With their first plan shot down in Congress, the GOP has released another, broader tax framework as the Trump Administration attempts to shift the tax code. This new plan has many elements that Congress will need to hash out before anything is signed into law, but taxpayers of all income levels are wondering how this plan may affect them personally. Below are five major developments in the new plan that could affect you come tax season:
- Rate Shift
Our current code has seven different income tax brackets, but the new plan would drop that number down to three: 12, 25 and 35 percent. Although the plan does not specify which income levels would be taxed at each new rate, the wealthy would likely see the greatest benefit since the current top bracket at 39.6% would drop to 35%. The current lowest bracket (at 10%) would see an increase to join the 12% bracket, but the plan claims to aid families in that bracket through an increase in the standard deduction and a greater child tax credit.
- Deduction Increase (for most)
For many taxpayers, the new plan would almost double the current standard deduction. Filers who claim multiple children would not see as high of a increase, but could potentially see that offset by a steeper child tax credit. Presently, about 70% of taxpayers take the standard deduction as it is higher than itemizing. However, experts believe that number would increase significantly if the standard deduction is doubled. The GOP’s plan would remove other deductions to offset the increased standard deduction, but the charitable contribution and mortgage interest deductions would be kept.
- Some Taxes and Deductions Eliminated Entirely
The largest deduction that would meet its end with the new GOP plan is the local and state tax deduction. This deduction is often taken in states where taxes, and average income, is higher, states that are often Democratic. Other taxes that would be eliminated include the alternative minimum tax and the estate tax for those who inherit funds in excess of $5.49 million.
- New Tax Rate for “Pass-Through” Businesses
S corporations, sole proprietorships and partnerships could see a new tax rate at 25% under the new plan. Currently, those “pass-through” businesses pay at the individual rate of their owners, and those businesses make up about 95% of the nation’s business demographic. Although many business owners currently pay a rate lower than 25%, just under 2% of those business owners pay the top rate of 39.6%, which means they could see a significant drop in rate if they are permitted to incorporate as a “pass-through.”
- Change in the Corporate Tax Code
The current plan taxes corporations at 35%, but the new plan would drop that rate to 20%. To offset this steep drop in rate, the proposal submits to eliminate certain business deductions and credits. The plan suggests that the deduction for domestic production could be eliminated, while maintaining exceptions for low income housing and research and development, but leaves many of those choices up to Congress.
Congress must still comb through the GOP’s newest plan and make adjustments before a finalized plan is voted upon, so taxpayers should prepare for more adjustments to be made before anything is signed into law. As developments arise, MKR will continue to keep our clients up to date in future newsletters.
The dust has ultimately settled from the somewhat turbulent Presidential Election of 2016 and preparations are fully underway for our new President’s January 20th inauguration. The transition period from President Obama to President Trump is in full swing with staff being nominated and confirmed and policies taking shape. One such plan that taxpayers would do well to pay notice to is the President-Elect’s tax plan. Trump’s plans for both businesses and individuals may involve some considerable shifts and could impact your early 2017 filing decisions. Although tax laws and regulations are in almost constant flux, Trump’s proposals could trigger some significant changes.
One major alteration Trump has proposed is to shift from seven tax brackets to only three tax brackets at 12%, 25% and 33% respectively. While this would present a cutting of taxes for some higher income brackets who had seen rates as high as 43.4% under President Obama, some lower income brackets could actually see their tax rates raised from 10% to 12%. Joint filers without children could also see definitive benefits from Trump’s plan, though large families or single parent filers may not. The President-Elect has also proposed to remove the 3.8% net investment income tax enacted under Obamacare. Thus, the top tax rate would be capped at 33%, and the top capital gains and dividends rate would not exceed 20%. Another proposal of Trump’s plan for individuals would include capping itemized deductions for married couples at $200,000.
On a business level, Trump’s proposals seem even more drastic. The President-Elect has suggested that he would cut all business tax rates to 15%, a drastic shift from the average 35% tax rate for most major corporations. Under President Obama, corporations have been paying a 35% tax rate, and those owning LLC’s, partnerships and S corporations are taxed for their flow-through business income at their respective income rate, though not exceeding 43.4%. Trump’s plan would prove especially beneficial for sole proprietors who had previously fit into the highest tax bracket; these entities could see their tax rates drop by almost 30%.
However, Trump’s tax plan is not presenting significant changes for many IRS tax rules, including the constructive receipt doctrine, which affects both businesses and individuals. Essentially, the IRS can tax you on any income or payment you have the legal right to in 2016, even if you don’t actually receive it until 2017. This includes sales made but not officially received until January, or bonus checks sent out but not cashed until January, something to keep in mind when filing in 2017. In addition to tax cuts, Trump’s plans have the potential to affect the housing market as well. To read more about the President-Elect and the housing market, check out our blog here. Of course, some of Trump’s proposals may not occur, but with a Republican majority in both the House and Senate, some level of tax cuts are likely. However, no matter what changes eventually come into effect, these prospective tax revisions could have significant impacts on 2017 and the years beyond.
About 150,000 residents in the State of Indiana have received a letter from the Department of Revenue saying that they owed more on their taxes, but the state is admitting that many of those who received the letters don’t owe anything.
If you think that you received this letter by mistake, the letter begins with:
“After a review of past tax filings, we believe you may be under-reporting taxable income for the State of Indiana…”
The Department of Revenue for the State of Indiana has said that the letters were sent to individuals and businesses that were flagged, but their results weren’t fully reviewed.
If you think you have received one of these letters, please contact our office today.
To read more on this story, click here.
The Latest Tax Implications of the Affordable Care Act Update (Obamacare)
Did you know the health care law actually created two new taxes to help pay for the cost of the ACA? The first of the two taxes is the Net Investment Income Tax (NIIT).
It is a new Medicare tax that applies to certain types of income received by the taxpayer.
Income that is subject to net investment income tax are the following:
- Capital Gains
Income that is not subject to the net investment income tax are:
- Income from an active business (S-Corp flow through)
- Social Security
- Tax-exempt interest
- Self-employment income
- IRA & Pension Distributions
The tax will apply to taxpayers with Income above the following thresholds (Adjusted Gross Income):
- Married Filing Joint $250,000
- Married Filing Separate $125,000
- Single $200,000
The tax is 3.8% applied to the lessor of the following:
– Taxpayers net investment income
– The amount of AGI above the threshold amount
Example: Tommy is a single individual with an adjusted gross income of $210,000 which included $20,000 of interest and $20,000 in dividends.
Tax is computed as follows:
Net investment income of $40,000
Adjusted gross income of $210,000
Threshold for singles: ($200,000)
Lessor of A or B: $10,000
Taxable at 3.8%: $380
The second new tax is the Additional Medicare Tax
The Affordable Care Act also created a .9% tax called the Additional Medicare Tax, which is entirely separate from the 3.8% net investment income tax discussed earlier.
Taxpayers with wages and/or self-employment income above certain thresholds are subject to the additional tax.
The thresholds are the same as the net investment income tax.
- $250,000 for joint filings
- $125,000 for married separate filings
- $200,000 for singles
How is the tax calculated and paid?
Rudy is employed as a lawyer with Duey Cheatem and Howe. He is single and has the following annual earnings:
W-2 Wages $240,000
Total Income $270,000
Since Rudy’s wages exceed his threshold by $40,000 he is subject to the additional Medicare tax on this $40,000 or $360.00 ($40,000*.9%)
**Note he is also subject to the net investment income tax and will pay an additional $1,140 in NIIT. ($30,000*3.8%)
Now let’s address the individual medical insurance coverage mandate.
Effective January 1, 2014, individuals must maintain a minimum essential insurance coverage or pay a shared responsibility payment (penalty) on their tax return.
Here is what we think will happen at tax time since no specific guidance has been released yet:
During January 2015 when you are receiving all your other tax documents, your insurance company will send you a form for proof of insurance that you will need to provide your tax preparer. This form will show the type of coverage you have and the number of months during 2014 the policy was in place. If it was not in place the entire 12 months, then you are subject to the penalty for those months.
Without this proof of insurance information the penalty will be assessed.
Now, the time bomb no one is talking about.
Taxpayers who purchased health insurance policies through the exchange that was set up by the government could have surprises at tax time.
Part of the Affordable Care Act created a tax credit for lower income families and individuals depending on family size and geographic location. The lower the income the higher the credit. Sort of makes sense.
Here is the flaw:
During the application process one of the questions is “What do you think your 2014 income will be?” Based on the answer, it calculates your potential premium credit and asks if you want that applied to your monthly premium or wait and receive when you file your 2014 taxes.
What do you think has happened?
You think people figured out they could enter a lower amount for anticipated income and receive a larger credit? You got it! And of course they have applied it to their monthly premiums so they are paying a much lower amount than they should.
What happens next you ask?
At tax time we have to prepare a reconciliation of premium credits received already versus what they are entitled to, based on their actual income. If they have received too much in credits they are required to repay the excess credit. So taxpayers who usually get refunds will have balances due; these could be quite large, and as they are in the lower income bracket they will not have the money to pay them. What will the IRS do? No guidance on this one yet. Nobody is talking about it, but it is real.
Please contact us with your questions about this Affordable Care Act Tax Implications Update, or schedule your consultation by calling us at 317-549-3091.
We’re here to help you be prepared for next year and beyond for your personal and business tax needs.
Nearly three years ago, the IRS launched the tax return preparer oversight program and seeds were planted in the landscape of tax return preparation services. Today, those seeds are starting to sprout.
In June, the IRS estimated there are 717,161 PTIN holders, many of which (212,975, or 29.7%) are CPAs, outnumbering Enrolled Agents (42,895) and attorneys (31,189) combined. While CPAs have dominated the regulated tax preparation arena, that landscape is about to change. More and more people are completing the final step to becoming a Registered Tax Return Preparer, or RTRP (they have until 12/31/13 to pass the competency exam). Currently, there are 4,893 RTRPs. That leaves an estimated 338,127 “provisional preparers” who may join the RTRP ranks.
That means more competition is coming and it will influence the public perception of tax return preparers. Unfortunately, the public doesn’t really understand the difference between a CPA and other tax return preparers. We have all seen the advertisements by the big box tax preparation and software chains that inflate the qualifications of their employees. They often compare them to CPAs or perhaps they feature a CPA in the ad, implying that every customer representative will have similar qualifications.
Some believe that RTRPs will leverage their new designation as some form of implied association with or endorsement by the IRS, thus giving them an advantage in the marketplace. While the IRS has put in restrictions on advertising that leverage the RTRP designation (thanks to AICPA advocacy), they cannot possibly enforce them completely. And they can’t police informal or non-commercial promotions. If CPAs wait to counter such marketing efforts, they may find themselves in the same position as a political candidate trying to counteract a negative ad: while the ad may be false, it is hard to change someone’s mind after the fact.
That’s why it is important for CPAs to start telling their stories better, more often and everywhere they can think of. And they need to start now. Clients need to hear messages about the value of a CPA directly from their CPA. They also need to understand how they are more than just a tax return, that their CPA is available year-round and can help them plan for life’s significant milestones such as buying a house, planning for retirement, saving for college and much, much more. If we don’t start tooting our own value horn louder and longer, who will?
When do you need to start building your new value proposition? Yesterday. And how do you do this? Start by developing a value-centric firm culture, then educating your staff on the importance of value based client communications.
The AICPA has developed the Tax Practitioner Toolkit (available free) to help members better define their value and communicate it to current and prospective clients. A Toolkit Implementation Checklist is included, so you can get started right away.
Once your firm masters its story so it is infused in every client contact, networking presentation, or prospective client meeting, it will become part of who you are and what your firm represents for its clients. Once you know your value and live it every day, clients will never have to guess. They’ll automatically know that their CPA is the premier provider of tax services and they would never trust their finances to anyone else.
Many American families are struggling to make ends meet and save for their future needs, according to a report from the Consumer Federation of America (CFA) and Certified Financial Planner Board of Standards, Inc. (CFP Board), but those with a financial plan do better and are more confident about meeting their goals.
But only 36 percent of the 1,508 household financial decision makers who participated in the CFA/CFP Board 2012 Household Financial Planning Survey have ever prepared a comprehensive financial plan. Respondents with higher annual incomes and older respondents were more likely than middle-income families to have a financial plan.
Survey responses reflected the effects of the recession that began in 2008. Nearly 38 percent of households said they live paycheck to paycheck. Less than 30 percent indicated they felt comfortable financially, and only 34 percent think they can afford to retire by age 65. The survey was conducted by Princeton Survey Research Associates International (PSRAI).
Regardless of income, decision makers with a financial plan, whether it is one they have prepared on their own or with a professional, are more likely to feel they are on pace to meet all of their financial goals by a margin of 50 percent to 32 percent. By an even larger margin (52 percent to 30 percent), and across all income brackets, families with a financial plan are more likely to feel “very confident” about managing money, savings and investments.
What Is a Comprehensive Financial Plan?
The survey assumes that a comprehensive financial plan will identify a family’s financial goals, and a plan for savings and investments that will help them meet those goals. For most families, those goals will be income in retirement, college education for children, insurance needs, emergencies, and other expenses (e.g., assisting parents). The plan should include paying off credit card debt.
Most Americans have spending plans, the report says, but few have savings plans except for employer-sponsored retirement plans. Many respondents say that they do not earn enough money to save. “Advances in technology have made accessing and analyzing financial information much easier, but a lack of understanding about savings and investment options and how to best manage household finances remains a serious obstacle to Americans’ financial preparedness,” the survey reported.
Comparison with 1997 Survey
The CFA/CFP Board survey utilized a number of questions asked by a 1997 CFA-NationsBank survey, also developed with and administered by PSRAI. This made possible a comparison of consumer attitudes and habits in the more optimistic, low unemployment year of 1997, with attitudes and habits in 2012, in the aftermath of the recent severe recession.
The number of Americans who reported living paycheck to paycheck rose from 31 percent to 38 percent from 1997 to 2012, and the percentage who indicated they felt comfortable financially fell from 38 percent in 1997 to 30 percent in 2012.
Other comparisons include:
- In 1997, only 38 percent felt [they were] behind in saving for retirement compared to 51 percent this year.
- In 1997, half (50 percent) said they thought they could retire by age 65 compared to only 34 percent this year.
- In 1997, more families with college-bound children were saving for higher education (56 percent) compared to this year (48 percent).
- However, the proportion of those who say they have a retirement investment plan in place is about the same (51 percent in 1997 and 49 percent this year).
Getting Help When Preparing a Financial Plan
The 2012 survey revealed that slightly more than half of respondents said “it’s hard for me to know who to trust for financial advice” (55 percent); “to me, investing seems complicated” (52 percent); and “I’m worried about losing my money if I invest it” (55 percent), a significant increase from the 45 percent who expressed this worry in 1997.
Kevin R. Keller, CEO of CFP Board said, “Consumers understandably are more nervous about investing their money given recent revelations about financial fraud, manipulation, and abuse of clients. This doesn’t mean that people shouldn’t create a financial plan and be prepared. We encourage consumers to do their homework and find a financial professional who always puts the clients’ best interests first and abides by a fiduciary standard of care.”
Both the CFA and CFP Board recommend that consumers begin by assessing their own financial condition and develop a plan. One useful tool is the website LetsMakeaPlan.org, where interested consumers can learn more about preparing a financial plan. The site also lists questions an individual might ask of a financial planner and some red flags.
CFA executive director Stephen Brobeck said that financial planning is an important component of financial literacy. Financial planners need to get the message out.
Full Article: http://www.accountingweb.com/article/personal-financial-plans-saving-future/219569