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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Accounting & Tax

Accounting & Tax :: U.S. Tax Court Denies MBA Tuition Deduction

In a recent U.S. Tax Court decision, taxpayers were denied a deduction for the cost of tuition for a Masters of Business Administration (MBA) program.


Taxpayers, Adam Edward Hart and Lisa Denning Hart, claimed a miscellaneous itemized deduction on their 2009 tax return for Adam Hart’s MBA tuition of $18,600, reported on a Form 1098-T issued by Rollins College. After applying the 2% AGI threshold, the resulting itemized deduction for the taxpayers was $17,138, which resulted in a tax savings of $2,572.


Hart graduated from college with his undergraduate degree in 2007 and in January 2009 he enrolled in an MBA program with a concentration in finance at Rollins. In 2009, Hart worked for a few companies and was unemployed for a period of time while attending his MBA classes at Rollins.


The court’s position is that a taxpayer must be established in a trade or business for tuition costs to be deductible as a business expense under Section 162 of the Tax Code and IRS regulations. Hart argued that he was in the business of selling pharmaceuticals and that the MBA classes enabled him to obtain employment in 2009. The IRS contended that Hart was not established in a trade or business and that his employers did not require him to enroll in an MBA program.


Judge Kathleen Kerrigan found that Adam Hart was not established in a trade or business before enrolling in the MBA program and disallowed the deduction.The taxpayers plan to appeal the decision. The ruling in this case will have serious implications for other taxpayers with little work experience who already have or plan on deducting tuition costs for their MBA program.

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Accounting & Tax :: New Jersey Economic Opportunity Act of 2013 – Incentives for Development in the Garden State

The New Jersey Economic Opportunity Act of 2013 was recently enacted into law on September 18, 2013 to attract new business development in the State of New Jersey and enhance job creation and retention efforts with the goal of strengthening New Jersey’s competitive position in the

global economy.


This act streamlines  the five existing economic development incentive programs in New Jersey into  two programs, the Grow New Jersey Assistance Program (Grow NJ) and the Economic  Redevelopment and Growth Program (ERG).  Grow NJ is the State’s main job creation and retention incentive program  and ERG is New Jersey’s key developer program. Both programs have been enhanced through the reduction of eligibility thresholds and the addition of qualifying geographical regions. These programs will sunset on July 1, 2019.


The New Jersey Economic Development Authority (EDA) is no longer accepting applications for assistance under prior programs, including the Business Employment Incentive Program (BEIP), the Business Retention and Relocation Assistance Grant Program (BRRAG), and the Urban Transit Hub Tax Credit Program (UTHTC),  but applications that have been submitted prior to the enactment of the new law  will be processed.


The Grow NJ incentive program targets businesses that are creating or retaining jobs and making capital investments in qualified incentive areas. The Act offers broader incentives and tax credits for businesses that invest and create jobs in New Jersey. A qualified project must meet minimum capital investment and jobs-created or jobs-retained thresholds in order to be eligible for the tax credit. These thresholds are reduced for businesses located in Atlantic, Burlington, Camden, Cape May,  Cumberland, Gloucester, Ocean and Salem counties and for businesses located in a newly created Garden State Growth Zone, which encompasses the four cities with the lowest median family income.


Under Grow NJ, the base tax credit ranges from $500 to $5,000 per job, per year; however, additional tax credits are awarded for particular project types and project locations that can increase  the total tax credit to as much as $15,000 per job, per year. The amount of the tax credit is tied to the project type, the number of jobs created or retained  by the project, and the location of the project. The tax credit is awarded for a period of 10 years.


The New Jersey Economic Opportunity Act also  addresses and expands the Economic Redevelopment and Growth Program (ERG).  ERG is a program designed to bridge  construction project financing gaps for projects located in areas targeted for growth in New Jersey. The ERG Program applies to projects having insufficient revenues to support the project debt service  under standard financing agreements. The underlying rationale of the program is to incentivize redevelopment and create additional jobs through the construction of capital improvements.The ERG Program provides incentive tax credits  that can be assigned to lenders for project financing for residential projects of up to 20% of the total project cost, plus an additional 10% (total 30%) if the project constructs and reserves at least 10% of the residential units for moderate income housing. Qualified  residential projects must have a minimum total project cost ranging between $5 million and $17.5 million, depending on the location of the project.


Additionally, the ERG Program provides  incentive reimbursements of up to 20% of the total project cost for commercial  projects, plus up to an additional 20% (total 40%) of additional grant funding  for projects located in a New Jersey Garden State Zone (GSGZ), a distressed municipality, and other targeted areas.


Incentive tax credits awarded under the Grow NJ program allows business to apply the tax credit dollar for dollar against  certain tax liabilities, including the corporation business tax.  It can also be used as a gap-financing tool  for development, whereby a developer assigns the tax credit to a financial  institution over the life of the tax credit (typically 10 years) in exchange  for up-front capital. In the case of the ERG Program, the up-front capital  cannot be less than 75 percent of the value of the total tax credit.

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Accounting & Tax :: Start of 2014 Filing Season Announced

TaxReturnThe IRS recently announced the 2014 filing season will open on January 31, 2014 for individuals –– it opened on January 13, 2014 for most businesses, estates, and trusts. The January 13th start date does not apply to unincorporated small businesses that report income on Schedules C,  E, or F on Form 1040. Business returns the January 13 start date applies to include, but not limited to, Forms 1120,  1120S, 1065, and 1041. The January 31st  start date for individual returns applies to both electronically-filed and paper-filed  returns. There is no advantage to filing paper returns prior to the start date as individual returns will not be processed until January 31.


The start of  filing season for individuals is a 10-day delay from the originally planned  opening date of January 21 due to the recent government closure. This 2014 date is one day later than the 2013 filing season opening, which started on January 30, 2013. The delayed opening date allowed the IRS to test its tax processing systems which was set back during the government shutdown. Additionally, in October 2013,  the IRS experienced nearly a 90 percent reduction in operations, which is the peak  period for prepping systems for the 2014 filing season.


The April 15 tax deadline will not be altered.  Therefore, taxpayers and tax professionals can expect challenges  comparable to those experienced in the previous year.  The IRS has noted a few methods available to  help prepare for the 2014 tax season and to receive refunds as early as possible. Options include using the  e-file method and having direct deposit.

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Tax Provisions Expiring in 2013

Many of these temporary tax provisions were previously extended as part of the American Taxpayer Relief Act. Temporary tax provisions that are regularly extended, for one to two years, are referred to as “tax extenders.” The President’s 2014 Budget identifies several expiring provisions that should be permanently extended, including the research and experimentation (R&D) tax credit, enhanced expensing for small businesses, renewable energy credits, the work opportunity tax credit (WOTC), the deduction for state and local sales taxes, the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy efficient commercial buildings.


Expiring Individual Provisions

All but one of the individual provisions scheduled to expire at the end of 2013 have been extended at least once.


• Above-the-Line Deduction for Certain Expenses of Elementary and

  Secondary School Teachers

• Deduction for State and Local Sales Taxes

• Above-the-Line Deduction for Qualified Tuition and Related Expenses

• Premiums for Mortgage Insurance Deductible as Qualified Interest

• Parity for Exclusion for Employer-Provided Mass Transit and

  Parking Benefits

• Exclusion of Discharge of Principal Residence Indebtedness

  from Gross Income for Individuals

• Credit for Health Insurance Costs of Eligible Individuals


Expiring Business Provisions

All but one of the business provisions scheduled to expire at the end of 2013 have been extended at least once. Most of the business provisions scheduled for expiration in 2013 have been extended more than once. Long-standing provisions that are scheduled for expiration include the research tax credit, and the work opportunity tax credit.

• Tax Credit for Research and Experimentation Expenses

• Work Opportunity Tax Credit

• Indian Employment Tax Credit

• 15-Year Straight-Line Cost Recovery for Qualified Leasehold,

  Restaurant, and Retail Improvements

• 7-Year Recovery for Motorsport Racing Facilities

• Employer Wage Credit for Activated Military Reservists

• Special Expensing Rules for Film and Television Production

• Special Rules for Qualified Small Business Stock

• Increase in Expensing to $500,000 / $2,000,000 and Expansion

  of Definition of Section 179 Property

• Bonus Depreciation

• Reduction in S Corporation Recognition Period for Built-In Gains Tax

• Election to Accelerate AMT Credits in Lieu of

  Additional First-Year Depreciation

• Low-Income Housing Tax Credit (LIHTC)

• Three-Year Depreciation for Race Horses Two Years or Younger


Expiring Charitable Provisions

• Enhanced Charitable Deduction for Contributions of Food Inventory

• Tax-Free Distributions From Individual Retirement Accounts for

  Charitable Purposes

• Basis Adjustment to Stock of S Corporations Making Charitable

  Contributions of Property

• Special Rules for Contributions of Capital Gain Real Property

  for Conservation Purposes


Expiring Energy Provisions

• Production Tax Credit (PTC) or the Investment Tax Credit (ITC)

  in Lieu of the PTC

• Special Rule to Implement Electric Transmission Restructuring

• Credit for Construction of Energy Efficient New Homes

• Energy Efficient Commercial Building Deduction

• Mine Rescue Team Training Credit

• Election to Expense Mine-Safety Equipment

• Credit for Energy Efficient Appliances

• Credit for Nonbusiness Energy Property

• Alternative Fuel Vehicle Refueling Property

• Incentives for Alternative Fuel and Alternative Fuel Mixtures

• Incentives for Biodiesel and Renewable Diesel

• Credit for Electric Drive Motorcycles and Three-Wheeled Vehicles


Other Expiring Provisions Include:

• the expiration of the New Markets Tax Credit and

• the Tax Exempt Bond Financing for NY Liberty Zone bonds.


Taxpayers may want to consider taking advantage
of these provisions while they still exist as
part of any year-end tax planning.


In addition, taxpayers who have been utilizing these techniques may want to prepare for the possibility that they will not be available for the year 2014, and adjust withholding or estimated tax payments for 2014 accordingly. In order for these tax provisions to be renewed, Congress would need to pass new legislation to extend these to future years. There is a cost for extending these provisions which are estimated by the Congressional Budget Office to be in excess of $900 billion. With the present sequestering, there remains uncertainty related to extensions of these expiring items.

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Accounting & Tax :: 2014 Income Tax Bracket Increase Estimates

Alas, inflation is put to good use – taxpayers will be seeing its benefits in the form of tax relief in 2014. The mandatory annual inflation-adjustments as provided under the Tax Code should provide relief.


The American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 2, 2013 will at least guarantee in most cases, a little more money for you. ATRA permanently extended the Bush administration tax cuts and other provisions that previously hinged on congressional action, such as the alternative minimum tax (AMT) exemptions. This eliminates the uncertainty that comes every time tax cuts approach possible elimination and are at the mercy of Congress. ATRA also indexes tax brackets for tax years after 2013.


Indexing brackets during inflation lowers tax bills by including more of people’s incomes in lower brackets. The formula used in indexing showed a slightly lower amount of inflation this year over last, just over 1.5 percent. This amount is slightly below the 2.5 percent amount used last year and far below the 3.8 percent inflation factor used to set 2012 tax amounts. Although some 2014 taxes will stay the same as they were for 2013, such as the $14,000 gift tax annual exclusion and the $5,500 limit on IRA contributions, many will change slightly for inflation in 2014.


Many taxpayers will experience modest tax savings generated by indexing of the 2014 individual income tax rate brackets. Some examples include:


1. A married couple filing jointly with a total taxable income of $100,000 should expect to pay $145 less income taxes in 2014 compared to the same income for 2013.

2. A single filer with taxable income of $50,000 should pay $72.50 less income taxes in 2014 as compared to the same income for 2013.


When you add to those savings, the additional tax savings realized in most cases by slightly higher 2014 standard deduction and personal exemption amounts, as well as amounts that might be claimed from an increase in the income ceilings imposed on tax benefits, such as education credits, individual retirement account (IRA) contributions, and more. When combined, inflation-based tax savings for the 2014 tax year can become substantial.


Higher-Income, Higher Taxes

The 2013 highest tax brackets – currently at $450,000 or more for married filing joint taxpayers, $425,000 for taxpayers filing as head of household, single filers at $400,000 and married couples filing separately at $225,000 – will likely go up. For 2014 these amounts are projected to rise to $457,600, $432,200, $406,750 and $228,800 respectively.


AMT Exemptions Indexed

It is projected that for 2014 the AMT exemption will be adjusted upward for married joint filers to $82,100, from $80,800 in 2013, single filers & heads of household to $52,800, up from $51,900 in 2013.


Standard Deduction, Personal Exemption Rise

The standard deduction and personal exemption amounts are also subject to indexing. Projections for 2014 indicate that the trend will continue, with increases across the board. The standard deduction is expected to rise in 2014 from $6,100 to $6,200 for single filers, $8,950 to $9,100 for heads of household and $12,200 to $12,400 for married couples filing joint.


Most taxpayers will see a boost in their allowed personal exemption amounts as well even for higher income brackets. The anticipated 2014 phase out range for personal exemptions begins at $305,050 for joint filers and $254,200 for single filers.


The IRS usually releases the official annual inflation adjustments by December each year. The projected amounts above were based on the relevant inflation data released September 17, 2013, by the US Department of Labor and should not be used for income tax returns or other federal income tax related purposes until confirmed by the IRS later this year.

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Accounting & Tax :: Sales & Use Tax

Sales and use tax can be a considerable burden for any company. These taxes can be imposed on nearly every transaction and the cost to comply with the myriad of rules can be significant. Add to this fact, that in recent years state taxing authorities have become increasingly more aggressive in both legislative changes and audit enforcement efforts. The likelihood of being audited has increased so businesses need to be prepared for challenges. Let’s face it, you are a revenue collector for the state, your objective is to collect as much as you can, as soon as you can.


Sales and use tax laws change constantly,

posing complex and distinct challenges.

It affects all of us – from individual consumers

to the largest businesses – regardless of the applicable jurisdictions or types of transaction at issue.

Through skillful planning, and analysis,

you should prepare yourself for what may

someday be inevitable – a sales and use tax audit.

Will you be ready when the sales tax auditor comes knocking at your door?

There are several steps you can take to ensure you are.

Generally, the following sales and use tax compliance issues
are applicable to all businesses:

Maintaining adequate records
Adequate records means that every book and record is in place that is needed to trace a transaction from its inception to inclusion on a tax return. In other words, there is a discernible “audit trail”. All states’ sales and use tax laws require that adequate records be maintained. When they are not, auditors are permitted to use alternative audit methods to determine the accuracy of returns under audit. It is then up to the taxpayer to prove that the auditor’s methods were unreasonable and resulted in an incorrect tax due.

Lack of exemption certificates
Generally when a taxable product or service is sold and sales tax is not charged the vendor must obtain a properly completed exemption certificate. The key is not only to obtain the certificate, but it must be properly completed and you must maintain it in your files. Auditors may disallow non-taxable sales that are not supported by properly completed exemption certificates. This results in sales tax imposed on a non- taxable sale.

Test periods
Most state sales and use tax laws allow for the use of a test period in lieu of a detailed review of all sales and/or purchase transactions. A test period is a review of a specific time frame within the audit period. The result of the test period is then projected (applied) throughout the entire audit period. Test periods work well and save time when the period chosen is representative. Therefore, it is imperative that a test period contain the same type of transactions that occur throughout the entire audit period. Selection of a non-representative test period could result in a significant over assessment of sales and use tax.

Responsible person liability
Sales and use tax is a trustee tax, therefore sales and use tax laws include provisions that allow a state to hold individuals who are deemed to be “responsible persons” personally liable for sales and use tax due. Generally, a responsible person is anyone who is under a duty to act for the business.

Use tax
Use tax is the complement of sales tax and is due when sales tax is not paid at the time of a purchase. Generally, everything subject to sales tax is subject to use tax. Everyone, including individuals, are subject to use tax and are required to voluntarily pay such upon the filing of their sales tax returns (if a registered vendor), or a use tax report. In the case of an individual use tax may be due upon the filing of a personal income tax return.

Filing requirements
Generally, if you sell tangible personal property you must be registered for sales and use tax and comply accordingly. Most states require sales and use tax returns be e-filed either monthly, quarterly or annually depending upon sales and sales tax volume.

Lack of adequate sales/use tax policies
Many companies do not have formal sales and use tax policies or procedures to capture the information needed to meet their sales and use tax responsibilities. This often leads to inadequate and lost records which can cause misstatement of tax due. Failures here often lead to outsized assessments on audit.


Businesses in specialized industries

are often subject to additional scrutiny:


Issues include Nexus determinations, affiliate nexus issues and click-through nexus issues; taxability of hardware/software and related services; taxability of printed promotional materials; proper inclusions and exclusions in taxable selling price and determination of sales tax rates; inaccurate product and service tax matrix; lack of trained sales and use tax personnel; not properly structuring transactions up front to minimize taxes; and failure to properly manage sales and use tax audits.

Issues are generally the same as above but one must also consider the impact the Marketplace Fairness Act (“Act” or “MFA”) will have on their business if enacted. The Act will allow states to require remote sellers to collect their sales and use tax, regardless of whether the seller has a physical presence in the state. The Act does not negate existing nexus rules; rather it will add an additional layer of rules which must be reviewed if you are a remote seller. Don’t be fooled, the Act will apply to any business which sells remotely, i.e. telephone solicitation, catalog sales, TV shopping channels, etc. not just businesses that sell over the Internet.

Issues include construction costs associated with building improvements; taxability of production machinery, equipment, parts and supplies; taxability of hardware and software and related services; installation of production equipment; nexus determination; overpayment of sales tax on exempt transactions; drop shipment rules and exemption certificate management;

Issues include product and service taxability; nexus determination; invoice preparation to minimize tax consequences; cloud computing, ASP, and SaaS; and taxability of purchases.

Issues include capital improvements vs. taxable repairs; taxability of building material purchases; use tax responsibilities; overpayment of sales tax on materials purchased for use in exempt organization jobs, taxable jobs, or where installed out-of-state; contractor or retailer determination, i.e. self-use of manufactured products; nexus determination; failure to properly claim refund/credit for tax overpaid on exempt purchases or paid on materials installed in taxable jobs; taxability of materials consumed by contractor vs. transferred to customers; and government contractor rules.


Action steps you can take now

to prepare for what may be the inevitable:


Be proactive
Don’t wait until the auditor comes knocking to determine your sales and use tax responsibilities. Sales tax should always be on your radar so you can properly comply. Once a state contacts you, your options are greatly reduced, you are relegated to playing defense.

Conduct a review of your sales activity in each state and determine where you have established nexus. States have aggressive nexus teams who identify businesses conducting business in their state, but yet aren’t properly complying with the state’s sales and use tax rules. When returns are not filed there is no statute of limitations this allows states to go back to the very first day you conducted business in their state. The resulting tax assessment can easily impact a business’s cash flow, in some cases may even cause a business to close.

Understand the rules
Once you know where you have nexus, know how sales and use tax applies to your activities in those states. Register and comply accordingly. Sales tax is a consumer tax which you collect and remit. Don’t let it become your expense.

Sales tax automation
Using automated processes increases accuracy, saves time, mitigates errors, creates a trail and can increase profitability.

Understand now how the MFA may affect you
As noted, should the MFA become law, it will grant states authority to require remote sellers to collect their state sales and use tax. Will you be caught in this new nexus net? Don’t wait until the last minute to find out.

Implement formal sales & use tax policies
Personnel must be properly trained. Every company should have formal sales and use tax policies and procedures in place. Only then can staff understand and follow the processes established to insure compliance.

Learn from past mistakes
If you were audited in the past and it resulted in a large liability or refund you must improve your sales and use tax function by implementing changes that will prevent the same mistakes from happening again.

Self-audit on a regular basis
You should review both sales and purchase transactions on a regular basis to ensure that sales and tax is being handled correctly and that proper books and records are maintained. A self-audit will also identify refund opportunities that may exist.

Voluntary disclosures
If you realize after following some of the recommendations above that you have sales and use tax exposure in a particular state consider participating in that state’s voluntary disclosure program. Most programs will limit the look-back period, waive penalties and impose minimum interest. These programs encourage non-filers and filers with problems to come forward voluntarily and become current. Significant penalty and interest savings are possible.

Sales and use tax laws change constantly, posing complex and distinct challenges. It affects all of us – from individual consumers to the largest businesses – regardless of the applicable jurisdictions or types of transaction at issue. Through skillful planning, and analysis, you should prepare yourself for what may someday be inevitable – a sales and use tax audit.


Don’t wait, put sales and use tax on your radar now. Avoid surprises, make sure your staff and processes are in order and you have minimized your audit exposure before the sales tax auditor comes looking for you.

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Accounting & Tax :: START-UP NY Program Updates

The START-UP NY Program will create statewide tax-free zones in order to provide major incentives for businesses to relocate, start up or expand in New York State.


This past Summer, the NYS Governor, Andrew Cuomo, unveiled, START-UP, a new job creation program. Businesses will have the opportunity to operate state and local tax-free for ten years on or near academic campuses, and their employees will pay no state or local personal income taxes.
Employees pay no state income taxes on their wages for the first five years on income up to $200,000 of wages for individuals, $250,000 for a head of household, and $300,000 for taxpayers filing a joint return. In addition, businesses may qualify for additional incentives.



What businesses are eligible for START-UP NY?

Many different types of businesses are eligible to apply to the program. In order to participate, businesses need to support the academic mission of the college or university. Every business must create new jobs in order to participate by:

1. Being a new start-up company;
2. Being a company from out-of-state relocating to New York State; or
3. Expanding as an existing New York State company.

In New York City, Long Island and Westchester County, businesses must be start-ups or high-tech companies. Certain types of businesses are excluded from the program, including retail and wholesale businesses; restaurants and hospitality; professional practices like law firms and medical practices; and energy production and distribution companies.

How many jobs must a business create to be eligible for START-UP NY?

There is no minimum requirement for the number of net new jobs that must be created, but all participating businesses must create jobs to receive the program’s benefits.


What tax benefits will participating companies receive?

START-UP NY will provide new and expanding businesses that create new jobs the opportunity to operate completely tax-free including no income tax for employees and no sales, property or business tax while partnering with higher education institutions. Business and employee tax benefits will be available for up to ten years. (After five years, certain NYS high-earners will be limited on the amount of employee earnings exempted from the Personal Income Tax).



G.R. Reid Associates is a full-service accounting firm with experience and knowledge in business formation. Obtaining financing can be crucial in getting your new venture started. Contact us today to discuss your needs.



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Accounting & Tax :: How to Use the Internal Revenue Service Rules and Regulations to Achieve Estate Tax Savings

The use of trusts known as Intentionally Defective Grantor Trusts (IDGT) may provide the opportunity for estate tax savings by using the IRS rules and regulations in your favor. In this instance, the term defective does not mean that it does not work or it is substandard like a defective toy or defective product. This type of trust is specifically drafted to be an irrevocable trust for gift and estate purposes. The carefully-drafted document includes certain selected provisions under the Internal Revenue Service Code 671 to 677 that cause the trust to be a grantor type trust income tax purpose. For example, a provision to allow the substitution of property by the grantor can cause the trust to be considered a grantor type trust. A gift to this type of trust is considered completed and reportable for gift tax purposes. The provision or the intentional defect results in income earned from the gift being taxable to the grantor.


“…With proper consultation with a skilled estate
and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and
maximize the transfer of property to your heirs.”


At first glance this may not be considered a great bargain to the donor. However, if the donor’s intention is to reduce the taxable estate over a period of years, the requirement to pay the income tax on the earnings of the grantor trust reduces the donor’s estate. Revenue Ruling 2004-64 further reinforced the benefit by stating the grantor’s payment of the income taxes that was not distributed to the grantor is not a taxable gift. Also, the current trust income tax rate thresholds are substantially lower resulting in higher taxes on accumulated trust income. For taxable years beginning in 2013, a trust’s highest tax rate on ordinary income is 39.6% when exceeding $11,950 of taxable income. During 2013, a single taxpayer reaches the 39.6% rate on the excess of $400,000 taxable income. Avoiding the compressed brackets result in tax savings.


If the value of the property contributed to the IDGT trust is below the available applicable lifetime exclusion amount there is no gift tax due. The lifetime gift tax exclusion for 2013 is $5,250,000.
Another opportunity to achieve estate tax savings is when the grantor can sell appreciating property to the IDGT. Under IRS Revenue Ruling 85-13, the sale is considered a nonevent and is not recognized for income tax purposes. The interest earned and interest paid is disregarded for income tax purposes. Capital Gain is not recognized and the trust takes the grantor’s basis in the assets. By coupling the sale with a promissory note the seller can fix the value of the property at the time of the sale. The remaining value of the promissory note at the time of death is includible in the grantor’s estate. The benefit is that the property sold the IDGT is allowed to continue to appreciate outside of the grantor’s taxable estate and the value to the estate is in effect frozen at the time of the sale.
When using the IDGT, there are many technical issues in drafting and complying with the law. Due care is required to make sure you are within the guidelines of IRS rules and regulations. Also, not all property is ideal for this type of trust. Closely held business interests that generate cash flow are the favored property for this type of transaction. Whereas, marketable securities contributed to the trust may not achieve the desired result.
The fans of the estate tax are not fond of this estate planning technique and routinely plot to restrict or to eliminate their use. But in the meantime, with proper consultation with a skilled estate and trust attorney and coordination with your tax professional you may want to consider the use of Intentionally Defective Grantor Trust to achieve tax savings and maximize the transfer of property to your heirs.


Contact G.R. Ried Wealth Management Services to discuss estate planning strategies.

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Additional Medicare Tax

As 2013 comes to an end, employers, employees and self-employed individuals should make sure they are complying with the new 0.9 percent additional Medicare tax.


This new rule was effective at the beginning of 2013, but the effects will not be fully felt until wages reach a threshold level which, for many employees, will not occur until the final months of the year. This additional tax will also need to be considered when processing year-end bonuses.
Beginning in 2013, employers were required to withhold an additional 0.9 percent Medicare tax on the wages paid to any employee whose wages exceed $200,000.
The tax applies only to employees and self-employed individuals, not employers, and is in addition to the 1.45 percent / 2.9 percent (regular) Medicare tax that all wage earners/self-employed individuals pay.
The required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax owed. This is because, employers are required to withhold on wages paid in excess of $200,000 regardless of the employee’s filing status. The actual threshold for the additional tax is $250,000 for joint filers.


Assume that an employee’s wages are $220,000 annually and his/her spouse earns $150,000, and they file a joint tax return. The employer will be required to withhold the additional Medicare tax on the $20,000 of wages that is in excess of the $200,000 withholding threshold. The spouse’s employer will not withhold additional Medicare tax because their earnings do not exceed $200,000. But, together, the employee and spouse will owe additional Medicare tax on $120,000 (the excess of the combined earnings over $250,000.)
In order to avoid under-withholding, such as in the above situation, taxpayers should consider filing a new form W-4 with their employers to request that additional income tax be withheld, or alternatively, make estimated tax payments to make up the difference.
The new withholding rules will require that employers withhold the additional Medicare tax even if employees have no additional Medicare tax liability. Since this is a payroll requirement, employees cannot request that the employer reduce the required withholding.


Assume an employee earns $220,000 annually, and the spouse does not work. The couple file a joint tax return. The employer is required to withhold additional Medicare tax on the $20,000 of the $220,000 compensation. However, the employee and spouse will not owe any additional Medicare tax because the joint annual salary is under $250,000, the threshold for joint filers. In this example the taxpayers will have to claim a refund for those amounts on their tax return.
Between now and the end of the year, employers should be checking their payroll systems to ensure they have properly begun to withhold from their high-earners. Employees should be making some calculations to see if they need to increase their withholding and self-employed individuals should be planning, with their tax return preparers, to be sure estimated tax payments are being made. Paying taxes now, can minimize penalties and interest that apply for failure to pay the additional Medicare tax.

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Debt Crisis Averted: But What’s Next?

Working to reach consensus before the October 17th debt ceiling deadline, the U.S. Congress reached an agreement to avoid a historic, and potentially catastrophic, lapse in the government’s ability to borrow money. The agreement averted an unprecedented debt default and will enable the government to re-open many of its services after a two-week shutdown. The agreement funds federal government agencies until January 15, 2014 and extends U.S. borrowing authority until February 7, 2014 although the Treasury Department may be able to temporarily extend its borrowing ability beyond that date should Congress fail to act early next year. While the agreement is good news, the deal reached by Congress is only a temporary solution to the nation’s debt ceiling challenges. The potential for another showdown in Congress, and shutdown of the government’s borrowing power, looms in a few short months when this temporary agreement expires. The agreement was only a stop-gap measure, Americans are faced with two real prospects for early next year: another government shutdown on January 15, 2014 and another debt ceiling crisis on February 7, 2014. Moreover, some Capitol Hill insiders believe that, unless Congress aligns on a final, “once and for all” solution to the debt-ceiling crisis, we could be facing many more Congressional showdowns and deadlines — perhaps on a monthly basis and through the next election.

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