Among the many financial and emotional issues that couples will encounter on their road to a divorce are the implications that a final dissolution of marriage will have on their taxes. Following are some important tax-related issues for separated and divorcing couples to keep in mind.
Tax Filing Status
Legally separated and divorced couples have the option to file their individual tax returns as single taxpayers, or they may choose to file as heads of household when they have custody of minor children and are not married on the last day of the year. Couples whose divorces have not become finalized by the last day of the calendar year have the option to file a joint tax return as married filing jointly, or they may file two separate tax returns as a married couple, whichever will result in a lower tax burden. Often, this determination is best made under the guidance of an accountant, who can run the numbers for each filing status and determine which is more financially advantageous.
Estimated Tax Payments
Couples that make quarterly estimated tax payments during their marriage must determine which spouse will receive credit for those payments and any overpayments made in the year prior to a legal separation or divorce. While the credit will typically apply to the former spouse whose social security number is listed first on a prior year’s tax return, the IRS allows divorcing couples to come to an agreement to allocate estimated tax payments in any manner they choose. For example, a couple may agree to divide the payments equally, or they may choose to allow one individual to claim all of the payments, leaving the other individual with none. When agreement cannot be made, the IRS will typically divide the credit for prior year estimated tax payments proportion to each party’s separate tax liability. On a related note, taxpayers should remember that a divorce will ultimately change the amount of estimated taxes they will be required to pay each quarter.
Alimony and Child Support
The alimony an individual pays to a former spouse is tax deductible to the individual making the payments, as long as those payments are a requirement contained in a divorce decree or separation agreement. Any money given voluntary to a former spouse, outside of the final dissolution of marriage, is not deductible.
Alimony recipients must include those payments as a part of their taxable income on their annual tax returns. Under certain circumstances, it may be advantageous for recipients of spousal support to make estimated tax payments throughout the year or increase the amount of taxes withheld from their wages in order to avoid the possibility of a significant tax bill that alimony payments will create.
Individuals who change their names after a divorce must notify the Social Security Administration (SSA) to ensure that the name on file with the SSA matches the name on their tax return. This can be accomplished by completing Form SS-5, Application for a Social Security Card, which can be found online at www.SSA.gov or by calling (800) 772-1213.
In addition, individuals who purchase health insurance through an Affordable Health Care Marketplace must report to the Marketplace any changes to their names or addresses. Should an individual lose health insurance due to a divorce, he or she must enroll in new coverage during the Special Enrollment Period. Obamacare requires all individuals to have coverage for every month of the year or risk exposure to an individual shared responsibility payment.
Investments and Financial Accounts
To ensure that one spouse does not remain responsible for the liabilities of the other spouse, it is recommended that divorcing couples close joint credit card and bank accounts. One a couple settles all of their marital debts, each spouse should then open new accounts in their own names. It is equally important that individuals update the named beneficiaries on all of their financial accounts, including retirement plans and insurance policies, to ensure that their assets will not be passed to an ex-spouse upon their death. Any contributions an individual makes to his or her Individual Retirement Account (IRA) before the issuance of a final divorce decree is tax deductible only to that individual; Contributions made to a former spouse’s IRA are not deductible.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at firstname.lastname@example.org.
As more businesses outsource operation-critical applications and services to third-party providers, they demand assurances that the vendors with whom they choose to work abide by the highest levels of security, availability, processing integrity, confidentiality and privacy requirements. They need to know that their partners’ offerings provide a solution for improving business processes. In today’s environment, they also need confidence that their partners have in place the appropriate controls to manage data security, compliance and regulatory risks. After all, if a business customer’s confidential data is exposed due to a security breach at the service organization level, it is the business that will be held responsible and risk loss of customers and reputation.
To help service organizations build trust among its business partners, many are turning to independent CPA firms to audit and prepare formal reports about their Service Organization Controls (SOC). These SOC audit reports demonstrate that service providers employ best practices for monitoring controls and managing risks in a changing business environment. For example, the reports are applicable to software as a service (SaaS) cloud-based applications; cloud computing and data storage; payroll processing, billing and collection services; as well as financial institutions and health care providers that must abide by customer confidentiality and data privacy provisions of the Gramm–Leach–Bliley Act (GLBA) and Health Insurance Portability and Accountability Act of 1996 (HIPAA), respectively.
While the American Institute of CPAs (AICPA) created the SOC framework some time ago, it adopted new guidance in May 2017 to replace the previous “Statement on Standards for Attest Engagements” (SSAE 16) in favor of a simpler SOC 1 report on “Concepts Common to all Attestation Engagements” (SSAE 18). By consolidating multiple attestation standards that clarify the assurance services provided by independent CPA firms, the new guidance includes the following principles:
- Service organizations must more effectively monitor the controls of their subservice organizations. An example of a subservice provider would be Amazon Web Services, which provides third-party remote infrastructure and cloud computing services. The stricter rules require new processes for vendor management services to reconcile output reports, test controls at the subservice organization, make regular site visits to the subservice location and monitor external communications, such as customer complaints about the organization.
- SOC reports must include “Complementary Subservice Organization Controls.” This requires service organizations to include controls performed by subservice organizations into the design of their overall controls and control system descriptions.
- Service organizations must provide auditors with more evidence to support the accuracy and completeness of their controls along with management’s sign off on their assertions.
- SOC auditors must conduct more in-depth risk assessments to better identify the risks of material misstatement in an engagement and the level of audit work to be completed at the subservice organization.
SOC reports will continue to address the AICPA’s Trust Service Principles of security, availability, processing integrity, confidentiality and privacy, and provide businesses with assurances that service providers have in place good internal controls around the interrelated components of the control environment, risk management, information and communication, monitoring, and control activities. Additionally, SOC examinations provide service organizations with an opportunity to enhance their business processes and ensure that they meet industry best practices. The three types of SOC reports include:
- SOC 1 Reports address service organizations’ internal controls surrounding their reporting of financial information. The two types of a SOC 1 report include those that substantiate “Suitability of Design at a Point in Time” (Type 1 Report), and those that will substantiate “Suitability of Design and Operating Effectiveness over a Period of Time” of typically six to 12 months (Type 2 Report).
- SOC 2 Report address the design and effectiveness of service organizations’ controls related to security, availability, processing integrity, confidentiality and privacy, both at a point in time (Type 1) and over a period of time (Type 2).
- SOC 3 Reports also address the security, availability, processing integrity, confidentiality and privacy of service organizations’ systems. However, the information is provided in a summarized format, which service organizations may use as a broad marketing statement attesting to the design or operating effectiveness of their controls.
Berkowitz Pollack Brant’s Business Consulting Group is registered with the AICPA to provide service businesses with SOC audits and reports that help improve transparency and build trust among service organization’s current and prospective customers.
About the Author: Steve Nouss, CPA, is chief consulting officer with Berkowitz Pollack Brant, where he provides profit-enhancing CFO services, operational reviews, enterprise risk management, internal audit and anti-fraud services for businesses of all sizes. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
It is not uncommon for taxpayers to realize that they left out important information from their federal tax returns long after the April 15th filing deadline. The IRS recognizes that mistakes can happen and has in place a simple process that allows taxpayers to update and make corrections to an already-filed tax return.
Correcting an Already-Filed Tax Return
To file an amended U.S. individual tax return, taxpayers need only complete IRS Form 1040X on paper and mail it along with updated supporting forms, schedules and any additional tax liabilities to the address listed on the form’s instructions. Paying any additional amounts in taxes as soon as possible is critical for limiting potential interest and penalty fees. When amending tax returns for more than one year, taxpayers will need to file separate 1040Xs for each tax year and mail them in separate envelopes. Electronic filing of Form 1040X is not permissible.
When to Amend a Tax Return
It is equally important that taxpayers know when it is appropriate to file amended returns. For example, there is no need to correct math errors or account for missing documentation, such as W-2s, that were not attached to an already-filed return. Typically, the IRS will catch and fix these mistakes and advise the taxpayer of any adjustments it made.
Filing an amended return is recommended when a taxpayer made mistakes to his or her filing status, number of dependents or when he or she reported the wrong amount of total income. It is also appropriate to amend a return to claim unused deductions or credits or to remove these items when a taxpayer was not entitled to them.
Generally, taxpayers have three years from the date of filing their original tax returns to file an amended return, or they may file within two years from the date they paid the tax, whichever date is later. However, taxpayers who expect a refund from their original return filing should wait until they receive the refund before filing an amended return. It is okay if the taxpayer cashes the refund check from the original return before receiving any additional refund from the IRS.
How to Prepare an Amended Tax Return
It is advisable that taxpayers to engage the services of experienced tax accountants when filing amended tax returns. These professional understand the process and requirements for making changes to an already-filed return, including checking the accuracy of calculations and providing an explanation for the change.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at firstname.lastname@example.org.
You are an entrepreneurial Boomer-generation business owner, and you are facing the daunting challenge of selecting a successor to lead your life’s work. You have arrived at the conclusion that this may be one of the most difficult decisions you will ever face. Whether you intend to pass your legacy to a family member or to a member of the business’s next generation of senior executives, you must begin planning early for a smooth transition of management and innovation that will sustain the business and provide a steady income stream for you and key stakeholders for multiple generations.
As technology threatens to disrupt your well-thought-out succession plan, your plan will require extensive management and, most likely, revision. Following are considerations that founding owners should address when preparing their organizations and themselves for a smooth succession of management to the next generation of leaders.
Develop a Pipeline of Future Leaders
You understand that it is not enough to recruit and hire the right people; you must also provide appropriate tools and support to help employees develop their talents and move their individual careers and the organization forward. The more prepared workers are to step into leadership positions, the smoother management transitions will be for the entire organization.
Employee-training and leadership-development programs are critical elements that will enhance a company’s culture and its ability to recruit and retain multiple generations of future leaders. Helping your team members hone their technical and soft skills demonstrates your commitment to support their success. When you invest in these programs, you provide a clear path to career advancement and incentivize your team to take on more responsibility. Performance and prospects for advancement are based on well-defined and objective criteria that promote the right team members into leadership roles. Your team will most likely stay engaged in pursuing their careers and aligning their professional goals with those of your business while supporting the business’s efforts to move forward and grow.
If you had to walk away from your business unexpectedly, or if you became ill, would your employees know who to turn to for leadership? Would the selected executive be able to lead the organization and ensure continuity of services? Would the strategy and culture which served as a foundation for your business’s success be preserved?
When leaders are given adequate time to develop in an organization, they have the advantage of receiving many years of hands-on mentoring and guidance from their predecessors. This allows them the opportunity to integrate slowly into management positions while testing and refining their capacity to lead. It also provides them with the time to build and enhance their relationships with coworkers, clients and other stakeholders upon which the business’s continuity, and profitability, relies. As each generation of workers moves up in an organization, they develop their own support teams and mentor and empower the next generation to innovate and steward the business into the future. The greatest challenge of great leaders is to develop great leaders.
From the perspective of founding owners, developing a pipeline of future business leaders improves the likelihood that their legacies will be preserved and the corporate culture and value that they created will be protected and positioned to face the relentless competition every legacy business faces. The larger the talent pool of capable successors, the easier it will be for the founding owner to step into an advisory role and eventually transition out of the business, if that is his or her ultimate goal.
Understand that the Path to Retirement and Management Succession is a Process
Before even thinking about a succession plan, you should first consider your ultimate needs and goals for the future and balance them against those of the organization you built. Are you looking to make a quick exit or merely slow down and cut back your hours? Is the transfer of management expected to result in your relinquishing control of the business or refocusing your role in the organization? How will you be compensated before, during and after the transition process? Will there be a buyout and an employment contract or alternative structures to accommodate your needs?
The transfer of organizational leadership is not a single, isolated event in a business’s life cycle. Rather, it is an ongoing, multi-phase process that requires many years of meticulous planning, coordination and implementation across multiple levels of an organization. Businesses must commit a significant investment of time to assess and prepare their processes, operating systems, resources and people for the transition while addressing a broad range of unexpected circumstances that can delay or impede a well-thought-out plan.
Similarly, it is crucial that you prepare yourself for the roles you will play through all phases of the management-transfer process. You must tread carefully to support and mentor your incoming CEO without letting your power overshadow your successor’s efforts to lead and effectuate change. This requires that you have faith in the next generations’ abilities and give your successor the room to make decisions that effectively guide the business’s future. While you should willingly loosen your grip on the company’s reins, you should by no means step aside. You may want to intercede when you perceive a major problem, but you must get comfortable watching your successor make mistakes because that will be the final step in his or her assumption of power. You made mistakes, and you know that the formative moments came when you resolved those mistakes. You can provide great value moving your organization forward when you transition into an advisory role and are able to fill in gaps that affect the organization’s operations or long-term strategy. You must be careful to avoid becoming an anchor by imposing your influence inappropriately and impeding your successor’s ability to adapt and innovate.
For example, you may remain active in a business’s recruitment and employee-development programs in order to keep the pipeline of future leaders full and ensure that new hires have the depth of knowledge to weather any storm and steer the organization forward. Yet, you must also be careful to take into consideration that new leadership may have their own idea of the type of talent they will require for the business to be successful going forward. You may also focus your attention toward raising the visibility of your business’s brand, cultivating new and old business relationships, or sharing your knowledge and leadership with non-profits and civic organizations. While your responsibilities will change, you may find your schedule just as full as it was previously. Yet, because you will not be mired in the day-to-day operations of running the business, you may gain a new perspective that will enable you to identify new opportunities to support company culture while sustaining your organization into the future.
Make it a Priority to Regularly Review and Refine Succession Plans
Even with the best-laid plans, financial conditions and life circumstances can put a significant dent in your path to retirement and wreak havoc on an organization’s leadership transition. To avoid these scenarios, businesses should begin succession planning as early as possible and consider their plans to be dynamic and evolving strategies that require regular reviews and modifications to adapt to external market forces and/or shifts in the business’s own operations. Failing to update these plans and manage any part of the succession process, including the selection of a successor, can come at a very high cost in terms of lost clients, lost revenue and loss of income for founding owners and employees.
Berkowitz Pollack Brant advises companies of all sizes on succession planning techniques and conducts exit strategy discussions with business owners and founders. Our experience can be a valuable asset as you work through these issues and set the stage for a successful transition.
About the Author: Richard A. Berkowitz, JD, CPA, is founding and executive chairman of Berkowitz Pollack Brant, where he provides business consulting, growth strategies and succession-planning consulting to entrepreneurs and companies. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
Commercial and residential real estate in the U.S. continues to be a safe haven for foreign investors who seek the potential for higher yields and capital preservation than they may receive in their home countries or from portfolio investments. However, the potential upside from an investment in the U.S. real estate market comes with the costly risks of exposure to a complicated web of U.S. tax liabilities and reporting requirements. Failing to prepare in advance of one’s intention to invest in American assets can be quite costly.
Understand the Difference between U.S. Tax Status and Immigration Classification
A foreign person’s immigration status may be different from his or her tax status. Under U.S. tax laws, foreign individuals are considered resident aliens or non-resident aliens, depending on whether or not they meet certain tax residency thresholds.
Nonresident aliens (NRAs) are required to pay U.S. taxes on income derived from U.S. sources. Net income from a rental property is generally subject to income tax on an annual basis. For NRAs, such income is taxed at graduated rates that may be as high as 43.4 percent, while a corporation (whether domestic or foreign) may face a 35 percent rate on such income. If real estate owned by an individual is sold after being held more than one full year, a reduced long-term capital gain tax rate will apply. There is no such reduced rate for a corporation.
NRAs or foreign entities that sell an interest in U.S. property may fall under the regulations of the Foreign Investment in Real Property Tax Act (FIRPTA), unless they qualify for an exception. FIRPTA requires property buyers to collect from sellers and pay directly to the IRS a withholding tax equal to 15 percent of the gross sales price. The IRS will consider the amount held back to be an NRA’s “deposit” on the income tax liability that he or she will generate from the sale of U.S. situs investment property, and the agency will apply that withholding amount as a credit against the seller’s final tax liability.
U.S. gift and estate tax will apply to NRAs who gift or donate U.S. situs property to another individual or to NRAs who die while owning U.S. situs property, regardless of whether the recipient or heir is a U.S. resident or a NRA. U.S. gift and estate taxes can be as high as 40 percent of the value of an NRA’s “U.S. situs” property that is located, or considered to be located, in the U.S. Unlike U.S. citizens and residents who have the ability to exclude $5.49 million from their taxable estates (or $10.98 million for married couples filing jointly), NRAs have a very limited estate tax exemption that protects only the first $60,000 of the value of their U.S. assets. This often leaves heirs of NRAs with a heavy and unexpected U.S. estate tax burden.
For gift and estate tax purposes, real estate located in the United States will always be considered U.S. situs property as will stock of a U.S. corporation.
Choose the Right Structure to Hold U.S. Real Estate
The tax consequences of investing in U.S. real estate depend largely on the way that the property is held. The goal of trying to minimize the impact of income taxes often conflicts with the goal of estate tax protection. A structure that provides for an opportunity for the reduced long-term capital gain tax rate may not protect the foreign investor from U.S. estate tax. Similarly, inserting an entity to “block” the U.S. estate tax may result in higher taxes on a gain due to the unavailability of the long-term capital gain rate. Unfortunately, there is no perfect structure, and foreign investors must work with experienced advisors who can help them navigate among the various options, each of which provides a different level of complexity, tax efficiency and risk.
Personal Ownership of Property
The least complex structure for an NRA to acquire U.S. property is in his or her personal name. If the NRA rents out personal property, he or she will be required to file annual U.S. income tax returns to report income or loss from such activities. However, if the property is solely for personal use, the NRA will typically not have a U.S. tax or reporting requirement until he or she sells the property. If the property is held for more than a year, the capital gain rate will apply upon sale. However, if the NRA dies while owning U.S. situs property, the value of the property that exceeds $60,000 will be subject to the 40 percent U.S. estate tax, as well as potential state-level estate or death tax. Often, an NRA will be advised to hold U.S. real estate through a single-member limited liability company (LLC). While holding the property through such an entity may provide the benefits of liability protection, absent a special tax election, such an entity is “disregarded” for income and estate/gift purposes and would not provide any protection against the estate tax.
Holding U.S. Property in a Legal Structure
The United States offers foreign investors a number of different entities to use for ownership of U.S. real estate. Primarily, these include a corporation, partnership or trust structure.
Corporate Structures. Holding property in a domestic corporation is simple. U.S. tax law considers the corporation to be a separate legal entity that is required to file an annual income tax return and report the property’s yearly activities, which may include rental income or taxable gains in the year that the corporation sells the property. Losses generated from rental activities may be deductible. Losses that cannot be used currently may be carried forward and used to reduce the gain on an eventual sale. FIRPTA withholding should not apply.
Despite its simplicity, a corporate structure is typically not tax efficient. Income or gain from the sale of the property will be subject to tax at the highest corporate tax rate. Further, stock of a domestic corporation is a U.S. situs asset for U.S. estate tax purposes, and the estate of an NRA who dies while owning stock of a U.S. corporation will be subject to estate tax on the value of the stock that exceeds $60,000.
NRAs also have the option to own U.S. real estate in a foreign corporation. Similar to a domestic entity, the foreign corporation would be subject to taxes on its activities. Income and gain would still be subject to the high corporate income tax, and FIRPTA withholding would apply to a sale. However, the value of the property would not be subject to U.S. estate tax because stock of a foreign corporation is not U.S. situs property, even if the foreign corporation only owns U.S. situs assets.
The most common structure for owning U.S. real estate involves the use of a foreign corporation, which owns a domestic corporation that owns the U.S. real estate. Although this option is slightly more complex and not tax efficient, it is still relatively simple and provides estate tax protected.
Partnership Structure. An entity treated as a domestic or foreign partnership typically is not considered a separate taxpayer for U.S. income tax purposes. Rather, each partner is subject to tax on his or her pro rata share of the entity’s income. As a result, if a partnership has a long-term capital gain from the sale of U.S. real estate, its NRA partners will benefit from the long-term capital gain tax rate. A complex set of withholding rules apply to a partnership with foreign partners.
Although tax efficient, this structure is very complex and requires the filing of multiple tax returns. Further, the structure involves risk. The law is surprisingly unclear in regard to whether an interest in a partnership is a U.S. situs asset for estate tax purposes. While many practitioners believe that an interest in a foreign partnership that owns an interest in a domestic partnership should not be considered a U.S. situs asset for estate tax purposes, there is no specific authority that addresses this issue nor is the outcome certain. Many other practitioners believe that there is a significant risk that the IRS will take the position that the partnership interest is U.S. situs property. This structure is advisable only where the NRA is comfortable with the level of complexity and risk.
Trust Structure. A final option available to NRAs is the creation of a trust structure to buy and hold U.S. real property, usually through a disregarded LLC. A trust may be subject to income tax itself, or its beneficiaries may be subject to tax to the extent the trust makes distributions. The long-term capital gain rate generally applies. When a trust is properly structured, the assets may escape gift and estate taxes as well as the public and costly process of probate. While a properly structured trust is simple, tax efficient and estate-tax protected, there are many traps that the unwary can fall into without careful drafting and planning.
Investing in U.S. real estate should be done under the guidance of experienced tax and legal professionals in order to minimize investors’ tax risks and properly accumulate costs throughout the life of the property. There are a multitude of strategies individuals may employ to minimize their exposure to U.S. income, estate and tax liabilities. Each must be weighed against the related costs and risks, as well as the individual investor’s unique circumstances.
The advisors and accountants with Berkowitz Pollack Brant Advisors and Accountants have developed a global reputation for helping foreign individuals and businesses navigate the complex world of U.S. tax laws.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
 A NRA is an individual who is not a U.S. citizen or a U.S. tax resident. For income tax purposes, an individual will be considered a U.S. tax resident if they are admitted as a permanent resident (the green card test) or they meet a test based on physical presence (the substantial presence test). For estate and gift tax purposes, a person other than a U.S. citizen will be considered a U.S. resident if they are domiciled in the United States. Rather than physical presence, domicile considers the more subjective test of “intent” to remain in the U.S. for an indefinite period time.
 A limited liability company may be treated as a corporation, a partnership, or it may be disregarded as an entity separate from its owner depending on the number and personal liability of the members and whether it has made an “entity classification” election for tax purposes.
 Any net income that the foreign corporation has may also be subject to a second level of “branch profits” tax, which is similar to what would apply if the foreign corporation were a domestic corporation and paid a dividend to its shareholder.
 A foreign entity will be treated as a partnership if it does not meet the Tax Code’s definition of a “per se corporation” and it does have more than one member, all of whom have limited liability However, there is an opportunity for certain entities that do not meet this “default” definition to elect treatment as a partnership for U.S. income tax purposes.
Businesses located in federally declared disaster areas and impacted by Hurricanes Harvey, Irma and Maria may qualify for an Employee Retention Tax Credit when they continue to pay wages to employees who were displaced by inoperable work locations.
Under the Disaster Tax Relief and Airport and Airway Extension Act of 2017, eligible employers may receive an income tax credit in an amount equal to 40 percent of the first $6,000 of qualified wages they paid to eligible employees during the specified dates the business’s primary location was inoperable. Therefore, the maximum credit available to affected businesses is $2,400 ($6,000 x 40 percent) per employee.
“Eligible employers” are those that conducted an active trade or business during the specified dates and for which that trade or business became inoperable “as a result of damage sustained by reason of” the named disasters. The damages need not be to the employer’s place of business. Rather, a business will be considered inoperable if, for example, the disaster caused the business to be physically inaccessible to employees, raw materials, utilities or customers.
For victims of Hurricane Harvey, the tax credits are for qualified wages paid by eligible employers to eligible employees after the specified dates of Aug. 23, 2017, and before Jan. 1, 2018. The eligibility period for victims of Hurricane Irma applies to qualified wages paid after Sept. 4, 2017, and before Jan. 1, 2018. For businesses impacted by Hurricane Maria, qualified wages would have to be paid after Sept. 16, 2017, and before Jan. 1, 2018.
“Eligible employees” include those workers whose principal place of employment as of the applicable date was with an eligible employer that operated a business in one of the Hurricane disaster zones.
“Qualified wages” generally refer to the definition of wages for unemployment tax purposes. The wages must be paid or incurred 1) by an eligible employer to or for an eligible employee and 2) beginning on the date the business’s principal place of employment became inoperable until the date the business resumed significant operations at that principal location. In addition, to qualify for the Employee Retention Tax Credit, the employer must have paid wages regardless of whether or not an employee actually continued to perform services during the time the principal place of employment was inoperable, even if such services were performed at a business’s other locations.
Generally, tax credits provide taxpayers with a dollar-for-dollar reduction of taxes, and are generally more valuable than a deduction, which only reduces taxable income. Thus, for high-income individual taxpayers, a dollar of wage expense would reduce their tax liability by approximately 40 cents, while a conversion of the expense to a credit would provide a $1 reduction of tax liability.
The Employee Retention Tax Credit is part of the Internal Revenue Code Sec. 38(b) general business credit, and is therefore subject to certain rules that may prevent some taxpayers from enjoying the full use of the credit to reduce their tax liabilities in the tax year that the credit is claimed.
The tax advisors and accountants with Berkowitz Pollack Brant have extensive experience helping individuals and businesses prepare for and navigate through complex laws related to disaster planning and recovery, including proving property and economic losses and substantiating credits, deductions and claims related to those losses.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
Due to global efforts to combat tax avoidance and uncover assets hidden in offshore accounts, individuals and financial institutions continue to face a complex and challenging environment for cross-border tax reporting and compliance. There are presently more regulations centered on tax transparency and reducing countries’ lost tax revenues than ever before. However, there remains a lack of one universal reporting standard for which all taxpayers in all countries must comply. As a result, taxpayers must tread carefully under the guidance of experienced tax professionals to avoid a broad range of tax, privacy and security risks.
Disparities Between U.S. and Foreign Reporting Requirements
The U.S.’s most recent attack on tax avoidance commenced in 2010 with the introduction of the Foreign Account Tax Compliance Act (FATCA). Effective for tax years beginning in 2014, the law generally requires foreign financial institutions to share information with the IRS about financial accounts with total asset values exceeding specific thresholds in which a U.S. taxpayer has a financial interest. This applies to U.S. entities, citizens, tax resident aliens (i.e. persons who have a green card or who meet the so-called “substantial presence test”), and non-resident aliens who elect to be treated as U.S. tax resident aliens. It also applies to U.S. persons who are beneficial owners of trusts, partnerships and corporations that are formed in a foreign jurisdiction.
Many foreign countries have entered into Intergovernmental Agreements (IGAs) to comply with FATCA and to report certain information to the U.S. about U.S. taxpayers with offshore accounts. Nevertheless, the U.S. faces criticism for being far less forthcoming and failing to share the same level of information and detail about financial accounts owned by residents of FATCA partner countries.
In 2014, the Organization for Economic Cooperation and Development (OECD) introduced the Standard for Automatic Exchange of Financial Information in Tax Matters, commonly referred to as the Common Reporting Standard (CRS). The OECD promulgated CRS as a global standard for the automatic exchange of information about financial accounts. Essentially, CRS is a global FATCA regime. However, while more than 100 countries have committed to CRS, the U.S. has declined to participate.
The U.S.’s absence from CRS, as well as its limited FATCA reciprocity with foreign countries, may leave U.S. and foreign taxpayers with unique opportunities to disclose their worldwide holdings in compliance with international tax reporting regulations while minimizing their reporting requirements and preserving their financial privacy.
Potential Opportunities Hidden in Contrasting Reporting Standards
While FATCA and CRS share the same basic objective, there are key differences between the two standards.
For one, FATCA applies to foreign financial accounts that meet minimum balance thresholds, whereas CRS has no minimum reporting requirements. Secondly, CRS requires the reporting of far more details about account holders’ personal information than those required by FATCA. As a result, CRS requires both higher volumes of reporting and more personal information about account owners.
Another differentiating factor between the two reporting standards is that FATCA focuses on identifying account holders who may be considered U.S. taxpayers, whereas CRS aims to identify the financial accounts held by all non-residents of a particular jurisdiction. Since the U.S. does not participate in CRS, financial institutions in the U.S. generally do not have a requirement to report the existence of foreign-owned financial accounts or the beneficial owners of such accounts. In certain situations, this may be true even though the foreign individuals or entities are residents of a FATCA partner country.
As a result, there may be opportunities for non-U.S. persons to preserve their financial privacy and reduce their compliance burdens when they hold assets, whether directly, through an entity, or within a trust, in U.S. financial institutions outside the purview of their home countries. This may be especially beneficial to high-net-worth families from countries that lack appropriate controls and who are all too often at risk of kidnappings and extortion. That said, it must be emphasized that exploiting the differences between FATCA and CRS to avoid reporting and disclosures as a means to commit tax evasion is inappropriate and likely illegal in most jurisdictions.
Although it may be possible for non-U.S. persons to protect their privacy and reduce their compliance burden by investing through U.S. financial institutions, it is important that such non-U.S. persons consult with U.S. tax advisors to ensure their investments are in the most efficient tax structures to meet their situations.
About the Author: Ken Vitek, CPA, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he provides income and estate tax planning and compliance services to high-net-worth families and closely held businesses with an international presence. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
In July 2017, the U.S. Treasury announced it would be winding down and eliminating the Obama-era MyRA retirement account savings program in the coming months due to low participation and high management costs over its two-year run.
President Obama introduced the MyRA program in 2014 as a way to help low- and middle-income households begin saving for retirement when they do not have access to Individual Retirement Accounts (IRAs) or 401(k) plans offered through their employers. According to the Treasury Department, while approximately 30,000 Americans created MyRA accounts, one-third did not make any contributions to the plan, and two-thirds of the accounts have a meager median balance of $500. Since its inception in 2014, it has cost more than $70 million in taxpayer money to manage the program.
MyRA participants will receive a notice informing them of the program’s demise along with information about moving their savings to a Roth IRA. With these types of accounts, savers can continue to make contributions with after tax dollars and take distributions in retirement tax-free. The only difference is that Roth IRA savers will have the ability to invest their contributions in a broad range of potentially high return investments, rather than safe and steady Treasury savings bonds. For 2017, individuals may contribute up to $5,500 to a Roth IRA, or $6,500 when they are older than 50.
It is advisable that MyRA participants make a direct rollover of their savings into a Roth IRA to avoid any potential taxes or penalties on their earnings, which can occur when they take a distribution of earnings from their MyRA savings.
About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with individual taxpayers and entrepreneurs on estate planning, tax structuring and business consulting. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000, or via email at email@example.com.
On the heels of the Equifax data breach that affected more than 145 million U.S. adults, many consumers are still confused about what they need to do to protect their personal information and their credit ratings. Following are four simple steps you should consider taking now.
Freeze your Credit
A credit freeze blocks individuals and businesses from running a credit check on you and prevents anyone from opening an account or securing a loan in your name without first obtaining your permission. Unlike a credit lock, which is merely an agreement between you and the reporting agency, a credit freeze is the strongest layer of protection against identity theft since it is covered by state laws and provides reassurance that you will not be held liable for any charges or losses caused by fraudulent activities. Yet, credit freezes do come with some costs.
You must separately contact each of the three credit reporting agencies, which include Equifax, Experian and TransUnion. Typically the agencies will charge for this service; however, some are waiving their fees in light of the recent breach. Upon your request, the agencies will provide you with a personal identification number (PIN) that you will need to use should you wish to “thaw” your credit for a specific period of time, such as when you legitimately apply for a loan or credit card. The credit bureaus have up to three days to temporarily lift a freeze, and some will require consumers to pay for this service.
Create a Fraud Alert
A fraud alert on your credit report signals to potential lenders that they must take extra steps to verify your identification before extending credit to you or anyone claiming to be you. However, unlike a credit freeze, fraud alerts will not prevent potential lenders from seeing your credit history. To create an alert, you need to contact only one of the three credit bureaus, which will automatically contact the other two. Fraud alerts, which are free, typically expire after 90 days but can be renewed at your request.
Check and Regularly Monitor your Credit Score and Financial Accounts
You do not need to pay for professional credit monitoring services. Rather, by law, you are entitled to receive one free credit report every year from each of the three credit bureaus. You can easily access these reports for free online at www.annualcreditreport.com. Once you receive a report, you should scan it for abnormal activity and confirm that the accounts listed are for credit cards or other lending instruments that you in fact opened.
Similarly, if you do not already check your credit card and bank account statements on a regular basis, now is the time to start. You may be able to spot an issue before it becomes a bigger problem.
Do Not Share Personal Information via Telephone or Email
Criminals go to extreme lengths to pose as legitimate businesses and government agencies to trick consumers into revealing personal information over the phone and via email and text message. They may go so far as to spoof phone numbers or create websites that look genuine but instead take more of your personal information, which was the case following the Equifax breach. Be alert to these scams and remember that you should never provide personal information over the phone or via email, unless you initiated the communication by placing the call to a number you know or typing in a business’s known website.
About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at firstname.lastname@example.org.
Benevolent individuals who volunteer their time for nonprofit organizations may be able to reduce their taxable income when their charitable work takes them away from home. U.S. tax laws allow individuals to deduct some of the expenses they incur when traveling on behalf of charitable organizations. Here’s what taxpayers need to know.
Duty. The time and work taxpayers commit to a non-profit must be “real and substantial” throughout the length of a charitable trip. Taxpayers cannot deduct expenses if they only have nominal duties, or if they do not have any duties, for significant parts of the trip.
Qualifying Charities. For taxpayers to deduct costs related to charitable travel, they must volunteer for a religious group, government or other organization that has received tax-exempt status from the IRS under Internal Revenue Code 501(c)(3). To make this determination, individuals may search an organization’s federal tax status and filings online at the IRS’s Exempt Organizations Select Check tool or at www.charitynavigator.com.
Qualifying Expenses. Deductible expenses include the necessary and unreimbursed out-of-pocket costs a taxpayer incurs only for and as a direct result of his or her volunteer service. This may include expenses for air, rail, bus, taxi or automobile transportation, lodging and meals. Excluded from this list are personal living expenses and any costs related to a taxpayer’s non-charitable recreation or vacation time. In addition, taxpayers may not deduct the value of the time or services they provide to a charity or the income they lost while serving as an unpaid volunteer.
Individuals who volunteer out-of-state or overseas should seek the counsel of professional tax advisors to identify opportunities in which their activities may qualify for potential tax savings.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail email@example.com.
Posted on October 03, 2017 by
Workers seeking new career opportunities in their current fields may be able to deduct certain expenses related to their job hunt even when they do not ultimately secure a new position. Qualifying job-search expenses are considered miscellaneous deductions that taxpayers may report on IRS Form 1040, Schedule A, Itemized Deductions.
To qualify for a tax deduction, job-search expenses must not be related to a new line of work, a first-time job or a search for employment that occurs after a long break in time after the conclusion of a prior job. Rather, deductible costs are limited to those expenses that are incurred when a taxpayer hunts for a new job in his or her existing industry or profession. This includes costs for writing and preparing resumes, fees paid to employment agencies or staffing firms, and unreimbursed travel and transportation expenses for out-of-state career opportunities.
Deducting job-search expenses are also limited to an amount that is more than 2 percent of a taxpayer’s adjusted gross income (AGI), which can be found on line 38 or IRS Form 1040 or line 37 or Form 1040NR. Generally, the 2 percent limit applies after a taxpayer applies all other deduction limits. Therefore, a taxpayer with $50,000 in AGI must have more than $1,000 in miscellaneous expenses before they may take any deductions. If the taxpayer’s miscellaneous expenses total $1,500, he or she will be able to deduct $500 during that year.
Searching for a new job can be stressful and costly, especially when it involves travel and a potential move to a new location. Individuals should seek the counsel of experienced tax professionals to identify opportunities where they may reap tax savings and potentially reduce their taxable income.
About the Author: Flor Escudero, CPA, is a senior manager of Tax Services with Berkowitz Pollack Brant, where she provides domestic and international tax guidance to high-net-worth individuals and businesses. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
On Sept. 29, 2017, President Donald Trump signed into law a bill that includes enhanced tax relief for victims of Hurricanes Harvey, Irma and Maria. Among the provisions included in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (H.R. 3823) are relaxed rules for qualifying individuals to deduct casualty losses, more flexibility for eligible taxpayers to take withdrawals and hardship loans from retirement plans, and the introduction of a tax credit for businesses located in federal-designated disaster zones.
Following are the material provisions of the new law:
- Allows full deductibility of hurricane-related losses (over $500) not covered by insurance without a reduction of such losses by 10 percent of the taxpayer’s Adjusted Gross Income (AGI). This should enable most individual taxpayers in South Florida to deduct uninsured hurricane-related damage, including minor repairs, cleanup costs, and landscaping replacement, that would in many cases be less than 10 percent of AGI.
- Allows deduction of a net disaster loss as either (i) an increase to a standard deduction, or (ii) an itemized deduction (without the reduction for 10 percent of the taxpayer’s AGI)
- Allows eligible taxpayers to withdraw funds from retirement accounts free of early withdrawal penalties and top spread out income tax on such distributions over three years. Additionally, taxpayers can avoid taxation on such withdrawals if they recontribute these distributions at any time over a three-year period.
- Increases flexibility for loans from retirement plans by increasing the maximum amounts that can be borrowed, and delaying certain repayment dates
- Allows taxpayers who took qualified retirement plan distributions between Feb. 28, 2017, and Sept. 21, 2017, solely for the purchase or construction of a principal residence located in an area subsequently declared a federal disaster area, and who have since cancelled the purchase or construction, to make one or more re-contributions to those accounts between Aug. 23, 2017, and Feb. 28, 2018.
- Provides qualifying businesses that were rendered “inoperable” due to the storms with an employee retention tax credit equal to 40 percent of up to $6,000 wages per employee whose employment was temporarily suspended due to a disaster designation
- Allows full deductibility of charitable contributions made between Aug. 23, 2017, and Dec. 31, 2017, to qualifying charitable organizations that provide hurricane relief by eliminating limitations on such contributions that may otherwise apply (e.g. 30 percent of AGI for donations of appreciated marketable securities)
- Permits taxpayers to compute their 2017 Earned Income Tax Credit and Child Tax Credit based on 2016 amounts, even if 2017 amounts are less than 2016 amounts
Taxpayers located in designated disaster areas should keep these incentives in mind throughout the entirety of their recovery and rebuilding efforts. For example, it is recommended that individuals and businesses impacted by the recent hurricanes take pictures or narrated videos of damaged property and retain receipts for all of their hurricane-related expenses, including, but not limited to, debris removal, remediation, pool cleaning, patio screening, roof repairs, landscaping, spoiled food, tree stump grinding, etc. It is equally important that affected individuals seek the counsel of experienced tax professionals who understand and can adeptly navigate through the nuances of the both the tax code and the Disaster Tax Relief and Airport and Airway Extension Act.
About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters, including multi-national holdings, cross-border treaties, and wealth preservation and protection. He can be reached at the CPA firm’s Miami office at (305) 379-7000, or via email at email@example.com.