As California’s revenues are at an all-time high, Governor Gavin Newsom proposed a budget that would cut taxes while also promising to pay the health care expenses of all the state’s low-income adults who are living in the country illegally. California taxpayers already pay the health care costs for low-income immigrants 26 and younger and plans to cover people 50 and older this May are in development. Newsom’s proposal would cover everyone else starting in January 2024. Immigrant health advocates have been pushing for this since the federal Affordable Care Act took effect in 2014. Newsom’s plan, if it becomes law, would cover nearly 700,000 additional people.

It is predicted that Newsom’s budget will cost state taxpayers $2.2 billion per year to cover the cost of health care for the state’s low-income immigrants. Newsom’s tax cuts would also reduce revenue by more than $6.5 billion. Fortunately, the numbers still balance since California has a projected $45.7 billion surplus, driven by the incredible growth in tax collections from the top 1% during the pandemic. Although California has the highest unemployment rate in the country, it is on pace to collect at least $25 billion in capital gains taxes for 2021. 

The biggest tax cut would be for businesses. In 2020 California temporarily raised taxes on businesses to help offset what they thought would be a huge deficit. Instead, California posted record surpluses. That tax increase was scheduled to expire at the end of this year. Newsom wants to end it one year early, which would cost the state about $5.5 billion in revenue. The tax cut that will get the most attention is at the pump. California taxes gasoline at 51.1 cents per gallon. That tax is scheduled to increase on July 1 because of inflation. Newsom aims to halt that increase, at least for this year. Doing so would cost the state about $523 million in revenue for civil development such as roads and bridges. But Newsom says the state can cover that loss with its surplus.

Last year, California spent billions of dollars on stimulus checks, with most people getting about $1,000 in addition to the federal stimulus package. This year, Newsom wants to give $1,000 to every low-income family that has a child aged 5 or younger. The state did this last year, but families with no income were not eligible. This year, Newsom wants to also extend that money to families with no income. That would cost roughly $55 million a year. He also wants to give $1,000 to people who have come through the state’s foster care system but are still 25 or younger. That would cost an additional $20 million.

Newsom cautioned that the spending limit calculations are complex, saying the figure will change substantially by May when he updates his plan before lawmakers vote on it. Newsom’s proposal now heads to the state Legislature. Several law-making leaders issued statements on Monday praising Newsom’s plan but pledging to work with him over the next month on changes.

Talley’s team of tax and estate planning 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.

If you are happily married, healthy, and wealthy, a tax perk you should be talking about with your advisor is the spousal lifetime access trust, or SLAT. Its ability to whisk assets out of their taxable estates while still benefiting from them during retirement is a valuable benefit. However, a SLAT is not a simple add-water-and-mix move since it is easy to get the requirements wrong. That will void your arrangement and you could end up owing the IRS millions of dollars. When done right, some estate planners call it the perfect tax break for the perfect couple with the perfect lifestyle. The trusts are a form of so-called grantor trusts, in which a donor, or grantor, transfers assets but retains a degree of control. Last fall, grantor trusts were on the chopping block, now they are no longer in immediate danger. 

How SLATs work
A spouse sets up a SLAT for the benefit of their partner by transferring assets held in their name only. The idea is to transfer assets, including life insurance, into the trust so that your estate dips below the historically high federal exemption levels, currently $11.7 million and $23.4 million, above which the 40% gift and estate tax kicks in. The donor will pay tax on the trust’s taxable income when filing their personal return. A SLAT must have a trustee. That person cannot be the donor and can be the beneficiary only if their power to move money out of the trust is limited.

SLATs owe tax on the gains made since the original owner acquired them when the donor dies. This means that a beneficiary can owe big capital gains taxes when selling any of its holdings. However, there is a way around that hit: the donor can swap stock or property in the trust whose tax bill would be high for separate assets that have not appreciated as much. Meaning the low basis assets will now be a part of the donor’s estate and heirs would not owe gains on their appreciation while they were in the trust.

‘Not a personal checking account’
The donor spouse has effectively given the beneficiary spouse the assets. But the spouse who’s the beneficiary can request withdrawals from the SLAT to fund basic lifestyle needs and pursuits, like vacations, mortgages or home remodeling. Although, this is still not a personal checking account because the trusts are typically set up so that distributions are under what the IRS calls health, education, lifestyle maintenance or support guidelines. These so-called HEMS can get squishy come tax return time.

The IRS and children who are heirs can glom on to such potential abuses when the SLAT donor passes away, which causes the trust’s inner working and use to be detailed in the estate’s federal return. IRS employees read the trust document’s terms to see if a standard has been violated.

Divorce and death can ruin everything
If you get divorced, the donor spouse loses access to the trust. Because a transfer of assets into a SLAT is irrevocable, your ex continues post-marriage as the beneficiary, a likely bitter pill to swallow. A donor spouse whose partner dies can no longer access the trust. While there are certain ways a SLAT can be structured to allow money to be returned when a spouse dies and allow a new spouse to become the beneficiary, they can prove to be complicated.

Things get turbocharged when each spouse creates a SLAT for the benefit of the other. But even assuming our happy and healthy married couple stay that way, there are pitfalls to that twofer. Under what’s known as the reciprocal trust doctrine ban, the IRS deems to be abusive arrangements when two identical trusts are used by the same married couple to avoid estate taxes while remaining in the same economic position as beneficiaries of the trusts.

Talley’s team of tax and estate planning 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.

One obstacle taxpayers are facing as they get ready for this coming filing season is the potential for several tax provisions to expire before Congress can act on them. Currently, it is anybody’s guess whether some of them will in fact be allowed to expire without at least being retroactively renewed. 

The following are a few tax provisions set to expire at year’s end:

  • The Recovery Rebate Credit. Currently, there are no proposals to extend this credit. Many speculate that it will not be extended, even with the recent COVID-19 surge.
  • The paid sick and family leave credit. While this credit has been extended several times, there has not yet been a proposal to extend it currently.
  • The Enhanced Child Tax Credit. This credit expired at the end of 2021, but extensions are proposed in the Build Back Better bill. Unlike the economic stimulus payment, where if you get more than you are entitled to you can keep it, with this credit you have to repay any amount in excess of what you were entitled to.
  • The Employee Retention Credit. This was extended to the end of 2021 but then was retroactively made to expire on Sept. 30, 2021. This retroactive expiration has created problems for employers that were already reducing their payroll tax payments, assuming that the credit would be available. Looking at notice 2021-65, it told employers that if they repaid reduced payroll taxes by Dec. 31, 2021, they would not be assessed a penalty, and cannot continue to reduce their payroll taxes for the quarter after Dec. 20, 2021.
  • The enhanced Earned Income Tax Credit for childless individuals. This was enacted in March 2021 as part of the American Rescue Plan and scheduled to expire at the end of 2021.
  • The premium tax credit under the Affordable Care Act for individuals receiving unemployment compensation. There has been no talk of extending this credit.
  • The enhanced child and dependent care credit, and the enhanced employer-provided dependent care assistance exclusion. The American Rescue Plan enhanced both for 2021 but, neither appears to be extended in the Build Back Better bill.

Several provisions are specific to charitable contribution deductions:

  • The charitable deduction for non-itemizers. Taxpayers claiming the standard deduction may claim a deduction for 2021 of up to $300, or $600 for married filing jointly. 
  • The enhanced itemized charitable deduction. For itemized charitable deductions, the adjusted gross income limit was raised from 60% to 100% for 2020 and 2021. 
  • The enhanced corporate charitable deduction. The enhanced limit of 25% of taxable income is scheduled to revert to a 15% limit.

While the following list of regularly expiring provisions is shorter than in previous years, several expiring provisions were extended last year for longer periods of time, and a few were made permanent. Such as:

  • The treatment of mortgage insurance premiums as qualified residence interest.
  • The credit for health insurance costs of eligible individuals.
  • The credit for nonbusiness energy property.
  • The credit for alternative fuel cell motor vehicles.
  • The credit for newly qualified fuel vehicle refueling property.
  • The two-wheel plug-in electric drive vehicle credit.
  • Several business-focused energy credits.
  • Tax breaks related to Indian reservations.
  • The mine rescue team training credit.
  • The classification of certain racehorses as three-year property

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.

Elon Musk, the world’s richest person and CEO of Tesla Inc., could face a tax bill in excess of $10 billion for 2021, if he exercises all his options due to expire next year. While it is hard to say whether that would be a record since the Internal Revenue Service does not publicly reveal individual tax filings, it would certainly rank as one of the largest payments of all time. Not surprising to many who follow Musk, a $10 billion payment is just a fraction of his overall wealth. His net worth is a quarter of a trillion dollars on the Bloomberg Billionaires Index, having risen by $95 billion so far this year.

Elon Musk’s exercise of an unusually large number of options is boosting his claim that he will pay more taxes this year than any other American in history, as he spars with Senator Elizabeth Warren over wealth inequality. Musk’s latest Twitter spat with the Massachusetts senator began after Warren blasted the Tax Code for being “rigged” and asked to change it “so The Person of the Year will actually pay taxes and stop freeloading off everyone else.” In a reply, Musk tweeted, “If you opened your eyes for 2 seconds, you would realize I will pay more taxes than any American in history this year.”

Musk faces the unusually high tax bill after exercising almost 15 million options and selling millions of shares to cover the taxes related to the transactions. That was following a Twitter poll last month where he asked whether he should sell 10% of his stake in Tesla. Musk may end up saving a couple of billion dollars in capital-gains taxes he would have owed to California because of his move to Texas.

A report in June stated that Musk paid little income tax relative to his outsize wealth. He has pushed back against this characterization, saying he does not draw a salary from either SpaceX or Tesla, and pays an effective tax rate of 53% on stock options he exercises. He added that he expects that tax rate to increase next year.

Musk is not the only billionaire likely to pay a big tax bill this year. Many top U.S. billionaires have more than doubled their stock sale activity this year, as the richest Americans unload shares after a run-up in stock valuations and before a potential tax hike in 2022. So far this year, Jeff Bezos, the second-richest person in the world, has sold more than $9 billion in Amazon stock, while Mark Zuckerberg has liquidated $4.5 billion in shares of Meta Platforms Inc. Both men are likely to pay a lower tax rate than Musk, partly because their sales are designed to fund charitable endeavors, which allow tax deductions.

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.

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.

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