Posts in the industry trends category
High profile billionaire, Warren Buffett, has been quite vocal in arguing that the rich should be taxed more. He sat down with Tom Brokaw back in 2007 on the NBC Nightly News discussing this very matter and, later, on August 14, 2011, The New York Times published an op-ed headlined “Stop Coddling the Super-Rich” written by none other. It was this editorial that ignited a focus on the tax treatment of millionaires. In it, Buffet speaks of his staff paying more in taxes, as a percentage of income, than he does. According to his calculations, his 2010 tax rate was 17.40% while his staff’s average was 36%.
To add to the momentum, when Mitt Romney, presidential candidate, recently released his income tax returns to the general public, they revealed a tax rate of 13.90%, far less than his $21.70 million income would suggest.
How can this be? Certain investment income, including long-term capital gains and qualified dividends, is subject to a maximum tax rate of 15 percent. In the extreme case, if all of a taxpayer’s income is derived from these sources, their overall tax rate could be 0 or 15%, depending on the amount of income.
As a result, the President’s latest tax proposal is affectionately coined the Buffett Rule. The proposal would require those with income in excess of $1 million pay at least 30 percent in taxes. Rather than raising the tax rates on long-term capital gains and qualified dividends, the proposal would create a new 30 percent alternative minimum tax (AMT) for the high earners.
So, here we have two very successful individuals who are taxed, almost exclusively, at the 15% rate. Are they the exception or the rule for America’s highest earners? According to 2009 data released by the Internal Revenue Service’s Individual Returns Analysis Section, those with income in excess of $1 million are paying, on average, 24.40%. That is actually up from 23.30% in 2008 and with the exception of those making $500,000 – $1,000,000, there is not another income level paying, on average, over 20%. Further, of the 140.50 million tax returns filed for 2009, the average tax rate was 11.40%.
So, what do all of these numbers mean? Generally, the more you make, the more you pay. On a lot of levels, Buffett and Romney are the exception rather than the rule. It is the nature of their business rather than the massive income of their business that allows for favorable tax treatment. What can we learn from this?
From a planning standpoint, because we’re in an environment of hyper-gridlock, don’t expect to see the President’s proposal passed into law. However, if Congress does not change the law, the expiration of the Bush-era tax cuts will boost the maximum tax rate on such investment income to 25 percent in 2013. What tomorrow brings is anybody’s guess. For now, taking advantage of the current rates may make good sense, whether you make $1 million a year or not.
One would think that the “S” in S corporation stood for stylish with the tremendous interest in this particular entity type. As an attorney friend of mine put it, everyone wants one but they don’t know why.
This demand is, at least in part, a result of the word on the street that says you can pay lower taxes when structured as an S corporation as compared to other entity types such as partnerships or limited liability companies (LLCs).
S corporation shareholders are taxed on a) compensation paid and b) business income. Compensation is subject to payroll taxes while business income is not. Shareholders often take business income in the form of dividend distributions which, generally, are not taxed (because they are being taxed on income that, at least in theory, should exceed distributions to maintain positive cash flows). Partnership and LLC income, in comparison, is fully subject to payroll taxes (up to the Social Security limits).
The too often attempted strategy, then, is to set compensation low in order to minimize payroll taxes. However, governing authority requires S corporation shareholders to be paid a reasonable compensation. Factors that play into reasonable compensation include: nature of the S corporation’s business; employee qualifications, responsibilities, time and effort; compensation compared to nonshareholder employees; comparable business pay for similar services; compensation as a percentage of corporate profits; and compensation compared with distributions.
This strategy has been much abused. In 2009, a Government Accountability Office (GAO) report to the Senate Committee on Finance revealed that in 2003 and 2004 combined, S corporations had underreported their shareholder compensation by $24.6 billion.
Clearly, a hot issue – the IRS has heightened audit frequency on S corporations, the GAO has posed several alternatives for S corporation reform and Congress has attempted to pass legislation that would subject all undistributed income of professional service S corporations to self-employment tax.
As the governing authorities continue to study and approach a resolve with S corporation shareholder compensation, the word on the street is bound to change.
We are often asked what is wealth management and how does it work. Wealth management is a holistic investment process that integrates the long-term goals of an individual with financial solutions, using a planning-based, consultative approach.
While not all wealth managers are created equally and, with that, our processes differ, McKinney Capital Management’s process is as follows:
- Discovery Meeting: This is an initial “fact finding” meeting involving an extensive interview in order that we may determine the prospective client’s financial needs and goals, values, risk tolerance, and past investment experience.
- Plan Development: We take the information gathered in the discovery meeting and develop a plan that is designed to achieve the prospective client’s financial needs and goals.
- Plan Review: In this second meeting, we review the plan with the prospective client and their significant other, if any. This meeting provides an overview of the plan, including how (if followed) it should reach the desired outcome.
- Plan Implementation: It is at this point that a client relationship is established and plan implementation begins.
- Ongoing Review: We continually monitor the portfolio and plan, communicating with our clients regularly and making changes as needed.
While wealth management is not for everyone, it is for those who are very serious about what they have worked so hard for. If that describes you, we invite you to contact us. Our discovery meetings cost you nothing more than your time which is one of your most important assets of all.
Nashville has done it again! In a report by Accounting Principals, an accounting and finance staffing provider, using data from the Bureau of Labor Statistics, Nashville ranked 6th in top cities to find a job in the financial services industry. Topping the list of seven were: San Francisco, Denver, Paramus (N.J.), Chicago, Portland, Nashville and Miami.
A study conducted by the University of Chicago Booth School of Business found small businesses whose books are audited by a CPA save an average of $6,900 annually for every $1 million in outstanding debt due to more favorable interest rates. In addition, a joint study last year by Michigan State University and Indiana University found small businesses with audited financial statements were significantly less likely to be denied credit from banks.
The House of Representatives on Thursday by a vote of 277–148 passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, HR 4853, which would postpone the sunset of the 2001 and 2003 tax cuts, reduce the estate tax, extend a large number of expired provisions, and extend unemployment benefits. The bill now goes to President Barack Obama for his signature, which is expected soon.
The House passed the Senate’s version of the bill without amendment. Prior to the vote on the bill, the House rejected, by a vote of 194–233, a motion that would have stricken the estate tax provisions in the bill and replaced them with an estate tax provision providing for a 45% rate and a $3.5 million exemption.
The bill has provisions covering the estate tax, expiring tax cuts, expired tax provisions and an alternative minimum tax (AMT) patch.
The bill postpones the scheduled sunset of the lower tax rates introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, PL 107-16); those rates will now continue through 2012. The bill also continues the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (PL 108-27) through 2012.
The EGTRRA’s repeal of the itemized deduction phaseout and the personal exemption phaseout are extended by the bill for two years.
For 2011 only, the bill reduces the rate for the Social Security portion of payroll taxes to 10.4%, by reducing the employee rate from 6.2% to 4.2% (the employer’s portion remains at 6.2%).
The bill includes an AMT patch for 2010 and 2011. For 2010, the AMT exemption amounts will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. For 2011, the amounts will be $48,450 and $74,450, respectively.
The bill extends the 100% bonus depreciation for business property acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012 (or before Jan. 1, 2013, in the case of certain property). The bill also sets the expensing limitation under IRC § 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. The bill then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.
The bill temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).
The bill also extends a large number of expired or expiring provisions, including:
- The increased standard deduction for married taxpayers filing jointly, scheduled to expire after 2010, would continue for two years;
- The $1,000 child tax credit amount would continue for two years, instead of reverting to $500;
- The increased starting and ending points for the earned income credit would continue for two years;
- The $3,000 amount for the child and dependent care credit, which is scheduled to revert to $2,400 after 2010, would continue for two years;
- The American opportunity tax credit would continue for two years;
- The temporary 100% exclusion of gain from the sale of certain small business stock under IRC § 1202, enacted by the Small Business Jobs Act of 2010, would be extended through 2011.
Please consult with your tax professional to learn more about how this bill may affect you.
If you are like me, you may find it hard to believe that Thanksgiving has past and Christmas is only weeks away. This has, without question, been the fastest year of my life. I’m guessing December will be no different. Before we know it, we will be erroneously dating everything 2010. And as if there wasn’t enough to think about in December, lets not forgot that this is also the season to act on tax reduction strategies.
Here are a few basic ideas for you to consider.
- Give it away. To charity, that is. While the true motive behind charitable giving should never be to reduce your tax bill, the Code does promote charitable giving by providing a deduction on Schedule A for the amount you give to a qualifying charitable organization.
- Fund retirement. Many retirement plans give you until the tax filing deadline to fund your retirement accounts in order to take the deduction on your return. Unless you utilize a Roth IRA, most qualifying retirement contributions reduce taxable income. Roth IRAs, on the other hand, do not provide a current deduction but do allow qualifying distributions to be withdrawn tax free.
- Take credit. There are a multitude of credits available to the taxpayer. Some more common examples include child and dependent care credits, education credits, child credits and residential energy credits. There are a number of credits available to business owners as well.
- Time it. When we know that tax rates are going to go up or down, timing the event that creates a deduction, credit or income is critical in optimizing your tax position.
- Harvest losses. If you are sitting on investment losses, consider selling off positions. Doing so will allow up to a $3,000 reduction in income.
Just like a fingerprint, tax positions and strategy are unique to the individual. We strongly encourage you to speak with your tax advisor prior to taking any action.
In a revenue ruling (Revenue Ruling 2010-25) released Thursday, the IRS ruled that mortgages of up to $1.1 million may be deductible. Prior to this ruling, the interpreted limit was $1.0 million. Therefore, such homeowners may have an additional $100,000 in eligible mortgage indebtedness.
The health care reform enacted earlier this year originally required employers to include cost of employer-sponsored health care coverage on employee Form W-2 for tax years starting on or after January 1, 2011.
The IRS decided that employers need additional time to make the necessary changes to their payroll systems and procedures to comply with this rule. On Tuesday, the IRS issued a notice (Notice 2010-69) providing interim relief to employers. Under the notice, employers are not required to include employer-sponsored health care coverage on Form W-2 for 2011 although they may elect to. Employers who choose to report 2011 health care coverage cost to their employees will do so in Box 12 using code DD. The IRS has posted a draft 2011 Form W-2 on its site.
This is the first of, perhaps, several changes to the legislation. Stay tuned.
Good news one day, bad news the next. Experts talk theory, politicians point blame and talking heads do what they do best. Everyone reacts.
How should we react? That is the real question. Here are a few ideas for you to think about.
- Don’t look. Watching the markets every day is unhealthy. One day rarely has a material impact in the overall scheme of things. The negative emotions as a result of a brief downward market are avoidable. For that matter, the positive emotions as a result of a brief upward market may be unwarranted.
- Think long term. Many of you will not need to tap into your (retirement) savings at all for several years. For those who are taking distributions, chances are you still have some good years ahead of you. Time is on our side.
- Avoid prophets. Be very skeptical of anyone, regardless of what their name is and what their track record indicates, who makes claims on the future. Sure, we have history, empirical data, and some great minds out there but no one is capable of predicting the future. Run from these people.
- Diversification still works. It doesn’t work all the time, as with a market crash, but it does work over time. Are you adequately diversified considering your comfort level with risk and where you are at in life?
- Deleverage. Cut back on spending and ramp up on debt reduction. Not only are you doing what is prudent, you are providing yourself a guaranteed rate of return on your money which happens to be the interest rate on the debt you are paying down. You might be hard pressed to find this rate of return elsewhere.
Naturally, these ideas cannot be all-inclusive. It is my hope, however, that they will offer you some comfort and a little logic as we continue to navigate these economic tides.