheld will be credited to your 2020 income tax return. This can reduce the amount of your September and December 2020 estimated income tax payments.

Example of withholding from RMD and reversal

Retired Rita withdrew an RMD of $50,000 in Feb 2020. She had $10,000 of federal income tax withheld from her RMD and received $40,000. If Rita would like to reverse the RMD she must return the entire $50,000 to her retirement account by August 31, 2020 even though she received only $40,000. On her 2020 US Income Tax Return (Form 1040) she will receive credit for the $10,000 of income tax withheld. This will enable her to reduce her third and fourth quarter 2020 US estimated income tax payments.

Look before you leap!

Everyone’s tax situation is different. If you feel you can benefit from the 2020 RMD reversal, contact your investment advisor. You should also contact our tax accountants at Urbach & Avraham, CPAs this week to assist you in the decision.

Tax Gifts for Self-Employed

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Tis the Season – Now is the time for business owners to review potential tax saving possibilities. People who are self-employed have many opportunities to cut taxes that regular employees don’t have.

Health Insurance– Self-employed individuals can deduct health-insurance costs above-the-line. That’s better than deducting them on Schedule A, ( Itemized Deductions) where they are limited.

If the spouse of the owner is an employee and the insured person on the medical insurance, then the medical insurance premiums can be deducted directly on Schedule C as a business expense.

Health insurance premiums paid for long-term care insurance may also be deducted (with some limitations) above-the-line for self-employed business owners.

Qualified Business Income (QBI) Deduction– The 2017 tax overhaul added a QBI deduction of 20% of the net income of self-employed people. Depending upon the type of business, the 20% deduction may be limited when taxable income is $160,700 for single filers and $321,400 for married couples filing jointly. Self-employed workers whose incomes will exceed the limits may get below them by making tax-deductible donations to charity before year-end or contributing more to tax-deductible retirement plans.

Self- employed business owners whose taxable incomes are over the limits, may still receive the QBI deduction depending upon the type of business and subject to additional limits. The amount of the tax deduction will vary depending on the specific taxpayer circumstances.

Office in the Home Deduction– Many self-employed individuals operate their businesses from their home. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

More people are taking the now higher standard deduction or their real estate tax deduction is limited as a result of the state and local income tax limitation. By deducting office in the home expenses, one can deduct a portion of the mortgage interest and real estate taxes that otherwise may be not be deductible.

Retirement Plan Contributions- Self-employed individuals can often make larger tax-deductible contributions to retirement plans than employees. The 2019 contribution to a traditional IRA is a maximum of $7,000. The 2019 limits are over $50,000 for SEP IRAs and Solo 401(k)s.

Retirement Plan Deadlines– For 2019, traditional IRAs can be set up and funded until April 15, 2020. The deadline for a SEP-IRA maybe as late as Oct. 15, 2020 if a valid extension is filed. It is important to remember that requesting a filing extension does not provide an extension on paying the taxes that will eventually be due. The Solo 401(k)s have a catch: for 2019, the contribution deadline can be as late as Oct. 15, 2020. However, the plan must be set up by Dec. 31, 2019.

Review Estimated Taxes– Self-employed workers usually owe estimated taxes. There is a penalty for underpayment. For self-employed who also have W-2 wage income earned either by them or their spouses one can avoid quarterly taxes by increasing their withholding on wages. If the wage-earner doesn’t increase his withholdings until late in the year, that is fine- as long as the IRS receives about 90% of the total tax due by year-end.

Everyone’s tax and financial situation is different. Please contact a tax professional at Urbach & Avraham, CPAs about your business tax options.

 

Conducting Business in Multi-States

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Year-end is a good time to review all operations and to ascertain if you are doing business in additional states. No matter where your company is headquartered, there’s a good chance you conduct business across other state borders. How do taxes work in this situation? Learn about multi-state taxes  to ensure that your business is registered with each appropriate secretary of state, and collecting and submitting the proper taxes.

If your business is headquartered in one state, but you sell your products across the border, do you have to pay taxes in the recipients’ state? This answer depends largely on whether you have what is referred to as a “nexus,” meaning an establishment in the recipients’ state. So what is a nexus and what constitutes an establishment?

Any of the following might create a nexus in a given state:

  • A temporary or permanent office
  • A warehouse
  • A storage locker
  • A sales representative based in that state

The rules have a lot of subtleties, however, and each state may have slightly different interpretations of how the rules work, further complicating the issue. Take for example, New Jersey, which does a lot of cross-border business with New York and Pennsylvania. New Jersey says any of the following may create nexus:

  • Selling, leasing, or renting tangible personal property or specified digital products or services
  • Maintaining an office, distribution house, showroom, warehouse, service enterprise (e.g., a restaurant, entertainment center, business center), or other place of business
  • Having employees, independent contractors, agents, or other representatives (including salespersons, consultants, customer representatives, service or repair technicians, instructors, delivery persons, and independent representatives or solicitors acting as agents of the business) working in the state

Of course, regulatory changes and court cases can change this interpretation at any time. Indeed, the New York State Department of Taxation and Finance issues more opinion letters on sales tax issues than on all other state taxes combined. Many states are desperate for additional tax revenues and are very ingenious at identifying out-of-state businesses operating in their jurisdiction.

With 45 states imposing a sales tax, it’s essential you stay in touch with us to ensure that you’re in compliance. Contact one of our tax professionals at Urbach & Avraham, CPAs to review your multi-state tax situation.

Compensation- or Dividend in Disguise?

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When your corporation has a profitable year, do you take more salary or pay yourself a year-end bonus? Since you are pivotal to your company’s success, paying yourself more in the good years only makes sense. Increasing or decreasing your compensation from year to year based on company performance can also help manage your company’s cash flow — and the amount of income taxes it has to pay.

Tax Impact

A corporation may deduct compensation as a business expense if it is reasonable in amount. Distributing profits as salaries and bonuses can help minimize taxable corporate income, although you and other recipients will be taxed individually on the compensation you receive.

You may decide that paying additional compensation is preferable to paying out profits as dividends. Unlike compensation, dividends are not deductible. Result: C-Corporate profits are taxed twice — once at the corporate level and again to the shareholders who receive the dividends.

A Word of Caution

If the amount of compensation paid to you and other shareholder-employees is deemed to be unreasonable, the IRS could challenge your company’s deduction for the expense, reclassifying the “excessive” amounts as nondeductible dividends. This applies to C-Corporations.

To potentially reduce the chances of problems with the IRS, consider these strategies:

  • Divide the profits and pay out a portion as bonuses. Leave enough money in the company to generate a small amount of taxable income.
  • When setting bonuses, avoid using ownership percentages to determine the amounts shareholders will receive, since that method suggests the payment of dividends.
  • Adopt and follow a formal compensation plan for executives that includes bonus payments based on meeting specified financial goals.
  • Earmark a portion of company profits for dividends. Individual shareholders will generally pay federal income tax on qualified dividends at a maximum rate of 20%, which is significantly lower than the maximum rate on compensation and other ordinary income.

What is reasonable compensation? The following factors must be considered :

  • The profession
  • Your specialty within the profession
  • Years of experience
  • Geographic area of business
  • Job responsibilities

Your tax situation, profession and circumstances are unique. Jeff Urbach, CPA and partner at Urbach & Avraham, CPAs is an expert is determining reasonable compensation. Jeff is also a CVA (Certified Valuation Analyst) and an ABV (Accredited in Business Valuations). Contact us for a consultation regarding your situation.

Retirement Savings Credit- Who Can Benefit?

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It’s not always easy to keep contributing to your employer-provided retirement plan. Bills and unexpected expenses can eat up most of your salary, leaving little for retirement savings. You might be tempted to forget about it until you start earning more money.
But before you stop or cut back (or never start) contributing to your plan, understand that you could be entitled to a federal tax credit called the Retirement Savings Contributions Credit, or Saver’s Credit, if you meet certain income requirements. In effect, the credit repays a percentage of the contributions you make to your 401(k) or other retirement savings plan by reducing your income tax liability for the year. It may be just the thing that enables you to keep participating in your retirement plan or increase your contributions.
What It Is?
The credit is a percentage — 50%, 20%, or 10% — of up to $2,000 in qualified retirement savings contributions for a maximum credit of $1,000 (or twice that amount for a married couple filing jointly who each contribute $2,000). The percentage depends on adjusted gross income (AGI) and filing status. The credit is available for contributions to a 401(k), 403(b), governmental 457(b), SIMPLE IRA, or salary reduction SEP as well as for traditional and Roth IRA contributions.

Who Qualifies? To claim the credit, you must be at least age 18, not claimed as a dependent on another person’s return, and not a full-time student. You will not be able to claim the credit if your AGI exceeds the top of the range for the 10% credit.

                                                                                        2019 Tax Credit
Percentage of Contribution:   50%                     20%                        10%                       0% 
 Tax Filing Status                                          Adjusted Gross Income
Married Filing Jointly    $38,500 or less     $38,501-$41,500      $41,501-$64,000      > $64K
Head of Household         $28,875 or less     $28,876-$31,125       $31,126-$48,000      > $48K
All other filers*                 $19,250 or less     $19,251-$20,750       $20,751-$32,000      > $32K
*Single, married filing separately, or qualifying widow(er)

This is an excellent saving tool for those who just entered the workforce or those with a lower than usual income year. Everyone’s tax situation is different. Contact one of our tax professionals at Urbach & Avraham, CPAs to discuss your circumstances.

 

 

 

Year End Tax Planning

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Tax planning in the weeks before year-end allows you to take advantage of strategies that might reduce your income tax obligation.

Tax Savings

Capitalize on Winners
Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $434,550 ($488,850 for joint filers) in 2019.
Cut Your Tax Bite With Losers
Investments that have lost value and have consistently underperformed a benchmark over time may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to offset gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2019 can be carried over for deduction in future years, subject to the same limits.
Don’t make taxes your only reason for selling an investment. Many different factors should be considered when selling securities, including how the sale of a specific investment would affect your overall portfolio.
Curb Surtax Exposure
The 3.8% surtax on net investment income (NIIT) is a relatively new wrinkle for higher income taxpayers. The surtax comes into play when an individual filer’s modified adjusted gross income (AGI) is more than $200,000 ($250,000 on a joint return or $125,000 if married filing separately). The NIIT applies to the lesser of net investment income or the amount by which modified AGI exceeds the threshold. For purposes of the surtax, net investment income includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income from passive trade or business activities. The surtax doesn’t apply to municipal bond interest or distributions from tax-deferred retirement plans.
Several planning moves are available that may help reduce your exposure to the surtax. These include:
• Maximizing contributions to your employer’s qualified retirement plan. For 2019, you can contribute up to $19,000, plus an additional catch-up amount of $6,000 if you’re age 50 or older and your plan allows. Pretax contributions to a tax-qualified plan reduce your taxable income.
• Contributing to a traditional individual retirement account (IRA). Contributions are tax deductible if neither you nor your spouse actively participates in an employer-sponsored retirement plan. For 2019, the contribution limit is $6,000 ($7,000 with catch-up contribution- for individuals over age 50).
• Investing in tax-free municipal bonds. Be cautious, however, about investing in private activity municipal bonds, which can increase your exposure to the alternative minimum tax (AMT).
• Deferring capital gains through the use of installment sales. The installment method lets you defer taxes on the sale of certain property by recognizing profit over more than one tax year.

As everyone’s situation is different, please contact one of our tax professionals at Urbach & Avraham, CPAs, to discuss your personal circumstances