Republicans are considering a fix to the so-called Harvey Weinstein provision in their new tax law that they acknowledge could inadvertently penalize victims of sexual harassment in the workplace.
Section 162(q) of the Tax Code provides:
“PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE. — No deduction shall be allowed . . . for (1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment.”
The provision was meant to stop defendants in sexual harassment cases from being able to deduct their legal fees and their settlement payments where they require confidentiality from their accusers in legal settlement agreements. But the law actually reads that the plaintiff accusers also cannot deduct their legal fees. Of course, most legal settlement agreements have some type of confidentiality or nondisclosure provision. The result is that if a plaintiff recovers $500,000 but must pay her lawyer 40%, the full $500,000 is taxable income to the plaintiff even though she only receives $300,000 (the other $200,000 going to the lawyer). This means the victim is paying tax on money she never receives.
A senior House Republican aide who works on tax policy acknowledged the provision has unintended outcomes and is being discussed as a so-called technical correction to the tax law.
A senior Senate Republican aide said lawmakers are examining the issue. But congressional gridlock before midterm elections in November means there’s no guarantee that the problem will be corrected quickly, if at all. In the meantime, plaintiffs attorneys are buzzing about how the law’s ambiguity is worrying their clients, who fear that coming forward about sexual harassment could now come at a much greater cost.
Filing your taxes isn’t just a once-a-year endeavor. Maintaining good records throughout the year – and disposing of old ones when appropriate – not only provides you with greater confidence when you prepare your tax return, but it also provides you with documentation you may need in the future.
One of the most common questions I’m asked is, “How long should I keep my tax returns?” I recommend you keep all federal and state income tax returns and supporting documents for a full six years.
Why so long? Although in most cases the IRS has up to three years after you’ve filed your tax returns to assess additional taxes, the IRS can take up to six years to assess additional taxes if it determines that you omitted a substantial amount of income from your return. You may believe your returns are accurate and all-inclusive, but the IRS may think differently.
Be sure to keep in your files a copy of your tax return mailing receipts and electronic filing confirmations too. If your return is ever lost or misplaced, having a receipt showing the date the return was submitted will save you from penalties.
Some events produce documentation that should be kept permanently: settlement records from all of your home purchases and sales, investment purchases, divorce agreements, etc.
But just because an event ends doesn’t mean that the documentation process should. Regularly adding “updates” – home improvement receipts, investment records, estate and gift tax returns under which you received property, etc. – to your records and files will help to compute your gain/loss when you sell assets and answer critical questions in the future.
There are other situations in which you would benefit from keeping records, including any nondeductible contributions you make to an IRA or Roth IRA. Review your personal and financial history with a professional to ensure you have all your bases covered.
Major tax reform legislation was signed into law late last year that impacts not only the federal income tax but also other taxes potentially affecting your estate plan (such as the estate, gift, and generation skipping transfer taxes).
The new legislation doubles the estate and gift tax exclusion amount and the GST exemption to $10 million (to be adjusted for inflation), effective for decedents dying and transfers made after 2017 and before 2026. After 2025, the exclusion amount will decrease to the amount calculated under the old law ($5.49 million for 2017).
Additional changes to individual, corporate, and pass-through entity taxation provisions will also impact many estate plans. Some of the provisions included in the law that may affect your plans include:
- Increase in charitable contribution limit for cash donations – the legislation increases the amount of cash contributions to charitable organizations that may be deducted from 50% of a taxpayer’s income to 60% of income for tax years after 2017 and before 2026.
- New deduction for certain business income earned through pass-through entities – the legislation creates a new deduction for individuals, generally equal to 20% of the qualified business income received by the individual from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) are excluded, and there are other income limits and conditions placed on the receipt of the deduction.
- Partner loss limitation – Partners will no longer be able to deduct losses in excess of their basis in their partnership interest.
- Extension of the holding period for “carried interest” – the legislation prevents individuals holding a so-called carried interest in private equity or hedge funds or similar investment vehicles from claiming long-term capital gain treatment on gains realized from the disposition of such an interest until the interest has been held for three years (compared to the one-year holding period required for other capital assets).
In light of the numerous changes made by the legislation, we recommend a review of your estate plan to make sure that it continues to satisfy your tax- and family-related objectives while remaining as flexible as possible.
Major tax reform legislation was signed into law late last year and resulted in sweeping changes to the tax code for the first time in about 30 years. Businesses should be aware of the provisions that have changed and plan now for how they affect them moving into 2018.
The corporate rate cuts are significant. The new law provides for a 21% flat corporate tax rate. Businesses conducted as sole proprietorships, partnerships, or S corporations may be entitled to a special 20% deduction beginning in 2018.
The 2017 tax act also significantly reforms international tax rules. This has made planning more difficult, particularly for businesses that must consider the impact of international taxes.
Below are highlights of the 2017 tax act.
Business Deductions and Credits
•Section 179 Expensing:
The expensing limitation is increased to $1 million and the phase out amount to $2.5 million. The new limitations are to be adjusted for inflation. The act further expands the definition of §179 property and the definition of qualified real property for improvements made to nonresidential real property.
•Research and Development Credit:
The research and development credit is preserved.
•Deductions for Income Attributable to Domestic Production Activities:
Beginning in 2018, the deduction for income attributable to domestic production activities is repealed.
•Entertainments Expenses Deductions:
Beginning in 2018, no deduction is allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.
Beginning in 2018, the limit on the NOL deduction is 80% of the taxpayer’s taxable income. Unused losses can be carried forward indefinitely.
•Corporate Tax Rate:
Beginning in 2018, there is a 21% flat corporate tax rate; there is no special tax rate for personal service corporations.
•Pass-Through Tax Rate:
Beginning in 2018, generally a 20% deduction for qualified business income is provided in lieu of tax rate changes. Special rules apply when computing the deduction and for services businesses. The deduction expires after December 31, 2025.
Please contact us to discuss tax planning opportunities in preparation for the new rules that are generally going into effect for 2018.
The taxable estate is an estate tax concept. It includes the decedent’s interest in every type of property owned at death, plus property over which the decedent had control at death, even if he or she did not actually own the property. The decedent’s taxable estate includes his or her probate assets AND non-probate assets. Just because the distribution of certain assets at death, such as life insurance proceeds, a retirement account, or a jointly owned house, are not controlled by a will (and are not probate assets) does not mean that those assets are not subject to the estate tax.
The probate estate includes only those assets that are subject to the decedent’s will (or subject to intestate succession, discussed earlier in this book). The taxable estate includes all of the decedent’s assets, even if the assets do not go through probate.
The Difference Between The Taxable Estate vs. The Probate Estate is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here:
Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Entertainment Industry Deductions Wins.
The Boston Bruins of the National Hockey League lost in the first round of the 2017 Stanley Cup playoffs, but subsequently scored a legal victory in U.S. Tax Court. The Bruins’ Tax Court victory doesn’t count in the NHL standings, but it will make it easier for entertainers and even tax professionals to claim full meal expense deductions while on the road. The U.S. Tax Court recently ruled that that the owner of the Boston Bruins could deduct the full amount spent on meals for players and staff at hotels during away games. The Tax Court held that the Bruins’ meals qualified for the exception to a 50 percent limitation on meal expense deductions under the Internal Revenue Code. To qualify for the exception, a taxpayer must establish that the meals were provided in a facility on or near the employer’s business premises and are provided immediately before, after, or during the employees’ workday. In finding for the Bruins, the Court noted that the NHL requires the Bruins to play half of their games away from their hometown arena, and attendance at pregame breakfasts is mandatory for all players. (Jacobs v. Commissioner, 148 T.C. No. 24, T.C. No. 19009-15, June 26, 2017).
Tax professionals agree that the decision may have broader implications than just for the Bruins and professional sports teams. For example, performers such as singers, actors, and authors who travel for their business doing concert tours or promotions could benefit from the Tax Court’s decision. And some predict that the implications could extend beyond the entertainment industry to include full meal deductions for corporate employees traveling to other states for work.
Small businesses that reimburse employees for the cost of premiums for individual health insurance policies or pay their health costs directly will be fined up to $36,500 a year per employee under a new Internal Revenue Service regulation that took effect July 1, 2015. According to the new rule, an employer arrangement that reimburses or pays for employee individual health premiums is considered to be a group health plan that is subject to the $100 per-employee per-day penalty. The penalty applies whether the reimbursement is considered a before-tax or after-tax contribution. The new penalty is more than 18 times greater than the $2,000 Affordable Care Act large employer-mandate penalty for not providing health insurance at all. Employers with fewer than 50 workers are not exempt, as they are from the employer-mandate penalty. The rule covers employers with more than one employee. Employers can exclude workers who have been with the company less than three years, are under age 25, or are part-time. S-corporations are exempt through the end of this year.
Rep. Charles Boustany has introduced legislation in the House (HR 2911) and Sen. Charles Grassley introduced legislation in the Senate (S 1697) to attempt to remedy this problem. Both bills are awaiting congressional action.
The gift tax is also a component of the federal transfer tax system and is a tax imposed on transfers (i.e., gifts) of property during life, either given outright or to a trust. Like the estate tax, the gift tax is a transfer tax distinct from the familiar income tax.
Generally, the gift tax is determined by applying the transfer tax rate (the same rate that applies to the estate tax) to the value of property above the exemption amount (the same exemption amount that applies to the estate tax) that is gifted by one person to another during their lifetime, but not including property transferred to a spouse.
Thus, the gift tax covers transfers of property during life, while the estate tax covers transfers of property at death. The two taxes work together, and are said to be unified.
So from a transfer tax perspective, is it better to give away property as a gift during life (subject to the gift tax), or to leave assets to heirs in a will at death (subject to the estate tax)? Generally, if you give assets away while you are still alive, you are also ridding your estate of the future appreciation in the value of that asset. The assets you give away now will trigger a lower gift tax (if any) today than an estate tax years from now because of the assets’ appreciated value at death.
Gift Tax Annual Exclusion
Each year, a person can gift to any one or more other persons up to the annual exclusion amount (currently $14,000 per recipient in 2015) without triggering the gift tax. Married couples can combine their individual annual exclusion amounts and gift $28,000 each year to each person without triggering the gift tax.
Annual exclusion is meant to shield from tax the small common gifts made every year to friends and relatives, such as birthday presents, holiday gifts and small tokens of appreciation.
The Gift Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
- Accelerate Deductions and Defer Income – It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Bunch Itemized Deductions – Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older as of the end of 2016). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
- Make Up a Tax Shortfall with Increased Withholding – Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
- Leverage Retirement Account Tax Savings – It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k), 12,000 for a SIMPLE IRA and $5,500 for a traditional/Roth IRA (not including catch-up contributions for those 50 years of age and older).
- Reconsider a Roth IRA Rollover – It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, re-examine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.
- Get Your Charitable House in Order – If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Give Directly from an IRA – Congress finally made permanent a provision that allows taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
- Zero out AMT – Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
- Use Your Gift Tax Exclusion – You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
- Leverage Historically Low Interest Rates – Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.
The estate tax is one component of the federal transfer tax system, which also includes the gift tax and the generation-skipping transfer tax. The estate tax is a tax imposed on the transfer of property at death. It is a transfer tax, which is a different tax than the familiar income tax.
Generally, the estate tax is determined by applying the transfer tax rate to the value of property on the date of death owned by the decedent in excess of a threshold amount (currently $5.43 million per person in 2015). The tax is technically imposed on the transfer of the decedent’s property either outright or in trust to the decedent’s heirs, but not including property transferred to the surviving spouse.
Most people will not be subject to the estate tax because most people will never own property with a total value in excess of the threshold amount. The threshold amount is referred to as the exemption amount, and is $5.43 million if you die in 2015. The exemption amount increases every year at the rate of inflation.
Estate Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.