Some of the best presents to receive are those that are not perfectly wrapped in a box or given on special occasions. Rather, there are often far more impactful gifts that individuals can give throughout the year to help their loved ones establish solid financial foundations. In some circumstances, these gifts can provide benefactors with not only the joy of giving but also significant estate-planning benefits.
Understanding Gift and Estate Taxes
The Internal Revenue Code provides U.S. taxpayers and resident aliens with multiple opportunities to transfer money or property to other individuals free of federal gift and estate taxes. For 2018, the maximum annual amount an individual may give to another person without incurring a gift tax is $15,000, or $30,000 for married couples. The tax laws allow individuals to make gifts up to these amount to as many people as they wish. Therefore, a married couple with two children and four grandchildren may in 2018 gift $30,000 to each of their six heirs, or a total of $180,000, free of transfer taxes. Any gifts that exceed these amounts will be subject to a flat 40 percent tax rate. However, gifting more than the annual exclusion amount to one person does not necessarily create a gift-tax liability. Individual taxpayers also have a lifetime exclusion, which effective on Jan. 1, 2018, allows them to transfer during life or at death up to $11.2 million in assets to their heirs without incurring federal estate taxes. For married couples, the lifetime exclusion is $22.4 million in 2018. While the Tax Cuts and Jobs Act of 2017 calls for these generous estate tax exemptions to expire on Dec. 31, 2025, there is no way to guarantee what Congress will do over the next eight years. It is also important to note that when couples split gifts between both spouses, each spouse will be consider to have given 50 percent of each of the other spouse’s gifts in that year. They will need to file a gift tax return, even if the gift is less than the annual exclusion threshold.
Making tax-free gifts throughout individuals’ lives may reduce the value of their estates and their exposure to the estate tax when they pass away. By gifting with warm hands, benefactors will also be able to witness the impact of their gifts and enjoy watching as loved ones benefit from them. However, there are specific rules that taxpayers must follow to qualify their gifts as tax-free transfers.
Gifts of Education
Due to the rising costs of tuition, coupled with the nation’s growing student-debt problem, a future college education is out of the financial reach of many individuals, including some with significant wealth and financial means. To mitigate this risk, families may consider establishing tax-advantaged 529 college-savings plans for young children and allowing the contributions they make today to grow tax-deferred until the children reach college age in the future. At that point, students can take tax-free withdrawals to pay for qualifying education expenses, including college tuition, books, computers and room and board.
The IRS considers contributions to 529 plans to be gifts of a present interest, which qualify for and are subject to taxpayers’ annual gift-tax exclusions. Because Congress understands that saving for higher education is good public policy, individuals are currently allowed to super-fund 529 plans with five years of annual exclusions. Therefore, a parent, grandparent or other individual can maximize his or her annual gift-tax exclusions of $15,000 in 2018 by making a $75,000 contribution to 529 college savings plans for each child and/or grandchild. Additionally, these contributions may qualify for additional state tax benefits. Imagine the savings that will accumulate over the next 18 years when an individual establishes and annually funds a 529 college savings plan for a newborn child today. Any funds that go unused after a child earns his or her degree may be transferred tax-free to other children, or they may go back to a benefactor who decides to return to school to further his or her education.
The state of Florida offers its residents a college-savings program that provides an additional opportunity to maximize future savings for a child’s college education. Under the Florida Prepaid College Program, families may lock in and pay for today’s costs for a child’s future education at a public university in the state. Should a child later select to pursue a degree out of the state or at a private university, he or she may apply the money saved in a prepaid plan to those institutions.
If saving for education is neither appropriate nor desired, individuals may instead pay a child’s tuition directly to a primary, secondary or college-level school. These payments made on behalf of another individual will not count toward a taxpayer’s annual or lifetime gift exclusion.
Gifts of Sound Saving Habits
Children are never too young to begin learning about the principle of saving today to build wealth for the future. In fact, parents may help children as young as five establish healthy savings habits and understand the benefits of compounding interest by putting money into Roth individual retirement accounts (IRAs).
While Roth IRA contributions are made with after-tax dollars, account owners have the benefit of tax-free withdrawals of those amounts at any time. However, it is important to note that account owners who withdraw earnings before they reach 59½ years of age and who have owned their Roth IRAs for more than five years may be subject to taxation and penalties unless they take distributions to pay for specific expenses. This includes payments for higher education and unreimbursed medical expenses that exceed 7.5 or 10 percent (based on age) of the account owners’ adjusted gross income.
Roth IRAs are ideal for children with summer jobs or who work during the school year and earn less than the modified adjusted income limit, which for 2017 was $132,000. Contributions grow year-over-year free of taxation. For example, consider a high-school teenager who earned $3,000 in 2017 through various odd jobs. The fact that he or she earned that income through work, and not from a portfolio or passive activity, allowed a retirement plan contribution of up to $3,000 by or on behalf of that worker. Usually, there is no current tax benefit for contributing to a traditional IRA, as there is no income tax on those earnings in this fact pattern. Therefore, family members may make contributions to a student’s Roth IRA and remove those assets and their future appreciation from the benefactors’ taxable estates.
Gifts of Charity
There are a multitude of non-profit organizations that rely on public donations to achieve their missions and goals, which can include supporting underprivileged families and disaster victims, increasing awareness or funding research for medical disorders/diseases or promoting global peace. It is well known that individuals may receive a tax deduction and reduce their taxable income when they reach into their pockets to support charitable organizations throughout the year. Monetary donations may be in the form of honorary gifts made on momentous occasions, as tributes to someone who has passed away, or simply to support a cause that is close to a donor’s heart.
The U.S. Tax Code also allows individuals to annually transfer up to $100,000 tax-free from an IRA directly to a qualified charity. These Qualified Charitable Distributions (QCDs) allow individuals over the age of 70½ to satisfy their annual required minimum distributions (RMDs) without adding the transferred amount to their taxable adjusted gross income for the year. However, because a QCD is not income, the donation may not be taken as a deduction.
Likewise, an individual may consider establishing and funding a charitable remainder trust during life to allow a non-profit entity to invest and potentially grow his or her donations. At the time of the donor’s death, any remaining trust principal will be gifted to the beneficiary charity.
Gifts to Spouses
Generally, there is no limit on the number or dollar value of gifts that spouses may give to each other without incurring federal gift-tax consequences. To qualify for a tax exemption, gifts between spouses may not include special demands or limitations on how or when the receiving spouse may use the gifts, nor may any gifts be considered “future interest,” which are subject to federal gift taxes. When one spouse is not a citizen of the U.S., however, the maximum amount that he or she may receive tax-free from a spouse who is a U.S. citizen is $152,000 in 2018. Anything above this threshold will be subject to transfer taxes.
Tax planning and gifting strategies should not be limited to the once-per-year tax filing deadlines. Rather, there are countless opportunities throughout the year when individuals may consider giving tax-free gifts to benefit someone else, whether it be for the birth of a child, a marriage, a birthday or simply just because.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
On Dec. 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, which represent the most comprehensive legislation reforming the U.S. tax code in more than three decades. The new law, which went into effect on Jan. 1, 2018, makes permanent many provisions affecting businesses while setting a Dec. 31, 2025, expiration date for many of the tax cuts affecting individual taxpayers. While individuals may feel some effects of the reform package in 2018, such as less taxes taken from their paychecks, they will not reflect the full impact of the legislative changes until they file their tax returns in 2019.
These sweeping changes to the tax laws provide opportunities for all taxpayers to reconsider their business structures, tax accounting methods and reporting positions in order maximize the opportunities afforded to them beginning in 2018 under the new act. For example, one of the more talked about strategies is the potential for certain pass-through businesses to convert to C Corporation status in order to take advantage of the lower corporate rates that go into effect and become permanent beginning in 2018. These decisions require careful analysis, and possibly further clarification of the new law, in order to fully maximize opportunity and avoid pitfalls.
While there is no lack of news coverage debating the prospective “winners” and “losers” of the reform package, individuals and business owners should consult with their tax advisors to understand not only how the law may affect them but to also plan for maintaining tax efficiency and compliance under the new regime.
The tax advisors with Berkowitz Pollack Brant are working closely with clients to evaluate their existing business structures, project out future tax liabilities under alternative scenarios and recommend potential changes to their business structures, reporting positions and operational policies and procedures.
Following are the key provisions contained in the Tax Cuts and Jobs Act. If you have any questions, please contact your accountants and advisors with Berkowitz Pollack Brant.
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 firstname.lastname@example.org.
With all of the political wrangling over tax reform, it appears that Republicans in the House and Senate have agreed to preserve the Child Adoption Tax Credit, which in 2017 can be as high as $13,570 per qualifying child.
The Federal Adoption Tax Credit has helped countless families afford the high cost of adoption, while providing permanent homes to millions of children. The tax credit can be used to offset qualifying adoption expenses, including adoption fees, court costs and attorney fees and amounts spent on adoption-related travel, including airfare, lodging and meals. In addition, families may use the credit to exclude from their taxable income any financial adoption assistance they may have received from their employers.
Because the credit it is non-refundable, it may, in some instances, reduce a family’s tax liabilities to zero. In fact, when the credit exceeds the amount of taxes owed, a family may carry unused credits forward to reduce their taxes for up to five subsequent years, or until the credit is fully used, whichever comes first.
However, if a family has a tax bill that is less than the credit of $13,750 per child, they will not be entitled to a refund of the remaining credit amount. In addition, families should be aware that the credit is subject to income limitations that may reduce or even eliminate the amount they may claim. For example, in 2017, the amount of the credit starts to phase out when families have an adjusted gross income above $203,540, and it becomes completely unavailable to families with income that exceeds $243,540.
The credit applies to adoptions of individuals younger than age 18 or persons who are physically or mentally unable to care for themselves that are made through international and domestic agencies, private sources or the public foster care system. Legal adoptions of step-children, typically through second marriages, do not qualify.
When a family adopts children with special needs, they may be able to claim the tax credit even if they did not incur any qualifying adoption expenses. For tax purposes, a special needs child is defined as one who is a citizen or resident of the U.S. at the time of the adoption, who would probably not be adopted without assistance provided to the adopting family and for whom a state determines can or should not be returned to his or her birth parent’s home.
While there are rules detailing when families may apply the Adoption Tax Credit, claiming the credit or exclusion will require the filing of IRS Form 8839, Qualified Adoption Expenses, along with the taxpayer’s U.S. Individual Income Tax Return.
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 email@example.com.
Effective Jan. 1, 2018, Florida’s sales tax on the total rental payments that commercial real estate owners receive for leasing their properties decreases from 6 percent to 5.8 percent. The reduced rate applies to the rental, leasing, letting and granting of a license to use certain commercial property for occupancy periods that begin on or after the first of the New Year. When a tenant occupies or has a right to occupy a covered property before Jan. 1, 2018, the 6 percent sales tax will apply.
Under a bill signed into law by Gov. Rick Scott, the .2 percent sales-tax reduction applies to leases and rentals of commercial property, including office and retail space, warehouses and self-storage units, when the tenant occupied or was entitled to occupy a property prior to Jan. 1, 2018. Excluded from the lower sales tax rate are rentals for parking or storing automobiles or towed vehicles in lots or garages, docking or storing boats at docks or marinas, or the rental of tie-down or storage space for aircraft at airports, all of which will be subject to a rate of 6 percent on the total rental charged.
As a result of the sales tax reduction, commercial property owners and managers should review their lease arrangements and update their systems and invoice software to reflect the change.
About the Author: Karen A. Lake, CPA, is State and Local Use Tax (SALT) specialist and an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals and businesses navigate complex federal, state and local tax laws, credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
Posted on December 19, 2017 by
Businesses have until Jan. 31, 2018, to file employee wage statements and non-employee compensation forms with the government.
More specifically, employers must provide their employees with Forms W-2, Wage and Tax Statement, and furnish copies along with Forms W-3, Transmittal of Income and Tax Statements, to the Social Security Administration (SSA) by the required deadline. In addition, businesses that hire independent contractors must file with the IRS certain Forms 1099-MISC to report the compensation they paid to non-employee workers. Failure to correctly and timely file any of these forms may result in penalties.
To begin preparing for the filing deadline, businesses should first review their relationships with workers and the degree of direction and control they have over each worker’s work product. The more control the business wields, the more likely the relationship is that of employer-employee. In these instances, employers are responsible for paying employees’ wages and withholding and remitting to the IRS the appropriate amount of workers’ federal income tax, Social Security and Medicare tax, and Federal Unemployment (FUTA) Tax. Businesses do not have to withhold or pay any taxes on payments to independent contractors.
Misclassifying workers, even unintentionally, can put businesses at risk of legal exposure, severe penalties on the state and federal levels, and required payments of back wages, overtime, and taxes.
Forms to Know
Employers should use Forms W-2 to report wages, tips and other compensation paid to employees as well as amounts paid to the government for the employees’ share of income and social security taxes. In addition to providing W-2s directly to employees, businesses must also send W-2s with Forms W-3 to the SSA, which will share wage and withholding information with the IRS. Prior to the filing deadline, it is critical that employers verify employees’ information, including their names, addresses and Social Security numbers, and place orders for paper copies of W-2 forms, as needed.
Should a business determine that it will not be able to meet the Jan. 31, 2018, it may request from the IRS a 30-day extension. However, these requests must be made in writing via Form 8809, Application for Extension of Time to File Information Returns, before the filing deadline.
When a business confirms that it has an independent contractor agreement with a worker, it is required to furnish that non-employee with a Form 1099-MISC to account for the income he or she received from the business. It will be the responsibility to the non-employee to pay his or her share of taxes, including self-employment tax.
The advisors and accountants with Berkowitz Pollack Brant work with businesses and individuals across a broad range of industries to maintain tax compliance and efficiency.
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 businesses and high-net-worth individuals. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Many foreign-born Americans would like to make charitable donations to organizations in their home countries where they continue to have strong ties. In some cases, these individuals may simply donate to a U.S.-based charity with a broad international reach. However, if the donor has in mind a specific foreign charity that is not directly supported by an organization that the U.S. recognizes as a section 501(c)(3) tax-exempt charitable organization, then the task becomes less clear and gives rise to the following questions:
1. Is the donation tax deductible for U.S. income tax purposes?
2. Will my money be well spent?
3. How do I know that the charity selected does not indirectly support organizations that are counter to the interests of the U.S.?
In general, donations that a U.S. citizen makes directly to a foreign charity will not qualify for an income tax deduction unless the charity is registered as a tax-exempt entity with the IRS or there is relief available under a U.S. income tax treaty. Rarely will a donation to a foreign entity meet either of these two requirements. Fortunately, there are a few options that donors may use to benefit a foreign charity and secure a deduction on their U.S. tax returns. The balance of this articles explores the use of a donor-advised fund or a private foundation to facilitate the donation.
A donor-advised fund (DAF) is a charitable-giving tool sponsored by a U.S. 501(c)(3) that allows individuals to qualify for a tax deduction when they donate to nonprofits whose philanthropic missions include assisting approved foreign charities. The donor makes a contribution to a U.S.-approved DAF, takes a tax deduction in the year of funding the DAF and directs which charities it recommends to receive grants from the DAF over time.
A DAF has the advantages of being easy to implement by allowing donors to use the sponsoring charity’s platform with little or no added cost to the donor. However, one downside to the DAF is that unless the U.S.-sponsoring nonprofit has already vetted a specific foreign charity, there is some degree of uncertainty as to whether or not a donor’s funds will reach the intended organization.
To gain more control over the foreign-charity selection process, a donor may instead establish a U.S. private foundation (PF), which is a separate legal entity formed for the purpose of philanthropic activity. Once established in accordance with IRS guidelines, the PF can receive deductible donations (usually from the individual, family or business that formed the PF) and then make grants to specific foreign charities identified by the donors.
Private foundations must take certain due diligence steps to ensure that the foreign charities they select to receive grants are equivalent to U.S. public charities (known as equivalency determination) and therefore eligible for PF grants. In addition, PFs need to ensure that the selected charities comply with U.S. anti-terrorism and anti-bribery laws.
The IRS recently published a new, simplified procedure for PFs to meet the foreign charity equivalency determination test. Specifically, effective Sept. 14, 2017, PFs must obtain written advice from a tax-qualified practitioner who can make a good faith determination that a foreign grantee would likely qualify as a public charity under U.S. guidelines.
An alternative to the equivalency test is available to PFs that sponsor specific projects in foreign countries. In these situations, the IRS requires the PF to conduct thorough pre-grant due diligence of the project to document the charitable purpose of the grant. In addition, the PF must continue to monitor the project’s activities and report to the IRS information demonstrating that the foreign organization used the funds responsibly.
Private foundations meet the long-term philanthropic goals and needs of individuals and families. Although they provide a higher level of control over the charity selection, there are annual administration and compliance costs to meet IRS requirements.
There are numerous ways for U.S. taxpayers to approach charitable giving based upon their specific circumstances and financial objectives. The professional advisors and accountants with Berkowitz Pollack Brant work closely with domestic and international individuals, families and businesses to design gift giving opportunities to U.S. and foreign- based charities.
About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he assists cross-border families and their advisors with personal financial planning and wealth management decisions. He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at firstname.lastname@example.org.
The Federal Government in 2015 made permanent an often-overlooked benefit of the U.S. Tax Code that allows entrepreneurs, venture capitalists and angel investors to potentially exclude from their taxable income 100 percent of the gain from the sale of qualified small business stock (QSBS) held for a minimum of five years. This exclusion could be as much as $500 million per qualified small business. Furthermore, with the lowering of the Federal corporate tax rate to 21 percent effective January 1, 2018, more and more qualified small businesses should consider operating as regular (‘C’) Corporations. The key term to focus on here is “qualified,” since not all investors nor their investments will be eligible for a complete or even partial tax exemption under Code Section 1202.
What is QSBS?
Qualified Small Business Stock refers to the shares a corporation issued after August 10, 1993, to non-corporate investors who acquired original-issued stock by investing (or exercising stock options or warrants) in a corporation that meets the following requirements:
- It must be a C Corporation, including a previous LLC, partnership or S Corporation that converts to a C Corporation (but excluding a Subchapter S Corporation),
- It must be a qualified small business with gross assets of no more than $50 million on the date of and immediately after it issues stock to the investor or converts to C Corporation status, and
- It must use at least 80 percent of the value of its assets (including intangible assets) in the active conduct of a qualified trade or business for the duration of the period that taxpayers hold the stock.
Here’s where things can get tricky.
For one, a qualifying business may NOT involve the delivery of services that require specialized skills in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services. In addition, QSBS benefits will NOT apply to shares an investor holds in the following types of entities:
- banking, insurance, financing, leasing, investment and similar businesses;
- hotels, restaurants and similar hospitality businesses;
- farming businesses;
- businesses involving the production or extraction of products of a character for which percentage depletion is allowable (e.g. oil and gas exploration); and
- businesses in which more than 10 percent of the value of the company’s net assets consists of stock and securities of unrelated corporations or real property that is not used in the active conduct of a qualified trade or business. For this purpose, owning, dealing in, or renting real property is not considered to be the active conduct of a qualified business.
Do I Qualify for a Complete Exemption on Gains from the Sale of QSBS?
Under current law, taxpayers may exclude ALL of their capital gains from the sale or exchange of investment in QSBS stock when they meet the following conditions:
- They purchased the stock from an original issuer (i.e. the QSBS and not another shareholder) after September 27, 2010;
- They held the stock for more than five years;
- The issuing corporation does not redeem more than 5 percent of the aggregate value of all of its stock within one year before or after it issues stock to the eligible taxpayers; and
- The gain on any ONE investment in a QSBS does not exceed the GREATER of $10 million, or 10 times the adjusted basis of qualified stock the taxpayer disposes of in each entity during a particular tax year.
Importantly, this means that if an investor subscribed to QSBS after September 27, 2010, by investing $50 million in a newly formed corporation as the initial sole shareholder and subsequently sold the stock for an amount between $50 million and $550 million after a minimum of five years, he or she could exclude from tax the first $500 million of capital gain. This exclusion would also apply to the investor’s exposure to the 3.8 percent Net Investment Income Tax (NIIT), also known as the Obamacare Tax, and the Alternative Minimum Tax (AMT). To illustrate further, consider an investor who subscribed to QSBS after September 27, 2010, by investing only $1,000 into a new or existing corporation. If the investor held the stock for at least five years and then sold it for between $1,001 and $10,001,000, ALL of the gain (up to $10 million) would be exempt from tax, including the NIIT and AMT, under Section 1202.
How Does the QSBS Exemption Work?
Taxpayers issued QSBS after September 27, 2010, can elect to exclude 100 percent of their qualifying gain from federal income taxes, including the AMT and NIIT. For QSBS issued between February 18, 2009, and September 27, 2010, 75 percent of the qualifying gain can be excluded, with the remaining 25 percent subject to federal income tax at the rate of 28 percent. For QSBS issued between August 11, 1993, and February 17, 2009, investors may exclude from tax 50 percent of the qualifying gain; the remaining 50 percent will be subject to federal income tax at the rate of 28 percent.
Significantly, in the case of QSBS acquired before September 28, 2010, the 3.8 percent Net Investment Income Tax will apply to the qualifying gain excluded as will the alternative minimum tax on 7 percent of the excluded gain. The table below summarizes the different tax benefits investors may receive, depending on when a corporation issued the QSBS:
Date Issued Exclusion QSBS Effective Tax Rate Non-QSBS Effective Tax Rate
After 9/27/10 100% 0% 23.8%
2/18/09-9/27/10 75% 9.42% 23.8%
8/11/93-2/17/09 50% 16.88% 23.8%
It should be noted that although this potential planning opportunity may lead to significant federal tax savings, certain states, including California, do not follow federal income tax treatment of QSBS. As a result, these states tax their residents on the gain excluded under federal law.
In light of the significant tax saving opportunities offered by Section 1202, and with the likelihood that more small businesses will choose to operate as C corporations due to the low 21 percent Federal rate effective January 1, 2018, under the Tax Cuts and Jobs Act, investors should meet with experienced advisors and accountants to analyze their ownership of small businesses and venture capital opportunities. Consideration should be given to structuring these investment vehicles as C Corporations, which could yield tax savings and are typically the ideal entity of choice for institutional private equity investors that may invest at a later stage.
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 in the CPA firm’s Miami office at (305) 379-7000, or via email at email@example.com.
Like many entrepreneurs, famed music producer and performer DJ Khaled put his child on the payroll and named his son executive producer of his platinum-selling album. However, at just one year old, Asahd Khaled’s resume is already vastly superior to many who have achieved much in their lifetimes.
Is this merely fun for the family or is it some kind of a hoax or promotion? No, it is actually a key to brilliant tax planning.
As an executive producer, young Asahd has earned income in his own name and social security number, and he is subject to taxes on those earnings based on his applicable tax rate. Therefore, income that the father might otherwise have had to report, most likely at the highest tax rate, is now reportable by the son for which lower graduated tax rates will apply.
In addition, with earned income, Asahd may also have the right to contribute to his own eventual retirement. If he is an employee of his father’s company, he can make tax-advantaged contributions to a traditional 401(k) or a Roth 401(k) plan and/or a traditional IRA or Roth IRA. If he is self-employed, Asahd has even more bountiful retirement plan options at his disposal, based on the facts and circumstances of the company he owns.
Because income earned by Asahd will not be included in his father’s estate, DJ Khaled has choreographed a reduction of his taxable estate while also shifting his wealth to the next generation without using any annual for lifetime gifts. Not only is the elder Khaled building tax savings into his family’s future wealth, he is also setting up his son for playground bragging rights about the size of his retirement savings.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at firstname.lastname@example.org.
Current tax laws allow business owners and investors to defer recognition of capital gains tax when they use the proceeds from the sale of one asset to purchase a similar asset of equal or greater value within a period of 180 days. Traditionally, this reinvestment of capital has allowed qualifying taxpayers to avoid or defer significant federal and state income taxes on the sale of appreciated investment property, such as artwork and other valuable collectibles, the gains from which are taxed at 28%. However, under the Republican’s proposed tax reform plan, this preferential treatment of 1031 like-kind exchanges would be limited solely to real estate investment property and no longer apply to collectibles effective with sales on or after Jan. 1, 2018.
This does not bode well for art investors, because the GOP bill aims to eliminate tax-deferred treatment for the exchange of appreciated personal property. Therefore, collectors of art, coins, cars and other collectibles should consider accelerating any planned asset sales and lodging the proceeds with a qualified intermediary before year-end. This will provide ample time to purchase replacement property within the required 180 day period (even though it will fall into 2018) and defer tax on sales occurring prior to December 31, 2017.
The advisors and accountants at Berkowitz Pollack Brant have significant experience assisting collectors with tax-free exchanges of art and other types of collectible personal property. Our team works to bring the best solutions to clients for their income and estate planning needs.
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 in the CPA firm’s Miami office at (305) 379-7000, or via email at email@example.com.
With the season of giving upon us, it is a good time to remember that the charitable donations you make during the year help individuals in need and may provide you with a potential tax benefit.
In addition to making donations to long-standing, well-established 501(c)(3) charities, taxpayers in 2017 are giving to organizations that provide relief specifically to victims of the Las Vegas shooting, the California Wildfires and Hurricanes Harvey, Irma and Maria. Moreover, the rise of crowdfunding websites in today’s hyper-social environment has made it easier for individuals and organizations to raise money in less time than ever before. However, not all giving is created equal. To qualify for a charitable deduction, please consider the following:
- Ensure the charity meets the IRS’s qualifications as a tax-exempt organization. Criminals are known to take advantage of devastating events and create bogus charities for which they use the telephone, email and social media to solicit donations from unsuspecting and altruistic victims. Before reaching into your pocket, visit the IRS’s Exempt Organization (EO) Select Check online tool at https://apps.irs.gov/app/eos/. A gift may be tax deductible only is it is given to a tax-exempt organization and not set aside for use by a specific person. This is an especially important point to remember when donating to crowdfunding campaigns. If the project is not associated with a qualified 501(c)(3) charity or if your monetary contribution is intended to benefit a named person or persons, the IRS will not allow you to claim a tax deduction.
- Understand the limits of charitable deductions. Generally, charitable giving can provide you with a deduction of 20 percent, 30 percent or 50 percent of your adjusted gross income (AGI), depending on the type of property you donate and the type of organization to which you give. However, for the 2017 tax year, Congress lifted the 50 percent of income limit on qualified contributions to hurricane relief charities in order to allow taxpayers to make larger gifts during a time of significant need.
- Decide what type of gift to give. Deductible monetary gifts are those you make by cash, check, credit card or payroll deductions to qualifying organizations. The deduction for gifts of personal property, including clothing, toys or furniture, is limited to the item’s fair market value (FMV), or the amount you would receive if you were to sell those items on the open market. When the FMV of property such as cars or boats exceeds $500, your deduction will be the lesser of 1) the gross proceeds the organization receives from its sale of the vehicle or 2) the vehicle’s FMV on the date of the contribution. When you give a gift of sticks, land or other appreciated assets that you held for more than one year, your deduction will be limited to 20 percent of your AGI. However, by gifting those assets to a charity, you may be able to avoid capital gains taxes on the disposition of those assets and reduce the amount of your adjusted gross income that is subject to the Alternative Minimum Tax (AMT).
- Keep receipts and records proving all donations. When making monetary gifts, ensure that the receiving organizations provide you with a receipt or written statement that lists your name, the name of the charity, and the date and amount of each of your contributions. To substantiate gifts you make via payroll deductions, you must keep copies of pay-stubs or Form W-2 wage statements that show the amount withheld and the name of the receiving charity.
- Give before Dec. 31, 2017. To receive a potential deduction in the current tax year for monetary gifts, you must mail or use a credit card to charge your donation before the last day of the year. This applies even if the organization does not deposit your gift until after Jan. 1, 2018.
- Forget the deduction and give your time. Countless organizations are in dire need of volunteers to lend their time and help advance their goals and mission. While you may not deduct the value of the time you spend as a volunteer, the IRS does allow you to deduct the miles you travel to and from the locations where you donate your time.
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 firstname.lastname@example.org.
Posted on December 01, 2017 by
As the end of the year approaches, individuals have a very limited amount of time to avoid an unexpected tax bill in 2018 by adjusting the amount of tax withheld from their salaries and paid directly to the IRS on their behalf.
Under the U.S.’s pay-as-you-go system of taxation, individuals pay most of their taxes during the year, as they receive income. These taxes can be paid either through quarterly estimated payments or, in the case salaried workers, by having their employer withhold income taxes automatically from their paychecks. The amount withheld will depend on an individual’s taxable earnings as well as his or her marital status, number of dependents and qualifying credits and deductions. Therefore, it is recommended that taxpayers annually update their W-4, Employee Withholding Allowance Certificates, to correspond with life events, such as marriage, divorce, death of a spouse, birth of child or having a child turn 19 (or 24 if he or she is a full-time student), which will affect the amount of taxes their employers withhold. In addition, the IRS recommends that the following taxpayers also consider conducting withholding checkups throughout the year.
- Taxpayers who received large tax refunds in prior years. While taxpayers are often happy to receive a refund from the IRS, it may mean that they had too much money withheld from their pay during the year. Rather than giving earnings to the government in what could be considered an interest-free loan, taxpayers can instead change their withholding and have more money from their pay go directly into their pockets.
- Taxpayers who owed taxes in years past. Just as individuals can have too much tax withheld from their paycheck, they may have too little withheld, which can lead to both a tax bill and an additional penalty.
- Taxpayers with more than one job. In today’s sharing economy, individuals who earn additional income from car driving services, such as Uber or Lyft, or who rent out rooms or apartments via Airbnb or other vacation rental service, must carefully check the total amount of taxes they have withheld to ensure it covers the total amount of taxes they owe based on combined income from all their jobs.
- Taxpayers who make estimated tax payments. Self-employed taxpayers, partners or S Corporation shareholders who make quarterly estimated tax payments throughout the year but who also work for an employer, should consider whether they can have more tax taken out of their salary and forego the estimated tax payments.
- Taxpayers with a new job. The total amount of tax an individual has withheld from the salary from a new job must consider the income taxes they will owe from both the new and old jobs combined.\
To avoid a tax liability surprise next year, taxpayers may complete and submit to their employers a new Form W-4 before the end of the year in order to adjust the amount of federal income taxes taken from their final paychecks in 2017.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.