What is the SECURE Act and How Could It Affect Your Retirement?
Feb 10, 2020
The new Setting Every Community Up For Retirement Enhancement or SECURE Act recently signed into law by President Trump is one of the most significant pieces of retirement legislation in more than a decade. The law focuses on retirement planning in three key areas: 1) modifying required minimum distribution (RMD) rules for retirement plans; 2) expanding retirement plan access and 3) increasing lifetime income options in retirement plans. Ultimately, the law has significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets
Here are explanations of some key provisions. Unless noted, the new rules went into effect on Jan. 1, 2020:
- Elimination of the so-call “stretch IRA” – The Secure Act eliminated the “stretch IRA,” which allowed non-spousal beneficiaries to withdraw assets of inherited accounts over their lifetimes to optimize the beneficiary’s income tax deferral. Now, those who inherited an IRA since the beginning of 2020 and thereafter have 10 years to withdraw the assets — however or whenever they’d like — or face taxation of the money all at once. Spouses and disabled beneficiaries are among the exceptions to the rule. The new restrictions pose a problem for people who have been planning to use IRAs as an inheritance vehicle.
- Increases the required minimum distribution (RMD) age for retirement accounts – Distributions must begin from traditional IRAs when savers reach a certain age. The SECURE Act raised the age for these required minimum distributions (or RMDs) from 70½ to 72. This will enable individuals between these ages to keep money in their IRAs longer and put off paying income taxes on withdrawals if they don’t need funds yet to pay for living expenses. However, the new rule does not apply to those already older than 70 ½ or turned 70 ½ in 2019 (born on or before June 30, 1949). Those individuals must continue or begin taking RMDs under the old rule.
- Allows long-term, part-time workers to participate in 401(k) plans – The SECURE Act requires employers to permit long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods to participate in their plans (other than collectively bargained plans). However, an employer will not be required to make matching or nonelective contributions on behalf of such employees and may continue to impose an age-21 requirement.
- Permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses – The new law allows penalty-free withdrawals from retirement plans for birth or adoption expenses, up to $5,000 limit would apply to each parent, including those who have adopted children. So technically, a couple could take out up to $10,000 from their retirement savings, as long as they both have separate accounts in their own names.
- Allows parents to withdraw up to $10,000 from 529 plans to repay student loans – The list of qualified expenses has now expanded under the SECURE Act. Most notably, 529 assets can now be used to pay for qualified education loan repayments (up to $ 10,000-lifetime maximum) and costs for an apprenticeship program.
Contact your William Vaughan Company tax professional if you have additional questions about how the SECURE Act impacts your retirement plans. Changes in the tax code, family relationships, and your own financial circumstances are common—requiring that you update your planning strategies every few years. Remember, your plans should evolve as you do. Look for additional tax alerts from William Vaughan Company as we roll out more information on how the SECURE Act impacts retirement plan administration.
Categories: Tax Planning
Unlocking the Tax Benefits of Opportunity Zones
Dec 10, 2019
Are you interested in reviving economically distressed communities in your area and reducing your tax burden at the same time? The Opportunity Zone program, created by the Tax Cuts and Jobs Act of 2017, provides the opportunity to do both.
What is an Opportunity Zone?
It is an economic development tool aimed to attract investments and jump-start economic growth in low-income urban and rural communities nationwide. To view all qualified opportunity zones, visit the U.S. Department of the Treasury for the most up-to-date listings. Zones are identified by state, county, and census tract number.
How does the program work?
It permits investors (individuals, corporations, partnerships, trusts & estates) to defer tax on any prior capital gains made from the sale or exchange of any asset, only if they invest in a Qualified Opportunity Zone (QOZ) by way of a special purpose entity known as a Qualified Opportunity Fund (QOF) within 180 days after the gain arises. In short, a QOF is an investment vehicle designed to hold funds to then invest in real estate to make “substantial improvements”.
What are the tax benefits?
- Deferral of taxable gains as late as December 31, 2026
- Qualifying investments made by December 31, 2021, and held until 2026 are eligible for a reduction in deferred gains in the amount of 10% of the gain. Investments made by December 31, 2019, and held until 2026 are eligible for an additional deferred gain reduction of 5% for a total maximum gain reduction/basis step-up of 15%.
- Permanently exempts any future gains of reinvested proceeds. Gain from appreciation in the QOF investment may be eliminated if the QOF investment is held for at least 10 years.
What should I know before investing?
Your original deferred gain (less any amount forgiven) will be subject to tax on whichever date comes first: either December 31, 2026, or when you sell your interest in an Opportunity Zone Fund. If you still own the interest in an Opportunity Zone Fund after December 31, 2026, you will owe tax on the original deferred gain without any cash proceeds from the investment to pay the tax.
When do I need to invest?
Act fast! Investing by December 31, 2019, will ensure you capture the greatest tax benefit.
Categories: Tax Planning
Wayfair Update: State & Local Tax Landscape Altered
Oct 30, 2019
Last year, the U.S. Supreme Court found in favor of the State of South Dakota by expanding the definition of in-state nexus to include a “virtual presence” in South Dakota v. Wayfair, Inc. The Supreme Court approved the South Dakota law imposing filing requirements on businesses that have $100,000 of gross receipts or 200 transactions with customers in the state. Many states have adopted those thresholds, but others have altered them slightly.
Since the Supreme Court’s decision, many states have enacted legislation similar to South Dakota’s rule expanding sales tax conditions to require more businesses to register and file sales tax returns. Businesses can now be required to collect sales tax even if they do not have a physical presence in a state, so long as it meets some minimum thresholds.
Recently, Ohio and Pennsylvania adopted modified economic nexus provisions:
Ohio
In response to the U.S. Supreme Court decision in Wayfair, Ohio has adopted an economic sales & use tax nexus standard. The new standard replaces the traditional physical presence nexus standard. Under House Bill 166, effective August 1, 2019, a seller is presumed to have sales & use tax nexus in Ohio if the seller has either gross receipts in excess of $100,000 from sales into Ohio or engages in 200 or more separate transactions in Ohio. The threshold under either test is measured during the current calendar year or the preceding taxable year. Taxpayers doing business in Ohio should review their sales data to determine if they are subject to the new nexus standards and are required to collect and remit sales tax from customers.
Pennsylvania
Beginning in the tax year 2020, the State of Pennsylvania will impose a new income tax nexus standard that is comparable to the sales & use tax economic nexus standard outlined in Wayfair. Historically, a taxpayer had income tax nexus in a state where it had a physical presence, i.e. carrying on activities beyond the solicitation of sales or having property located in the state. The Pennsylvania Department of Revenue is asserting that the physical presence is no longer required. Under the new standard, the state will impose an income tax filing obligation on remote taxpayers that are doing business and have an economic presence in the state. Economic presence under the Pennsylvania nexus standard is defined as having in excess of $500,000 of gross receipts sourced to Pennsylvania from the sale or lease of tangible personal property, sale of services or the sale or licensing of intangible property in the state. Taxpayers that have Pennsylvania sourced sales and are not filing an income tax return in the state should review their sales data to determine if they have an income tax filing obligation based on the new nexus standard for tax years beginning on or after January 1, 2020.
Click here to view an up-to-date state nexus guide.
Categories: Retail, Tax Compliance, Tax Planning
Gift-giving and Taxes
May 25, 2017
The recipient of a gift need not worry about the tax consequences; receipts of gifts are non-taxable events. However, that is not always the case for the giver. Every year the IRS allows for the tax-free transfer of a specified amount of monetary gifts. For 2017 this amount stands at $14,000 per person, per year. Amounts given to any one individual, by any one individual, during a tax yearbring about no consequences as long as they are at or below $14,000. For example, a husband and wife can each give $14,000 in cash ($28,000 total) to each of their grand-kids every year, with no resulting tax or return filing consequences.
Gifts in excess of this annual exclusion can also be tax-free; however, these gifts are required to be reported against the givers lifetime gift and estate exemption. The total lifetime exemption for 2017 stands at $5.49 million per individual. Gifts made during the year in excess of the annual exclusion ($14,000) require the giver to file a gift tax return. This return discloses the excess gifts given annually as well as tracking their lifetime excess/remaining exclusion. Typically annual gift returns come with no tax due; however, these returns reduce the tax-free amount allowed upon death and could have potential tax consequences down the road.
Bottom line? If you have a large estate and make any large gifts during the year, consult your tax advisor. We may be able to offer advice on how to better structure these transactions.
– Courtney Elgin, CPA
Categories: Other Resources, Tax Compliance, Tax Planning
Home Sweet Office
May 10, 2017
Do you have a room in your home that you use just for your business? If so, you could claim a deduction on your tax return for your home office.
Before we get ahead of ourselves, we should acknowledge that you will have to meet certain requirements. However, most are able to deduct a percentage of the costs of running the home such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, some casualty losses, repairs, and improvements as related to the portion of your home used for business.
A “home”, as defined by the IRS, can be a condo, house, apartment, mobile home or boat (with provided amenities). The home can be rented or owned, however, to qualify for the home office deduction you must meet two tax law requirements:
- You must regularly use part of your home exclusively for a trade or business.
- You must be able to show that you use your home as your principal place of business meaning you meet patients, clients, or customers at your home or you use a separate structure on your property exclusively for business purposes.
Regular use:
The IRS doesn’t offer a clear definition of regular use – only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You should qualify by working a couple days a week for a few hours.
Exclusive use:
Exclusive means that you must use a portion of your home only for your business. If you use a portion of your home for work but also for personal use then you will not meet that requirement. However, you are able to use a portion of a larger room as long as your personal activities do not enter that area. There are two exceptions to the exclusive use rule. If you run a qualified daycare out of your home or store inventory or product samples then you do not have to meet the exclusive use test.
If you are storing inventory or samples in your home, you can still qualify for the home business expense even if you are not using that space exclusive for your business.The inventory will need to be stored in a certain location such as the garage, a closet, or bedroom. However, you will not get the deduction if you have an office or business location outside of your home.
Remember you can only claim this deduction if you are running a business. If the IRS believes it’s a hobby the deduction will not be honored.
– Brittany Jennings, Staff Accountant
Categories: Audit & Accounting, Other Resources, Tax Compliance, Tax Planning