Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
Please note that this blog is based on information known as of September 2020 and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
As the November 2020 elections approach, you might want to know what the two front-running presidential candidates’ tax plans for the future are. The following is an overview of their positions, as we know and understand them today. However, the political and economic landscapes can and will change, and there is no assurance these plans won’t be revised or that they will have eventual Congressional backing. However, the information may be helpful as you look toward future tax planning.
Individual Tax Rates
Capital Gains Tax Rates
Basis Step Up on Inherited Property
Range from 10% to 37%. The top rate is scheduled to return to 39.6% in 2026.
Range from 0% to 20%; Collectibles top rate is 28%.
A beneficiary uses as their basis of an inherited asset the fair market value at the date of death. (Basis is the amount from which future gain or loss is determined.)
Generally, would continue with current rates by extending the Tax Cuts and Jobs Act past 2025. However, would lower the rate for middle class taxpayers, possibly by bringing the 22% rate down to 15%.
Would continue with current rates by extending the Tax Cuts and Jobs Act beyond 2025.
No proposed change.
Would return the top rate to the pre-tax reform 39.6% immediately (if approved by Congress).
Increase top rate to 39.6% for taxpayers with over $1 million of income.
Would eliminate the step up, either by taxing “paper gains” at death or assigning the decedent’s basis to the beneficiary (details not clear at this time).
Again, these plans are only proposals of what changes might happen based on the election results. It takes acts of Congress to move plans into law. With various scenarios in play, it might be wise to look at proactive tax planning to minimize future tax liability. Please feel free to contact Cray Kaiser to discuss your tax planning for next year.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
With jobs at a premium during the COVID-19 pandemic, you might consider hiring your children to help out in your business. Rather than helping to support your children with your after-tax dollars, you can instead hire them and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked.
If this is something you’re considering, we encourage you to read the following situations that are typically encountered when choosing to hire your child:
A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child. When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules, if their investment income is upward of $2,200. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,100 standard deduction.
However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $350, or the regular standard deduction for the year, which is $12,400 for 2020. Assuming that a child has no other income, the child could be paid $12,400 and incur no federal income tax. If the child is paid more, the next $9,875 he or she earns is taxed at 10%.
Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of federal income tax (24% of $16,000), and your child has taxable income of $3,600, $16,000 less $12,400 standard deduction, on which the federal tax is $360 (10% of $3,600).
If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed in an unincorporated business owned by the parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half of these payroll taxes either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.
Example: Continuing the same parameters as above, assume your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of $16,000 times the SE factor of 92.35%). And since your net profits for the year are less than the maximum SE income ($137,700 for 2020) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion. Thus, your total SE tax savings would be $2,261.
A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.
Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2020, the child can make a tax-deductible contribution of up to $6,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($12,400) and the maximum deductible IRA contribution ($6,000) for 2020, a child could earn $18,400 of wages and pay no federal income tax.
Example: Referring back to the original example, the child’s federal tax to be saved by making a $6,000 traditional IRA contribution is only $360 (tax rate of 10% of $6,000 would be $600, but the savings is limited to the actual tax of $360). So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $360 savings.
The above only considers federal income tax savings. As every state has its own rules on tax rates and dependency exemptions, it’s important to speak with your tax advisor about potential state implications of the above federal tax planning.
If you have questions about the implications of hiring your children or other possible tax benefits, please contact Cray Kaiser.
Note: Wages paid to children and other relatives aren’t eligible for the Employee Retention Credit created by Congress in 2020 as part of the COVID-19 emergency relief measures for employers.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for the most recent information.
On August 28, the Treasury Department issued guidance regarding the deferral of payroll taxes going into effect on September 1, 2020. The guidance was a result of President Trump’s Executive Order issued on August 8.
For the period between September 1 and December 31, 2020, employers can opt out of withholding the 6.2% payroll tax that is the employee’s share of Social Security taxes. The deferral is only available to employees that earn less than the equivalent of an annual salary of $104,000. If the employer chooses to defer collection, the taxes would then be due no later than April 30, 2021.
Mechanically, this would mean that if an employer opts in to the deferral program, employees would see an increased paycheck for the remainder of 2020. However, because the taxes are due in early 2021, employees would need to repay the deferred taxes to make the government whole. The net effect of this provision is a short-term, interest-free loan to employees.
The guidance does not speak to the effect of an employee leaving the company after having deferred taxes other than to indicate that if necessary, an employer can make “arrangements” to collect the taxes from the employee.
Complicating matters further, President Trump has indicated that if re-elected, he will forgive the deferred taxes. Forgiveness was not addressed in the guidance, as only Congress can take action to allow for forgiveness.
If you would like to discuss whether your company should opt in to the payroll tax deferral program, please call Cray Kaiser today at 630-953-4900.
Please note that this blog is based on laws effective in August 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
The rules surrounding the sale of one’s principal residence have changed over the years. It used to be that you could simply rollover your gain on a tax-free basis as long as you reinvested the proceeds into a new principal residence. However, those gain on home sale rules have since been eliminated and replaced with a principal residence exclusion. Here’s how it works:
Individuals who use and own their home as a principal residence for at least 2 out of the last 5 years before sale can exclude a portion of the gain from tax. This rule is regardless of prior sale gains that have been rolled over. Those who meet the 2-out-of-5-year use and ownership tests can exclude up to $250,000 ($500,000 if both filer and spouse qualify) of gain from the sale of their home, and generally don’t need to keep a record of improvements made to the home.
But what happens when you don’t meet the exclusion rules? Here are some situations that could lead to a taxable gain on the sale of your home:
In these cases, it is important to keep home improvement records in order to substantiate a reduced gain. We understand that keeping records can sometimes feel like a burden. But, consider the alternative. For every dollar of improvements that you cannot substantiate, you will recognize a higher capital gain on the sale of your home. As a result, you will be subject to the capital gains tax. Additionally, there is a good chance your overall tax rate will be higher than normal simply because the gain pushed you into a higher tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain in excess of the exclusion amount.
You’re likely wondering which records to keep. We don’t recommend keeping the receipt for every can of paint purchased or ripped screen replaced, as these wouldn’t be eligible as improvements. However, you should file away receipts, invoices, contracts, etc., and cancelled checks, credit card receipts or bank records to prove payments when you make improvements such as adding a room, putting on a new roof, or remodeling the bathroom.
If you have questions related to the gain on home sale rules or questions about how keeping home improvement records might directly affect you, please contact Cray Kaiser today.
Please note that this blog is based on laws effective on July 29, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Many companies use alternative fuels in their operations, such as utilizing propane for their forklifts, but they may not be aware of the Biodiesel and Alternative Fuels tax credit. Prior to 2018, Congress allowed a credit of $0.50 per gasoline-gallon-equivalent used during the year on the company’s annual income tax return. For propane, this credit is calculated to about $0.37 per gallon used during the year. While this credit expired in 2017, Congress resurrected it in December 2019 and made it retroactive for 2018 in Notice 2020-8. The current legislation has this tax credit set to expire after 12/31/2020, unless Congress extends the date again.
What’s even more beneficial about the Biodiesel and Alternative Fuels tax credit is that the IRS simplified the reporting for the expired credit. Taxpayers are able to claim both 2018 and 2019 on a single form outside of the tax return, thereby avoiding the preparation of amended returns. However, it’s important to note two things:
1) Form 8849 “Refund of Excise Taxes” is due August 11, 2020
2) To complete the claim, you will need to have a registration number from the IRS which can be obtained using Form 637.
If you are unable to complete Form 8849 by August 11, 2020, or if you need to apply for a registration number, then the credit can be claimed with Form 4136 “Credit for Federal Tax Paid on Fuels”. This form needs to be filed with your annual tax return and would require amending 2018 and 2019 returns, if already filed. At the very least, if you do not want to amend prior year returns, you can still claim alternative fuel used in 2020 on your 2020 tax return.
Cray Kaiser is here to help if you have further questions about the Biodiesel and Alternative Fuels tax credit. Please contact us today at 630-953-4900.
Please note that this blog is based on laws effective on June 22, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
When businesses hear about the research tax credit, they typically imagine that it’s for scientists in white lab coats. But that is not the case! The credit is actually much broader and more valuable than you might think.
The tax credit of up to 20% of qualified expenditures encourages businesses to develop, design or improve products, processes, techniques, formulas or software and similar activities. In the past, this credit—called the Credit for Increasing Research Activities—had to be reauthorized by Congress annually, but as part of the 2015 PATH Act, this credit was made permanent.
Calculated on the basis of increases in research activities and expenditures, the purpose of the research tax credit is to reward businesses that pursue innovation by continually increasing investment in research activities. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline compared with prior years.
There are two methods used to compute the credit: the regular method that provides for a 20% research credit or the simplified method which is easier to document but results in a reduced credit of 14% of eligible expenses.
• Regular Method – Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the business entity in 1984–1988, or a later period for companies that started subsequent to that period of time. This method may be the best choice for companies that can document a low base amount.
• Simplified Method – Under the alternative simplified method, the credit equals 14% of qualified research expenses over 50% of the average annual qualified research expenses in the three preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year’s qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, taxpayers with a high base amount from that period or smaller business entities.
The term “qualified research” means research undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:
However, certain purposes that are not qualified include style, taste, cosmetic or seasonal design factors. The definition is relatively broad and encompasses such activities as:
The research tax credit is considered part of a taxpayer’s general business credit. A general business credit may typically be carried back one year by filing a refund claim for that earlier year, and if not used in that prior year, it is carried forward for a maximum of 20 years. This credit will not normally offset the alternative minimum tax. However, eligible small businesses with $50 million or less in gross receipts may claim the credit against their alternative minimum tax liability.
The business expense that created the credit must be reduced by the amount of the credit.
In the case of a qualified small business (one with gross receipts of less than $5 million) the business may elect to claim a portion of its research credit, not to exceed $250,000, against the employer’s share of the employees’ FICA withholding requirement (the 6.2% payroll tax). To be eligible for the payroll tax credit, the business may not have had gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election.
If you would like to further discuss the research tax credit and how it might benefit your business, please contact Cray Kaiser today.
Please note that this blog is based on laws effective on April 27, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Self-employed individuals, unlike employees, don’t have an employer withholding federal (and state, where applicable), Social Security or Medicare (FICA) taxes tax from their wages during the year.
They are not paid a wage; instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business that will allow them to determine their taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, a self-employed person pays 100% of these taxes, termed the self-employment tax (SE tax), on his or her self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all of the self-employment activities are combined to determine the amount of the SE tax. However, two spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax.
Since a self-employed taxpayer doesn’t have taxes withheld on their self-employment income, they need to pay estimated taxes quarterly based upon their taxable profits. These estimated taxes are paid with IRS Form 1040-ES . In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance. The payments are due April 15th, June 15th, September 15th, and January 15th. If the due date falls on a weekend day or legal holiday, the due date will be the next business day. (And if you didn’t notice, the second “quarter” is two months, and the third one is four months – one of the many quirks in our tax system!)
A self-employed taxpayer who has more than $400 in net profit from their self-employment must pay self-employment tax, which is made up of Social Security tax of 12.4% on the first $137,700 (2020) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is a 0.9% Medicare tax to the extent the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. Finally, half of the self-employment tax can be deducted from gross income.
If a self-employed taxpayer pre-pays less than 90% of his or her current year’s tax liability, including Social Security and Medicare taxes for the year, then the taxpayer can be subject to a penalty that assesses interest on underpayments by the quarter, unless the taxpayer meets the safe harbor provisions
Estimated-Tax Safe Harbors rather than having to determine their quarterly profits and estimate their income tax and SE tax liabilities, some self-employed individuals instead opt to use a quarterly safe-harbor-payments method allowed by the IRS, which avoids the underpayment penalty if used correctly. There are two safe harbors available:
The underpayment penalty does not apply if the final amount due on an individual’s tax return is less than $1,000.
One thing to consider when deciding whether or not to use the safe harbor method is that because the safe harbor estimates are not based on the current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year’s income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current-year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes, instead of the taxpayer receiving a refund payment.
Also remember that tax pre-payments are not just based on the self-employment income and must factor in all other taxable income, including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources.
Generally, a self-employed individual keeps track of his or her own income but may also receive one or more 1099-MISC forms issued by a payor. If that income has already been accounted for in the business’s income records, it should not be included again. Beginning in 2021 for earnings received in 2020, Form 1099-NEC will be used in place of the 1099-MISC to report nonemployee compensation.
Self-employed individuals that take credit card payments for sales of their business products or services use third parties to settle the transaction and return payment to the self-employed individual. To combat fraud, the IRS requires all third-party network transactions to be reported on Form 1099-K if the amount is $20,000 or more and the number of transactions is 200 or more. Again, the sales should have already been included as income and should not be included a second time.
Besides self-employed individuals having to pay SE tax on their trade or business income, the SE tax also applies to other situations such as members of the clergy, partnership distributions, foreign self-employment income, agricultural co-op payments to retired farmers, director fees, and certain executors/administrators (fiduciaries). If you fall into any of these categories, please contact Cray Kaiser for more information.
Income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the self-employment tax. In addition, the following are some sources of income as well as individuals not subject to self-employment tax: a shareholder’s portion of an S corporation’s taxable income, fees for the services of a notary public, non-resident aliens, the fiduciary of an estate on an isolated basis, rents paid in crop shares, real estate rental income, statutory employees, a self-employed taxpayer’s child employee under the age of 18.
If you are self-employed and have any questions about your tax planning situation and opportunities, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Please note that this blog is based on laws effective on April 7, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
A hobby exists for pure enjoyment – there’s (typically) no goal to make money or make a living from a hobby. They are passion projects or fun activities that people choose to spend their time on because it makes them happy. But that doesn’t mean that hobbyists don’t make money from their hobby – sometimes they do! In that case, what are tax issues related to hobbies? Tax law generally does not allow deductions for personal expenses except those allowed as itemized deductions on the 1040 Schedule A, and this also applies to hobby expenses.
Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. By disguising hobbies as a trade or business, and if the hobby expenses exceed the hobby income, they think they can report the difference between hobby income and expenses as a deductible business loss. But not so fast! To curtail hobbies being treated as businesses, the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies. The not-for-profit rules are often referred to as the hobby loss rules.
The distinction between a hobby and a trade or business sometimes becomes blurred, and the determination depends upon a series of factors, with no single factor being decisive. All of these factors have to be considered when making the determination:
Because making a determination using these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during a period of five consecutive years. However, if the activity involves breeding, training, showing or racing horses, then the period is two out of seven consecutive years.
Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.
However, hobbies (not-for-profit activities) have special, unfavorable rules for reporting the income and expenses, which have been exacerbated by the 2017 passage of the Tax Cuts and Jobs Act (tax reform). These rules are:
Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether or not that income is subject to self-employment tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.
If you have any questions related to how not-for-profit rules may apply to your activity, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Do you know what your tax nexus is and how it impacts your business? In this audio blog, CK Principal Karen Snodgrass gives an overview of nexus, how the Wayfair ruling has affected businesses, and what business owners should be doing to comply with nexus.
This is a complex topic that requires a lot of careful attention to ensure compliance. You should work with your tax advisor to make sure you’re taking the necessary steps to follow the law. In the meantime, click below to listen to a quick introduction to nexus:
If you have questions about your tax situation, please don’t hesitate to contact Cray Kaiser today.
Congratulations on making it to half a century! Your fifties can be a time of change. Maybe not having to work anymore sounds like a dream, but you might be concerned you don’t have enough saved for your upcoming retirement. Those concerns definitely aren’t unfounded as 40 million households in America have no retirement savings at all. Additionally, the Federal Reserve found that as of 2016, the median account balance of most retirement assets was only $60,000 with an average of $228,900. Given that healthcare and housing costs alone can easily deplete that amount during retirement, this is a growing concern nationwide.
This is why your fifties are a crucial period to continue to build up your retirement savings. This is especially true if you didn’t get to save as much when you were younger due to lower earnings, recessions, caring for children, or other roadblocks. While you may be facing new difficulties, you still must prioritize retirement savings. The good news is that there are many tax-advantaged savings strategies you can leverage once you reach age 50 or 55 to start catching up to where your retirement contributions should be. Here are some smart money moves you can make when you turn 50:
Most standard retirement plans have a catch-up contribution that kicks in once you turn 50. These catch-up caps are separate of the indexed annual cap on your retirement contributions:
For example, if you have a 401(k) at work, the cap for 2020 is $19,500 so your total annual contribution can be as high as $26,000 if you are 50 or older. If you have an employer match, you should take advantage of this cap and additional catch-up contribution to maximize your savings as employer matches are the closest you can get to free money.
Medical expenses are a cold hard reality at any age, but especially once retirement approaches. HSAs are tax-advantaged savings plans where the funds grow tax-free, and distributions are also tax-free provided that you had medical bills.
You must be enrolled in a high-deductible health plan, and Medicare enrollees aren’t allowed, so you need to take advantage of this strategy while you are still enrolled in a health plan. For self-only coverage, the minimum deductible is $1,400 and maximum is $6,900 for 2020 ($2,800 and $13,800 respectively for family coverage).
Your contribution limit can vary based on the type of health coverage you have, your age, when you became eligible, and when you’re no longer eligible. Assuming your coverage is consistent, you can contribute up to $3,550 to an HSA if you have self-only coverage ($7,100 for family).
HSAs often function as supplementary retirement assets because you don’t pay any tax on distributions made after you turn 65, or you become permanently and totally disabled. They are frequently overlooked, but you should contribute to an HSA so long as you have a qualified health plan.
The need for care is going to be a reality for millions of Americans who may not have much family to help them out in retirement age or don’t want to burden their loved ones. Keep in mind that 70% of Americans over 65 end up needing long-term care. If you don’t already have long-term care insurance, you need to start comparing rates now. Some policies are even bundled with life insurance, or act as a hybrid of the two insurances, if you want to ensure that your loved ones will be cared for if anything happens to you sooner.
If you are self-employed, you can deduct your long-term care insurance premiums. Some states also offer tax benefits regardless of employment, such as New York, Idaho, and Indiana. For federal tax purposes, you can deduct long-term care insurance premiums as a medical expense exceeding 10% of your adjusted gross income, although the 2018 tax reform has vastly reduced the number of taxpayers who itemize.
Entering your fifties can feel like a pivotal transition. No matter how much saving and preparing you were able to do earlier in your life, there is still plenty of time (and you have many options) for “catching up” or continuing to improve your financial position for the long-term. If you are looking for a trusted advisor to help you navigate financials, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in March 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
