Saturday, January 26, 2013

Ashleae Beling: Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out:

Ashleae Beling, Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out:
Folks with trusts, and that includes widows and the disabled, not just the ultra-wealthy, have been hit with a double tax whammy this year. First the 3.8% Obamacare tax that applies to net investment income kicked in Jan. 1. Then, the American Taxpayer Relief Act was signed into law on Jan. 2, imposing income and capital gains tax hikes on trusts akin to those on the wealthiest taxpayers. The top income tax rate is now 39.6%, up from 35%, and the top capital gains rate is now 20%, up from 15%.
The kicker: these taxes hit a trust on any income it does not distribute over just $11,950, far less than the $400,000/$450,000 ATRA and $200,000/$250,000 Obamacare thresholds for individuals.

“It’s hitting where it really shouldn’t,” says Laurie Hall, an estates lawyer and head of the Wealth Management Group at Edwards Wildman in Boston. “These increases weren’t intended to hit people with income below $200,000, and they will.”

Here’s why. Most trusts (non-grantor trusts) pay tax on capital gains and accumulated income that stays in the trust, while the beneficiaries pay tax on income that is distributed to them. So trusts—even relatively small ones—will be hit with the 23.8% capital gains rate (the 20% rate plus the 3.8% Obamacare tax), even if the beneficiary himself would be squarely in 15% capital gains territory. “Going forward you have to think the trust is going to be hit with the extra 8.8%,” says Hall.
See Ashleae Beling's full article Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money, January 9, 2013.

Wednesday, January 16, 2013

What is the Difference Between Forms W-2 and 1099?

With tax season looming around the corner, Robert W. Wood explains the differences between IRS Form 1099 and IRS Form W-2 in his article on 1099 or W-2? Giving or Receiving, Be Careful:
Both key tax forms arrive in January or February, so watch your snail mail. If you’re an employee, taxes must be withheld. You’ll receive an IRS Form W-2 from your employer in January the following year. If you’re an independent contractor, you are liable for your own taxes. Assuming your total pay was $600 or more, you’ll receive an IRS Form 1099.

But is it that simple? What if you’re the employer rather than the recipient? This key decision is made thousands of times daily all over America, often, it seems, without much thought. Some employers ask “1099 or W-2?” as if they were asking how you take your coffee.
If you’re the worker, you may be tempted to say “1099,” figuring you’ll get a bigger check that way. Of course, you’ll actually owe higher taxes. As an independent contractor, you’ll owe not only income tax, but self-employment tax too.  In contrast, if you’re an employee, you pay only one half the Social Security tax, plus one half the Medicare rate. Your employer pays the other half.

Apart from tax law, employee status carries protection under nondiscrimination laws, pension and benefits laws. Wage and hour protections apply to employees but not to independent contractors. For all of these reasons, employers have considerable incentives to try to pay independent contractors rather than employees. This can often be done in ways that are perfectly proper.
See Robert W. Wood, 1099 or W-2? Giving or Receiving, Be Careful:, January 25, 2013.

QUICK TIP: has a handy online tool, which can be found here, that compares the different effective 'take-home pay' of equally compensated W-2 and 1099 employees.

Thursday, January 3, 2013

Bonner & Nevius: Congress Passes Fiscal Cliff Act

Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act, Journal of Accountancy:

Pulling back from the “fiscal cliff” at the 13th hour, Congress on Tuesday preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions.

Shortly before 2 a.m. Tuesday, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257–167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.

“The AICPA is pleased that Congress has reached an agreement,” said Edward Karl, vice president–Tax for the AICPA. “The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.”

With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It  temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.

The act’s nontax features include one-year extensions of emergency unemployment insurance and agricultural programs and yet another “doc fix” postponement of automatic cuts in Medicare payments to physicians. In addition, it delays until March a broad range of automatic federal spending cuts known as sequestration that otherwise would have begun this month.

Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.
See full article by Paul Bonner and Alistair M. Nevius, Congress passes the fiscal cliff act, Journal of Accountancy, January 1, 2013.