Other News & Info Archives - Page 9 of 77

IRA charitable donations: An alternative to taxable required distributions

Greencrest on May 18, 2022

Are you a charitably minded individual who is also taking distributions from a traditional IRA? You may want to consider the tax advantages of making a cash donation to an IRS-approved charity out of your IRA.

When distributions are taken directly out of traditional IRAs, federal income tax of up to 37% in 2022 will have to be paid. State income taxes may also be owed.

Qualified charitable distributions

One popular way to transfer IRA assets to charity is via a tax provision that allows IRA owners who are age 70½ or older to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions (QCDs). The money given to charity counts toward your required minimum distributions (RMDs) but doesn’t increase your adjusted gross income (AGI) or generate a tax bill.

Keeping the donation out of your AGI may be important for several reasons. Here are some of them:

It can help you qualify for other tax breaks. For example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 7.5% of AGI.
You can avoid rules that can cause some or all of your Social Security benefits to be taxed and some or all of your investment income to be hit with the 3.8% net investment income tax.
It can help you avoid a high-income surcharge for Medicare Part B and Part D premiums, which kick in if AGI is over certain levels.
The distributions going to the charity won’t be subject to federal estate tax and generally won’t be subject to state death taxes.

Important points: You can’t claim a charitable contribution deduction for a QCD not included in your income. Also keep in mind that the age after which you must begin taking RMDs is 72, but the age you can begin making QCDs is 70½.

To benefit from a QCD for 2022, you must arrange for a distribution to be paid directly from the IRA to a qualified charity by December 31, 2022. You can use QCDs to satisfy all or part of the amount of your RMDs from your IRA. For example, if your 2022 RMDs are $10,000, and you make a $5,000 QCD for 2022, you have to withdraw another $5,000 to satisfy your 2022 RMDs.

Other rules and limits may apply. Want more information? Contact us to see whether this strategy would be beneficial in your situation.

Lost your job? Here are the tax aspects of an employee termination

Greencrest on March 9, 2022

Despite the robust job market, there are still some people losing their jobs. If you’re laid off or terminated from employment, taxes are probably the last thing on your mind. However, there are tax implications due to your changed personal and professional circumstances. Depending on your situation, the tax aspects can be complex and require you to make decisions that may affect your tax picture this year and for years to come.

Unemployment and severance pay

Unemployment compensation is taxable, as are payments for any accumulated vacation or sick time. Although severance pay is also taxable and subject to federal income tax withholding, some elements of a severance package may be specially treated. For example:

If you sell stock acquired by way of an incentive stock option (ISO), part or all of your gain may be taxed at lower long-term capital gain rates rather than at ordinary income tax rates, depending on whether you meet a special dual holding period.
If you received — or will receive — what’s commonly referred to as a “golden parachute payment,” you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under very complex rules, along with the excess parachute payment also being subject to ordinary income tax.
The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.

Health insurance

Also, be aware that under the COBRA rules, most employers that offer group health coverage must provide continuation coverage to most terminated employees and their families. While the cost of COBRA coverage may be expensive, the cost of any premium you pay for insurance that covers medical care is a medical expense, which is deductible if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income.

If your ex-employer pays for some of your medical coverage for a period of time following termination, you won’t be taxed on the value of this benefit. And if you lost your job as a result of a foreign-trade-related circumstance, you may qualify for a refundable credit for 72.5% of your qualifying health insurance costs.

Retirement plans

Employees whose employment is terminated may also need tax planning help to determine the best option for amounts they’ve accumulated in retirement plans sponsored by former employers. For most, a tax-free rollover to an IRA is the best move, if the terms of the plan allow a pre-retirement payout.

If the distribution from the retirement plan includes employer securities in a lump sum, the distribution is taxed under the lump-sum rules except that “net unrealized appreciation” in the value of the stock isn’t taxed until the securities are sold or otherwise disposed of in a later transaction. If you’re under age 59½, and must make withdrawals from your company plan or IRA to supplement your income, there may be an additional 10% penalty tax to pay unless you qualify for an exception.

Further, any loans you’ve taken out from your employer’s retirement plan, such as a 401(k)-plan loan, may be required to be repaid immediately, or within a specified period. If they aren’t, they may be treated as if the loan is in default. If the balance of the loan isn’t repaid within the required period, it will typically be treated as a taxable deemed distribution.

The election to apply the research tax credit against payroll taxes

Greencrest on March 1, 2022

The credit for increasing research activities, often referred to as the research and development (R&D) credit, is a valuable tax break available to eligible businesses. Claiming the credit involves complex calculations, which we can take care of for you. But in addition to the credit itself, be aware that the credit also has two features that are especially favorable to small businesses:

Eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability.
The credit can be used by certain even smaller startup businesses against the employer’s Social Security payroll tax liability.

Let’s take a look at the second feature. Subject to limits, you can elect to apply all or some of any research tax credit that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence you to undertake or increase your research activities. On the other hand, if you’re engaged in — or are planning to undertake — research activities without regard to tax consequences, be aware that you could receive some tax relief.

Why the election is important

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, any wage-paying business, even a new one, has payroll tax liabilities. Therefore, the payroll tax election is an opportunity to get immediate use out of the research credits that you earn. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Eligible businesses

To qualify for the election a taxpayer must:

Have gross receipts for the election year of less than $5 million and
Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual’s businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that an entity or individual can’t make the election for more than six years in a row.

Limits on the election

The research credit for which the taxpayer makes the payroll tax election can be applied only against the Social Security portion of FICA taxes. It can’t be used to lower the employer’s lability for the “Medicare” portion of FICA taxes or any FICA taxes that the employer withholds and remits to the government on behalf of employees.

The amount of research credit for which the election can be made can’t annually exceed $250,000. Note, too, that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for the research credit that the taxpayer can use to reduce current or past income tax liabilities.

The above are just the basics of the payroll tax election. Keep in mind that identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us about whether you can benefit from the payroll tax election and the research tax credit.

Are you ready for the new disclosure requirements for government assistance?

Greencrest on February 25, 2022

Starting in fiscal year 2022, all entities — except nonprofit organizations in the scope of Topic 958, Not-for-Profit Entities, and employee benefit plans — must provide detailed disclosures about government assistance. Here are the details of the new rules.

Defining government assistance

The term “government assistance” may refer to perks and other incentives policymakers provide to lure large companies to establish a business in their states. The goal of these incentives is to drive economic growth by boosting jobs for residents. However, government assistance can take many forms because there are many types of governments, related entities and enterprises authorized by governments to administer assistance for them.

Examples of government assistance transactions include grants of assets, tax assistance, low-interest-rate loans, loan guarantees and forgiveness of liabilities. The COVID-19 pandemic significantly increased the number of entities receiving assistance and the level of government funding provided.

Following new rules

Accounting Standards Update (ASU) 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, was finalized in November 2021. Previously, there were no explicit accounting rules for government incentives under U.S. Generally Accepted Accounting Principles (GAAP), leading to divergent practices.

The scope of ASU 2021-10 is limited to transactions accounted for by applying a grant or contribution accounting model by analogy. It specifically excludes transactions accounted for under other GAAP, such as:

Topic 450, Contingencies,
Topic 470, Debt,
Topic 740, Income Taxes,
and Topic 606, Revenue from Contracts with Customers (when the government is a customer).

For instance, the new rules don’t apply to Paycheck Protection Program loans provided under the CARES Act, if they’re accounted for under Topic 470, Debt.

Providing enhanced transparency

Under the new rules, the following details must be disclosed about government assistance transactions:

The nature of the transactions and accounting policies used. This includes a general description and whether the assistance was received in cash or other assets.

Financial statement effects. You must disclose all balance sheet and income statement line items where the transactions were recorded and the amount of each line item.

Significant terms and conditions of the transactions. Examples include 1) the agreement length, 2) amounts to be received each year and whether they are fixed or variable, 3) commitments made by the government and the entity, and 4) whether the government can recapture any of the amounts and under what conditions.

If any disclosures aren’t provided because of legal prohibitions on disclosing them, there should be a general description and indication of the legal restriction for the omitted disclosures.

We can help

The new rules are effective for annual periods beginning after December 15, 2021. But early application is permitted. Contact us for more information.

February Short Bits

Greencrest on February 23, 2022

MATH ERRORS

The IRS had a record-setting year in 2021 for sending notices to taxpayers who made math errors on their returns. From January 1 to July 15, about nine million notices were sent out, compared to just over 600,000 for the same period in 2020. Most of the math errors were related to the stimulus payments provided by the pandemic financial relief legislation.

TRAILBLAZING WOMEN

Starting this year and through 2025, the U.S. Mint will release five new quarter designs each year to recognize the accomplishments and contributions of trailblazing American women. The 2022 coins recognize the achievements of Maya Angelou, Dr. Sally Ride, Wilma Mankiller, Nina Otero-Warren, and Anna May Wong.

TEACHING PERSONAL FINANCE

Ohio became the latest state to pass legislation requiring high school students to take a personal finance class before graduation. Beginning in the 2024-2025 school year, Ohio joins other states like Mississippi, North Carolina and Rhode Island with similar education requirements. Topics kids will learn include basic budgeting, opening a bank account and managing student loans.

REMOTE WORK

According to a recent Gallup Poll, 91% of remote employees surveyed reported their desire to continue working from home, while over half support a hybrid at-home and at-office arrangement. And about 30% of workers said they would look for another job if their current employer eliminates remote work. Commute time coupled with wellbeing and flexibility were the top reasons workers mentioned for continuing remote working. And the majority of employees didn’t believe company culture would be harmed without a physical office location.

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