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New
Law=Larger Refunds?
The new tax
law enacted in 2003 provides many opportunities for taxpayers to increase
their refunds (or lower their tax bills). Primarily, this results from the
reduction of tax rates retroactively to January 2003; withholding taxes
were not reduced until July 1, 2003. The top tax rate, previously 38.6%,
fell to 35%; the 35% rate was reduced to 33%; the 30% rate was cut to 28%
and the 27% rate fell to 25%.
The long-term capital gains rate was reduced
from 20% to 15%. This 15% rate also applies to certain
"qualified" dividends (i.e. generally from stocks and stock-based
mutual funds), which were previously taxed at the ordinary income rates.
These rate reductions should lead most investors to reconsider their
investment strategies.
Families may also benefit from some of the
tax law changes-the standard deduction for married couples who do not
itemize was increased to $9,500, twice the amount for single filers and up
from $7,850 last year. Also, a child tax credit of $1,000 (increased from
$600) is available for each qualifying child under the age of 17 to joint
filers with adjusted gross income of $110,000 or less.
Read more...
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Greetings!
Welcome to the second edition of my tax newsletter- don't worry-I will not
keep a running count in future issues!
As if anyone needed to be reminded, we are approaching
various filing deadlines. It is important not to overlook valuable tax
deductions and/or tax strategies, whether for 2003 or 2004-the stress of
racing the deadline is no excuse! A few helpful hints...
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· NYS "Line
56"-Enforcing the Tax on Out-of-State Purchases
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 In 2003, NYS
enacted into law a provision that requires unpaid sales and use tax to be
included on the taxpayer's NY personal income tax return. This law
resulted in the addition of a single line--line 56--to the NY resident
income tax return (not to mention 5 pages of instructions). As a result,
each taxpayer must report and pay the sales/use tax on products purchased
out-of-state (either in person, by catalog, or through the internet) that
have been shipped or brought into New
York. Although New York
residents have always been responsible to pay this tax within 20 days
from the time purchased property is brought or delivered into New York, such tax
had to be reported and paid on a "voluntary" basis.
The
instructions for the resident income tax return state that if a taxpayer
does not owe such sales/use tax, a "zero" must be entered on
line 56; otherwise, the statute of limitations on assessing this tax will
not run. If you cannot determine an "exact" amount owed, the
instructions provide various charts, including a tax based on one's
adjusted gross income, to determine the reportable sales/use tax amount.
This provision is a serious matter that should not be overlooked by the
taxpayer and his/her tax advisor. The NYS Department of Taxation has
threatened to assess this tax, if applicable, by conducting routine and
special audits.
Read more...
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· S Corporation
Owner Characterized as Employee
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The IRS continues to attack S corporation owners who attempt
to treat corporate payments as distributions paid from earnings and
profits and not as wages.
While it
is tempting for an owner to try to avoid payroll taxes, namely FICA and
FUTA, on corporate distributions, the owner is usually performing
services by managing the business operation; thus, he/she will have
difficulty avoiding employee status. Therefore, it is recommended that an
S corporation owner, unless truly a passive investor in the business,
receive a "reasonable" salary for services performed. It is not
necessary that all corporate profits distributed be treated as salary. As
long as the salary amount is equivalent to what the corporation would have
to pay an unrelated third-party to perform similar services, then any
remaining profits can be properly distributed to the shareholder without
being treated as wages subject to the various employment taxes.
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·
Why Use a Life Insurance Trust?
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Life insurance is usually purchased to create an estate that
will provide sufficient cash to family members to sustain an accustomed
standard of living should the insured die unexpectedly. Wealthy
individuals purchase insurance to provide a fund to satisfy their
estates' needs for liquidity. One may also buy insurance to establish a
wealth replacement fund to replace property transferred to a charitable
remainder trust.
A very
basic estate planning strategy is to either transfer a current life
insurance policy to a life insurance trust, or preferably, have such a
trust purchase the policy from its inception. By utilizing a life
insurance trust, the life insurance proceeds may be excluded from the
insured's estate, reducing potential federal and/or state estate taxes.
Life insurance held in trust will be included in the decedent's estate
only if the grantor/decedent had "incidents of ownership" over
the policy, or the proceeds of the policy are required to be used to pay
taxes and expenses of the estate of the insured. Thus, the trust must be
irrevocable and the grantor must not be the trustee or the beneficiary of
the trust. Further, life insurance transfers made within 3 years of death
cause inclusion of the proceeds in the grantor's estate; hence, it is
preferred that the trust purchase the policy, if possible.
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