The end of the Bush tax cuts may just be a reality. Those rock bottom rates for long-term capital gains and qualified dividends are set to expire after 2010. Even if Congress extends the Bush cuts, they may limit the benefit for high-income earners. Here are a few things to consider:
Cash in your stock winners before 2011. If you wait until 2011, you generally will have to pay 5% more on long-term capital gains.
Harvest your stock losers after 2010. On the flip side, losses realized in 2011 may offset capital gains that will be taxed at higher rates.
Roll over or sell “small business” stock. If you own qualified small business stock, you can avoid tax on a sale by rolling over the proceeds into other QSBS stock within 60 days. Alternatively, you can exclude tax on 50% of the gain from the sale of QSBS in 2010 or 2011 , but the capital gain rate is 28%.
Take dividends in 2010. There is a urgent tax incentive to pile up dividends this year. If it makes sense, invest in stock a few months (now may be a good time) before dividends are scheduled to be paid. If you own a closely held corporation or a personal holding company, now may be the time to pay dividends.
Pass on the installment sale tax break. If it makes sense, you can elect out of installment sale treatment and have the entire gain taxed at 15% in 2010. Remember, this will accelerate your tax liability for both federal and state tax purposes.
Tuesday, August 31, 2010
Monday, August 16, 2010
S Corporation Tax Reduction Strategies
You may be receiving several types of payments from your S corporation, including a salary, rental payments from leasing real estate to the corporation, and a portion of the S corporation's net income. Since even minor fluctuations in these payment categories can produce differing tax results, we have the following ideas for saving taxes when extracting S corporation cash.
Income Shifting
S shareholders often attempt to minimize their compensation to increase the pass-through income to other owners (typically children in a lower tax bracket. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this objective in mind.
Reducing Compensation
Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, pass-through S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to receive additional pass-through income.
The IRS is aware of this strategy and has successfully fought it in several court cases. In some cases, the corporation issued no compensation to the key employee providing virtually all of the services the corporation sold. Instead, the shareholder-employee took corporate distributions without incurring payroll taxes. The courts recharacterized the distributions as compensation and imposed payroll taxes. Despite these IRS victories a shareholder's salary may be adjusted to the lower end of a reasonable range, especially when services are not the primary income-producing activity of the corporation.
Generating Rental Income
It is generally beneficial for an owner to rent real estate to the S corporation because any resulting net rental income is exempt from payroll taxes. But the arrangement must be reasonable because the IRS has ample authority to recharacterize rent payments as compensation or dividends to the extent they exceed market rates. S corporation shareholders using portions of their homes to perform services for the corporation (or to store corporate inventory) may lease space to the corporation. Deductions are not available for this use, but the rent is exempt from payroll taxes.
S corporation shareholders can often choose how to structure funds extracted from the corporation. While compensation and rental amounts must be reasonable, shareholders' tax results can often be improved. To discuss how S corporation distribution strategies can improve your tax situation, please give me a call.
Income Shifting
S shareholders often attempt to minimize their compensation to increase the pass-through income to other owners (typically children in a lower tax bracket. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this objective in mind.
Reducing Compensation
Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, pass-through S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to receive additional pass-through income.
The IRS is aware of this strategy and has successfully fought it in several court cases. In some cases, the corporation issued no compensation to the key employee providing virtually all of the services the corporation sold. Instead, the shareholder-employee took corporate distributions without incurring payroll taxes. The courts recharacterized the distributions as compensation and imposed payroll taxes. Despite these IRS victories a shareholder's salary may be adjusted to the lower end of a reasonable range, especially when services are not the primary income-producing activity of the corporation.
Generating Rental Income
It is generally beneficial for an owner to rent real estate to the S corporation because any resulting net rental income is exempt from payroll taxes. But the arrangement must be reasonable because the IRS has ample authority to recharacterize rent payments as compensation or dividends to the extent they exceed market rates. S corporation shareholders using portions of their homes to perform services for the corporation (or to store corporate inventory) may lease space to the corporation. Deductions are not available for this use, but the rent is exempt from payroll taxes.
S corporation shareholders can often choose how to structure funds extracted from the corporation. While compensation and rental amounts must be reasonable, shareholders' tax results can often be improved. To discuss how S corporation distribution strategies can improve your tax situation, please give me a call.
Monday, June 21, 2010
5319 New Law Provides Two Tax Benefits For Hiring Unemployed Workers
Today I am giving you an overview of two key tax incentives for hiring unemployed workers in the recently enacted Hiring Incentives to Restore Employment (HIRE) Act.
Payroll tax holiday. The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010.
$1,000 retention credit. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Employers are eligible to claim these tax benefits for workers hired after Feb. 3, 2010, but only wages paid after March 18 qualify for the payroll tax holiday. And, in order to give IRS more time to adjust its payroll tax forms for the payroll tax holiday, the holiday's tax forgiveness for the first quarter of 2010 will not be available until the second quarter of 2010. Some additional features of the new hiring incentives include:
• There is no minimum weekly number of hours that a new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010.
• An employer that is a sole proprietorship can't claim the new tax breaks for hiring certain relatives. An entity cannot claim the new tax breaks for hiring certain relatives of its more-than-50% owner.
• An employer can't claim the new tax breaks for a worker who replaces another employee who performed the same job for the employer unless the prior employee left the job voluntarily or was fired for cause.
• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The Act also provides that the credit isn't available for remuneration paid to domestic workers.
If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call me.
Payroll tax holiday. The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010.
$1,000 retention credit. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Employers are eligible to claim these tax benefits for workers hired after Feb. 3, 2010, but only wages paid after March 18 qualify for the payroll tax holiday. And, in order to give IRS more time to adjust its payroll tax forms for the payroll tax holiday, the holiday's tax forgiveness for the first quarter of 2010 will not be available until the second quarter of 2010. Some additional features of the new hiring incentives include:
• There is no minimum weekly number of hours that a new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010.
• An employer that is a sole proprietorship can't claim the new tax breaks for hiring certain relatives. An entity cannot claim the new tax breaks for hiring certain relatives of its more-than-50% owner.
• An employer can't claim the new tax breaks for a worker who replaces another employee who performed the same job for the employer unless the prior employee left the job voluntarily or was fired for cause.
• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The Act also provides that the credit isn't available for remuneration paid to domestic workers.
If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call me.
Wednesday, March 17, 2010
Buchbinder March 2010 Website Online Advisor
We have just posted the March 2010 issue of the ONLINE ADVISOR newsletter on our website. Here are a few headlines from that issue. To read any of these articles in full, please click here.
CONSIDER THIS NEW WAY TO USE YOUR TAX REFUND If you're receiving a tax refund this year, you can use it to buy U.S. savings bonds from the IRS.
PRIOR YEAR LAWS MAKE CHANGES TO THE TAX RULES FOR 2010 There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
CORPORATE MINUTES ARE AN IMPORTANT PART OF YOUR COMPANY'S TAX PLANNING Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.
HOMEOWNERS: DON'T MAKE THESE INSURANCE MISTAKES Catastrophes, thefts, natural disasters, accidents, fires - they happen.
If such misfortunes strike, a well-researched and up-to-date homeowner's insurance policy can keep your family's finances afloat during trying times.
CONSIDER THIS NEW WAY TO USE YOUR TAX REFUND If you're receiving a tax refund this year, you can use it to buy U.S. savings bonds from the IRS.
PRIOR YEAR LAWS MAKE CHANGES TO THE TAX RULES FOR 2010 There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
CORPORATE MINUTES ARE AN IMPORTANT PART OF YOUR COMPANY'S TAX PLANNING Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.
HOMEOWNERS: DON'T MAKE THESE INSURANCE MISTAKES Catastrophes, thefts, natural disasters, accidents, fires - they happen.
If such misfortunes strike, a well-researched and up-to-date homeowner's insurance policy can keep your family's finances afloat during trying times.
Thursday, February 25, 2010
New for 2010: Roth IRA Conversions Available to Everyone!
2010 is the year when those with significant amounts in their traditional IRAs can convert and reap the tax-free growth benefits of a Roth IRA - regardless of their income level. Previously, you had to have a modified adjusted gross income (MAGI) of $100,000 or less to be eligible to convert.
There is, however, one stipulation for higher-income taxpayers - they still can't contribute to a Roth IRA. So, they won't be able to make additional contributions after the conversion unless either their economic situation or tax law changes. For 2010, the ability to contribute to a Roth IRA begins to phase out at a MAGI of $105,000 for single filers or heads of households ($167,000 for joint filers). This ability to contribute is eliminated after MAGI hits $120,000 for single filers and heads of households ($177,000 for joint filers).
Be aware that any conversion you make is subject to income tax, but for conversions made in 2010 you may report the income in two equal installments in 2011 and 2012. Thus, you'll be able to defer half of the income to 2011 and the other half to 2012. And if you're converting nondeductible contributions, you'll be liable for tax only on the account earnings. Also keep in mind that Roth IRA assets must remain in the account for at least five years and you must be at least 59 1/2 before you can withdraw earnings without incurring income tax liability and early withdrawal penalties.
There is, however, one stipulation for higher-income taxpayers - they still can't contribute to a Roth IRA. So, they won't be able to make additional contributions after the conversion unless either their economic situation or tax law changes. For 2010, the ability to contribute to a Roth IRA begins to phase out at a MAGI of $105,000 for single filers or heads of households ($167,000 for joint filers). This ability to contribute is eliminated after MAGI hits $120,000 for single filers and heads of households ($177,000 for joint filers).
Be aware that any conversion you make is subject to income tax, but for conversions made in 2010 you may report the income in two equal installments in 2011 and 2012. Thus, you'll be able to defer half of the income to 2011 and the other half to 2012. And if you're converting nondeductible contributions, you'll be liable for tax only on the account earnings. Also keep in mind that Roth IRA assets must remain in the account for at least five years and you must be at least 59 1/2 before you can withdraw earnings without incurring income tax liability and early withdrawal penalties.
Thursday, January 21, 2010
New Study Claims Fraud May Increase in the Next Year
Senior executives expect fraud to pose a significant challenge over the next 12 months, according to a new study conducted by KPMG. Nearly one-third of the senior executives surveyed said they expect some form of fraud or misconduct to increase in their organizations. A majority said that fraud and misconduct poses a significant risk to their industry today.
What is their greatest concern if such wrongdoing is experienced? More than 70% were concerned with the potential loss of public trust at a time when market confidence is at a premium.
The executives reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked, and they identified the following areas in need of the most improvement in antifraud efforts: employee communication and training, technology-driven continuous auditing and monitoring techniques and fraud and misconduct risk assessment.
If you are concerned with the possibility of fraud in your organization, feel free to give us a call so we might help you achieve peace of mind.
What is their greatest concern if such wrongdoing is experienced? More than 70% were concerned with the potential loss of public trust at a time when market confidence is at a premium.
The executives reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked, and they identified the following areas in need of the most improvement in antifraud efforts: employee communication and training, technology-driven continuous auditing and monitoring techniques and fraud and misconduct risk assessment.
If you are concerned with the possibility of fraud in your organization, feel free to give us a call so we might help you achieve peace of mind.
Wednesday, December 16, 2009
Try a Different Gift Idea This Year
Are you searching for gift ideas for the holiday season? It’s never easy, especially for older children and teenagers. They’re too old for toys, but do they really need another sweater or computer game?
Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.
Here are a few ideas you might want to consider.
Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.
Here are a few ideas you might want to consider.
- Fund a child’s Roth IRA. If your teenagers worked this summer, chances are they spent their earnings. But they can use your gift to open a Roth IRA, up to the amount of their earnings or the regular $5,000 limit. The IRA will grow tax-free, and by the time the teenager retires, your gift should have compounded to a substantial tax-free retirement fund.
- Fund a 529 education account. Anyone can contribute to a child’s Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-free in the plan.
- You could also make your gift to a Coverdell education savings account. These IRA-like accounts also grow tax-free, but there’s a limit on total contributions of $2,000 a year from all sources. The amount of your gift may also be limited, depending on your income.
- Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment grow over time and can enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.
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