Anderson ZurMuehlen Blog

Few Changes to Retirement Plan Contribution Limits for 2017

Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.

Type of limit
2017 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
$18,000
Contributions to defined contribution plans
$54,000
Contributions to SIMPLEs
$12,500
Contributions to IRAs
$5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
$6,000
Catch-up contributions to SIMPLEs
$3,000
Catch-up contributions to IRAs
$1,000

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.

 

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Employee, Partner or Both? Recent Developments Help You Decide

Are you an employee, a partner, a partner who doesn’t know it — or a combination of these classifications? The answer can have serious tax implications. If you participate in a business that’s operated as a partnership or a limited liability company, here are some recent developments that you need to know.

IRS Position on Dual Status

Longstanding IRS guidance in Revenue Ruling 69-184 states that a partner can’t also be an employee of the same partnership. taxrulescourtwpHowever, this policy has recently come into question. Some tax experts have been prodding the IRS to allow dual employee/partner status in certain circumstances.

For example, it can be argued that dual status is appropriate when an employee of a partnership receives a small interest in the partnership as equity-oriented compensation. Continued status as an employee would allow the individual to continue to participate in tax-favored employee benefit programs sponsored by the partnership.

In a recently issued temporary regulation, the IRS stated that, until further notice, there’s no exception to the Revenue Ruling 69-184 stipulation that a partner in a partnership can’t also be an employee of the same partnership. So, for now, once an employee of a partnership receives an ownership interest in the partnership, that individual is treated as a partner — regardless of how small the partnership interest may be.

However, the IRS says it might consider changing this stance if it can be shown that allowing dual employee/partner status in certain cases is desirable and wouldn’t lead to abuse of tax rules.

Important note: These considerations apply equally to multimember LLCs that are treated as partnerships for tax purposes and their employees and members.

IRS Position on Partners in Partnerships that Own Disregarded SMLLCs

In a recently issued temporary regulation, the IRS clarified the federal employment tax treatment of partners in a partnership that also owns a disregarded single-member (one-owner) LLC (SMLLC). A disregarded SMLLC is generally ignored for federal tax purposes. So, a disregarded SMLLC that’s owned by a partnership is simply treated as an unincorporated branch or division of the partnership, and all of the SMLLC’s tax items are included in the partnership’s tax return.

The new temporary regulation says that partners in the parent partnership can’t also be treated as employees of the disregarded SMLLC. Therefore, these individuals may be subject to self-employment tax on income passed through from the disregarded entity and they’re prohibited from participating in certain tax-favored employee benefit programs sponsored by the disregarded SMLLC. The new temporary regulation is effective as of the later of:

  • August 1, 2016, or
  • The first day of the latest-starting plan year following May 4, 2016, of an affected employee benefit plan.

An affected plan would include any employee benefit plan sponsored by the disregarded SMLLC that was adopted before and in effect as of May 4, 2016.

Important note: These considerations apply equally when a disregarded SMLLC is owned by a multimember LLC that is treated as a partnership for tax purposes.

Appeals Court Ruling on Oil and Gas Working Interest Income

The self employment (SE) tax is the government’s way of collecting Social Security and Medicare taxes on net income from self employment. What you may not know is that profits from passive investments in oil and gas working interests are subject to SE tax, according to a Tax Court decision that was recently affirmed by the 10th Circuit Court of Appeals. (Methvin v. Commissioner, 117 AFTR 2d 2016-2231, June 24, 2016.)

The taxpayer in this case owned small percentage working interests in several oil and gas properties. Owning a working interest entitles you to a percentage share of the net profits, if any, from an oil and gas property. The taxpayer had an agreement with the operator of the properties that allocated the taxpayer a share of the revenue and expenses from the properties. He had no right to be involved in the management or operation of the properties, and he had no expertise in oil and gas drilling or extraction. (His background was as a computer company executive.)

The taxpayer’s working interests represented no more than about a 2% to 3% interest in any single property, and they weren’t part of any formal business organization — such as a partnership, limited partnership, LLC or corporation — that was registered under applicable state law. Instead, the working interests were governed by a purchase and operation agreement entered into by the taxpayer, other working interest owners and the operator/manager of the properties.

Despite these informal arrangements, the oil and gas ventures that the taxpayer was involved in constituted partnerships for federal income tax purposes. However, the parties involved in the ventures exercised their right to be excluded from the partnership tax rules found in the section of the Internal Revenue Code that applies specifically to partnerships.

Consequently, there wasn’t a requirement to file annual partnership returns for the ventures. Instead, the operator provided the taxpayer with annual accounting summaries that showed the revenues and expenses allocated to the taxpayer’s working interests. The operator also issued an annual Form 1099-MISC to the taxpayer that showed his share of the net revenues from his working interests.

While the taxpayer reported the net revenue on his federal income tax returns, he didn’t pay any SE tax on the net revenue. After auditing his 2011 return, the IRS claimed that the taxpayer’s net profits from the oil and gas working interests were subject to SE tax because they constituted income from a business carried on by a partnership.

The taxpayer contended that he wasn’t engaged in the oil and gas business and wasn’t a partner in any oil and gas partnership. He argued that his minority working interests were merely investments in which he had no active involvement. Therefore, the taxpayer believed he didn’t owe SE tax on his working interest income, and he took his case to the U.S. Tax Court.

Court Decisions

The Tax Court noted that taxpayers who aren’t personally active in the management or operation of a business may nevertheless be liable for SE tax on their share of net SE income from the business if the business is carried on by a partnership in which the taxpayer is a member. In this case, the taxpayer and other parties involved in the oil and gas ventures elected out of the partnership federal income tax provisions. However, the election out applied only to tax provisions that are included in Subchapter K of the Internal Revenue Code (such as the requirement to file an annual partnership return on Form 1065). The SE tax provisions are not found in Subchapter K.

Therefore, the Tax Court ruled that the oil and gas ventures were still considered partnerships for SE tax purposes and that the taxpayer owed SE tax on his net income from his working interests.

On appeal, the 10th Circuit agreed, affirming that those working interests should be treated as partnership interests and that the profits from the investments were subject to SE tax.

Bottom Line

Business arrangements, including employment and compensation arrangements, can have surprising (and sometimes costly) tax consequences. For that reason, seeking advice from a tax professional before entering into arrangements is a smart idea. That way, there won’t be unpleasant surprises, and better tax results can often be achieved with some advance planning.

Contact us for advice.

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FBI Case Exposes Massive Telefraud Scheme

 

Do you dread getting phone calls from unfamiliar sources? It seems that callers are more likely to be aggressive solicitors, pushy telemarketers or even devious con artists than legitimate business people. Criminals typically target the elderly, disabled people or immigrants, threatening them with fines, penalties or deportation if they don’t make payments to the callers. In some cases, unsuspecting victims lose their entire life savings.blogpostpic

The FBI recently exposed a telephone scam involving dozens of individuals and entities that were indicted by a grand jury in
Texas. The defendants were allegedly involved in a transactional organization that victimized tens of thousands of U.S. residents through frauds that caused hundreds of millions of dollars in losses.

Fraud by Phone

Unfortunately, telefraud remains a common and persistent problem in this country. Victims are often reluctant to report such fraud, due to embarrassment and/or fear. So, any statistics are likely to underestimate its true prevalence.

Elderly people represent an estimated 80% of the victims of such scams — a disproportionate amount of the population, according to recent research by the Federal Trade Commission (FTC). They’re attractive to scammers who assume that they’re trusting, too polite to hang up or easily duped. What’s more, senior citizens may be sitting on a sizable retirement nest egg.

Several branches of the federal government — including the IRS, the FBI and the FTC — have established websites that provide information about fraud detection and reporting scams. Ultimately, however, it’s important to use common sense and handle unknown callers with a healthy dose of skepticism. (See “How to Handle Suspect Calls” at right.)

Case Facts

The FBI recently unsealed its indictment against 61 individuals and entities that were charged in connection with the massive telefraud scheme. Currently, 20 individuals have been arrested, while 32 individuals and five call centers in India have been charged. An additional U.S.-based defendant is in the custody of immigration authorities.

The defendants are charged with conspiracy to commit identity theft, impersonation of an officer of the United States, wire fraud and money laundering. One defendant has been separately charged with passport fraud.

“The indictment we unsealed and the arrests we made today demonstrate the Justice Department’s commitment to identifying and prosecuting the individuals behind these impersonation and telefraud schemes, who seek to profit by exploiting some of the most vulnerable members of our communities,” said Assistant Attorney General Leslie R. Caldwell in a press release. “This is a transnational problem, and demonstrates that modern criminals target Americans both from inside our borders and from abroad. Only by working tirelessly to gather evidence, build cases and working closely with foreign law enforcement partners to ensure there are no safe havens can we effectively address these threats.”

According to the press release, the defendants perpetrated a sophisticated scheme organized by conspirators in India, including a network of call centers in Ahmedabad. Using information obtained from data brokers and other sources, the call center operators allegedly called potential victims while impersonating IRS or U.S. Citizenship and Immigration Services agents. These call center operators would threaten arrest, imprisonment, fines or deportation if the victims didn’t pay the requested taxes or penalties.

The Mechanics

When someone agreed to make payment, the call center would then immediately turn to a network of U.S.-based co-conspirators to liquidate and launder the extorted funds as quickly as possible, using prepaid debit cards or wire transfers. Prepaid debit cards were often registered through misappropriated information of identity theft victims. Wire transfers were handled by associates using fake names and fraudulent IDs.

To direct funds into accounts of U.S.-based individuals, the co-conspirators allegedly used “hawalas.” With these, money is transferred internationally outside of the formal banking system. According to the indictment, the co-conspirators kept a percentage of the proceeds for themselves, but they weren’t aware of the illicit nature of the operation.

The Victims

According to the indictment, one of the call centers reportedly extorted $12,300 from an 85-year-old victim in San Diego by threatening her with arrest if she didn’t pay fictitious tax violations. On the same day that she was scammed, one of the U.S defendants used a reloadable debit card loaded with her funds to purchase money orders in Texas.

In another instance, the defendants extorted $136,000 from a victim in Hayward, Calif. The scammers called this person multiple times over a period of 20 days, fraudulently representing to be IRS agents and demanding payment for alleged tax violations. The victim was instructed to purchase 276 stored-value cards, which the defendants then transferred to reloadable debit cards. Part of the victim’s money ended up on cards, which were activated by using stolen personal information.

At times, the call center operators would offer small short-term loans or advise targets that they were eligible for grants. Then the conspirators would request a “good faith deposit” to demonstrate the ability to pay back the loan, or payment of a fee for processing the grant. Victims never received any money after making the requested payment.

The Department of Justice has established a website to provide information about the case to victims, as well as the general public. Anyone who believes they have been scammed, or is a victim of fraud or identity theft relating to another telefraud, may contact the FTC at this website.

Protect Your Assets

Telefraud is ongoing and prevalent. Every year, scammers seem to get craftier and bolder with telephone fraud schemes. Regardless of your station in life, you can’t be too careful when you’re answering the phone. If you receive a call from an unfamiliar number, evaluate the caller with skepticism and common sense.

© 2016

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Ensure Your Year-End Donations Will be Deductible on your 2016 Return

Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.

When’s the delivery date?

To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.

 

© 2016

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Go Green, Save Green. 2016 Incentives

There’s Still Time to Set Up a Retirement Plan for 2016

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

  1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
  2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
  3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Contact us if you want more information about setting up the best retirement plan in your situation.

 

© 2016

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It’s Critical to be Aware of the Tax Rules Surrounding Your NQDC Plan

Nonqualified deferred compensation (NQDC) plans pay executives at some time in the future for services to be currently performed. They differ from qualified plans, such as 401(k)s, in that:

  • NQDC plans can favor certain highly compensated employees,
  • Although the executive’s tax liability on the deferred income also may be deferred, the employer can’t deduct the NQDC until the executive recognizes it as income, and
  • Any NQDC plan funding isn’t protected from the employer’s creditors.

They also differ in terms of some of the rules that apply to them, and it’s critical to be aware of those rules.

What you need to know

Internal Revenue Code (IRC) Section 409A and related IRS guidance have tightened and clarified the rules for NQDC plans. Some of the most important rules to be aware of affect:

Timing of initial deferral elections. Executives must make the initial deferral election before the year in which they perform the services for which the compensation is earned. So, for instance, if you wish to defer part of your 2017 compensation to 2018 or beyond, you generally must make the election by the end of 2016.

Timing of distributions. Benefits must be paid on a specified date, according to a fixed payment schedule or after the occurrence of a specified event — such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.

Elections to change timing or form. The timing of benefits can be delayed but not accelerated. Elections to change the timing or form of a payment must be made at least 12 months in advance. Also, new payment dates must be at least five years after the date the payment would otherwise have been made.

Employment tax issues

Another important NQDC tax issue is that employment taxes are generally due when services are performed or when there’s no longer a substantial risk of forfeiture, whichever is later. This is true even though the compensation isn’t actually paid or recognized for income tax purposes until later years. So your employer may:

  • Withhold your portion of the tax from your salary,
  • Ask you to write a check for the liability, or
  • Pay your portion, in which case you’ll have additional taxable income.

Consequences of noncompliance

The penalties for noncompliance can be severe: Plan participants (that is, you, the executive) will be taxed on plan benefits at the time of vesting, and a 20% penalty and potential interest charges also will apply. So if you’re receiving NQDC, you should check with your employer to make sure it’s addressing any compliance issues. And we can help incorporate your NQDC or other executive compensation into your year-end tax planning and a comprehensive tax planning strategy for 2016 and beyond.

© 2016

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Beware of Income-Based Limits on Itemized Deductions and Personal Exemptions

Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.

Income thresholds

If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.

Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).

The limits in action

These AGI-based limits can be very costly to high-income taxpayers. Consider this example:

Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.

The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).

These two AGI-based provisions combined could increase the couple’s tax by $17,805!

Year-end tips

If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.

For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.

© 2016

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What the Self-Employed Need to Know About Employment Taxes

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.

The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.

Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.

If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.

Deductions for the self-employed

For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.

© 2016

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Are You Timing Business Income and Expenses to Your Tax Advantage?

Typically, it’s better to defer tax. One way is through controlling when your business recognizes income and incurs deductible expenses. Here are two timing strategies that can help businesses do this:

  1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
  2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.

© 2016