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Trump Taxes and 2016 tax planning for higher income earners
By Stacie Clifford Kitts
The proposed tax plans offered up by President Elect Trump and the House Republican Tax Reform Plan are presenting some unique year-end tax planning challenges.
The most common question that taxpayers are asking is, will tax rates be lower in 2017?
To help answer this question, we should first review how our tax rates work now.
We currently pay federal income taxes at graduated rates ranging from 10% to 39.6%. However, if you are a higher income earner making more than $125,000 (single) or $250,000 (married), you may pay an additional 3.8% tax on your net investment income, making your top federal rate 43.4%.
An analysis of Trump’s current plan, indicates that if your income is over approximately $425,400 (single) and $487,650 (married), you may (depending on your itemized deductions) see a significant reduction in income taxes under his plan.
However, middle class taxpayers may face an increase in tax depending on the size of their family and filing status. This is largely due to the Republican and Trump plans which seek to limit itemized and dependent deductions, expand income tax brackets, and repeal the personal exemption and head of household status.
To help better understand the possible impact on your taxes, here are some of the key proposals affecting higher income earners (AGI over $150K). Because the Trump and Republican plans are not the same, we will most likely see some sort of mix of the two plans:
Individual income tax
- Both Trump, and the House Republican Plan, will drop the number of income tax brackets to just three, at 12%, 25%, and 33%.
- The plan will also eliminate the alternative minimum tax (yay),
- it also eliminates all itemized deductions (boo) except mortgage interest and charitable giving.
- They have further proposed to limit the amount of total itemized deduction to $100,000 (Single) and $200,000 (Married). This proposal will reduce the tax incentive for charitable giving once your itemized deductions reach the allowed limit.
- Significantly for us here in California, state income taxes paid would no longer be deductible on Federal returns.
Investment income
The top rate for long term capital gains is currently 20% plus the 3.8% investment tax imposed by the Affordable Care Act (for high income earners), for a total top rate of 23.8%. Interest and non-qualified dividend income is taxed at ordinary rates.
Trump’s Plan
Trump proposes to repeal the affordable Care Act including the 3.8% tax which will cap long term capital gains at 20%.
House Republican’s Plan
On the other hand, the House’s plan would apply tax to 50% of interest income, dividends and capital gains at ordinary income tax rates. The remaining 50% would not be subject to tax. This translates to a top rate of 16.5% for investment income.
Estate and gift tax
Under current law, estates are subject to a 40% tax on the estates value over $5.45 million. In addition, beneficiaries of the estate receive a step-up in the basis of the assets value equal to the fair market value at the date of death.
Trump and the House Republican Plan propose a repeal of the estate and gift tax entirely. Trump proposes to repeal the step up in basis provision and replace it with a carryover provision for computing taxable gains on sales for estates in excess of $5 million (single) or $10 million (married). The Republican Plan provides for carryover of basis on all assets.
Business tax
The top corporate tax rate is currently 35%. Income from pass-through businesses such as partnerships and S-corporations are taxed at individual rates.
Trump’s Plan
- Trump’s plan would reduce top corporate income taxes from 35% to 15% and repeal corporate AMT tax.
- Individuals can elect a tax rate of 15% for business income from pass-through entities (including sole proprietorships).
- Distributions from large pass-through businesses received by owners who elected the 15% flat rate would be taxed as dividends. (included in overall personal taxable income)
- The Trump plan eliminates all tax credits (tax incentives) except the research credit.
- The plan would allow businesses to elect to expense capital equipment, structures and inventories directly rather than over time. However, if direct expense is elected, interest expense deductions would not be allowed.
House Republican’s Plan
- The Republican Plan would reduce the corporate tax to a flat 20%.
- Eliminate the corporate alternative minimum tax.
- Income from pass-through entities would top out at 25%.
- Costs of capital investments are immediately deductible
- Eliminates the deductibility of net interest expenses on future loans.
- Restricts the deduction for net operating losses to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflation and the real return to capital. Does not allow net operating losses to be carried back.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.[Tax Foundation]
Conclusion
An analysis of your personal itemized deductions along with the type of income to be reported on your return, including pass through or investment income, is necessary to determine the actual impact of these proposed tax plans on your 2017 income tax. Higher income earners might consider deferring income into 2017 if possible.
Many Business Tax Filers Can File for 2012 Starting Feb. 4 But many others are Looking at late Feb. Early March before they can file
Many businesses will be able to file their 2012 federal income tax returns starting Monday, Feb. 4. Filers of forms affected by January tax law changes will need to wait until late February or early March.
These delay dates impact the release of your electronically prepared returns. They do not prevent Katherman Kitts from preparing your tax return.
Katherman Kitts wants to remind our clients that there is no push back on the March 15 (business filers) and the April 15 (individual filers) due dates for your tax returns. Therefore, we still need enough time to receive the information and to prepare your returns before the filing deadlines. Please, continue to send the information to prepare your returns as soon as possible.
The Monday opening covers non-1040 series business returns for calendar year 2012, including Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships, Form 990 filed by exempt organizations and most users of Form 720 , Quarterly Excise Tax Return. This includes both electronic filers and paper filers.
While many businesses will be able to file starting Feb. 4, there are a number of business forms still being updated for 2012. The IRS will announce soon when individual and business taxpayers can begin filing returns that include any of the delayed forms. Processing of these forms were delayed while the IRS completes programming and testing of its processing systems to reflect changes made by the American Taxpayer Relief Act (ATRA) enacted by Congress on Jan. 2.
A full list of the affected forms is available on IRS.gov.
In addition to the forms listed on IRS.gov, filing of two other business forms is affected by the delay, but only for electronic filers. Businesses using Form 720 and filling out lines 13 and 14 cannot file yet electronically, but they can file on paper. Other Forms 720 are being accepted electronically. In addition, Form 8849 Schedule 3, Claim for Refund of Excise Taxes, is not currently being accepted electronically, but it can be filed on paper.
Additional information will be posted soon on IRS.gov.
IRS Presents: Six Tax Tips for New Business Owners
Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know.
- First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
- The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
- An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
- Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
- Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
- Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
IRS Publication 583, Starting a Business and Keeping Records, provides basic federal tax information for people who are starting a business. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.
IRS Presents: What to do With Your Business Start-up and Organization Costs
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 8.
Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation. For more information on start-up and organizational costs, see chapter 8 [of publication 535] .
Extend The Due Date To Pay Your Corporate Income Taxes – A Good Reminder From a Past Post
Do you have a profit in the current year, but because of certain economic conditions, or other factors you expect to have a net operating loss next year?
If the answer is yes, you may be able to delay payment of your corporate income taxes.
Yes – Really, you can delay payment of corporate income taxes if the right conditions exist.
Generally, if you request an extension of time to file your tax return, you are extending the due date of the return, but not the due date for paying your income tax. As corporate tax payers know, their income taxes are due in full by the 15th day of the third month following the corporation’s year-end.
However, you may be able to extend the due date for paying your corporate income taxes by filing Form 1138 Extension of Time for Payment of Taxes by a Corporation Expecting A Net Operating Loss Carry back.
In order to take advantage of this extension of time to pay your tax, you must also extend the due date of your corporate income tax return using Form 7004 Application for Automatic Extension of Time to File Certain Business Income Tax. Payment is delayed [and therefore not deposited with Form 7004] because taxes that normally would be deposited will be reduced or possibly eliminated by the carry back of the net operating loss from the following year.
File the Form 1138 after the beginning of the tax year where you expect a net operating loss, but before the original due date of the tax return.
The extension for payment is in effect until the return for which the extension is requested is due to be filed – including extensions.
Note: Not all payments are extended. If you were required to make estimated payments throughout the year, these will most likely not be extended. Only payments that would be due after you file Form 1138 are extended.
Joe Schmo Didn’t Think He Needed Any Tax Planning
By Stacie Clifford Kitts, CPA
Joe Schmo’s [cash based] business did exceptionally well during the year. He closed the biggest deal of his life and collected a large amount of cash. Joe was very pleased with his performance and knew he deserved a reward for all his hard work.
Now Joe had always wanted to own a BMW. The problem being, the fully loaded price of Joe’s dream car was approximately $100,000. For the first time in his professional career, Joe felt he could indulge in his dream and buy the expensive car. So sometime in the year, Joe headed to the dealership where on behalf of his company he skillfully negotiated a pretty good price on that expensive car. And by the end of the day, Joe had written a check that paid for his dream, and substantially reduced the balance in his business bank account.
With his wealth of cash, Joe felt he should get some other things he wanted too. So one day when the summer heat was causing him to sweat through his suit, Joe decided to purchased a new air-conditioning unit along with some other building improvements for his office – the cost $50,000.
Joe also learned that his computer system needed an expensive overhaul, the cost of which would be approximately $75,000. Although Joe had the system installed by December, he didn’t get around to actually writing the check until January of the following year. Pulling out his checkbook, he wrote a check making sure to back date it to December 31. With that, he had successfully spent all the remaining money in his business account.
But was Joe worried about the lack of funds in his account? Nope.
Joe remembered that in previous years his tax advisor had counseled him to determine what items he needed to purchase for his business and to make sure he bought them by the end of the year. This would reduce his taxable income, and hence no income taxes would be owed. He certainly didn’t need to pay his advisor to give him the same advice each year. Spend what you make – he had no problem doing that.
Poor Joe, was he in for a shock. When he met with his advisor, he learned that he owed a substantial amount of tax with no way to pay it.
“Why,” he asked his tax advisor. “I spent all the money I made. I have nothing left. How can I owe taxes?”
“Because,” his advisor explained. “You didn’t consult with me on what things to spend your money on.”
As it turns out Joe didn’t understand the tax rules and therefore made poor “tax” choices. His advisor laid it out:
1) Because of the tax rules, only a portion of the amount that Joe had spent for his new car, and the air-conditioning unit would be deductible on his current tax return. The balance of the cost would be deducted over a number of years based on depreciation rules – sadly, the special section 179 depreciation deduction that may have applied to other purchases, and would have allowed for a greater deduction in the current year, did not apply to his purchase of the car or the air-conditioning unit.
2) Because Joe didn’t deliver [or mail] the check by December 31, the amount spent on the computer system would not be deductible until the next year.
“You know Joe, I don’t begrudge you a new car,” the advisor told him. “But had you consulted with me first, we could have figured out a better cash plan for the purchases that you made.”
What a gloomy outcome for Joe.
So how about you, did you complete some tax planning or consult with your advisor about major purchases during the year?
If not, now is the time to contact your advisor to determine how you might pay any potential tax obligation. No need to be a Joe Schmo.
Linda Keith Tells Us What Lenders Are Looking For In Business Loan Requests
Access to the right funding is key to the survival of many small businesses. Therefore, if you don’t know What Lenders Are Looking For in Business Loan Requests click on over to hear Linda Keith CPA give the right answers to the right questions.
Inspired Ideas For CPA’s – By Michelle Baca
Michelle Baca over at ConvergenceCoaching LLC provides Inspired Ideas for CPA’s and IT professionals. Michelle’s latest post The Top 3 Business Uses for Twitter, is certainly inspired. If you are interested in learning more about social networking – why wait – join the throng. Michelle indicates that one of her most popular training courses this year has been “Embracing Social Networking in Your Firm.” If you would like to learn more, click on over to ConvergenceCoaching LLC.
A Tax Blog Throw Down – I Dished it Out – Now it Looks Like I Will Have to Take It.
By Stacie Clifford Kitts, CPA
Where to begin?
Until recently, I was happily posting little tidbits of tax stuff, mostly gleaned from the IRS’s tax tip releases and some original posts written when I could get time away from the tax practice.
Then an old friend, who is also a writer, publisher, editor, and internet-marketing expert, pointed out that I should use my blog posts to boost my internet presence and market myself online. [Frankly, I always thought people just stumbled onto blogs by accident or found you by some miracle. I really didn’t think much about it. However, that is another blog on another day.]
In addition to following some of her great tips, I also began looking for other tax blogs and quickly realized that there was a whole tax blogging community. They appeared to be a supportive group too, re-tweeting posts, linking to each other’s blog pages, writing flattering posts about each other, generally a very pleasant blogging experience.
That is, until I read a post by June Walker. Now, to be fair, June did not strike first. No, she was set off by a couple of bloggers, The Wondering Tax Pro, aka “Sammy Segar, CPA” and The Tax Lawyer’s Blog aka “Attila Attorney” to be specific. Each of these bloggers disagreed with her post, You Do Not Need a Business Checking Account.
Now, if you have ever thought that accountants were docile number crunchers, you were wrong, at least as it applies to Ms. Walker. You can check out her retaliation here.
In addition, as this saga drags on, it appears that I am soon to be the target of Ms. Walkers rants as I might have been a bit harsh in my comments to her retaliation post. I am not going to go into the whole thing here since you can click on the link and page down to my post. Mine starts “OMG -I can’t believe what I am reading. Is this how tax bloggers behave?”
Although I risk being the target of her mean spirited rants, I stand by my “chick think” statement. I believe some of her comments were snide, belittling, unprofessional, and unnecessary – In the same way a bunch of women might stand around the water cooler and gossip about the pretty girl in the office next door. . However, that’s just my opinion.
So here you go Ms. Walker, rip me apart. It certainly won’t take a genius to find flaws in my blog posts. I definitely need an editor. LOL. However, it will be interesting to see how many mistakes she was able to find in my comment posted on her blog…kind of like a Where’s Waldo exercise.
Oh…do I get a “composite figure?” How exciting. I cannot wait to find out. 🙂
Now off to take care of the important things in life, like putting my granddaughter to bed.
Oh and yes, that’s me and the grandbaby right after we finished this evenings bath.
Is it a Hobby or a Business?
Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.
If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
Here are eight questions that will help determine if your activity is a hobby or a business.
Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
Do you depend on income from the activity? If so, your activity is likely considered a business.
Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).
Link: IRS Publication 535, Business Expenses
Wowser – A Tax Blog Throw Down – Why Keeping a Separate Business Checking Account Can Save Your Clients Money.
By Stacie Clifford Kitts, CPA
I must say, the business life of a tax accountant isn’t exactly a mardi gras. Moreover, it’s no wonder that we don’t see movies of the week about the accountant who couldn’t balance his or her ledger – borrrrring.
Therefore, I certainly look forward to the occasional lively debate, something stimulating and thought provoking, you know to spice it up a bit . But gees, I sure was stunned to read the comments made by June Walker over at her blog post There’s no shortage of bad advice out there. I suppose I don’t need to go into the details, since you can head over to her blog and read it yourself. But suffice it to say, she was a little miffed when a fellow blogger seamed to diss her blog post You Do Not Need A Business Checking Account.
But, hello, what do you expect to happen when you give that type of advice? Come on -you do not need a business checking account? What? Are you serious?
Regardless of all the important reasons to have a separate business account, you can check those out here at The Wondering Tax Pro’s blog, the extra cost that would be incurred by many clients to have an accountant or bookkeeper wade through business and personal expenses to pick out the proper deductions is not something I would readily advise to any client. And I know this from personal experience. Thank you.
I want my clients to focus on the important aspect of managing their businesses – you know – the revenue generating part, not the “Oh crap, I forgot to pull that business expense out of my co-mingled account” part.
So if you want to save your clients some frustration and some accounting fees, please advice them to open a separate banking account for their self-employed business.
In my opinion, advising a client NOT to open a separate business account would undoubtedly increase the accounting fees for those clients. So unless that is your intention, better stay away from that type of advice.
Small Businesses – Don’t Miss Out on Your Expanded Refund Claim. Time Is Running Out!
This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.
Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006. Not only could this mean a special tax refund, but the refund could be larger, because the loss is being spread over as many as five tax years, rather than just two.
This option may be particularly helpful to any eligible small business with a large loss in 2008. A small business that chooses this option can benefit by:
Offsetting the loss against income earned in up to five prior tax years,
Getting a refund of taxes paid up to five years ago,
Using up part or all of the loss now, rather than waiting to claim it on future tax returns.
Under ARRA, eligible taxpayers can choose to carry back a NOL arising in a taxable year beginning or ending in 2008 for three, four or five years instead of two. The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. This choice may be made for only one tax year.
Most taxpayers still have time to choose this special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must file a claim by Sept. 15, 2009. For individuals, the deadline is Oct. 15, 2009. This includes a sole proprietor that qualifies as an ESB, an individual partner in a partnership that qualifies as an ESB and a shareholder in an S corporation that qualifies as an ESB. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends and whether they are making the choice for the tax year that ends or begins in 2008.
Individuals can accelerate a refund by filing Form 1045, Application for Tentative Refund. Similarly, corporations with NOLs may also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund. Normally, refunds are issued within 45 days. These forms, along with answers to frequently-asked questions about this special carryback, and other details can be found on the IRS Web site.
Read How Small Business Can Get A Bail Out
Here’s the latest More Tax Tip – Read about the small business bail out
Yeah – A Bail Out for Small Business From The SBA
From the SBA‘s Website.
About the ARC Loan Program
ARC Loan Eligibility
Applying for an ARC Loan
Learn How SBA Can Help
Since June 15, lenders across the country have provided millions of dollars in capital to small businesses through the America’s Recovery Capital (ARC) loan program. Created under the Recovery Act, the temporary ARC program offers interest-free loans to viable small businesses, which carry a 100 percent guaranty from the SBA to the lender and require no fees paid to SBA. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.
Stacie's Tax Tips and Other Stuff 