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THE TRUMP TAX CUT: IT’S A HOAX

By Chuma Megafu

This is the biggest hoax cast upon the American people ever…. so declared Republican Sen. Bob Corker of Tennessee the Chairman of Senate foreign committee.

The plan is a typical Republican tax plan, in that it advocates deep tax cut to the wealthiest of Americans, with the belief that the wealthy will then somehow trickle down the gains to the general population called THE TRICKLE DOWN THEORY. A term coined after the massive Reagan tax cuts of the early eighties. President Trump has likened his tax plan to that of President

Reagan’s and at a recent rally at Indiana state Park said, “we want a tax reform that is pro-growth, pro-jobs, pro-worker, pro-family, and yes, tax reform that is pro-American.” Are there any similarities of Trump tax plans and Reagan’s? Though Trump is currently heaping praise on Reagan’s tax plan it should be noted that in its wake he called it “an absolute catastrophe for the country” and “one of the worst ideas in recent history”.
Is Trump currently sincere in praising the Reagan tax cuts or maybe is he simply confused.

The Reagan tax cut of the eighties was a bipartisan effort the Trump tax cut has no democrats in support. More importantly the eighties was a different era with economic stagnation, inflation at an all time high, unemployment was hovering around 11% and the marginal tax rate was believe it or not 70%. Though the economy grew robustly in the years that followed the Reagan tax cut, most economists including Martin Feldstein Reagan’s Chief Economist attributed this growth to the expansive monetary policy that slashed interest rate massively. The tax cut on the other hand tripled the then deficit and ushered in the explosive deficit that has followed ever since, so the Republican party once known for fiscal disciple and balanced budget is now the party of tax cuts and explosive budget deficits with the Darth Vader himself “Big Dick” Chenney once declared “Budget deficient’s don’t matter, Reagan proved it”.

Subsequent Republican’s attempts on tax cuts i.e., the Bush tax cuts did not grow the economy or create jobs as it promised and most recently Kansas Governor Sam Brownback attempts at massive tax cuts have left Kansas economy in tatters. Why then will The Trickle Down Fairy work this time? Well, let’s take a look at Trum’s tax cut proposal.

The frame work lays out the following changes to the federal tax code…

Personal

  • Collapse the current seven tax brackets into three, paying marginal rates of 12%, 25% and 35%.
  • Raise the standard deduction to $24,000 for married couples filing jointly (from $12,700 in 2017 under current law) and to $12,000 for single filers (from $6,350).
  •  Eliminate the personal exemption, currently at $4,050 per person and also scrape the additional deduction of 1550 for single filers who are over 65 years and or disable.
  • Eliminate most itemized deductions, with the exception of those for mortgage interest and charitable contributions.
  • Increase the child tax credit, leaving the first $1,000 refundable as under current law, and increase the income levels at which the credit begins to phase out.
  • Repeal the alternative minimum tax, a device intended to curb tax avoidance among high earners.
  • Repeal the estate tax and the generation-skipping transfer (GST) tax.

Business

  • Lower the top corporate tax rate to 20% from the current 35%.
  • Allow businesses capital investments (excluding structures) to be immediately expensed, rather than depreciating the value of these assets over time as under current law. The provision would sunset 1n 2022.
  • Eliminate the domestic production (section 199) deduction.
  • Eliminate the deduction of interest expense by C- Corporation
  • Introduce a “territorial” tax system that will not tax income that business earn in foreign countries and allow a one-time tax holiday on past income earned overseas.
  • Eliminate the corporate alternative minimum tax.
  • Establish a top pass-through rate of 25% for Owners of pass-through businesses, which include sole proprietorships, partnerships and S-corporations.
  • The frame work retains deduction for research for research and developments and low income housing.

What does this all mean? Is it a hoax? Will it work? As with everything Donald Trump there seems to be a lot of chaos and confusion and this tax plan is no exception. Take the proposal to scrape the personal exemption of $4050,
which is available for all taxpayers and their dependent with the proposal to double the standard deduction for single filers from $6300.00 to $12000.00 and married filers from $12000 to $24000, while this will help single filers with one or no dependent or a married filer with three or less dependent it will hurt singles with more than one dependent or married filers with more than three dependents, so you basically have an Even Stevens situation.
Also, the elimination of itemized deduction with the exception of Mortgage interest and charitable deduction then becomes an oxymoron, because by themselves will not qualify taxpayers who wish to itemize their expenses, but will need the cumulative sum of all of your deductible expenses to qualify.

Also in the framework is the repeal of the estate tax. This tax applies to estates of individuals with combined gross assets and prior taxable gifts exceeding $5.45 million (double that for estates of married couples)
Of the 2.6million death reported in 2013 about 11,300 estate tax returns were filed of which only 4,700 were taxable generating $17 billion in taxes. Clearly repeal of this tax is self serving in that it benefits trump and his family directly.

Also on the chopping block is the Alternative minimum tax. This is a tax that kicks in when high income earners have a disproportional tax write off and it ensures they pay their fair share. It is not worthy to state though Trump has yet to release his tax return, snippets that have leaked show in 2005 he paid of $38,000,000 of taxes on $150,000,000 of income of which $31,000,000 of tax paid was attributed to the Alternative minimum tax. Guess he’s still mad about that.

Though President Trump is touting his tax plan as a massive tax cut for the middle class, evidence suggest otherwise. The tax policy Center says the wealthiest of Americans, the top 1% would get over half of the benefit with a millionaire getting an average tax cut of $317,000. A single taxpayer earning $75000 with 2 or more dependents will actually see a tax increase of $2400 and a married couple with 3 or more dependents will get a tax increase of $150. Most other taxpayer will get a tax cut of $240 to $600 all other things being equal.

Congressional Republicans have allowed for a deficit of $1.5 trillion to be added to the deficits to finance this tax plan, but The Tax Policy center estimates the government would lose $6.2 trillion in revenue producing huge budget deficits that could hurt the economy. Most economists are in agreement that this tax plan will not work and will most certainly add to an already ballooning deficient. But, you have Donald Trump’s word that it will work and create jobs.

Who do you believe? Mind you Trump has filed for bankruptcy four times already and arguably the only person to ever bankrupt a casino.

Chuma Megafu is a Senior Tax Consultant with Prime Financial & Tax Service and writes out of Los Angeles California.

Check out our analysis of the business framework at www.pfandtax.com Coming out shortly.

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Section 475 Traders May Be Eligible For Pass-Through Tax Cuts

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Owners of a trading business are anxious to learn if they will qualify for tax cuts with the House’s 25% pass-through rate or the Senate’s 17.4% pass-through tax deduction. While the two bills have a few things in common, they are vastly different, and both contain nuances for a trading business.

The House bill provides little relief for active owners of a service business, which likely includes a trading business. The Senate bill has a more generous provision for service companies.

Last week, the House passed its bill, the “Tax Cut & Jobs Act” (H.R.-1), and the Senate Finance Committee approved its modified mark. The Senate expects the Joint Committee on Taxation (JCT) to complete drafting its bill this week and release it for floor debate the week after Thanksgiving. Republican Senator Ron Johnson came out in opposition to tax reform proposals, saying they don’t go far enough to help small-business pass-throughs vs. big corporations. He’s right. In current form, the Senate’s modified mark is better than the House bill for active owners of pass-throughs, and I hope GOP leaders choose the Senate’s pass-through proposals, with further improvement, for final legislation.

Here are the steps required for a trading business to achieve tax relief under the House vs. Senate proposals. (Spoiler alert: It’s much easier in the Senate.)

The first requirement is business income

Because the House and Senate bills limit pass-through tax cuts to business income, a big question remains: Does income in a pass-through entity meet the definition of “qualified business income”? A trading business, eligible for trader tax status (TTS), with capital gains income, is likely not included in the definition of business income. But a trading business with Section 475 MTM ordinary income might be included.

Here’s my rationale. The House bill’s summary states, “Certain other investment income that is subject to ordinary rates such as short-term capital gains, dividends, and foreign currency gains and hedges not related to the business needs, would also not be eligible to be recharacterized as business income.”

The House bill goes on to state, “Net business income or loss shall be determined with respect to any business activity by appropriately netting items of income, gain, deduction, and loss with respect to such business activity.” The bill notes “certain investment-related” exceptions, a list that includes short-term and long-term capital gains, dividend income, any interest income other than interest income that is properly allocable to a trade or business, and annuities.

Section 475 ordinary income and rental income are not on the exceptions list. A TTS futures trader has lower Section 1256 contract 60/40 capital gains tax rates (60% is a long-term capital gain), so it’s doubtful he or she could qualify for the more moderate pass-through rates.

The Senate mark (JCX-51-17, Nov. 9) states, “Qualified business income or loss does not include certain investment-related income, gain, deductions, or loss.” This language is similar to the House summary.

A TTS forex trader has foreign currency ordinary income (Section 988) that is business-related. Without TTS, that forex trader’s ordinary income is investment-related. Forex traders may want to consider a capital gains election to be eligible for Section 1256(g) 60/40 tax rates on “major” pairs, but that may disqualify them from pass-through benefits. They can consider which is better for them.

Section 475 ordinary income is also considered business-related for TTS traders. Steven Rosenthal, Senior Fellow, Urban-Brookings Tax Policy Center, weighs in: “Section 475 treats the gain as ordinary income,” he says. “Section 64 provides that gain that is ordinary income shall not be treated as gain from the sale of a capital asset.” Mr. Rosenthal thinks Section 475 income is business income under the House bill and Senate mark. (Section 475(f)(1)(D) excludes Section 475 ordinary income from self-employment income and self-employment tax.)

The next requirements for receiving pass-through tax cuts vary significantly in the House vs. Senate bills.

Does the House bill consider a trading business a service activity?

It’s essential because active owners of service businesses may receive a tiny pass-through tax cut in the House bill. The bill states, “The term ‘specified service activity’ means any activity involving the performance of services described in section 1202(e)(3)(A), including investing, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).” When my partner Darren Neuschwander, CPA, and I read this definition two weeks ago, we thought it expressly included a trading business.

The House summary that accompanies the bill is different from the actual bill, it states, “certain personal services businesses (e.g., businesses involving the performance of services in the fields of law, accounting, consulting, engineering, financial services, or performing arts) would be zero percent.” Notice the summary version dropped the second part, “including investing, trading, or dealing in securities.” Section 1202(e)(3)(A) lists the personal service fields.

The thousand dollar question is: Does the House consider a trading business a specified service activity, or not? Rosenthal believes a hedge fund with Section 475 ordinary income does not meet the House definition of specified service activity. His interpretation is that an investment manager offers trading services to a hedge fund and the fund receives those services. The manager is a service activity; the hedge fund is not. It’s about how Rosenthal interprets the comma placement in the definition, which he knows well because he used to be a legislation counsel at JCT.

I pointed out to Rosenthal that a management company is the general partner of a hedge fund limited partnership, to bring trader tax status to the fund level, which is a requirement for the hedge fund using Section 475. For this blog post, I assume a trading business is a service company based on how I read the House bill’s definition.

The House gives little benefit to active owners of service companies

An active owner of a non-service activity receives a 70% labor percentage and a 30% capital percentage. Calculate the pass-through benefit as “distributed” business income, multiplied by the capital percentage, multiplied by the maximum pass-through rate (25% for the 35% and 39.6% ordinary brackets and 9% for 12% ordinary bracket).

Active owners of a service business get a 100% labor percentage and 0% capital percentage. If they have a significant investment in business equipment and other fixed assets, they may have an “alternative capital percentage,” providing it’s at least 10%. Most TTS trading businesses won’t have an alternative capital percentage and therefore won’t get any relief in the House bill, except for the preferential 9% rate.

The House bill’s summary states, “Under the provision, the first $75,000 of an active owner or shareholder’s net business taxable income would be subject to a 9-percent rate in lieu of the ordinary 12-percent rate. Owners or shareholders in personal service businesses would be eligible for the preferential 9-percent rate.” This provision gives a small tax benefit to a service business.

The House bill favors passive business activities

The bill summary states, “Net income derived from a passive business activity would be treated entirely as business income and fully eligible for the 25-percent maximum rate.”

The original House bill had a sneaky proposal to expand self-employment tax on the labor percentage of active owners and for all limited partner income. After blowback, the House scrapped the self-employment tax provisions, yet it retained the significant tax break on limited partners. Active owners of non-service businesses get 30% of the benefits vs. limited partners. Many active-owners of service companies will get very few benefits.

I think Congress and the IRS will object to active owners restructuring their interests into general partner vs. limited partner ownership stakes to cash in on the House bill provisions favoring limited partners.

Will hedge fund limited partners get the 25% pass-through rate?

The House bill’s summary states, “The determination of whether a taxpayer is active or passive with respect to a particular business activity would rely on current law material participation and activity rules within regulations governing the limitation on passive activity losses under Code section 469. Under these rules, the determination of whether a taxpayer is active generally is based on the number of hours the taxpayer spends each year participating in the activities of the business.”

Some tax advisers suggest limited partners in hedge funds with TTS and Section 475 income can get the 25% House rate. I think there is likely a problem with that position. Under the “trading rule” exception to Section 469, a hedge fund investment is not a passive activity. Hedge fund investors are “non-active” owners, rather than passive-activity owners so that the House bill may treat them as an active owner of a service business with 0% capital percentage.

The Senate proposal is better for TTS Section 475 traders and funds

The Senate mark’s definition of a “specified service activity” does not include a trading company, but it has not yet released the final bill. It’s conceivable that the Senate could render a trading company a service activity. But, service companies fare much better in the Senate modified mark vs. the House bill.

Active owners of non-service businesses get the full benefit of the Senate pass-through proposals. The Senate’s original mark allows a 17.4% pass-through deduction on net business income, limited to 50% of owner wages.

The Senate’s original mark excluded service activities unless the owner had taxable income under $150,000 married and $75,000 for other individuals. (See How The Pass-Through Tax Cut Is Better In The Senate.)

The Senate modified mark significantly improved the provision for all owners of pass-throughs, including non-service and service businesses. It doesn’t mention passive activity owners or limited partners, so I presume they should be able to get the benefits since the Senate waived the wage limitation under the income threshold.

The modified mark states, “Under a special rule, the W-2 wage limit does not apply in the case of a taxpayer with taxable income not exceeding $500,000 for married individuals filing jointly or $250,000 for other individuals. The application of the W-2 wage limit is phased in for individuals with taxable income exceeding this $500,000 (or $250,000) amount over the next $100,000 of taxable income for married individuals filing jointly or $50,000 for other individuals.

“The modification further provides that the exception allowing the 17.4-percent deduction in the case of certain taxpayers with income from a specified service business applies to those whose taxable income does not exceed $500,000 for married individuals filing jointly or $250,000 for other individuals. The benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for married individuals filing jointly or $50,000 for other individuals.” (See Senate Juices Up Tax Cut For Pass-Throughs.)

The process is moving fast

I look forward to reading the Senate bill after Thanksgiving, and I will update this blog post accordingly. I hope GOP leaders agree to use the Senate bill as the vehicle for passage as they rush to pass tax reform legislation before year-end.

The timing is right for taxpayers and accountants. If Congress finalizes the legislation by mid-December, TTS traders will have time to consider a new tax plan for 2018, which might include a revised entity solution and a Section 475 election.

TTS traders with Section 475 should not count their tax chickens on pass-through tax breaks before they hatch. Stay tuned for updates.

Darren Neuschwander CPA contributed to this blog post.

Robert A. Green, CPA
GreenTraderTax
Author of Green’s 2017 Trader Tax Guide
Managing Member, Green, Neuschwander & Manning, LLC

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10 Million U.S. Taxpayers Faced IRS Penalties in 2016

By ISAAC M. O’BANNON,
MANAGING EDITOR ON NOV 3, 2017

The Internal Revenue Service says that about 10 million taxpayers were hit with a penalty in 2016, and is offering tips to reduce or eliminate penalties in 2017 and future years.

To help raise awareness about the growing number of estimated tax penalties, the IRS has launched a new “Pay as You Go, So You Don’t Owe” web page. The IRS.gov page has tips and resources designed to help taxpayers, including those involved in the sharing economy, better understand tax withholding, making estimated tax payments and avoiding an unexpected penalty.

Each year, about 10 million taxpayers are assessed the estimated tax penalty. The average penalty was about $130 in 2015, but the IRS has seen the number of taxpayers assessed this penalty increase in recent years. The number jumped about 40 percent from 7.2 million in 2010 to 10 million in 2015.

Most of those affected taxpayers can easily reduce or, in some cases, eliminate the penalty by increasing their withholding or adjusting estimated tax payments for the rest of the year. With a little planning, taxpayers can avoid the penalty altogether.

By law, the estimated tax penalty usually applies when a taxpayer pays too little of their total tax during the year. The penalty is calculated based on the interest rate charged by the IRS on unpaid tax.

How to Avoid the Penalty

For most people, avoiding the penalty means ensuring that at least 90 percent of their total tax liability is paid in during the year, either through income-tax withholding or by making quarterly estimated tax payments. Keep in mind exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishers, casualty and disaster victims, those who recently became disabled, recent retirees, those who base their payments on last year’s tax and those who receive income unevenly during the year. For details, see Form 2210 and its instructions.

Taxpayers may want to consider increasing their tax withholding in 2017, especially if they had a large balance due when they filed their 2016 return earlier this year. Employees can do this by filling out a new Form W-4 and giving it to their employer. Similarly, recipients of pensions and annuities can make this change by filling out Form W-4P  and giving it to their payer.

In either case, taxpayers can typically increase their withholding by claiming fewer allowances on their withholding form. If that’s not enough, they can also ask employers or payers to withhold an additional flat dollar amount each pay period. For help determining the right amount to withhold, check out the Withholding Calculator on IRS.gov.

Taxpayers who receive Social Security benefits, unemployment compensation and certain other government payments can also choose to have federal tax taken out by filling out Form W-4V and giving it to their payer. But some restrictions apply. See the form and its instructions for details.

For taxpayers whose income is normally not subject to withholding, starting or increasing withholding is not an option. Instead, they can avoid the estimated tax penalty by making quarterly estimated tax payments to the IRS. In general, this includes investment income —such as interest, dividends, rents, royalties and capital gains —alimony and self-employment income. Those involved in the sharing economy may also need to make these payments.

Tips to Make Estimated Tax Payments

Estimated tax payments are normally due on April 15, June 15, Sept. 15 and Jan. 15 of the following year. Any time one of these deadlines falls on a weekend or holiday, taxpayers have until the next business day to make the payment. Thus, the next estimated tax payment for the fourth quarter of 2017 is due Tuesday, Jan. 16, 2018.

The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay  or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. Taxpayers may also use Form 1040-ES to figure these payments. IRS Publication 505, Tax Withholding and Estimated Tax, is a resource on withholding and estimated payments.

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Why The Tax Cut May Disappoint Owners Of Pass-Through Entities

Most small business owners who saw the aggressive advertising about tax reform thought they would receive a significant tax cut on pass-through entity (PTE) business income, but now that the House released its tax cut bill (Tax Cut & Jobs Act), we see the savings will be far less than expected. Additionally, the bill extends self-employment taxes to owners of S-Corporations, limited partners, and on rental income.
The 25% PTE rate only applies to the “capital percentage,” which by default is 30% for non-service businesses and 0% for service businesses. It does not apply to the remaining “labor percentage” attributed to the officer/owners. PTEs may use an “alternative capital percentage based on the business’s capital investments,” but for many, that may not improve the results by much.
Assume an active owner of a non-service business is in the 35% ordinary tax bracket. His actual PTE rate is 32%, calculated as follows: 70% labor percentage multiplied by the 35% ordinary rate; plus 30% capital percentage multiplied by the 25% PTE rate. The blended rate is just 3% less than the 35% ordinary rate — not a significant tax saving.
The bill’s Section-by-Section Summary (page 3) states, “Under the provision, a portion of net income distributed by a pass-through entity to an owner or shareholder may be treated as “business income” subject to a maximum rate of 25 percent, instead of ordinary individual income tax rates. The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates.”
Service businesses
The bill disfavors service companies probably related to the anti-abuse provision to prevent people from reclassifying employee wages as service company revenues. Service companies have a 0% default capital percentage, so zero business income is subject to the lower PTE rate.
The bill permits PTEs to use an “alternative capital percentage based on the business’s capital investments.” Manufacturers have significant business capital investments, but many service companies do not. If a service business operates virtually in the cloud, it may not have much capital investment in equipment. Service companies with significant capital equipment may receive some tax benefits from the PTE rules, but the savings won’t be substantial.
Trading vs. investment management businesses
The bill treats trader entities with trader tax status (TTS) and investment managers as service companies, but there is a critical difference. In a trading company, trading and investment income do not constitute “business income,” so a trading company may not use the 25% PTE rate, even if it has an alternative capital percentage.
Conversely, an investment manager’s advisory fees are business income, but the profit-allocation (carried interest) of trading and investment income are not business income. The investment manager with net business income may utilize the 25% PTE rate if it has an alternative capital percentage. Investment managers may have trading workstations and high-frequency trading equipment that may deliver a decent alternative capital percentage.
The bill expressly excludes trading and investment capital from the business capital investment, and it states that trading and investment income are not business income.
The bill states, “SPECIFIED SERVICE ACTIVITY.—The term ‘specified service activity’ means any activity involving the performance of services described in section 1202(e)(3)(A), including investing, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).”
Limited partners get the PTE rate
The bill treats a limited partner’s entire distribution of business income as a capital percentage subject to the favorable maximum 25% PTE rate. The bill states, “Net income derived from a passive business activity would be treated entirely as business income and fully eligible for the 25% maximum rate.” Limited partners do not have a labor percentage since they are passive-activity owners. Some limited partners perform minor services, but not enough to satisfy the material participation standards in Section 469. The bill also subjects limited partner income to self-employment (SE) tax in Section 1402(a).
The bill expands self-employment income
Taxpayers calculate SE taxes based on self-employment income (SEI). It’s essential to understand SEI included vs. excluded items. SE taxes include Social Security and Medicare taxes. Social Security taxes are 12.4% up to the social security base amount ($128,700 for 2018) and 2.9 Medicare tax without an income limit. Obamacare added a 0.9%-Medicare surtax on earned income for people with AGI incomes over $200,000 single and $250,000 married.
The bill significantly expands the base of Section 1402 SEI for assessing SE tax. Tax writers did not mention this in earlier blueprints.
The bill adds these items to Section 1402(a):
• Labor percentage and capital percentage for PTEs.
• “Adjustment For S Corporation Wages – For purposes of this subsection, proper adjustment shall be made for wages paid to the taxpayer with respect to any trade or business carried on by an S corporation in which the taxpayer is a shareholder.”
• Application to rental income – Strikes Section 1402(a)(1), which had “excluded rentals from real estate and from personal property leased with the real estate.”
• Application to limited partners – Strikes Section 1402(a)(13), which had “excluded the distributive share of any item of income or loss of a limited partner.”
The bill does not add investment and trading income to SEI. That would be contrary to Republican tax policy; the GOP is trying to repeal the Obamacare 3.8% Medicare surtax (net investment tax) on investment and other unearned income.
The bill closes the S-Corp SE tax reduction loophole
Under current law, S-Corps do not pass SEI to owners. The IRS requires S-Corps with underlying earned income to have “reasonable compensation” for officer/owners. Industry practice for determining reasonable compensation in an S-Corp is 25% to 50% of net income before officer compensation.
The bill enshrines a labor percentage for S-Corps in Section 1402(a). Accountants should be able to use an S-Corp’s labor percentage, adjusted for office compensation paid, for determining SEI from the S-Corp.
For example, assume a non-service business S-Corp with a 70% labor percentage has $200,000 of income before officer compensation. It pays the officer $50,000, resulting in a net income of $150,000. The labor percentage amount is $140,000 (70% labor percentage multiplied by $200,000 income before officer compensation). SEI is $90,000 (labor percentage amount $140,000 less $50,000 officer compensation.)
For a non-service business S-Corp officer/owner, it’s an SE tax hike from 25% to 70% of income. For a service business, its a hike to 100%.
Trading S-Corps
A trader tax status (TTS) S-Corp does not have business income; it has investment income on capital assets. The bill expressly states, “Certain other investment income that is subject to ordinary rates such as short-term capital gains, dividends, and foreign currency gains and hedges not related to the business needs, would also not be eligible to be recharacterized as business income.” I assume Section 475 MTM ordinary income fits the catchall “certain other investment income,” since it’s trading income on capital assets.
The IRS should not apply a labor percentage to a TTS trader S-Corp or partnership since the entity does not have business income. Currently, the IRS does not require a TTS trading S-Corp to have “reasonable compensation” for officer/owners because there is no underlying earned income.
Trader S-Corp retirement plan deduction in 2018
Assume a TTS trader S-Corp makes $200,000 in net income before officer compensation and employee benefit deductions. Assume the IRS does not assess a labor percentage on a trading S-Corp. Assume the S-Corp pays officer compensation of $19,000 to create some earned income. That unlocks a 100% deductible Solo 401(k) elective deferral deduction of $18,500, the maximum limit for 2018. (The bill does not change 401(k) limits).
The trader owner saves income taxes on the $18,500 deduction, figure at 30.3% for federal and state, and pays payroll taxes of 15.3% on $19,000. The owner enjoys a 15% tax savings on $18,500, which is $2,775. The owner could also do the maximum 25%-deductible profit sharing plan of $36,500 on wages of $146,000. That increases the net tax savings of income tax savings over payroll tax costs.
With no labor percentage applied in a TTS trading S-Corp, the officer/owner retains control over compensation and retirement plan choices.
Alternative structures for TTS traders
If the IRS insists on 100% self-employment income for a trading business S-Corp, then traders should consider alternative arrangements. I don’t think the IRS will require SEI for a trading S-Corp, and the bill has a long way to becoming law.
A TTS trader can be a sole proprietor using a Schedule C or a trading partnership and pay a C-Corp management company reasonable administration fees. The C-Corp can deduct health insurance, a retirement plan contribution, and fringe benefit plans, including a health reimbursement arrangement. The management company would be deemed a “personal service C-Corp,” with a 25% rate in the bill, not the 20% rate for other types of C-Corps.
The TTS trader could skip employee benefits and remain a sole proprietor. If married, the sole proprietor trader could hire their spouse, and the spouse could have a health insurance deduction for family coverage (HSA and HRA). The spouse could also have a tax-deductible retirement plan contribution. A sole proprietor may not pay himself as an employee. Trading gains are not SEI, so these machinations are required for employee benefit deductions.
We are looking into whether a C-Corp can be a good option for some traders, so stay tuned.
Alternative structures for companies with business income
The PTE rate deal is disappointing, and S-Corps face an SE tax hike with a 70% to 100% labor percentage. Some small businesses may want to consider changing to a C-Corp for the 20% rate, or 25% rate on personal service corporations.
LLCs taxed as S-Corps may consider revoking the S-Corp election to convert to a C-Corp. Consult with a tax advisor to avoid pitfalls on certain types of reorganization, which could result in taxation. You should consider a tax-free reorganization. If you have a personal service company C-Corp with a 25% rate, plus a qualified dividend rate of 20%, the total federal tax rate would be 45%. C-Corps also must contend with the 20% accumulated earnings tax, which may apply if you avoid paying sufficient qualified dividends. Don’t forget to factor in state double-taxation.
Our firm is considering various options for traders and other business for 2018 so stay tuned. The bill would take effect in years after Dec. 31, 2017, except for a few provisions like increased expensing and the change in mortgage deduction.
Nov. 14 update: The House improved HR-1′s pass-through entity provisions with RULES COMMITTEE PRINT 115–39, scrapping the original bill’s expansion of self-employment income (SEI). (See the details of the original proposal below.) The modified House bill helps middle-income taxpayers by adding an 11% maximum pass-through tax rate, phasing down to 9%, on the first $75,000 of business income, which phases out between $150,000 and $225,000 of income. Otherwise, the maximum 25% pass-through rate only provides tax relief in the 35% and 39.6% brackets. It’s not clear if a trading company, eligible for trader tax status and using Section 475 ordinary income, has “business income” and may qualify for the pass-through tax rate.
You can see how I did it on https://greentradertax.com/why-the-tax-cut-may-disappoint-owners-of-pass-through-entities/.
See my other blog post, How The Tax Cut Bill Impacts Traders And Investment Managers.
If you have any questions, contact me soon.
Robert A. Green, CPA
GreenTraderTax
Author of Green’s 2017 Trader Tax Guide
Managing Member, Green, Neuschwander & Manning, LLC

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Sacred deductions complicate push to simplify taxes

By Marcy Gordon

08/31/2017
http://www.msn.com/en-us/money/markets/sacred-deductions-complicate-push-to-simplify-taxes/ar-AAr13Nu?ocid=se

President Donald Trump and congressional Republicans have pledged to overhaul the nation’s complex tax code. To slash taxes, they say they’ll curb a web of expensive deductions and credits to allow more revenue to flow to the government.
Problem is, they’re likely to run into a wall of resistance from people and groups drawn together by a singular warning: Don’t touch my deduction.

Major cherished tax breaks — from deductions for mortgage interest and charitable donations to incentives for 401(k) contributions — have deep-pocketed supporters and lobbyists who are sure to fight to preserve those benefits. They add up to hundreds of billions of dollars in lost potential revenue that could otherwise go to rebuilding roads and bridges or social programs or even to help finance broader tax cuts for people and companies.

“On every single item, there’s a group out there ready to battle,” says Thomas Cooke, a professor and tax expert at Georgetown University.

This makes the outlook thorny for a tax rewrite effort this fall, a Trump priority that Republicans consider a political imperative looking ahead to next year’s midterm elections. The collapse of GOP health care legislation raises the stakes for taxes, with Trump’s team talking about action by year’s end.

The president and the GOP agree on the broad goals: Simplifying the tax code, lowering the rate for corporations from the current 15-35 percent range, and bringing relief for the middle class. But details have to be filled in.

“First, we need a tax code that is simple, fair and easy to understand,” Trump said Wednesday at a rally in Missouri. “That means getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests.”

Among the seemingly unassailable benefits, the most cherished may well be the deduction of interest paid on mortgages. Touted as a pillar in the promotion of homeownership, the benefit cost the government an estimated $77 billion in the budget year that ended last Sept. 30, according to Congress’ Joint Committee on Taxation.

© The Associated Press Graphic shows estimated costs for popular personal deductions; 2c x 3 inches; 96.3 mm x 76 mm;

The benefit allows homeowners to deduct up to $1 million in interest payments on a primary (and a secondary) residence. It is fiercely defended by the National Association of Realtors, which spent $64.8 million on lobbying on various issues last year including the mortgage deduction, according to the Center for Responsive Politics.

Roughly 28 million Americans deduct mortgage interest from their income taxes, with the biggest concentrations in the high housing-cost states of California, New York, New Jersey, Virginia and Maryland, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.

House Republicans say they’ve got a more efficient way to encourage home buying. Under their plan, the standard deduction would be increased from the current $12,600 for married couples filing jointly, for example, to $24,000. They argue that a majority of homeowners would no longer choose to itemize deductions and claim the mortgage-interest benefit. They’d be better off using the bigger standard deduction.

Another possibility is halving the mortgage deduction to $500,000. That would surely set up a pitched battle.

Other highly popular benefits:

—Employees’ earnings from defined-contribution retirement plans such as 401(k)s are not taxed until retirement; pay-ins by both employers and employees also receive tax-preferred status. That cost $82.7 billion in the most recent budget year.

Among the ideas circulating among some Republicans is reversing that by taxing investment earnings upfront, not upon retirement; or reducing the limits on pre-tax contributions.

With about 55 million U.S. workers holding some $5 trillion in their 401(k) accounts, the plans have become a touchstone of retirement security for the middle class.

A coalition of groups representing employers, consumers and the financial industry recently expressed concern to the powerful chairman of the Senate Finance Committee. With lawmakers looking for revenue sources to offset prospective tax cuts, “Any changes to the retirement system made solely for short-term budgetary gains, and not for policy reasons, could hurt Americans’ long-term retirement security,” the Save Our Savings coalition said in a letter to Sen. Orrin Hatch, R-Utah.

—Deductions for donations to charitable, religious and other nonprofit organizations. Estimated cost: $41.5 billion. Americans are generous, House Republicans note, and charitable giving should be encouraged with a tax incentive. But only 25 percent of taxpayers benefit from the deduction because the rest don’t itemize. The solution is to make the charitable deduction more efficient by simplifying taxpayers’ compliance and record-keeping, the Republican plan says.

Under the plan, all itemized deductions would be eliminated except for two: mortgage interest and charitable donations.

—Tax-free employer-paid health insurance premiums and other medical expenses, including long-term care insurance, clocking in at $143.8 billion. Employees aren’t taxed on the benefits, while employers can deduct them as a business expense.

—Tax credit for children under age 17, $55 billion. An individual can claim a $1,000 credit for each qualifying child. The credit starts phasing out for single filers earning over $75,000 a year and for joint filers earning over $110,000.

Some lawmakers have proposed increasing the credit to $2,500, by combining the exemption for dependents and the child care credit. Organizations including the Child Poverty Action Group and the National Association for the Education of Young Children have stressed the importance of using tax policy to help children and families. They express concern that such benefits for children could get caught up in the Republicans’ drive to eliminate “special interest” loopholes in the tax overhaul.

Rep. Kevin Brady, the Texas Republican who heads the tax-writing Ways and Means Committee, acknowledged in a recent speech, “The fight will get tough.”

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The 401(K)

As a metaphor for claiming your double portion.

by Chuma Megafu

The People of Judea christian belief often use the term double portion to refer to over and beyond blessings or gifts.There are six instances in the
Bible where specific references are made to double portion with the most notable one being, toward the end of Prophet Elijah’s Ministry.
He offered his assistant Elisha a gift: ‘ what can I do for you before I am taken from away? Elisha answered ,’ Please let there
be a double portion of your spirit on me’.(2:Kings2:9) Sure enough Elisha performed double the miracles of Elijah, showing he was
indeed granted a double portion. So also you can use the 401(k) to claim your double portion.

The 401(k) enacted into law in 1978 by congress, it was intended to give taxpayers a break on taxes on deferred income.
It wasn’t untill 1980 that Ted Benna regarded as the father of the 401(k) took note of this obscure provision and figured out
that it could be used to create a 401(k) plan, which simply is an arrangment that allows an employee to choose between
taking compensation in cash or deferring a percentage of it to a 401(k) account. The amount deferred is usually not taxable
to the employee until it is withdrawn or distributed from the plan.Several variations of the 401(K) has since emerged such
as the Roth 401(k) which can be funded with after tax dollars , but for the sake of simplicity I will limit dicussion to the traditional
401(k).

The other popular feature of the 401(k) plan is called The Match. This is when an employer matches a percentage of employee
compensation up to a certain portion of total salary. For example assume your employer offers 100% on all your contribution
each year up to a maximum 3% of your annual income . If you earn $60,000.00, the maximum amount your employer will contribute
will be $1,800.00 , if you contribute $5000.00 and your employer maxes out the matching requirememnt it will give you a total
contribution of $6800.00 in a year. The pretax contributions earning from investment in a 401(k) account(in the form of interest, dividends and capital gains)
and the resulting compounding interest with delayed taxation becomes a very powerful vechicle to accumalate wealth when held over
long periods of time. In other words all things being equal the money just sits there and grows.

The IRS imposes severe restrictions on withdrawals from 401(k) plans and imposes a 10% excise tax equal to the amount distributed
when the taxpayer is under the age of 59 1/2 ( this is on top of the ordinary income tax that has to be paid). However the last
economic meltdown of 08/09 saw many taxpayers in financial distress and dipping into their 401(k) and opting to pay the penalties
with the often familiar phares, ‘I had no where else to go’. There are some exception allowed by the IRS on the 10% excise tax which
includes:
distribution after death or disability of the employeee
distribution made under a qualified domestic relations order(usally done during divorce)
distribution to pay medical bills exceeding 10% of adjusted gross income
distribution taken as a series ofsubstantially equal peridic payments over the taxpayer’s life
distribution done for hardship as defined under the plan
distribution to correct excess contributions or deferrals

Section 72(p) of the IRS codes also allows employees to take loans from their 401(k) plans if the employer offers it.The
loans itself is not taxabe income nor subject to the 10% penalty and must be paid back for a term not longer than 5years
with a reasonable rate of interest charged. If employee do not adhere to the strict guidelines of Section 72(p) the loan is declared in default
and becomes a taxable distribution. This i see happen very frequently.

Account owners must begin making distribution by April 1, of the calender year after turning age 70 or April 1, of the calender
after retiring. The amount of the distribution is based on life expectancy according to appropriate IRS tables. The penalty for
not making the required minimum distribution is 50% of the amount that should have been distributed, one of the most severe
penalties the IRS applies.

The 401(k) plan is not without its detractors , the most vocal being the man who created it in the first place, Ted Benna. He
laments he as created a monster and feels wall street firms are racking too much in fees to manage 401(k) plans he also feels
and that the 401(k) is susceptible to the volaitility of the market.He futher laments that the 401(k) has eclipsed the defined benefit
plan (which guarantees a fixed payment) as primary retirement plan. According to Investment Company Institute as of March 31
of 2016 Americans held $4.8 trillion in 401(k).

All in all when planned properly , 401(K) is an exceptional wonderful program to earn over and beyond what should have been,
in that you have an employer match your savings which grows tax free in the plan. When you retire and distribution starts
chances are you are in a lower tax bracket.

This has been only a summary of the 401(k) plan. As the saying goes “there is more than six after five” and it can get very complicated
and involved . It can also be used as a tax planning tool. For further discssion on using 401(k) as a tax planning tool please contact
us at …. Prime Financial and Tax Service ..323-933-4183

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Estate Planning: How to Adjust to Rising Rates

By Veronica Dagher

Dec. 23, 2015 5:30am ET

Now that the Federal Reserve has taken the long-awaited first step in raising interest rates, affluent families should consider how a changing interest-rate environment might affect their estate plans.

People may want to take advantage of some wealth-transfer approaches before rates climb even further, while keeping other possibilities in mind for coming years if rates continue rising from today’s very low levels.

Interest rates can affect strategies for minimizing estate taxes and taking advantage of income-tax breaks in a couple of ways. Some approaches are dependent on investments earning more than a “hurdle” interest rate, so they are more attractive when rates are low. Also, interest rates are used to figure the value of a lump sum or series of payments in the future, which can affect income-tax deductions and the magnitude of potentially taxable gifts to heirs. The present value of a future sum is lower when interest rates are higher.

Here are two strategies that work best when rates are low and two that could be worth a closer look if rates keep rising.

Intrafamily loans

Wealthy individuals sometimes lend money to their adult children to invest. Or they transfer a promising investment to the children, taking back a promissory note on which the children pay interest. Any net investment return above the loan rate is effectively a tax-free transfer of wealth to the younger generation.

Tax rules spell out the minimum interest rate the parents must charge to avoid having a below-market-rate loan treated as a taxable gift. That rate this month ranges from 0.56% to 2.61%, depending on the term of the loan.

The higher rates rise, the higher the rate of return borrowers will need to make a profit and that could make the strategy less attractive, says Matthew Brady, senior director of wealth planning for Wells Fargo Private Bank in San Francisco. Some people who have already used this strategy may want to refinance now to lock in current low rates and extend the term of the loan, he says.

Grantor retained annuity trusts

GRATs are often used by wealthy individuals who wish to pass down appreciating assets to heirs without taking a big gift-tax hit and to lower their overall estate-tax burden.

They are set up for a term of two years or more and often funded with assets with high growth potential, including private equity, says John Voltaggio, managing director and senior wealth adviser at Northern Trust Corp. in New York.

The grantor (say, a parent) who creates the GRAT usually receives annuity payments from the trust that add up to the asset’s original value plus a market-based interest rate set by tax rules. If the assets in the GRAT generate a total pretax return that exceeds that hurdle rate, the excess return passes to heirs free of gift and estate taxes, says Mr. Voltaggio.

If you think interest rates are going to continue rising, you may want to set up a new GRAT to lock in today’s rate, says Mark Parthemer, senior fiduciary counsel at Bessemer Trust in Palm Beach, Fla.

Qualified personal residence trusts

One strategy that could be more attractive when rates are higher is the use of a trust to pass a primary residence or vacation home to heirs, while the grantor retains the right to live in the house for a number of years.

A qualified personal residence trust essentially freezes the value of the property for gift- and estate-tax purposes at the time of creation.

The potentially taxable gift is the present value of the asset in a certain number of years, Wells Fargo’s Mr. Brady says. “In a higher-rate environment, the present value of the asset is lower, therefore the gift value is lower,” he says.

Charitable remainder annuity trusts

Philanthropically minded people put assets into CRATs and name one or more charities as the ultimate beneficiary while continuing to draw income during their lifetime.

The grantor is allowed a tax deduction at the time the CRAT is funded for the remainder interest that will ultimately pass to the charity.

When interest rates are high, the present value of the income stream the donor receives is lower, making the value of the gift to the charity higher for tax purposes.

“The higher the interest rate at the time a CRAT is funded, the greater the tax deduction,” says Kevin Koscil, a lawyer at White and Williams LLP in Philadelphia.

Write to Veronica Dagher at veronica.dagher@wsj.com
Appeared in the December 26, 2015, print edition as ‘Estate Planning: How to Adjust to a Rise in Rates.’

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April 15 tax extensions and Section 475 election

March 15, 2015 | By: Robert A. Green, CPA

Securities brokers issue corrected 1099Bs close to and sometimes even after the April 15 tax deadline due to complications over cost basis reporting. Schedule K-1s often come late, too.

When tax information is incomplete near the deadline, it’s wise to file an automatic six-month extension. Caution: It’s not a payment extension; so try to pay at least 90% of your tax liability to avoid late-filing and late-payment penalties. If you don’t pay 90%, hopefully the IRS will accept your “reasonable cause” spelled out in a letter seeking penalty abatement. Retaining tax funds as working capital for trading is not reasonable cause in my view.

April 15 is also the important deadline for individual and partnership traders qualifying for trader tax status to file a Section 475 MTM election statement with the IRS for 2015 and subsequent years. The election statement is attached to the federal extension.

There are many advantages to filing extensions. One negative is waiting longer for a tax refund, but traders often apply overpayment credits to estimated taxes due on trading income instead of claiming a refund.

Extensions for individuals
If you don’t owe taxes, the extensions are easy. Enter taxes paid (including credits) with the same amount for tax liability reflecting a zero balance due. Perhaps your spouse has a W-2 with ample tax withholding and you have trading business losses, itemized deductions and nominal other income. You don’t need to prepare detailed draft tax returns before April 15.

If you think you may owe taxes, then continue working on your tax filings. Prepare draft tax returns based on tax information in hand, accounting and estimates of missing information to generate the extensions from tax software. If you have year-to-date trading gains in 2015, it’s wise to be conservative with extension payments figuring you can apply overpayment credits toward 2015 estimated income taxes.

Extensions for entities
Tax extensions for pass-through entities are March 16, 2015 for S-Corps (since 15th is a Sunday) and April 15, 2015 for partnerships with an extension due date of Sept. 15. Pass-through entities are tax filers, not taxpayers, so the federal extension is simple to prepare without any tax liability. Be sure to file it on time because the late-filing penalty for missing the election is $195 per month per partner or shareholder up to a maximum of twelve months.

Some states have nominal franchise taxes or minimum taxes so check with your state or tax advisor. The state taxes are generally due with the extension filing. March 16 is also the deadline for an existing entity – LLC, C-Corp or general partnership (in most states) to elect S-Corp tax status (see our recent blog on S-Corps).

Section 475 MTM election
Active securities traders qualifying for trader tax status should consider a Section 475 MTM election for ordinary business loss treatment (tax loss insurance). Generally, you should elect Section 475 on securities only, not Section 1256 contracts so you retain lower 60/40 tax rates on those. Section 475 converts capital losses — otherwise subject to a $3,000 capital loss limitation and wash sales — into unlimited business ordinary losses. If you have large trading losses in 2015, you should consider a Section 475 election to lock in those losses as business ordinary losses. Ordinary losses are far better than capital losses.

If you have material capital loss carryovers, you can form a new trading entity to pass-through capital gains to your individual tax return, thereby using up capital loss carryovers. In the last-minute rush of tax season, many taxpayers and tax preparers make the wrong decision on Section 475 and it costs them thousands of dollars in tax savings.

Existing partnerships and individuals elect Section 475 for 2015 by attaching an election statement to their 2014 federal extension filed by April 15, 2015. For existing S-Corps, the election date is March 16, 2015. The second step is to file a Form 3115 (Change of Accounting Method) with your 2015 tax return filed in 2016. Learn more about Section 475 and see the election statement in Green’s 2015 Trader Tax Guide. Consult a trader tax expert before the election deadline.

Broker 1099Bs and confusion over wash sales
Many securities brokers are issuing corrected 1099Bs — it’s the new normal. Brokers continue to face many challenges with new IRS cost-basis reporting rules, including wash sale loss adjustments.Options and simple debt instruments purchased on or after Jan. 1, 2014 are considered “covered securities” and are included on 2014 Form 1099Bs for the first time.

Broker and taxpayer rules differ on calculations for wash sales. Brokers calculate wash sales based on the same equity or symbol (identical position) per account. Conversely, taxpayers must calculate wash sales based on substantially identical positions — i.e., between stocks and stock options and options at different expiration dates — across all individual accounts including all IRAs, even Roth IRAs.

Taxpayers can’t rely on 1099Bs and profit and loss reports from brokers if they trade securities and options or have multiple accounts. In these cases, taxpayers should use securities trade accounting software like TradeLog, which calculates wash sales correctly based on substantially identical positions across all accounts. It’s important to reconcile TradeLog results to 1099Bs, so taxpayers need to account for corrected 1099Bs on tax filings. TradeLog and other software publishers release program updates late in tax season or after April 15, too.

Traders are not simple like employees
Employees have taxes withheld on each paycheck and many wind up over-withheld generating material tax refunds, which they are anxious to collect. Many employees have simple tax filings and they can file early. Don’t wait for tax refunds every year — update your W-4 for more allowances and less tax withholding. Traders don’t have tax withholding on trading income. They generally owe taxes on trading income on April 15 because many prefer to underpay estimated taxes.

Traders with large Section 475 ordinary losses may be due large tax refunds. These traders have a lot riding on trade accounting and trader tax status; they should not rush their tax filings, especially if corrected 1099Bs are expected. Rushing may lead to errors, delays in tax refunds and potential tax exams, which can hold up refunds.

Futures and forex traders
If you trade Section 1256 contracts (futures), your broker issues a simple one-page 1099-B listing “aggregate profit and loss” based on marked-to-market accounting (realized and unrealized gains and losses). Correct 1099-Bs are rare for Section 1256 contracts. Likewise, forex brokers provide an online tax report that is reliable.

Extensions provide benefits for retirement plans
2014 contributions to Individual 401(k), SEP IRA and employer 401(k) profit-sharing plans must be funded by the due date of your tax return — Oct. 15 if you filed for an extension. That helps your cash flow. But IRAs must be funded by the original due date of April 15.

If your 2014 Roth IRA conversion didn’t work out well — perhaps the securities dropped significantly in value and you paid conversion taxes on the higher value — you’re entitled to “re-characterize” (reverse) the Roth IRA conversion up until the extended due date of Oct. 15. If you already filed your 2014 tax return, you’ll have to amend it to reflect the re-characterization.

Pressuring your tax preparer may lead to errors
If you engage a quality CPA firm for tax compliance, you should not expect them to focus on completing your tax returns during the last few weeks of tax season when filing an extension is a better option. Quality firms have internal deadlines and they avoid error-prone working conditions. I’ve seen countless cases of clients coming to us with botched prior year tax returns where they also missed vital tax elections like Section 475 because they focused on filing a complete return rather than filing an extension and making this election.

Early filers may get audited more
“The early bird gets the worm.” But in this case, the IRS is the bird and your tax return may be the worm selected for audit. I’ve always believed that audit quotas are met based on early filers. The IRS also wants to get started early with exams, and not wait until Oct. 15.

At the start of tax season, the IRS commissioner said there would be delays due to complications over Obamacare taxes, late renewal of “tax extenders” and the IRS being short of resources and staff.

Late-filing and late-payment penalties
Read federal automatic extension Form 4868 with instructions, especially the Page 2 sections on late-filing and late-payment penalties and how to avoid them.

State extensions
Some states don’t require an automatic extension if you’re overpaid and they accept the federal extension. Generally in all states, if you owe taxes, you need to file a state extension with payment. States tend to be less accommodating than the IRS in waiving penalties, so it’s usually wise to cover your state first if you are short on cash. Check the extension rules in your state.

U.S. citizens and resident aliens abroad
Excerpt from the IRS website: “If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15. If you qualify for this 2-month extension, penalties for paying any tax late are assessed from the 2-month extended due date of the payment (June 15 for calendar year taxpayers). However, even if you are allowed an extension, you will have to pay interest on any tax not paid by the regular due date of your return (April 15 for calendar year taxpayers).”

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Now that taxes are over

By Chuma Megafu

May 23,2014

Are you happy with the outcome of your taxes? Did you get a refund or did you incur a tax liability. Regardless of the outcome, their are simple steps you can take for a better outcome next tax season.

If you incurred tax liability, you probably are not having a enough withheld from your paycheck through the year or as I often hear ,” oh I went exempt during the year , I meant to change it after a while but I totally forgot.” If that is you, be reassured you are not alone. Emergencies do come up and it might seem like a good idea to go exempt and have all of your money now, but then at the end of the tax season you are struck with a tax liability.

If you got a refund are you happy with the refund? Would you use a bigger refund next filing season? If you plan prudently, you can use the income tax for effective budgeting and savings , which can be used for those big ticket item purchases.

The earned income credit which the government provides for taxpayers earning less than $51567.00 for the tax year 2013 can be as much as $6044.00 with three dependents, $5372.00 with two dependents, $3250.00 with one dependent and for taxpayers with no dependents and earning below $14340.00 this credit can be as much as $487.00. However the Obama administration is pushing congress to increase the amount available for taxpayers with no dependents to $1100.00.

Another tax credit available for tax payers with dependents under the age of 17 is the child tax credit. This Bush era tax cut was set to expire end of 2012. However the fiscal cliff deal signed on Jan 3, 2013 extended this credit for 5years. This credit provides up to $1000.00 for each child you claim .

The education credit is another credit that is also currently available and can provide as much as $2500.00 for qualified tuition, registration and books for higher education for students taking at least 6 units in a calendar year. This credit is also available for your dependents . So as the saying goes ” education does pay.”

Depending on your family size and limiting your withholding to one or zero and enrolling in school you will be smiling to the bank next tax season. A word of caution, some tax advisers see this strategy of the government holding on to your money all year with no interest being paid as rather expensive but I feel that is the prize you pay for getting that fat check all at one time.

for further discussion on how to minimize your tax liability and increase your refund , you can reach us at
1296 S La Brea Ave
Los Angeles Ca 90019
323-933-4183
www.pfandtax.cpom