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Client Profile

Henry’s mother died of pancreatic cancer, and he is looking into starting a foundation named in her honor to fight this terrible disease. He hopes that compliance and tax filing won’t become a burden. Is there a simpler solution?

What a wonderful gesture on Henry’s part. First, he should consult an attorney and a tax professional. Both should be experienced working with not-for-profit groups. They can help him set up the foundation, file for tax-exempt status and complete the paperwork necessary to become an IRS non-profit entity.

If he wants to start on his own, he could apply online for Section 501(c)(3) tax-exempt status with the IRS’s revised Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This year is the first year he can apply online, which the IRS says will help with application processing time. He may also enjoy a newly reduced excise tax, depending on the setup.

If Henry qualifies, he could fill out Form 1023-EZ to save time. Ultimately, the size and scope of Henry’s foundation will determine the level of compliance needed.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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They’re Back!

A basketful of tax breaks that either expired last year or were scheduled to end before 2020 have been brought back to life, courtesy of Congress. Lawmakers packed end-of-year appropriation bills with these extenders.

MORTGAGE INSURANCE

If you qualify by income, you may be able to deduct mortgage insurance premiums for your principal residence on your tax return.

DEBT TREATMENT

Homeowners who met eligibility requirements were allowed to exclude mortgage debt cancellation from income on their tax returns from 2007-2017, and Congress now allows this type of debt cancellation to remain tax-free from 2018 through 2020.

HEALTH COSTS

Scheduled to rise from 7.5% of adjusted gross income to 10% in 2020, Congress moved to keep the itemized medical expense deduction threshold at the lower percentage for costs that were not reimbursed. Most medical costs that are not cosmetic, including prescription drugs, dental work and vision, qualify for the deduction.

DISASTER RELIEF

Congress gave some taxpayers who experienced federally declared disasters as far back as 2018 the ability to take penalty-free withdrawals from their retirement plans. Employers who continue paying employees during a disaster will also receive favored tax treatment on the amount of wages paid during this period.

COLLEGE DEDUCTION

Remember when Congress ditched the tax deduction for qualified college expenses? Never mind, it’s back at least through tax year 2020, with the repeal retroactive to 2018. To qualify, your adjusted gross income needs to fall under certain thresholds.

FOR THE ENVIRONMENT

Energy-efficient taxpayers are winners with a handful of extensions giving them continued favorable tax treatment. Alternative fuel refueling equipment, fuel cell vehicles and electric motorcycles will have their tax credits extended through 2020, retroactive to 2018 for some of them. Also, take a tax credit up to $500 for making energy-saving improvements to a principal residence through 2020, retroactive to 2018.

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Mind the RMD Gap

The SECURE Act pushes required minimum distributions (RMDs) from an IRA, SIMPLE IRA, SEP IRA or retirement plan account to age 72, up from age 70 1/2. However, you’re out of luck if you are younger than 72 but were 70 1/2 in 2019. You’ll have to begin taking withdrawals by the former age limit of 70 1/2 limit.

Understanding RMDs

Calculate your RMDs by dividing your life expectancy, as determined by the IRS’s Uniform Lifetime Table, into your account balance as of the end of the immediately preceding calendar year. Different rules may apply if your account’s sole beneficiary is at least 10 years younger than you or if you continue working past age 72.

Plan for Withdrawals

When planning your withdrawal strategy, know that you may withdraw more than your RMD each year, but you can’t take less. You can also begin distributions earlier than required.

Talk to your tax and plan professionals to learn more.

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Business Security

In last month’s ClientLine, we highlighted some of the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s new headlines for business owners. This month, we share some of the details for you:

GREATER ACCESS

For the first time, small businesses can join a pooled employer retirement plan with two or more unrelated employers. Part-time employees will have more access, too: those who worked at least 500 hours in three consecutive years are newly eligible for qualified plan participation, but they don’t factor into existing top-heavy requirements.

ENHANCEMENTS

Employers will see other reasons to start a plan. The startup tax credit for newly established plans increased significantly, from the former cap of $500 up to $5,000. Eligible 401(k), SIMPLE IRA and other qualified plans can take another $500 credit for three years for auto-enrolling new employees. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.

ANNUITY SAFE HARBOR

Plan sponsors will find more streamlined administrative and compliance requirements, while they also have a new annuity safe harbor, which will protect employers from liability if the annuity provider they choose meets certain standards involving state insurance licenses, audited financial statements and adequate reserves.

Employers should also be aware of a change that benefits individual participants: an increase in the age when required minimum distributions must begin, from 70 1/2 to 72. This change applies only to people who reach age 70 1/2 in 2020 or later. Employees older than age 72 may continue contributing to employer plans.

Talk to your tax professional to learn how these changes might affect your company’s tax situation.

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May 2020 ClientLine Newsletter

Business Security – Details on the Setting Every Community Up for Retirement Enhancement (SECURE) Act

Insights & Tips – The SECURE Act pushed required minimum distributions (RMDs) to age 72, up from age 70 1/2.

They’re Back! – Tax breaks that have been brought back to life.

Client Profile – Do compliance and tax filing become a burden when starting a foundation.

Steps to a Successful Company Audit – All public and some closely held companies should undergo periodic company audits to stay on top of their businesses.

How to Correct Tax Filing Mistakes – You’ll have to file another tax return if you made an error.

Questions and Answers

Short Bits

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Short Bits

COMP BREAKDOWN

In September 2019 compensation costs for private industry workers averaged $34.77 per hour worked. Wages and salaries averaged $24.38 per hour worked while benefit costs comprised the rest. The cost of benefits was nearly 30% of total compensation, with health insurance comprising 7.5% and paid leave 7.2% of total comp. The average cost for life and disability insurance, though, was less than one-half of 1%.

BONUS TIME

If you are a private industry worker who received a bonus, you’re among the minority. About one of every 10 employees surveyed had access to end-of-year bonuses (generally performance-based) in 2019, while 6% had access to holiday bonuses (typically equal for all staff). Workers in natural resources, construction and maintenance fared better with year-end and holiday bonuses coming in at 15% and 12%, respectively. Service workers fared the worst.

EMPLOYERS SQUEEZED

Some employers are still finding rough going trying to fill job openings. According to the Bureau of Labor statistics, there were 7.3 million job openings on the last business day of October 2019 and about 5.9 million unemployed people during October, a ratio of 0.8 unemployed people to job openings. Since January 2018, that ratio has ranged between 0.8 and 1.0.

UNPAID CARE

Some 40 million Americans age 15 and over provide unpaid eldercare, and 58% of these providers are women. About one in four of the caregivers were between ages 55 to 64, 21% were ages 45 to 54 and nearly 18% were age 65 and older. More than 8 million eldercare providers also had children living at home.

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New Retirement Rules

Congress capped off last year by passing the Setting Every Community Up for Retirement Enhancement (SECURE) Act as part of a larger spending bill. This is the biggest change in retirement saving rules in more than a decade. We urge you to discuss any changes to your retirement strategy with your tax and financial professionals, but here’s a quick look at why the new law may change your approach to saving for retirement.

MORE TIME

One big change is the age when minimum required distributions (RMDs) must begin. Now, that age moves back to April 1 of the calendar year following the year in which you turn 72. Previously it was age 70 1/2. This tweak is particularly helpful if you want to delay taking RMDs as long as possible.

Congress also removed the age cap for contributing to a traditional IRA, as long as there is sufficient earned income to offset the contribution. Previously, you couldn’t contribute to one after age 70 1/2, whether or not you earned income.

LESS TIME

While Congress gives, it also takes away in the case of stretch IRAs. Some people who inherit an IRA anytime beginning in 2020 will get less time to stretch out payments. While beneficiaries used to have the ability to stretch inherited IRA assets to last their lifetimes, new rules mandate that some people withdraw all IRA assets within 10 years. There are exceptions to this rule, including surviving spouses, minor children and special-needs beneficiaries.

OTHER CHANGES

Two provisions in this spending bill will especially help younger taxpayers. The first is a new ability to take up to $10,000 tax-free from Section 529 plans to pay qualified student loans and the cost of some apprenticeships. The second is a new penalty-free exception to take up to a $5,000 distribution penalty-free from an IRA and some qualified retirement plans for a qualified birth or adoption.

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Exploring Trusts For Your Estate

While the federal estate tax basic exclusion amount has risen dramatically in recent years, some states have not followed suit by raising their exemptions. Even with higher current exemptions, the future of taxes is unpredictable, so you need a strategy to deal with potential estate taxes if you own significant assets. A trust could be part of that strategy.

CONTROL AND PRIVACY

A trust can help you control when and how assets are used during your lifetime. And when estate taxes aren’t an issue, a revocable trust may offer an attractive option. (It is revocable because you can change its terms or cancel it.)

Trusts, both of the revocable and irrevocable variety, shield their assets from the public glare of probate. One caveat: Only those assets owned by the trust avoid probate, so you’ll have to change the title of any assets you move. Both types of trusts can also include terms and conditions that deal with potential incapacitation.

And even when taxes aren’t an issue, you may want to consider trusts that can offer you more control over how and when adult special-needs and spendthrift children receive assets during their lifetimes.

TAX REDUCTION

While all trusts provide a measure of privacy and control, revocable trusts won’t provide tax advantages. However, an irrevocable trust will. The federal estate tax exclusion, now more than $11 million per person, was half that just three years ago and below $1 million two decades ago. As governments seek revenue, know that taxes can rise as easily as they fall.

Regardless, some states offer the same exemption allowed by the federal government, but others decouple their rates – some to as low as a $1 million exemption. Other states levy separate inheritance taxes, too. So if you have assets you want to pass to future generations, talk to an estate planning attorney and your tax professional to learn more about trusts.

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A Qualified Opportunity

When you sell appreciated assets, you pay taxes on them in the year you realize capital gains. But when you invest in a Qualified Opportunity Fund (QOF), you defer capital gains taxes and potentially receive tax-free appreciation. If you invest outside of a qualified retirement plan, you might explore how these types of funds could fit into your investment strategy.

A NEW OPPORTUNITY

Qualified Opportunity Zones (QOZs) were created by the Tax Cuts and Jobs Act (TCJA), the last major federal tax overhaul, to benefit economically distressed areas and those who invest in them. QOF investments are either corporations or partnerships that must meet a number of requirements. For example, a QOF must hold at least 90% of its assets in QOZ property, and at least 50% of a zone property’s gross income should come from conducting business in a designated zone.

TAX BENEFITS

If you reinvest capital gains into these funds, you defer gains until selling or exchanging shares (until 2026, when this provision expires with the rest of the TCJA). If you hold the investment for at least five years, you’ll get a 10% step up in basis on reinvested capital gains. A special rule applies if you hold a QOF at least 10 years: the amount gained will be tax-free because the basis will increase to 100% of fair market value once gains are realized. Talk to your tax professional to learn more.

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A Different Type of Enterprise

If you’re looking to expand your business, moving to a Qualified Enterprise Zone may provide an opportunity to grow in a tax-smart way.

A PRIMER

Enterprise zones have been around for decades. And while federal tax breaks for enterprise zones expired, companies that meet certain requirements may gain state and local tax credits in exchange for locating or expanding their businesses in locales that qualify as enterprise zones.

Individual enterprise zone rules vary, but generally a company looking for tax credits will need to actively conduct a significant part of its business and earn a good ratio of its gross income within the zone. A substantial part of a company’s tangible and intangible property and services typically must be located in the zone, and enterprise zone companies typically must hire a healthy percentage of their employees from the distressed areas in which they are located.

In New Jersey, for example, which has one of the country’s longest-running enterprise zone programs, the Department of Community Affairs oversees 32 designated zones. Economic incentives are generous, including up to a $1,500 tax credit per permanent fulltime employee hired. Individual states and locales have different rules, so contact your local agencies to learn more.