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Trump Taxes and 2016 tax planning for higher income earners

By Stacie Clifford Kittscartoon-trump-300x316

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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

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] .

  
How to make the election.    You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on your amended return and write “Filed pursuant to section 301.9100-2.” File the amended return at the same address you filed the original return. The election applies when computing taxable income for the current tax year and all subsequent years.

Extend The Due Date To Pay Your Corporate Income Taxes – A Good Reminder From a Past Post

Now is a good time to remind corporations to conserve cash flow if possible.  If you expect to have a net operating loss in 2010 but have taxable income in 2009, here is an opportunity to extend the due date of  the amount due with your 2009 corporate tax return.  This is another good post from the past.
 
By Stacie Clifford Kitts, CPA
 

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.

Expanded NOL Election Deadline September 15 for Corporations – Don’t Miss Out

WASHINGTON — Eligible taxpayers must act soon if they want to take advantage of the expanded business loss carryback option included in this year’s Recovery law. According to the Internal Revenue Service, eligible calendar-year corporations have until Sept. 15, and eligible individuals have until Oct. 15 to choose this special option.

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. Eligible taxpayers are eligible small businesses (ESB) that have 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 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. This choice may be made for only one tax year.

Taxpayers must choose this special carryback by either:

Attaching a statement to an income tax return for the tax year that begins or ends in 2008 or,

Claiming a refund on Form 1045, Application for Tentative Refund or Form 1139, Corporation Application for Tentative Refund, or on an amended return for the tax year to which the NOL is being carried back.

Most taxpayers still have time to choose the special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must make this choice by Sept. 15, 2009. For individuals, the deadline is Oct. 15, 2009. 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.

A calendar-year taxpayer that chooses the special carryback by attaching a statement to the income tax return has until December 31, 2009, to claim the refund on Form 1045 or 1139, or 3 years after the due date (including extensions) for filing the 2008 income tax return to claim a refund on an amended return.

These forms, along with answers to frequently-asked questions about this special carryback, and other details can be found on IRS.gov
Related Items:
Net Operating Loss Carryback

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