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Month: October 2017

Arrange RMDs before Year End

Posted on by Debra Barcuch

2017-2018 Tax Update

Per IRS rules, people generally must begin taking required minimum distributions (RMDs) from their retirement plans and IRAs (except Roth IRAs) beginning after age 70½. And they must continue taking RMDs year in and year out without fail. This article answers the questions of when to begin taking RMDs, the penalties for not taking them and why it’s best not to wait until year end to take them.

Arrange your RMDs before year end

During the course of your career, you may have managed to build up a tidy nest egg, most likely augmented by tax-favored saving devices. For instance, you may have accumulated funds in qualified retirement plans, like 401(k) plans and pension plans, and traditional and Roth IRAs. If you don’t need all the funds to live on, your goal likely is to preserve some wealth for your heirs.

Can you keep what you want? Not exactly. Under strict tax rules, you generally must begin taking required minimum distributions (RMDs) from your retirement plans and IRAs (except Roth IRAs) after age 70½. And you must continue taking RMDs year in and year out without fail. Don’t skip this obligation for 2017, because the penalty for omission is severe.

When should you begin taking distributions?

RMD rules apply to all employer-sponsored retirement plans, including pension and profit-sharing plans, 401(k) plans, 403(b) plans for not-for-profit organizations and 457(b) plans for government entities. The rules also cover traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE-IRAs. But you don’t have to withdraw an RMD from a qualified plan of an employer if you still work full-time for the employer and you don’t own more than 5% of the company.

The required beginning date for RMDs is April 1 of the year after the year in which you turn age 70½. For example, if your 70th birthday was June 15, 2017, you must begin taking RMDs no later than April 1, 2018. This is the only year where you’re allowed to take an RMD after the close of the year for which it applies. (Keep in mind that delaying the first RMD will result in two RMD withdrawals during that tax year.) The deadline for subsequent RMDs is December 31 of the year for which the RMD applies.

If you’ve inherited a retirement plan, contact us for information on when you must begin taking RMDs. And if you inherited a Roth IRA, be aware that you will be required to take RMDs.

How much is your RMD?

To calculate the RMD amount, you divide the balance in the plan account or IRA on December 31 of the prior year by the factor in the appropriate IRS life expectancy table.

Although you must determine the RMD separately for each IRA you own, you can withdraw the total amount from just one IRA, or any combination of IRAs that you choose. However, for qualified plans other than a 403(b), the RMD must be taken separately from each plan account.

What’s the penalty for failing to take RMDs?

The penalty is equal to a staggering 50% of the amount that should have been withdrawn, reduced by any amount actually withdrawn. For example, if you’re required to withdraw $10,000 this year and take out only $2,500, the penalty is $3,750 (50% of $7,500). Plus, you still have to pay regular income tax on the distributions when taken.

Keep in mind that with the additional income there are other tax issues, such as the net investment income tax (NIIT). RMDs aren’t subject to the NIIT but will increase your modified adjusted gross income for purposes of this calculation and thus could trigger or increase the NIIT. The NIIT might, however, be repealed under health care or tax reform legislation. (Contact us for the latest information.)

Don’t procrastinate!

Typically, taxpayers wait until December to arrange to take RMDs from qualified plans and IRAs. But that could be dangerous. It’s easy to be distracted during the holiday season and forget about the obligation. Furthermore, it can take several days, if not longer, for trading and settling funds. And haste can lead to errors and miscalculations that could cost you.

A better approach is to take your time. Make arrangements for RMDs well in advance of the December 31 deadline.

Download the 2017 – 2018 Tax Planning Guide

Have a Household Employee? Be Sure to Follow the Tax Rules

Posted on by Debra Barcuch

2017-2018 Tax Update

Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.”  This article looks at applicable taxes, such as Social Security, Medicare, unemployment and federal income.

Have a household employee? Be sure to follow the tax rules

Many families employ people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. The employer’s tax obligations for such workers is commonly referred to as the “nanny tax.” If you employ a domestic worker, make sure you know the tax rules.

Important distinction

Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, you must first determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.

Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.

Social Security and Medicare taxes

If a household employee’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2017, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the employee. (If you and the employee share the expense, you must withhold his or her share.) But don’t count wages you pay to:

  • Your spouse,
  • Your children under age 21,
  • Your parents (with some exceptions), and
  • Household employees under age 18 (unless working for you is their principal occupation).

The $2,000 domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax that’s also adjusted annually for inflation ($127,200 for 2017).

Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain commuting costs.

Unemployment and federal income taxes

If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.

The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal income tax — or, usually, state income tax — unless the employee requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except:

  • Meals you provide employees for your convenience,
  • Lodging you provide in your home for your convenience and as a condition of employment, and
  • Certain reimbursed commuting costs.

Excludible commuting costs include transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace.

Other obligations

As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).

After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.

The details

Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

Download the 2017 – 2018 Tax Planning Guide

Other Considerations Relating to CECL

Posted on by Debra Barcuch

CECL Considerations for Dealerships

The ECL will be reported in current earnings as an allowance for loan and lease losses (ALLL) in your entity’s financial statements. Because this new methodology could adversely affect a BHPH dealer’s net worth on financial statements, dealers will need to factor in CECL considerations and how adjusted financial statements could impact existing bank loan covenants or other credit agreements.

Banks will be aware of potential changes among their customers, but proactive communication will be important to ensure that relationships and access to credit remain intact.

Besides big changes in accounting methodologies for RFCs, it remains to be seen what this FASB standard means for established BHPH dealers seeking future access to traditional capital. BHPH loans, by their nature, are short-term loans with a high risk of default. Dealers rely on strong relationships with financing arms to purchase inventory and maintain operations through the ebb and flow of customer transactions and variable payment plans. As banks and other third-party financing arms adopt some form of CECL model for their portfolios, they will weigh the expected risk of loans even more heavily than before — which may limit their participation in financing higher risk industries like BHPH.

Well-managed BHPH dealerships can maintain strong cash flow by keeping customers in cars, collecting payments consistently, diversifying sources of revenue and reinvesting in a variety of inventory. As we have discussed in , there are ways to improve the scale and structure of your dealership to add value to the loan portfolio. We focus on your relationship with financing, your tax returns and operational changes to improve profits.

Download the Whitepaper: The Impact of New Credit Loss Standards on the BHPH Industry

In light of this new federal accounting standard for monitoring and calculating expected credit losses, BHPH operators of all sizes will likely require additional professional support. A CPA knowledgeable in BHPH operations can help you determine the standard’s impact on your current accounting methods, monitoring and reporting. Talk to the audit group at Cornwell Jackson to start planning for internal and external finance changes in the next few years.

Mike Rizkal, CPA is the lead partner in Cornwell Jackson’s Audit and Attest Service Group. He provides advisory services, including financial audit and attest services, to privately held, middle-market businesses. Contact him at mike.rizkal@cornwelljackson.com

 

 

 

Deduct Now, Donate Later

Posted on by Debra Barcuch

2017-2018 Tax Update

Taxpayers who are planning on making significant charitable donations should consider a donor-advised fund (DAF). Such a fund offers many of the tax and estate planning benefits of a private foundation, but at just a fraction of the cost. This article explains how a DAF works and its benefits, such as the ability to deduct DAF contributions immediately but make gifts to charities later. A sidebar discusses how private foundations can offer important advantages for those who can afford them.

Deduct now, donate later Donor-advised funds offer significant benefits

If you’re planning to make significant charitable donations, consider a donor-advised fund (DAF). A DAF offers many of the tax and estate planning benefits of a private foundation, at a fraction of the cost. Most important, a DAF allows you to take a significant charitable income tax deduction now, while deferring decisions about how much to give — and to whom — until the time is right.

What is a DAF?

A DAF is a tax-advantaged investment account administered by a not-for-profit “sponsoring organization,” such as a community foundation or the charitable arm of a financial services firm. Contributions are treated as gifts to a Section 501(c)(3) public charity, which are deductible up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for contributions of appreciated property (such as stock).

Like other gifts to public charities, unused deductions may be carried forward for up to five years. And funds grow tax-free until they’re distributed.

Although contributions are irrevocable, you’re allowed to name the account and recommend how the funds will be invested (among the options offered by the DAF) and distributed to charities over time. You can even name a successor advisor, or prepare written instructions, to recommend investments and charitable gifts after your death.

Technically, a DAF isn’t bound to follow your recommendations. But in practice, DAFs almost always respect their donors’ wishes — otherwise, they’d have a hard time attracting contributions. Generally, the only time a fund will refuse a donor’s request is if the intended recipient isn’t a qualified charity.

What are the benefits?

DAFs offer a variety of valuable benefits, such as:

Immediate tax deduction. The ability to deduct DAF contributions immediately but make gifts to charities later is a big advantage. Consider this scenario: Rhonda typically earns around $150,000 in AGI each year. In 2017, however, she sells her business, lifting her income to $5 million for the year. Rhonda decides to donate $500,000 to charity, but she wants to take some time to investigate charities and spend her charitable dollars wisely. By placing $500,000 in a DAF this year, she can deduct the full amount immediately and decide how to distribute the funds in the coming years. If she waits until next year to make charitable donations, her deduction will be limited to $75,000 (50% of her 2018 AGI).

Even if you have a particular charity in mind, spreading your donations over several years can be a good strategy. It gives you time to evaluate whether the charity is using the funds responsibly before you make additional gifts. A DAF allows you to adopt this strategy without losing the ability to deduct the full amount in the year when it will do you the most good.

Another benefit of making donations in a big income year is that the higher the donor’s tax bracket, the more valuable the deduction.

Capital gains avoidance. An effective charitable-giving strategy is to donate appreciated assets — such as securities, real estate or interests in a business. You’re entitled to deduct the property’s fair market value and you can avoid the capital gains taxes you would have owed had you sold the property. But not all charities are equipped to accept and manage this type of donation. Many DAFs, however, have the resources to accept contributions of appreciated assets, liquidate them and then reinvest the proceeds.

Ease of use. DAFs can greatly simplify the estate planning and charitable giving process, substantially reducing your costs. Once you’ve established a DAF, making a charitable gift is simply a matter of sending instructions to the sponsor. The sponsor takes care of confirming the charity’s tax-exempt status, sending the contribution and obtaining necessary acknowledgments.

A DAF also enables you to streamline your estate plan by setting up a single vehicle for all of your charitable bequests. By naming a DAF, rather than individual charities, as a beneficiary of your will, trusts, retirement accounts or life insurance policies, you avoid the hassle and expense of modifying these documents if your charitable priorities change.

Anonymity. Making anonymous gifts to individual charities, while obtaining IRS-required acknowledgments, can be a challenge, particularly for noncash donations. But, when you use a DAF, the sponsor handles the transaction, making it easy to protect your privacy if you so desire.

Do your homework

If you’re contemplating a DAF, be sure to shop around. Fund requirements — such as minimum contributions, minimum grant amounts and investment options — vary from fund to fund, as do the fees they charge. So, work with your financial advisor to find a fund that meets your needs.

Sidebar: DAFs vs. private foundations

Donor-advised funds are similar to private foundations in that they allow you to make tax-deductible contributions while retaining the right to make charitable gifts over time. But foundations are expensive to set up and administer, and they’re subject to excise taxes, minimum distribution requirements and lower deduction limits (30% of AGI for cash; 20% for appreciated property).

Private foundations offer important advantages, however, for those who can afford them. For example, they give you complete control over investments and gifts, they’re permitted to compensate family members who work for the foundation, and they’re allowed to make gifts to individuals (such as scholarships or grants) under certain circumstances.

Download the 2017 – 2018 Tax Planning Guide

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