As tax increases make their way through Congress, a surprising takeaway has emerged for financial advisors with clients who are affluent but may not be “Jeff Bezos-rich.” Nearly 4.8 million individuals making between $369,300 and $884,900 would pay $4,340 less in federal tax starting next year under the tax and spending bill approved with last minute changes by the House of Representatives the week before Thanksgiving. Americans that fall just below the 1% highest income earners typically have a net worth that exceeds earnings once homes and retirement accounts are added in. So far, many high net-worth individuals are off the hook from the tax hikes embedded in the Biden administration’s $1.8 trillion Build Back Better Act.

For months, investors had been on high alert amid early proposals from Democrats that took aim at the wealthy. However, the bill that House Democrats approved omitted many of the most feared measures that had been in the legislative works for months. Investors will still be able to use a longstanding loophole to pass on wealth to heirs, who won’t have to pay taxes on gains in assets that accumulated before they inherited them. With the top ordinary federal rate of 37% remaining unchanged, so is the 23.8% capital gains rate. The long-standing tax benefits of grantor trusts remain in place as well.

For all their talk earlier this year about taxing the rich, House Democrats landed on a bill in which the average federal tax rate of those making between $500,000 and $1 million would nudge down to 27.2% next year from the current 28.1%.

Changes for the richest

Ultra high net-worth individuals don’t get off as easily in the reworked bill. The bill places a $10 million cap on individual retirement accounts. The so-called mega backdoor Roth conversions, in which an investor can put as much as $58,000 a year into a 401(k) account and convert much of the money to a tax-free Roth account, would be banned after the first of January. However, investors can still do regular Roth conversions but would be banned from the strategy come 2032, if they’re high earners. Those conversions involve taking money out of a taxable retirement account like an IRA or 401(k), paying income tax on the gains, then putting the proceeds into a Roth, where it can grow free of tax.

Individuals making more than $10 million a year would pay a 5% surtax on their incomes, including wages, capital gains and dividends. Those making more than $25 million would pay an 8% levy. The “millionaires’ surtax” is still considerably less painful than earlier proposals. Some 22 million American adults had a net worth over $1 million in 2020. Many affluent investors will be happy with the tax bill, but there’s a subset of who may not be pleased. These folks are a niche group of people who own small businesses or participate in partnerships and receive a chunk of their profits. Investors with interests in those so-called pass-through entities who make more than $400,000 ($500,000 for couples) would pay the existing 3.8% net investment income tax if they don’t already. The levy, which falls on capital gains, dividends, rental income, and passive income, has an identical counterpart for people who earn wages. Tax writers expanded the levy due to data showing that some affluent business owners avoid both forms of the tax by improperly casting income as profits rather than wages.

An even smaller subset of investors who have stock in start-ups will be upset, as the bill cuts the tax benefits of qualified small business stock. That perk lets founders and employees at small companies who receive stock as part of their compensation rake in $10 million, and often giant multiples of that, free of federal tax. The tax bill now before the Senate would slice that tax benefit to 50% for individuals earning more than $400,000 and for trusts and estates. The bill would hit investors who sell their founders stock after Sept. 13, 2021, unless there is a binding contract for a sale before then and it’s completed by the end of the year.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The Internal Revenue Service released new regulations (REG-109128-21) on November 22 that may help taxpayers, employers, and insurers navigate the complex tax rules surrounding COVID-19 testing and health insurance coverage. This document includes proposed regulations stating “minimum essential coverage,” as that term is used in health insurance-related tax laws, doesn’t include Medicaid coverage that is limited to COVID-19 testing and diagnostic services provided under the Families First Coronavirus Response Act of 2020. These regulations would affect taxpayers who claim the premium tax credit, health insurers, self-insured employers, government agencies, and others that provide minimum essential coverage to individuals, as well as large employers.

The set provides an automatic extension of time for providers of minimum essential coverage to furnish individual statements regarding such coverage, and an alternative method for furnishing individual statements when the shared responsibility payment amount is zero. In addition, it provides an automatic extension of time for “applicable large employers,” typically those with 50 or more full-time or equivalent employees, to furnish statements relating to health insurance that the employer offers to its full-time employees, as required by the ACA.

The proposed regulations clarify some of the guidance issued last year in response to COVID-19 relief legislation. Previously, the IRS said that Medicaid coverage that is limited to COVID-19 testing and diagnostic services, wasn’t considered minimum essential coverage under a government-sponsored program. This means an individual’s eligibility for that coverage for one or more months doesn’t prevent those months from qualifying as coverage months for purposes of determining eligibility for the premium tax credit for health coverage. Lawmakers aimed to amend previous legislation by adding Medicaid coverage for COVID-19 testing and diagnostic services to the health coverage areas listed there that don’t qualify as minimum essential coverage under a government-sponsored program.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

Although Shaquille O’Neal has made millions from his NBA career and endorsements, he has joined a growing number of wealthy parents who limit how and when their heirs will get their inheritance. During an episode of the “Earn Your Leisure” podcast, O’Neal shared his views on giving his kids money, now and in the future: “we ain’t rich, I’m rich“. Like many affluent people before him, O’Neal is taking a creative approach with respect to gifting his children money. Here are three key considerations using Shaquille O’Neal as an example.

Communicate with your heirs. It is important to keep an open line of communication between yourself and those who will eventually inherit your earnings. Be sure to tell your kids what your plans are, like O’Neal. In the podcast, O’Neal says that he explains to his children that they are not wealthy, O’Neal is the one with the money. He has also had discussions with his children about how he will invest in their businesses in the future. O’Neal goes on to explain that his kids will need to get their bachelor’s or higher and if they want dad to invest in their future business ventures, they will need to submit to him a proper business proposal for his review and approval.

Think Big. O’Neal’s plan focuses on setting his children up for long term success, rather than instant gratification and handouts. It would not be difficult for him to just give his children money now, but he chooses to encourage them to generate their own wealth instead of relying on his. This also cultivates a healthy ambition and drive to succeed that they will need in life.

Take your time, but start now. Be sure that when creating your will, there is no room for interpretation. Make your words clear and concise. While O’Neal is still relatively young, there is no time like the present to start planning. Taking the time to consult an estate planning expert is also a great way to ensure everything goes according to plan.

Though your options are virtually limitless, proper estate planning -deciding on the “who, what, when, and how” and executing this with the least amount paid in taxes, legal fees, and court costs possible can be a challenging and an emotional affair to wrestle with alone. For more information, contact Talley LLP today.

On October 27th, President Joe Biden and members of the House of Representatives adjusted their tax plan proposing a new surcharge of 5% on individuals earning more than $10 million a year. That’s more than the 3% that was suggested previously and comes after members of the House proposed to tax the paper profits of billionaires. The latest plan intends to levy an additional 3% surcharge on those making more than $25 million. Those wealthy taxpayers would thus pay an additional 8% on top of the top ordinary rate, now 37%.

Neither the House document nor fact sheet from the White House made any mention of raising the top ordinary rate to 39.6% as Biden and representatives had previously called for. Nor did the documents mention the administration’s and lawmakers’ prior call to raise the top capital gains tax to 28.3% from the current 23.8%.

The new proposal would also close the Medicare Self-Employment Tax Loophole by strengthening the 3.8% net investment income tax for people making more than $400,000.

Some reports believe that unspecified changes to the $10,000 cap on state and local tax deductions, including for property taxes, would likely be in the final package. Biden is seeking ways to pay for his dialed-back social spending and climate bill, now costing $1.75 trillion instead of the original $3.5 trillion.

Key points from the proposal summary include, but are not limited to:

  • Taxpayers with more than $100 million in annual income or more than $1 billion in assets for three consecutive years would be required to pay annual taxes on their stock and bond profits, even if they’re only on paper. Individuals and trusts that pay taxes will be affected as well.
  • Paying capital gains tax on profits regardless of whether they’re the result of a sale or not is known as “mark-to-market.” Billionaires can pay the initial taxes over five years. In years after the first tax is due, they would pay tax on their subsequent gains. While the current top capital gains rate is 23.8%; some House Representatives want to raise it to 28.8%.
  • Capital losses could be carried back for up to three years in certain circumstances. Non-tradable, hard-to-value assets like real estate, a partnership interest, or a business would bear a new, one-time interest surcharge when sold. Billionaires would pay their usual tax, plus a new deferral recapture amount that’s equal to the interest on the tax that was deferred while the individual held the asset. The interest rate for “deferral recapture amounts” will be calculated by the short-term federal rate; currently at 0.18%. Non-publicly traded assets, the total tax owed, including the interest surcharge, would be capped at 49%.
  • Interest would not be tallied for assets sold before the proposal goes into effect or in the first tax year that a taxpayer is subject to the Billionaires Income Tax, whichever is later.
  • Billionaires would be able to exclude up to $1 billion of tradable stock in a single corporation from being taxed before sold. 
  • Billionaires would fall out of the three-year rule for $1 billion in assets or $100 million in income only if their assets or income shrink below half of those thresholds for three back-to-back years.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The IRS has issued new filing requirements for any taxpayer filing an IRC Section 41 Research & Development tax credit claim. The Service’s overall goal is to reduce the large number of audits on the R&D claims and instead, determine upfront if such a claim should be accepted or whether further review is required before approval. While the R&D tax credit and IRC Section 41 has been available for decades, this is the first time in quite a while where the Service is asking for specific and detailed information on the actual tax filing. Releasing Chief Counsel Memorandum 2021410F guides taxpayers in providing information that they must include for research credit refund claims. The information that the taxpayer must include is:

  • A list of all business components that relate to the claim
  • For each identified business component, describe all research activities performed
  • Names of all individuals who performed the qualifying activities; as well as information everyone sought to discover
  • Qualifying costs that must include employee wages claimed
  • Qualifying supply costs claimed
  • Qualifying contract research costs claimed
  • A declaration signed by the taxpayer under the penalties of perjury verifying the facts provided are accurate

While it may seem like a lot of documentation to provide for something as straightforward as a tax credit, well-established R&D tax credit claims normally have all this information on hand. The only difference to this directive is that the Service is asking for this information to accompany the tax credit filing. Many of these requirements are already found on Form 6765, as well as the taxpayer signing their individual or corporate/partnership tax returns to serve as their declaration that the facts provided are accurate.

Many states who allow for R&D tax credit claims require a great deal of supporting documentation to accompany a state claim. Pennsylvania for example has evolved its filing from a paper form to an application, to now an online application process that requires multiple items of supporting documentation. Connecticut, among other states, follows this line of thought as well.

It is important to note that the grace period for this filing requirement is January 10, 2022. Meaning, this requirement goes into effect January 11, and all research claims filed after that date must adhere to these new filing requirements. The IRS also promises to provide further details related to the new filing requirements. Once the grace period expires, there is a one-year transition period when the taxpayer has 30 days to perfect their R&D tax credit claim before the IRS makes a final determination on the claim.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

While Curry is confident in torching the net with every shot he makes, not all of his made baskets are treated equally from his perspective. Curry and his personal trainer, Brandon Payne, worked hard this past off-season to ensure precise and efficient shots. Payne utilized technology to track the ball’s movement as Curry practiced his shooting, and converted it into data they were able to analyze and leverage to improve Curry’s already lethal shooting skills.

In order to quantify Curry’s free throws, the technology used tracked the ball’s arc as well as how close to the center the ball entered the basket. Payne and Curry agreed that if the ball did not drop through the middle, it was a failed attempt. These standards also applied to Curry’s moving shots, as if he were up against a defender as well. So far the results speak for themselves, with Curry currently leading the league in scoring, averaging 30.4 points per game.

Just as many businesses take time to perfect new processes, Curry had to do the same. Curry and his team of trainers are able to identify bottlenecks and measure efficiency from basket to basket to ensure he is putting his best foot forward, as well as maintaining peak performance and synergy with the team. Curry comments that if one does not have the kind of stimulation within workouts and practices that Payne provides, then they become mundane and chore-like.

With an ever-expanding surplus of information, it is increasingly difficult for organizations to decide where to focus their efforts to deliver meaningful results. Here are three key things to remember;

  • Data and metrics can be too much. Be sure to talk with your advisors to determine what you should be focusing on, such as Curry and Payne choosing to analyze the arc and the location of the ball going into the net.
  • Like basketball, business is a team sport. As Curry knows, success depends on both individual performance and the overall performance of the group. Variations on this type of analysis can be applied to businesses when you use metrics to identify bottlenecks, measure efficiency, and increase accountability across key departments and personnel.
  • Strategic partnerships are everything. Curry and Payne worked with expert data, analytic software, and hardware providers to help them succeed, and you should too. Choosing the right advisory team can mean the difference between simply spinning your wheels and growing your business to its full potential.

With over 25 years of experience consulting with industry-leading companies, Talley LLP is committed to providing clear, knowledgeable, and applicable financial data and analysis solutions, enabling management to intelligently track performance, progress, and profits. To determine whether your business is taking advantage of all the metrics available to make the most informed decisions for future success, schedule a time to talk with us today.

Lawmakers are asking to curtail the international tax changes included in the House Ways and Means Committee portion of a sweeping tax and spending bill written last month. This plan included increasing the minimum tax on overseas earnings for U.S. companies to 16.56%, from 10.5%. In a letter to Speaker Pelosi, Tom O’Halleran of Arizona, Henry Cuellar of Texas, and Lou Correa of California, agree that the U.S. needs to not make its move before other global legislations implement a new Global Intangible Low-Taxed Income (GILTI) regime. They also do not want the U.S. to be responsible for new rules such as country-by-country regime. Lawmakers believe that the new legislations in the Ways and Means draft could allow other countries to take advantage of them, which may cause harm to U.S. companies.

Differing arguments. While the broad outline of the agreement has the backing of nearly 140 countries worldwide, the technical details still need to be written. The global corporate tax deal, endorsed by finance ministers from the Group of 20 nations this week, calls for a 15% minimum but allows countries to have higher rates. Eliminating the international measures of the Democrats’ tax plan would scale back the revenue that lawmakers
are hoping to use to fund a major expansion in domestic social programs. The GILTI rate increase and related international changes would raise roughly $300 billion in new tax revenue, according to estimates from the Joint Committee on Taxation.

By excluding international tax changes, there is a risk of not being able to pass a higher global minimum tax in the future for the Democrats because they may not control Congress after the 2022 midterm election. House Ways and Means Committee Chair, Richard Neal, has made the opposite argument to that of the three moderates — saying that having a high-level international agreement gives the U.S. enough certainty to go forward with its own plans. Many Republicans have said they oppose increasing the offshore rate.

Neal’s proposal for a 16.56% rate is a pared-back version of Biden’s earlier tax plan, which called for a 21% rate. Democrats are hoping to pass a multi-trillion-dollar tax and spending bill by the end of the year. The bill is largely funded by tax increases on corporations and the wealthy. Narrow margins in both chambers mean that Democrats need the votes of all their caucus members in the Senate and can only afford to lose three in the House.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

President Joe Biden recently conceded that lawmakers will need to scale back the economic agenda to get it enacted. This means that Democrats are now at risk of settling for a less generous expansion of the state and local tax deduction than they previously hoped. In a closed-door meeting with House Democrats, Biden said the cost of the tax-and-social-spending package could potentially end up as a range around $2 trillion, down from a previously planned $3.5 trillion top-line figure. this means lawmakers will likely have to decrease the cost of nearly every spending program and tax credit in the legislation, including a planned increase in the state and local tax, or SALT, write-off.

The Joint Committee on Taxation, Congress’s nonpartisan scorekeeper, estimates that a single-year repeal would cost nearly $89 billion, or $178 billion for two years. Democrats advocating for a bigger SALT deduction had been pushing for a two-year repeal of the $10,000 cap on the tax break. This costly tax break that largely benefits high earners in New York, California and New Jersey is likely to pit lawmakers in both chambers who want to repeal the cap against progressives who are advocating to keep their preferred programs in the bill, including free community college tuition and funds for childcare and climate-related spending.

Negotiations loom. Representative Jimmy Gomez believes that it’s likely that SALT changes will be in the final bill, but lawmakers must negotiate the broader spending totals to figure out how much money can be spent on the move. With Biden’s comments to Democrats to greatly reduce the amount of spending on education, climate programs and health care in the package, Democrats set off a race to figure out how to salvage their preferred proposals.Some options for scaled-back SALT-cap changes include repealing the $10,000 cap for a single year instead of two, raising the deduction limit, or putting income restrictions on who can claim the write-off.

Representative Tom Suozzi, leader of the effort to repeal the SALT cap, believes that Biden’s tax and spending bill will pass with a SALT-cap repeal embedded within.

House Ways and Means Chairman Richard Neal has been responsible for finding a solution that satisfies both the SALT-break advocates and the progressives. Though he is still working on the specifics, Neal pledges to include SALT changes in a final bill.

Talley’s team of tax professionals provides comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

The tax plan taking shape in Congress will erase the long-standing benefit of keeping life insurance in certain trusts, by making its value subject to the 40% estate tax when the policy owner passes away. This is a tremendous change since the trusts and their assets are not currently subject to the levy. Many advisors are still suggesting that their clients splurge on life insurance. This is because advisors believe that by pre-paying a lifetime’s worth of annual premiums by January 1st, before the new curb would go into effect if approved, individuals may be able to preserve the trust’s lucrative tax benefits.

Crisis Stage. The blow to life insurance in trusts, a bread-and-butter wealth preservation strategy for decades, is one of many proposals in the emerging tax bill that takes aim at the wealthy to finance President Joe Biden’s $3.5 trillion social spending plan. The draft bill plans to raise the top individual rate to 39.8% and bump up the top capital gains rate to 28.8%. It will tax capital gains at the top ordinary rate once income hits $1 million as well as crack down on large retirement accounts and end backdoor Roth conversions. The Bill will also kill the use of grantor trusts, whether they do or do not contain life insurance. Currently, if an individual owned a $3 million home, had $7 million in retirement accounts, and had $4 million not in a trust, $2.3 million of that $14 million estate would incur the 40% estate tax, which is about $920,000. Now if it is assumed that the insurance policy is in a grantor trust, the $920,000 would instead be left to heirs. These types of savings will no longer be possible if the proposal passes.

A major impediment. Financial advisors and estate lawyers are upset with the proposal because it is common for life insurance to be held in a widely used type of trust called a grantor trust, in which the grantor retains control and pays income tax on its gains. Many benefits of these trusts include intentionally defective grantor trusts, or IDGTs, and grantor retained annuity trusts, or GRATs. Advisors say that most irrevocable life insurance trusts, or ILITs, are set up as grantor trusts, so they would be hit by the curb, too.

In obscure language, the proposal states that any assets contributed to grantor trusts come 2022 would become part of the grantor’s estate for estate tax purposes. The issue with this is that under the plan, a policyholder who pays their annual premiums for a policy that is held in a trust would be “contributing assets,” thus making the trust subject to the 40% estate levy. Wealthy individuals who want to create a future trust for their life insurance could not make their spouse a beneficiary without subjecting the trust to estate tax as well. This is due to it automatically being a grantor trust and thus would have to pay estate tax under the proposal.

The solution becomes the problem. The proposal has the potential to upend retirement planning. The idea of pre-paying premiums revolves around using outside funds, not the money inside the trust, as the latter would get caught by the proposed curb. Many are advising clients to pre-fund their premiums now by contributing cash or other assets before the new law passes so that no additional outlays are required to pay future premiums.

Flying blind. The proposed curb would hit not just the very wealthy. Many families have a life insurance policy that is often their trust’s single largest asset. For example, a person might have a net worth under the estate tax threshold but also a large life insurance policy to care for their family if they die prematurely and their income grinds to a halt. This means that when the insurance death benefit is paid, the decedent’s total assets can exceed the estate tax exemption.

One solution might involve “decanting” a grantor trust. This strategy involves “pouring” a trust’s assets into a new trust. Or a trust could pay the insurance premiums through so-called split dollar arrangements, which are common with wealthy executives. It could be set up so that beneficiaries other than a spouse would have to approve any distributions out of the trust to the spouse, but some fear that it could cause family rifts and may have gift tax implications for kids.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

While most financial advisors know that the proposed tax increases will prevent affluent investors from using trusts to pass on major wealth to their heirs, something that many, and even estate planners do not know, is that there is a separate threat to investors who use trusts to move assets out of their estate free of taxes. While the threat does not come from Congressional tax writers, instead, it comes via a nearly unnoticed sentence in an obscure Treasury Department document released by the agency early last month. In a little-noticed remark in the agency’s priority plan, the Treasury is looking at whether the IRS could “claw back” taxes on gifts that investors have made under the higher estate and gift tax exemption levels in place since 2018. The recapture would begin once those higher thresholds expire come 2026.

The Treasury item is almost completely unknown in the financial planning and wealth management industry. The decision to target sophisticated moves by the wealthy is the latest blow to tax strategies used by affluent Americans to minimize their tax bills and pass on legacies to heirs. If it becomes the rule, millions of taxpayers could face sudden outsize tax bills.

Squeeze on the Wealthy. The claw back would interact with a provision in the draft tax bill coming from the House of Representatives. That provision would not extend the higher exemptions for estate and gift taxes, instead reversing them by 2026. It would also put an end to backdoor Roth conversions. The emerging bill is now mired in a fresh fight with Republicans over debt limits. The 2017 Republican tax-code overhaul nearly doubled the lifetime exemptions to historic highs. The 2017 law said that come 2026, the limits would revert to their earlier levels, with extra for inflation, unless extended. The current draft tax bill makes clear that extension will not happen.

Clawing back the anti-claw back rule. When the exemptions were doubled nearly four years ago, it spawned a frenzy of estate planning with trusts for rich investors. It also raised a question: What would happen if someone transferred assets to the next generation while the higher exemption is in place, but then died in 2026 or later when the double threshold would no longer be in place?

Treasury appeared to answer that question in November 2019. It said that for people who give assets into trusts for their children during the years of the higher thresholds but die after those levels shrink back, it would not “claw back” from their estate any taxes on amounts transferred above the smaller thresholds. The amounts would be “locked in.”

The Treasury’s priority plan released on Sept. 9 appears to signal that an anti-abuse provision is in the works. One sentence of the plan said that it would examine whether a November 2019 rule saying no claw backs would take place would be revisited. Treasury’s plan is an outline of the top tax issues it plans to focus on over the 12 months beginning in October when the government’s next fiscal year begins.

Targeting ‘have your cake and eat it, too.’ The Treasury plans to target lifetime gifts that would use the donor’s gift tax basic exclusion amount, lifetime exclusion, while at the same time being designed so that the donor retains a beneficial interest in the gifted property. A classic example of this would be a grantor retained income trust, or GRIT. In that type of trust, the grantor transfers assets to the trust, paying taxes on it, but also keeps an income stream from the gifted property. The Internal Revenue Service has flagged trusts that give the appearance that a person is giving up control of their assets and money when they still control how the money and assets are used as potentially abusive.

‘Killing’ Grantor Trusts. The Treasury’s consideration of whether gifts that are includible in the gross estate should be exempted from the anti-claw back rule comes as lawmakers consider other curbs to trusts. The draft House bill would prevent people from using grantor trusts. Specifically, it would treat sales between grantor trusts and their owner as a sale to a third party which means it will be taxable. The measures would only apply to future trusts and future transfers.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

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