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Steer Clear Of The Trust Fund Recovery Penalty

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If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here […]

By |July 7th, 2020|business, income tax, irs, social security, tax planning|0 Comments
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Selling Securities by Year End? Avoid the Wash Sale Rule

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If you’re planning to sell assets at a loss to offset gains that have been realized during the year, it’s important to be aware of the “wash sale” rule.

How the rule works

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, the wash sale rules may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

Keep in […]

By |October 22nd, 2019|income tax, individuals, investment, retirement, roth ira|0 Comments
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The Next Estimated Tax Deadline is September 16: Do You Have to Make a Payment?

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If you’re self-employed and don’t have withholding from paychecks, you probably have to make estimated tax payments. These payments must be sent to the IRS on a quarterly basis. The third 2019 estimated tax payment deadline for individuals is Monday, September 16. Even if you do have some withholding from paychecks or payments you receive, you may still have to make estimated payments if you receive other types of income such as Social Security, prizes, rent, interest, and dividends.

Pay-as-you-go system

You must make sufficient federal income tax payments long before the April filing deadline through withholding, estimated tax payments, or a combination of the two. If you fail to make the required payments, you may be subject to an underpayment penalty, as well as interest.

In general, you must make estimated tax payments for 2019 if both of these statements apply:

  1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
  2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2019 or 100% of the tax on your 2018 return — 110% if your 2018 adjusted gross income was more than […]
By |September 5th, 2019|income tax, individuals, tax deadlines|0 Comments
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You May Have to Pay Tax on Social Security Benefits

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During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. […]

By |July 8th, 2019|income tax, social security|0 Comments
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Careful Tax Planning Required for Incentive Stock Options

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Incentive stock options (ISOs) are a popular form of compensation for executives and other employees of corporations. They allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the ISO grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. But careful tax planning is required because of the complex rules that apply.

Tax advantages abound

Although ISOs must comply with many rules, they receive tax-favored treatment. You owe no tax when ISOs are granted. You also owe no regular income tax when you exercise ISOs. There could be alternative minimum tax (AMT) consequences, but the AMT is less of a risk now because of the high AMT exemption under the Tax Cuts and Jobs Act.

There are regular income tax consequences when you sell the stock. If you sell the stock after […]

By |February 26th, 2019|business, income tax, New Tax Laws, strategy, tax planning|0 Comments
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Consider All the Tax Consequences Before Making Gifts to Loved Ones

Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.

Multiple types of taxes

Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.

By |October 16th, 2018|estate, estate tax, gift tax, income tax, New Tax Laws|0 Comments
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Close-up on the New Qualified Business Income (QBI) Deduction’s Wage Limit

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorship, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. partial phase-in

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

  • 50% of the amount of W-2 wages paid to employees during the tax year, or
  • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

  1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
  2. The resulting percentage is multiplied by the difference […]
By |July 16th, 2018|business, income tax, New Tax Laws|0 Comments
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How to Avoid Getting Hit with Payroll Tax Penalties

For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government.

If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company.

The 100% penalty

Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.

If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a […]

By |July 9th, 2018|employer, income tax, tax|0 Comments
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Factor in State and Local Taxes When Deciding Where to Live in Retirement

Many Americans relocate to another state when they retire. If you’re thinking about such a move, state and local taxes should factor into your decision.

Income, property and sales tax

Choosing a state that has no personal income tax may appear to be the best option. But that might not be the case once you consider property taxes and sales taxes.

For example, suppose you’ve narrowed your decision down to two states: State 1 has no individual income tax, and State 2 has a flat 5% individual income tax rate. At first glance, State 1 might appear to be much less expensive from a tax perspective. What happens when you factor in other state and local taxes?

Let’s say the property tax rate in your preferred locality in State 1 is 5%, while it’s only 1% in your preferred locality in State 2. That difference could potentially cancel out any savings in state income taxes in State 1, depending on your annual income and the assessed value of the home.

Also keep in mind that home values can vary dramatically from location to location. So if home values are higher in State 1, there’s an even greater chance that […]

By |June 6th, 2018|income tax, retirement, tax|0 Comments
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State and Local Tax Deduction Limited

Under pre-Act law, taxpayers could deduct from their taxable income as an itemized deduction several types of taxes paid at the state and local level, including real and personal property taxes, income taxes, and/or sales taxes.

New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction.

However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted. (Code Sec. 164(b)(6), as amended by Act Sec. […]

By |January 9th, 2018|CA tax, income tax, New Tax Laws, property tax, state income|0 Comments
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