Kiddie Tax: What You Need to Know
Nov 13, 2013
Prior to 1986, parents were able to shift investments to their children so that interest and dividends were reported on the child’s tax return often resulting in the child paying little or no tax at all. This tax strategy was expunged by the birth of the kiddie tax. Children with unearned income such as interest or dividends above certain thresholds ($2,000 for 2013) are subjected to this tax. The excess investment income is taxed at the parent’s highest marginal rate not at the child’s marginal rate.
Kiddie tax rules apply to: a. children under the age of 18 at the end of the year b. children aged 18 with earned income (a job) does not exceed one-half of their support c. children between the ages of 19-23 who are full-time students and whose earned income does not exceed one-half of their support.
How this tax works
When a child’s investment income exceeds $2,000 (for 2013), any unearned income above this amount is subject to the Kiddie Tax; your (the parent’s) highest marginal tax rate. This rate could be as high as 39.6%.
The kiddie tax may be paid in two ways:
- Include your child’s investment income on your tax return using Form 8814
- Your child files their own separate return using Form 8615.
Either way, the tax will be the same.
Things to Consider • A child is a natural offspring, a legally adopted child and a stepchild.
• These tax rules are upheld regardless of whether the child is considered a dependent or not for tax purposes.
• Something to consider is if the increase to your own taxable income will prevent you from taking certain deductions and credits such as education etc. • Your name and social security number will be on your child’s return if the Form 8615 is filed
• The kiddie tax rules do not apply if the child is married and files a joint return. • An exception applies to distributions from some qualified disability trusts.
• If parents are divorced then the custodial parent’s return would be used even if that person is remarried.
• If parents are married but file separately or parents who are not married, use the parent’s return with the highest taxable income.
Example: Your daughter has $500 wages and $2,035 in dividends. On Schedule A, she claims itemized deductions of $400 due to investment income after 2% AGI floor. With an additional $800 of itemized deductions her total deductions claimed is $1,200. Gross income less itemized deductions equals a taxable income of $1,335.
What is subject to tax at the parent’s rate? Investment income $2,035 less (the greater of $2,000 or the sum of $1,000 plus directly related expenses of $400). $2,000
Subject to kiddie tax $35 Contact your William Vaughan Company consultant and discuss the kiddie tax and how you can minimize its impact.
By: Tammy Scheuermann, Accountant
Categories: Uncategorized
What is FASB? How Are They Looking To Change GAAP
Nov 07, 2013
Since 1973, the Financial Accounting Standards Board (FASB) has been the designated private sector for establishing standards of financial accounting that govern the preparation of financial reports for nongovernmental entities. The purpose of the FASB is to improve standards of financial accounting and reporting for nongovernmental entities. The standards are officially recognized by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) as authoritative. The FASB is part of a structure that is independent of all other business and professional organizations.
In 2002, the FASB and International Accounting Standards Board (IASB) collaborated through joint projects to develop common standards known as generally accepted accounting principles (GAAP). These standards refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements. The FASB has issued those standards as U.S. GAAPand the Internal Accounting Standards Board has issued them as International Financial Reporting Standards known as IFRS, or International Financial Reporting Standards. Over time, the two sets of standards are anticipated to both improve in quality and become ever more similar, if not identical.
The major difference between the two is their conceptual approach: U.S. GAAP is rule-based, whereas IFRS is principle-based. Under U.S. GAAP, the research is more focused on the perception of documentation whereas under IFRS, the review of the facts pattern is more thorough.
The goal of convergence between U.S. GAAP and IFRS is to develop a unified set of international accounting standards that would be used worldwide for financial reporting. Through convergence FASB is keeping up with the demand of financial users and U.S. investors. There are four joint projects remaining which are revenue recognition, financial instruments including hedging, impairment, classification and measurement, leases, and insurance contracts.
During the past ten years changes have been made to U.S. GAAP with a reconciliation approach for each transition. FASB and IASB identifies a difference and only works on that. The project has been in motion over the years by illuminating or minimizing the differences between the two set of standards piece by piece. As business owners, controllers, or financial experts, these changes may or may not be noticed. For the sake of the users, international convergence will continue to progress over the course of time.
By: Aubrey Forche, Staff Accountant
Categories: Uncategorized
Additional Medicare Tax Creating Withholding Problems
Oct 31, 2013
Effective at the beginning of 2013, employees and self-employed individuals are required to pay an additional 0.9% Medicare tax on wages in excess of $250,000 for married filling joint filers, $125,000 for married individuals filling separately, and $200,000 for all other filers. Employers, while not subject to this additional Medicare tax, are required to withhold this additional 0.9% Medicare tax on wages paid to an employee in excess of $200,000, beginning in the pay period in which wages exceed this amount. This requirement can potentially create withholding problems for many taxpayers.
These potential issues arise from the fact that employees are subject to the tax based on thresholds that are dependent on a person’s filing status. However, employers are required to withhold this additional 0.9% Medicare tax on wages paid to an employee in excess of $200,000, regardless of filing status, any additional wages this employee or his spouse earns, or any self-employment income this employee may have received. This requirement may result in individuals paying more or less than they actually owe.
For example, say a taxpayer earns $230,000, his spouse earns $120,000 and they file a joint return. The taxpayer’s employer will withhold the additional Medicare tax on the $30,000 in excess of the $200,000 threshold and the spouse’s employer will not withhold any additional Medicare tax because her earnings did not exceed the threshold. However, the couple actually owes the additional 0.9% Medicare tax on $100,000, the difference between their combined wages of $350,000 and the $250,000 married filling joint threshold, so their withholdings do not sufficiently cover the tax owed. In another example, say a taxpayer earns $230,000, his spouse has no earnings, and they file jointly. The taxpayer’s employer withholds the additional 0.9% Medicare tax on the $30,000 in excess of $200,000, as required. However, the couple actually owes no additional Medicare tax because their combined earnings do not exceed the $250,000 married filling joint threshold. In this case, employees cannot request their employer to stop or reduce the withholding, because any employer that does not meet the requirements, regardless of taxpayer liability, is subject to penalties. Employees will instead have to claim a refund when they file their 2013 tax return.
To ensure compliance with this additional 0.9% Medicare tax there are some actions employers, employees, and self-employed individuals can take. Employers should be checking their payroll systems to make sure they have started withholding the additional tax where necessary, employees should be looking to see if additional withholding may be necessary, based on their individual situations, and self-employed individuals should be making sure they are paying the proper amount of estimated tax payments. All of these actions should be considered with the help of your William Vaughan Company tax adviser.
By: Ruben Becerra, Staff Accountant
Categories: Uncategorized
Long-Term Borrowing
Oct 29, 2013
Are you considering long-term corporate borrowings later in 2013 or 2014? If so, you might want to close on the financing before legislation could be introduced that would potentially reduce corporate interest expense, allowing you to benefit from any possible grandfathering of the interest expense deduction.
In order to affect “revenue neutral” corporate tax reform, as called for by both the President and the House Ways and Means Chairman, the highest marginal corporate tax rate of 35% would be reduced and some corporate tax expenditures may be reduced or eliminated. Interest expense is one of the leading corporate tax deductions. If revenue neutral corporate tax reform is enacted, corporate interest deductions may be reduced.
Historically, the tax treatment of taxpayers who have already incurred expenses, has been grandfathered by Congress and those expenses have been allowed. Therefore, if you are considering long-term borrowing, sooner may be better than later in order take advantage of current tax benefits.
By: Diane Allman, CPA
Categories: Uncategorized
Roth IRA, 401(k) Plan, or Both?
Oct 24, 2013
Roth individual retirement accounts (IRAs) and 401(k) plans both offer advantages for retirement savings, so you may wonder which you should choose. Before deciding, let’s look at some of the advantages of each.
The Advantages of a Roth IRA
- While your contribution is not tax deductible, your contributions and earnings grow on a tax-free basis. You can withdraw those funds without paying any federal income taxes, as long as the distribution is qualified. A qualified distribution is one made at least five years after the first contribution and after age 59 1/2.
- You choose which investments to use for your IRA. You are allowed to invest in a broadrange of investment alternatives. With a 401(k) plan, you are limited to the investment options offered by your employer.
- You can withdraw your contributions at any time without paying any federal income taxes or the 10 percent federal penalty.
- You are not required to make withdrawals from a Roth IRA, even after age 70 1/2. Thus, it can be a good tax-advantaged way to accumulate funds for heirs.
The Advantages of a 401(k) Plan
- Contributions are typically made on a pre-tax basis, so you don’t pay current income taxes on your contributions.
- Your earnings grow and compound on a tax-deferred basis until you make withdrawals from the plan.
- Larger contributions are allowed to 401(k) plans.
- Many employers match a portion of your 401(k) contributions, effectively increasing your savings rate.
Deciding Between the Two
Typically, the best strategy is:
- First, contribute enough to your 401(k) plan to take full advantage of your employer’s matching contributions. This is free money that you give up when you don’t contribute.
- Next, contribute up to $5,500 to a Roth IRA for 2013 (up from $5,000 in 2012) provided you are eligible to make a contribution. Taxpayers 50 and older can also make catch up contributions of $1,000 (same in 2012). Single taxpayers with adjusted gross income (AGI) of less than $112,000 and married taxpayers filing jointly with AGI of less than $178,000 can make contributions (up from $110,000 and $173,000 in 2012) .
- Next, contribute any additional retirement money to your company’s 401(k) plan. You can contribute a maximum of $17,500 for 2013 (up from $17,000 in 2012) unless your employer sets a lower limit to comply with government nondiscrimination regulations. If you are age 50 or older and your plan permits, you can make an additional $5,500 catch-up contribution (unchanged from 2012) bringing your maximum contribution to $23,000.
- Finally, consider other alternatives for any other savings you would like to earmark for retirement. That could include taxable investments and annuities.
Categories: Uncategorized