Tag Archives: tax reform

Death Warrant in the Tax Proposal?

photo of Larry Goldsmith

Larry Goldsmith

The Senate and Congressional income tax bills propose to eliminate itemized medical deductions.  For the elderly, who depend on pensions and social security income, and who require nursing homes and private caregivers, this deduction is essential. Nursing home expenses and caregiver costs can easily exceed $100,000 annually. If an elderly individual with an annual income of $80,000 is forced to pay taxes on the $80,000, this individual will not have the financial resources for necessary living expenses.

Larry Goldsmith is a partner and director of litigation services at CJBS, LLC. Mr. Goldsmith is regularly engaged to be a financial forensic expert witness in matters of divorce and business litigation.

Questions or comments? E-mail Larry Goldsmith at larry@cjbs.com if you have any questions about this posting or if he can be of assistance in any way.

IRS Issues 2015 Inflation-Adjusted Vehicle Depreciation Dollar Limits

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

The IRS has released the inflation-adjusted limitations on depreciation deductions for business use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 limitations to reflect passage of the Tax Increase Prevention Act of 2014 late last year.

At the end of 2014, Congress extended bonus depreciation to the 2014 tax year in the case of passenger vehicles. Congress has not, however, done the same for passenger vehicles placed in service during 2015. This means that although several of the 2015 limits have been adjusted upward for inflation, the total amount a taxpayer may deduct for a vehicle placed in service during 2015 will be effectively $8,000 lower than for a vehicle placed in service during 2014, unless Congress again provides retroactive relief this year.

Depreciation limits

The Internal Revenue Code imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year.  The IRS adjusts for inflation the amounts allowable for depreciation deductions.

Passenger automobiles

The maximum depreciation limits for passenger automobiles first placed in service during the 2015 calendar year are:

  • $3,160 for the first tax year;
  • $5,100 for the second tax year;
  • $3,050 for the third tax year; and
  • $1,875 for each succeeding tax year.

Trucks and vans

The maximum depreciation limits under for trucks and vans first placed in service during the 2015 calendar year are:

  • $3,460 for the first tax year;
  • $5,600 for the second tax year;
  • $3,350 for the third tax year; and
  • $1,975 for each succeeding tax year.

Sport Utility Vehicles (SUVs) and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for business owners and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

Top Tax Developments of 2014 with Impact on 2015

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

2014 was a notable year for tax developments on a number of fronts. Selecting the top tax developments for 2014 requires judgment calls based upon uniqueness, taxpayers affected, and forward looking impact on 2015 and beyond. With respect to David Letterman, the following list of 2014 tax developments reflects this prioritization in no particular order.

Passage of the Extenders Package
2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one senator put it, “This tax bill doesn’t have the shelf life of a carton of eggs,” referring to the fact that the 50-plus extenders provisions expired again on January 1, 2015. Instead, it has been left to the 114th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break.

Affordable Care Act
In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far reaching requirements, known as the “individual mandate”, took effect on January 1, 2014. Unless exempt, individuals who fail to carry minimum essential health coverage will make a shared responsibility payment in 2015. Another key provision, the “employer mandate”, was further delayed to 2015. Employer reporting for 2014 is voluntary. The IRS also developed new forms for reporting many new requirements.

Repair Regulations
In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping “repair” regulations. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property, including the identification of assets, the treatment of dispositions, and the computation of gain and loss. The complexity of the repair regulations has not gone unnoticed by many tax professionals, who have asked the IRS to simplify some of the provisions.

IRS Operations
IRS predicted a complex and challenging 2015 filing season due to cuts in the Service’s funding. This dictates the Service having to do more with less because of budget cuts. The IRS is funded $1.5 billion below the amount requested. IRS could face another round of budget cuts under the new Republican controlled Congress for 2016.

Net Investment Income Tax
Many higher income individuals were surprised to learn the full impact of the net investment income tax (“NII”) on their overall tax liability during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income tax. Recent run ups in the financial markets, combined with the fact that the thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.

Retirement Planning
A number of changes were made during 2014 affecting IRAs and other qualified plans, which cumulatively rise to the level of a “top tax development” for 2014:

  • Distributions from a qualified retirement plan account are now able to have the taxable and non-taxable portions of the distribution directed to separate accounts.
  • 401(k) plans can now offer deferred annuities through target date funds.
  • A Tax Court ruling held that a taxpayer is limited to one 60-day rollover per year for all IRA accounts rather than one 60-day rollover per year for each IRA account. The IRS stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
  • A 2014 Supreme Court decision found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.
  • The IRS announced the 2015 cost-of-living adjustments for qualified plans. Many retirement plan contribution and benefit limits increase slightly in 2015.

Identity Theft
Although clearly not confined to the area of Federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft.

Tax Reform
Although 2014 was clearly not the year for tax reform, the foundations for serious tax reform discussions were laid in 2013 and 2014. Looking ahead to 2015 and beyond, it is possible that Congress will complete some form of tax reform in 2015 or 2016.  The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Many leaders have called for tackling comprehensive tax reform on both the business and individual side. The Senate Finance Committee expects to hold tax reform hearings in 2015.

Conclusion
So what does this all mean? To continue the theme from the last few years, the tax world is ever evolving with increased complexity. Both current and long term planning is as essential as ever. Other 2014 developments may prove more significant to your particular situation.  Be sure to seek advice from a dental specific tax accountant to discuss your unique circumstances.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

House Bill Would Expand 529 College Savings Plans

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

Representatives Lynn Jenkins (R-Kansas), and Ron Kind (D-Wisconsin), introduced legislation that would expand and strengthen tax-free Section 529 college savings plans. The bipartisan measure stands in stark contrast to President Obama’s proposal to end the program, which the administration outlined earlier and was referred to in the president’s State of the Union Address.  However, in a late-breaking development, the president, after pressure from Republicans and Democratic leaders, indicated that he would drop his proposal to end the tax break for Section 529 college savings plans.

The decision was made shortly after House Speaker John Boehner (R-Ohio), appealed to the president to drop the proposal in his budget, due out on February 2nd. House Democratic Leader Nancy Pelosi, (D-California), and House Budget Committee ranking member Chris Van Hollen (D-Maryland), also asked the president not to include the proposal in his budget.

The bill would clarify that computers are a qualified expense for Section 529 account funds and remove all distribution aggregation requirements. The current rules were designed for when earnings were taxed to the beneficiary at distribution. However, since 2001, the tax treatment changed and Jenkins said there is no policy need for such aggregation. This would also eliminate a paperwork burden for Section 529  plan administrators.

In addition, the bill would permit refunds to be re-deposited without taxes or penalties within 60 days of the student withdrawing from the college due to illness or other reason. Currently, the refund would be subject to income tax on the earnings and a 10% penalty.

“This bill would expand Section 529 plans to further promote college access and eliminate barriers for middle class families to save and plan ahead,” said Jenkins. “This bipartisan, sensible legislation strengthens an extremely popular savings plan for middle-class families so that all Americans have the opportunity to send their children to the college institution of their choice.”

Since the creation of Section 529 in 1996, the savings plan has grown to nearly 12 million accounts and resulted in college savings of more than $225 billion, according to figures released by Jenkins’ staff.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

Navigating the Tax Obstacles of Investing in 2014

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

It’s never been easy to navigate the various tax consequences of buying and selling securities and investments. Among the many obstacles investors need to consider in 2014 is the relatively new net investment income tax (“NIIT”). This 3.8% tax may apply to your net investment income if your income exceeds certain levels. And the tax can show up when you least expect it – for example, passive activity and qualified dividend income are subject to the tax. Some other tax issues related to investing should also be considered.

Capital Gains Tax and Timing
Although time, not timing, is generally the key to long-term investment success, timing can have a dramatic impact on the tax consequences of investment activities. Your long-term capital gains rate might be as much as 20 percentage points lower than your ordinary income rate. The long-term gains rate applies to investments held for more than 12 months. The applicable rate depends on your income level and the type of asset sold. Holding on to an investment until you’ve owned it more than a year may help substantially cut tax on any gain.

Remember, appreciating investments that don’t generate current income aren’t taxed until sold. Deferring tax and perhaps allowing you to time the sale to your advantage can help, such as in a year when you have capital losses to absorb the capital gain. If you’ve already recognized some gains during the year and want to reduce your 2014 tax liability, consider selling unrealized loss positions before the end of the year.

Loss Carryovers
If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married filing separately) of the net losses per year against ordinary income. You can carry forward excess losses indefinitely. Loss carryovers can be a powerful tax-saving tool in future years if you have an investment portfolio, real estate holdings or a practice that might generate future capital gains. Also remember that capital gain distributions from mutual funds can absorb capital losses.

Income Investments
Qualified dividends are taxed at the favorable long-term capital gains tax rate rather than the higher, ordinary income tax rate. Qualified dividends are, however, included in investment income under the 3.8% NIIT.

Interest income generally is taxed at ordinary income rates, which are now as high as 39.6%. Stocks that pay qualified dividends may be more attractive tax wise than other income investments, such as CD’s, money market accounts and bonds. Note some dividends are subject to ordinary income rates.

Keep in mind that state and municipal bonds usually pay a lower interest rate, but their rate of return may be higher than the after tax rate of return for a taxable investment, depending on your tax rate. Be aware certain tax-exempt interest can trigger or increase alternative minimum tax.

Mutual Funds
Investing in mutual funds is an easy way to diversify your portfolio. But beware of the tax ramifications. First, mutual funds with high turnover rates can create income that’s taxed at ordinary income rates. Choosing funds that provide primarily long-term capital gains can save you more tax dollars.

Second, earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund.

Additionally, buying equity mutual fund shares later in the year can be costly tax wise.  Such funds often declare a large capital gains distribution at year-end. If you own shares on the distribution record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year, even if you reinvest the distribution.

Paying Attention to Details
If you don’t pay attention to details, the tax consequences of a sale may be different from what you expect. For example, the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss. And if you bought the same security at different times and prices and want to sell the high tax basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

Passive Activities
If you’ve invested in a trade or business in which you don’t materially participate, remember the passive activity rules. Why? Passive activity income may be subject to the 3.8% NIIT, and passive activity losses generally are deductible only against income from other passive activities. Disallowed losses can be carried forward to future years, subject to the same limitations.

The Internal Revenue tax code is ever evolving and recent tax law changes have provided increased complexity. Tax obstacles related to investing is just one reason why it’s important to plan ahead and consider taking advantage of strategies available to you. You should always consult with your tax adviser to determine the best course of action.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

House Passes Child Tax Credit Improvement Bill

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

Married couples with children would no longer face a tax penalty when claiming the child tax credit under a House bill passed on July 25, 2014. House lawmakers voted 237 to 173 to approve the Child Tax Credit Improvement Bill of 2014.  The bill would eliminate the marriage penalty in the child tax credit by increasing the income phase-out threshold for couples filing joint tax returns from $110,000 to $150,000 ($75,000 for individuals and married taxpayers filing separately).

The bill would also index for inflation the phase-out threshold for the $1,000 credit beginning in calendar year 2015. To combat fraud, taxpayers would be required to include their Social Security numbers on tax returns in order to receive the Additional Child Tax Credit (ACTC), which is refundable.

Ways and Means Chairman Dave Camp noted that the Treasury Inspector General for Tax Administration has reported that the number of filers for the ACTC without a Social Security number grew from 62,000 filers (claiming $62 million in benefits) in 2000 to 2.3-million filers (claiming $4.2 billion in benefits) in 2010. “This is a common-sense provision that will help safeguard taxpayer dollars from fraud, and put it in line with other refundable tax credits, like the Earned Income Tax Credit, which require a Social Security number,” he said.

House Rules Committee Chairman Pete Sessions said Republicans are fighting to make sure that hardworking American families keep more of their paychecks. “That’s why today the House passed legislation to provide common-sense reforms to ensure that the child tax credit keeps up with the rising cost of living,”” he said.

According to the Joint Committee on Taxation (JCT), eliminating the marriage penalty in the child tax credit and adding the inflation adjustment would cost $114 billion over the next decade. Part of that cost would be offset, in the amount of $24 billion, by requiring the use of Social Security numbers for the ACTC. In total, the JCT estimates that would cost $90.3 billion.

Under the bill, a married couple making $160,000 with two children would get an additional $2,200 in their 2018 tax refund, according to a study by the Center on Budget and Policy Priorities (CBPP).  The CBPP study estimates that a single mother of two making $14,500 would see her refund cut by $1,750 under the legislation.

The White House has threatened to veto the bill if it passes Congress. The measure would raise taxes for millions of struggling working families while enacting expensive new tax cuts without offsetting their costs, reflecting fundamentally misplaced priorities, the administration said. “If Republicans want to show they are serious about helping working families through the Child Tax Credit, they should start by extending current provisions past 2017,” the statement reads.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Tax Reform Proposals Released From White House, Congress; Next Steps Uncertain

Michael Blitstein

Michael Blitstein

by Michael W. Blitstein, CPA

Shortly before President Obama unveiled his proposed fiscal year 2015 Federal budget on March 4th, House Ways and Means Chair Dave Camp (R-Mich.), introduced a sweeping tax reform bill. While President Obama did not call for such a mammoth overhaul of the Tax Code as Camp did, the President did include many tax proposals in his budget, affecting individuals, businesses and tax administration.

In Camp’s bill, two greatly affected groups are taxpayers in high-tax states, who would be impacted by elimination of the deduction for state and local taxes, and corporations, which would benefit from a corporate tax cut, but one that would be partially paid for by higher taxes on small and mid-size businesses that are generally structured as pass-through entities.

Both the President and Camp quickly took to social media to promote their proposals. At a news conference, House Speaker John Boehner (R-Ohio), indicated it was unlikely Camp’s bill would come before the House for a vote. Republican support for many of the President’s proposals remains even less likely before mid-term elections.

Obama’s proposals

As in past budgets, President Obama proposed tax incentives for manufacturing, research, energy, and job creation. The President called for Congress to make permanent the research tax credit and expand incentives for employers to hire veterans. Carried interest would taxed as ordinary income and payroll taxes would be extended to cover distributions from certain pass-through entities engaged in a professional service business.

President Obama signaled a willingness to reduce the corporate tax rate but would require the elimination of some business incentives, particularly tax preferences for fossil fuels, in exchange. The President also proposed a number of international and insurance taxation reforms.

For individuals, President Obama proposed to enhance the earned income credit (EIC) for individuals without children and noncustodial parents, and make permanent the American Opportunity Tax Credit. The President also proposed to reduce the value of certain tax expenditures for higher income individuals.

Camp’s bill

Camp’s bill would replace the current seven individual income tax rate brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) with three rates: 10, 25 and 35 percent. In addition, many incentives for individuals would be repealed, including the state and local tax deduction, the itemized deduction for medical expenses, the adoption credit, deduction for alimony payments, the deduction for higher education tuition, and residential energy credits. A few incentives would be enhanced, such as the child tax credit.

Two popular individual incentives—the home mortgage interest deduction and the charitable contribution deduction—would survive under Camp’s plan but in modified form.

Camp’s bill would gradually reduce the corporate tax rate to 25 percent. Few targeted business tax incentives would survive. Camp’s plan eliminates the Work Opportunity Tax Credit, many energy-related incentives, the rules for like-kind exchanges, and more. However, Code Section 179 small business expensing would be enhanced. The research tax credit would be retained but modified.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Tax Policies of the Major Presidential Candidates

by Michael W. Blitstein, CPA 

On November 6, 2012, Americans will elect the occupant of the White House for the next four years. As President of the United States, the winner will play a major role shaping tax policy and possibly reforming the entire Tax Code. This briefing describes the tax policies of President Obama and former Governor Mitt Romney, with analysis of the potential impact of their tax positions both for the immediate future and for 2014 and beyond.

Impact

Under current law, the Bush-era tax cuts (reduced income tax rates, reduced capital gains/dividends tax rates, and much more) are scheduled to expire after December 31, 2012. Effective January 1, 2013, sequestration under the Budget Control Act of 2011 is scheduled to take effect, with the goal of reducing the Federal budget deficit by nearly $1 trillion over 10 years. In addition, after 2011, a host of so-called tax extenders expired, and after 2012, numerous additional temporary incentives are scheduled to sunset. Moreover, the 2012 payroll tax holiday, which reduced the employee-share of OASDI taxes by two percentage points, is also slated to expire after December 31, 2012. The combination of all these events has many commentators referring to 2013 as “taxmageddon” or the “fiscal cliff.”

The balance between Democrats and Republicans in the House and the Senate may also change on election day. However, whether either party acquires sufficient political capital, let alone a mandate, on taxes to address short-term issues such as sunsetting provisions and long-term issues like tax reform, remains to be seen.

Caution

Between the date of publication and election day, the positions of the candidates may change. CJBS has based this briefing on what we consider accurate, nonpartisan and unbiased information at the time of publication.

SELECTED POSITIONS
Obama —Individual taxes Romney – Individual taxes
2013 rates higher for higher-income taxpayers only 2013 rates same as 2012 for all taxpayers
Unspecified future date: lower rates for middle/lower income brackets Unspecified future date: 20% income tax rate reduction for all taxpayers
Higher capital gains/dividend rate for higher-income taxpayers Eliminate tax on investment income for AGI below $200,000
$3.5 million estate tax exemption/45% rate Abolish the estate tax
Replace AMT with “Buffett rule” Repeal the AMT
Obama – Corporate Taxes Romney—Corporate Taxes
Reduce maximum corporate tax rate to 28% (25% for manufacturing) Reduce maximum corporate rate to 25%
Maintain worldwide system but with reforms Implement territorial system of international tax
 SELECTED CHANGES IN FEDERAL TAXES: 2012-2013 IF CONGRESS FAILS TO ACT
2012 2013
Top individual tax rate 35% 39.6%
Capital Gains 15%* 20%
Dividends 15%* Taxed at ordinary income rates
Top estate tax rate 35% 55%
Child tax credit $1,000 $500
AOTC Up to $2,500 Unavailable
Code Sec. 179 dollar limit $139,000** $25,000
WOTC for veterans Up to $9,600 Unavailable
Research tax credit Unavailable Unavailable
Wind energy PTC Available Unavailable
*Zero percent for taxpayers in the 10 and 15 percent brackets
**As adjusted for inflation

Individuals: 2014 and Beyond

The basic goal for tax reform on the individual tax level expressed by both candidates is to broaden the tax base and lower tax rates. The candidates agree that tax reform should be revenue neutral. Each candidate also forecasts an improved economy from the savings of a simplified tax system and lower overall rates.

Businesses: 2014 and Beyond

Corporate tax reform, and business tax reform in general, has been raised by several Congressional committees and both candidates over the past year as a necessary long range step in making businesses more innovative and competitive. Based upon the multilayered considerations involved, however, concrete changes are not anticipated until 2014 or later.  Specific issues include:

  • Corporate Tax Rates
  • International Proposals
  • Other Business Reforms

Note: A more comprehensive PDF version of this brief can be seen on the CJBS website at: http://www.cjbs.com/Email/October2012/CJBS_long.pdf

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com