Category: Chuma’s Tax Blogs

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.

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.

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