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November 2013 - Year End Tax Planning Seminar
Check out our extended presentation from the recent Year End Tax Planning Tools for the Business Owner on SlideShare.
September 2013 - Wurst Fest is Back!
This year, Cornwell Jackson is joining with Sagiss to host the 13th annual Wurst Golf Fest, benefitting The Samaritan Inn and Journey to Dream. Please help us reach our fundraising goal of $40,000 for these local causes by participating in the Wurst tournament this year.
The Samaritan Inn
The Samaritan Inn was established in 1984 after community leaders joined together to address the issue of homelessness in Collin County. Twenty five years later, The Samaritan Inn is still the only homeless program in a county of over 762,000 residents. All services and support are provided free of charge through funding made from donations by churches, service groups and organizations, corporations and individuals. The Samaritan Inn is also a member of the United Way of Collin County.
Journey to Dream
In 2004, two mothers who witnessed firsthand the devastating toll destructive behaviors has on kids founded Journey to Dream, a 501(c)(3) nonprofit corporation. Their efforts to harness the power of positive peer pressure and use methods relevant to youth culture, like hip hop music and media, proved effective in reaching young people. Programs empower students to use their life experiences and voices to positively influence other students to live free from destructive behaviors like alcohol and drug abuse, cutting, bullying, dating violence, and suicide. Since 2004, Journey to Dream have positively impacted over 30,000 lives.
For more information or questions about the tournament, please contact Beth Smith, at 972-202-8035 or at Beth.Smith@cornwelljackson.com. To access the registration form, please click here or visit www.wurstgolffest.com.
Cornwell Jackson and Underwood Perkins, P.C. are proud to present the 2012 Wurst Golf Fest, benefiting City House.
The Wurst Golf Fest, a charity golf tournament benefiting City House, is back for the 12th straight year. Cornwell Jackson and Underwood Perkins want you to join in on the fun! Mark your calendars: Tuesday, September 25, 2012 Stonebridge Ranch Country Club – The Hills Course located at 5901 Glen Oaks Drive, McKinney, TX 75070.
The Wurst Golf Fest isn't your typical golf tournament. As one walks the fairways, they might see a live Bavarian band playing, grown men dressed in lederhosen, sausages and other German style cuisine on the grill and fellowship united by charity and the love for the game of golf. Cornwell Jackson and Underwood Perkins will provide food, beverages, golf and a fun time for both those interested in volunteering, sponsoring, or competing to win it ALL.
Help us reach our fundraising goal of $40,000 for City House. City House is an emergency youth shelter located in Plano that has been providing care, shelter, and transitional living arrangements for over 24 years. In 2011, Wurst Fest raised $33,500 for City House, and we fully expect to build upon last year's success.
Beyond helping the children and youth of Collin County, there are various forms of recognition for our company. Several levels of sponsorship are available to meet any budget requirements and recognition your company desires. Sponsorship helps offset the cost of the tournament so that more money can go directly to City House.
Burdensome 1099 Reporting Requirements Are No Longer
In March we shared the gratifying news that Congress had come to its senses and was in the process of repealing the burdensome 1099 reporting requirements that were part of 2010's Patient Protection and Affordable Care Act.
Well the good news keeps coming. On April 5, 2011, the Senate passed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which will repeal the rules that would have required businesses to file 1099 tax forms beginning next year for all purchases over $600. The bill is expected to be signed by the president.
Thanks to this just-passed law, none of the attempted 1099 changes will take effect. So if you’re currently handling 1099s and payee statements without any trouble, you can continue with the status quo. If not you might want to start complying as the harsher penalties from the 2010 law are still valid.
In case you’re wondering how Congress compensated for the estimated $22 billion of revenue that was expected from the attempted 1099 changes, the Feds will try to recover the revenue (which some consider grossly overestimated in the first place) by collecting more “excess advance payments” of health insurance premium assistance credits collected by individuals. This change will take effect in 2014.
What Won't Be Changing
The longstanding 1099 rules will continue to apply without any changes:
Businesses are required to report various types of payments to the IRS and to recipient taxpayers. For instance, when Company A pays $600 or more during a calendar year to John Doe, an unincorporated independent contractor, for services rendered, Company A must file a Form 1099-MISC with the IRS and must send a copy to John Doe (a so-called payee statement).
Other types of payments that businesses must report to the IRS on 1099s and to payees on payee statements:
- Commissions, fees and other forms of compensation paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
- Interest, rents, royalties, annuities and other income items paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
Note: Penalties for failing to file 1099s and issue payee statements were increased by a 2010 law. The increased penalties ($100 or more for each failure to file 1099s AND payee statements) remain in effect. So, each time you do not file a 1099 and issue a related payee statement, the IRS can still assess a penalty of $200 or more.
Most payments to corporations are exempt from any 1099 reporting requirements, except for payments of $600 or more to a corporate law firm, which must be reported on a Form 1099-MISC for that year.
There is generally no requirement to issue 1099s to report payments for property (merchandise, raw materials, equipment, etc.).
Tax Relief Act of 2010
The House approved the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (HR 4853) by a vote of 277 to 148 on December 16. The Senate passed it on December 15. The $858 billion measure extends the Bush-era tax rates, provides unemployment benefits, patches the alternative minimum tax and provides a two-year break for inheritance taxes.
The measure now goes to the White House where President Obama is expected to sign it.
For your convenience we've summarized the key provisions of the Tax Relief Act of 2010. You can read it by clicking here.
If you have any questions about the Tax Relief Act, please contact us at (972) 202-8000.
New Small Business Law Provides Tax Incentives
After several failed attempts to arrive at a consensus, Congress finally passed the Small Business Jobs and Credit Act. This vital new legislation, which President Obama signed on September 27, 2010, provides various tax incentives targeted to small business owners.
Here are several key provisions in the new law.
Enhanced Section 179 Depreciation Deductions: Under Section 179 of the Internal Revenue Code, a business can currently deduct the cost of qualified property placed in service during the year, within an annual limit. Prior to the new law, the limit for 2010 was $250,000, and the maximum deduction was subject to a phase out for annual purchases above $800,000. The new law increases the maximum deduction to $500,000 for 2010 and 2011 with a phase-out threshold of $2 million. Eligible assets include computers, office equipment and furniture. Certain real estate improvement costs now qualify for Section 179 deductions of up to $250,000.
Bonus Depreciation is Back for 2010: The new law also restores bonus depreciation, which expired after 2009. A business may claim a deduction equal to 50 percent of the cost of qualified assets, which include vehicles. (An additional year of bonus depreciation through 2011 is allowed for property with a cost recovery period of 10 years or longer and certain transportation property.)
Qualifying new assets must be placed in service by December 31, 2010.
Note: There is a tax-saving opportunity for businesses that are able to take advantage of both Section 179 and 50 percent first-year bonus depreciation. These two breaks can be combined to offset a large part, or perhaps all, of a company's major acquisitions for the year. While larger businesses may be ineligible for the Section 179 deduction, 50 percent first-year bonus depreciation is available to any business regardless of size.
S Corporation Disposition Rules are Eased: After a C corporation converts to S corporation status, it may be liable for the built-in gains (BIG) tax if it sells or otherwise disposes of appreciated property within a specified time period. The normal recognition period of 10 years was shortened to seven years for disposition in tax years beginning in 2009 and 2010. The new law reduces this period still further to only five years for dispositions in tax years beginning in 2011.
Start-Up Expense Deductions Increase: Prior to the new law, a taxpayer could deduct up to $5,000 of qualified business start-up expenditures for new ventures just getting off the ground. The maximum $5,000 deduction was phased out for expenses over $50,000. The new law doubles the maximum deduction for 2010 to $10,000 with a $60,000 phase-out threshold. Note that these figures are scheduled to revert to their prior amounts in 2011.
Restrictions on Business Credits Removed: With limited exceptions, general business credits cannot be used to offset a taxpayer's alternative minimum tax (AMT) liability. The new law removes this restriction for eligible small businesses. To qualify average annual gross receipts of a non-public corporation, partnership or small proprietorship can't exceed $50 million for the prior three years. In addition, beginning in 2010, an eligible small business may carry back general business credits for five years instead of one year.
Qualified Small Business Stock Gets Better Tax Treatment: Assuming certain requirements are met, an investor in qualified small business stock may exclude part of the gain from the sale of the stock after a five-year holding period. Normally, the tax exclusion is 50 percent for QSBS, which is taxed at the 28 percent rate, but the 2009 stimulus law increased the exclusion to 75 percent for acquisitions after February 17, 2009, and before January 1, 2011. The new law allows 100 percent exclusion for acquisitions from the date of enactment through December 31, 2010.
Cell Phone Recordkeeping is Less Burdensome: Previously, cell phones were treated as listed property for tax purposes, therefore triggering the same strict substantiation rules that apply to business use of vehicles. In other words, in order to claim deductions, taxpayers had to track business and personal use. The new law removes these requirements for cell phones and similar communication devices and treats employer-provided devices as tax-free fringe benefits.
Self-Employed Taxpayers Get a Break on Health Insurance Costs: A self-employed individual must pay self-employment tax comparable to the Social Security tax paid on employee wages. For 2010, eligible self-employed people can deduct health insurance premiums from the self-employment income subject to employment tax. This tax break is a limited one-year window of opportunity.
Contributions to Roth Accounts are Made Easier for Some Taxpayers: Roth IRAs provide tax-free treatment for qualified distributions. Beginning in 2011, participants in state and local goverment-operated 457 plans (other than employees of non-profits) can contribute deferred amounts to designated Roth accounts. Participants in 401(k) and 403(b) plans already have this ability. Also, participants in 401(k), 403(b) and 457 plans can roll over account balances to a Roth, subject to tax on pre-tax contributions and earnings. This provision takes effect on the date of enactment. For rollovers in 2010, account owners can opt to have the taxable income split between 2011 and 2012.
Businesses and individuals may want to take action before the end of the year based on these significant new law changes.
Revenue Raisers: How did Congress pay for the new law?
To offset the cost of the tax incentives in the new law, revenue raisers were imposed, including the following:
- New information reporting requirements on rental real estate activities for annual payments of $600 or more made after December 31, 2010. In other words, landlords will have to file 1099 forms for service providers, such as plumbers, painters and landscapers.
- Increased failure-to-file penalties on information returns.
- Allowing levies to be issued against federal contractors prior to a collections due process hearing.
- Treatment of debt guarantees by certain foreign entities as U.S. source income.
- Increased estimated tax penalties in 2015 for large corporations.
2010 Wurst Golf Fest
UPDATE: the 2010 Wurst Golf Fest was a huge success. We had 113 golfers and raised $30,753 for the kids at City House. You can see pictures from the event here. Many thanks to all of our sponsors, golfers and volunteers. We're looking forward to having everyone back next year!
Annuities: Surrender Strategies
A 2007 Wall Street Journal article commented on the mistakes that investors often make in disposing of an unwanted annuity (Maxey, July 9, 2007). A key point was that those looking to cash in an annuity often do so in haste, ignoring the potential tax cost and surrender charges.
In general, annuities come in two flavors. Traditional annuities grow based on the general interest crediting rate of the issuing insurance company, while variable annuities hold underlying stock and bond mutual funds. In this second case, the cash value may increase or decrease depending upon the performance of the underlying investments. A common feature of both forms is the internal insurance charge, which tends to be a drag on performance compared to a similar investment in non-annuity form.
But annuities have a significant tax deferral advantage. The growth in the cash surrender value of the underlying investments is not taxable until annuity payments are received or a cash-out is taken by the owner.
The Wall Street article commented on how some investors who surrender an unwanted annuity are surprised by the large tax cost. That is certainly a valid observation. An annuity that has been untouched for 30 years, for example, typically has appreciated significantly and can bring a substantial tax bill. The amount received is considered ordinary income, even though the underlying investments may represent capital appreciation in stocks and funds that otherwise would be capital gain.
For those contemplating the cash-in of an unneeded annuity, the article commented on the importance of shopping around, both with the issuing insurer and also with the secondary market. Some annuities are capable of a sale to a third party, giving the investor another option.
But what about taking advantage of a key annuity attribute: a lifetime payout that you cannot outlive? An annuity can generally be “annuitized,” with the issuing insurance company committing to a lifetime monthly payout. This shifts the risk of extended longevity to the insurance company. Using an annuity as a core monthly retirement income source is probably an underutilized feature.
And there are other choices as well. Perhaps the annuity should simply be left to your heirs. Or how about leaving it to charity where all of that accrued income might avoid taxes?
Unfortunately, designating your heirs as beneficiaries does nothing to cleanse the significant deferred income tax cost. Unlike many other investments, annuities do not receive a fresh tax cost when they pass through an estate. Accordingly, all of that income will still be taxable to your children or other heirs when they cash in the annuity after you are gone.
Charitable transfers, of course, fare better. If an annuity is transferred to a charity during lifetime, the owner must recognize the deferred income at the point of transfer. But an offsetting charitable deduction is allowed for the full proceeds of the annuity that move to the charity. Generally, this should produce a charitable deduction that is larger than the income by the sum of the owner’s investment in the annuity contract.
Another option is to pass the annuity to charity after death by naming a charity as the beneficiary. For those who desire to leave some amount to charity as a bequest, using an annuity is a tax-efficient choice. The charity is not subject to any income taxes when it receives the proceeds. Other assets with no deferred tax liabilities can then be left to your heirs.
Individual Tax Developments
New Complex Kiddie Tax Rules
For many years, Congress has imposed the infamous “kiddie tax” on the unearned income of a younger child. The motivation has been to prevent parents from shifting investment income, such as interest, dividends and capital gains, to the lower bracket tax returns of their children. From its inception, the kiddie tax applied the parents’ tax rate to the unearned income of a child under age 14. But beginning in 2006, Congress extended the kiddie tax to reach those under age 18.
The kiddie tax allows the child to have only $1,700 of investment income and gains at the child’s low rate. Any excess is taxed at mom and dad’s top tax rate.
Now, in the recent tax legislation, effective beginning with the 2008 tax year, the kiddie tax has been expanded in a very complicated manner to potentially reach children through age 23! This expanded kiddie tax actually aims at two groups who have attained age 18: (1) those who have their 18th birthday during the year, and (2) those who are in full-time student status for at least five months of the year and attain their 19th through 23rd birthday during the particular tax year.
But there is a further test for those in this age 18-23 upper tier group. For the kiddie tax to apply, the individual must have earned income, such as from wages and self-employment income, that does not exceed one-half of the amount of the individual’s support for the tax year. In measuring support, amounts received as a scholarship are not taken into account.
Support, of course, is a figure that is difficult to quantify. Support takes into account the various expenditures for that child during the year, such as food, shelter, clothing, medical care, education, recreation and the like. Often, support is provided in kind, such as lodging provided by parents. In that case, the item is measured in terms of its fair market value. In determining support, only amounts actually expended or provided during the particular year are considered. If the child has low personal earnings (wages and self-employment income) compared to the support amount, he or she will be subject to the kiddie tax during the years 18-23, assuming he or she is also in student status. But if the child has a larger wage amount compared to his or her support, the child will be exempt.
Example: Ben is a college student, age 20, with several scholarships. During 2008, items expended for Ben’s support include room, board, tuition and other items that total $26,000. However, Ben has received several scholarships in the total amount of $6,000 that reduce the outlay for his tuition. Accordingly, his total support for 2008 is $20,000. Ben has a W-2 from employment at his school during 2008 for $7,000. Ben is subject to the kiddie tax, because his earned income of $7,000 does not exceed $10,000 (half of his support for the year excluding the amount covered by scholarships).
If Ben had greater wages for 2008, such as $11,000 in total employment, he would not be subject to kiddie tax. In that case, Ben could recognize interest and dividend income or sell securities with significant capital gain recognition without imposition of his parents’ tax rate on his unearned income.
Observation: A surprising aspect of this kiddie tax expansion is that its application has no bearing on the child’s dependency deduction. The dependency exemption for a student or young adult generally goes to the party (parent or child) that provided over half of that child’s support for the year. The kiddie tax, instead, simply looks to the W-2 and self-employment income of the student, and does not consider who provided the sources of support for the child for the year.
In many cases, particularly among upper income families, a student may not be a dependent of the parents because the student’s assets (received through earlier gifts from parents or grandparents) have provided over half of the student’s support for the year. And yet that student could be subject to kiddie tax at the parents’ tax rate, simply because the student had low W-2 income for the year. It is even possible under this set of rules to have the kiddie tax apply to an estranged child who no longer is in communication with the parents!
Strategies: Here are some thoughts about how to react to this new kiddie tax. First, because the age 18-23 rule does not take hold until 2008, those who have children presently in that age group should consider recognizing gains and investment income in their tax returns during 2007. A 19 year old’s mutual funds and stocks can be sold in this year without any kiddie tax, but it may be a different story next year.
Secondly, is it possible the child’s W-2 and self-employment earnings could approach over half of their support amount, so that the 2008 kiddie tax did not apply? If so, adding to that W-2 income by employing the child in a family business could be of benefit.
Investment strategies for saving for college for a child will need rethinking. Rather than build up funds that will now be cashed in kiddie tax years when needed for college, consider the efficiency of state-sponsored 529 plans. These investments are never taxed if withdrawn and expended for higher education.
Finally, for many, the kiddie tax may not be that costly, at least with respect to capital gains. For example, if a child is holding unsold stocks that have been received as a gift from parents, the sale will produce a capital gain. At the child’s rate, it would be taxed at 0% in 2008, but with kiddie tax it is a 15% capital gain rate. While no tax is the perfect answer, the full capital gain rate of 15% is hardly a confiscatory tax.
If any of these strategies merit discussion with respect to your personal situation, let us know.