BUILDING RELATIONSHIPS | DELIVERING SUCCESS ®

New changes to Maryland Section 529 investment plans

New changes to Maryland Section 529 investment plans

Jan 4, 2017

If saving for college is on your list of New Year’s resolutions, new laws in Maryland will make 2017 a great year to start. Two new changes to Maryland Section 529 investment plans will make them even more attractive vehicles to save for college expenses. A Section 529 plan is created by making contributions to the Maryland College Investment Plan (which is managed by T. Rowe Price) on behalf of a beneficiary. The beneficiary can be anyone who will be able to use the money towards qualified higher education expenses—a child, grandchild, friend, or even the account holder. Earnings on the contributions grow tax-deferred (at both federal and Maryland levels) and will also be free from federal and Maryland taxes on withdrawal, provided that the money is used for qualified education expenses. In addition, taxpayers can take a subtraction on their Maryland income tax returns of up to $2,500 in contributions per beneficiary ($5,000 for married filing jointly if each contributes $2,500). Amounts contributed in excess of that amount can be carried forward and used for up to 10 years. The first change affects who can take the subtraction for contributing to a plan. Until recently, only the account holder could take the subtraction. Beginning July 1, 2016, a subtraction is available for anyone making a contribution to plan, even if they are not the account holder of the plan. For example, parents could establish a plan for their child, and the subtraction would be available not only to them, but also to any other relatives and friends who would contribute. A second change affects the benefits available to account holders who make plan contributions. As an alternative to the Maryland income tax subtraction, the College Affordability Act of 2016 provides that the state will make a $250 “matching” contribution to for qualifying accounts. In order to qualify: The account must be established after December 31, 2016; the qualified beneficiary must be a Maryland resident; the account holder must have had Maryland taxable income in the previous tax year of no more than $112,500 ($175,000 for a married couple filing a joint return); the account holder must submit an application between January 1 and...

IRS Takes Aim at Valuation Discounts for Family Controlled Entities

IRS Takes Aim at Valuation Discounts for Family Controlled Entities

Sep 26, 2016

For years, the transfer of family-owned entities and the use of valuation discounts such as those for lack of control and marketability have been a staple of the estate planning process. These discounts allow value to be transferred from one individual to another with a reduction from the pro-rata value of up to 40% in some cases. Generally, these discounts are the result of strict verbiage in the family controlled entity’s organizational documents. The IRS has been lobbying to have laws implemented that reduce or abolish the usage of these discounts when family members effectively retain control of a company. Although these congressional proposals were never passed into law, there are currently proposed changes to the IRS regulations contained within IRC §2704. Historically, IRC §2704 has presented strict guidelines regarding what attributes can and cannot be considered when valuing an interest in a family-owned entity such as transfer, distribution, voting, and liquidation restrictions. However, in many cases valuation specialists were still able to consider some of the attributes of the interest as stated in the governing documents if they were not overly restrictive or onerous. Under the new proposed regulations, the ability to rely on these attributes to justify an impact on value would significantly change if the family member owners of the entity have the ability to alter these attributes. Essentially, the new regulations require a valuation specialist to ignore certain restrictions that would limit control or marketability and in some cases, require the valuator to make certain assumptions. The major changes under the proposed regulations are as follows: New 3-Year Lookback Period. Transfer within 3 years of a decedent’s date of death may be added back to the estate for purposes of determining control and marketability; Change in the Definition of Control. Control may be defined by either vote or value; Consideration of Family Control. The determination of control will no longer be based on the interest valued if the family still retains control over the entity. It will be assumed that the remaining family could adjust the attributes of a specific interest and therefore the interest’s attributes are to be ignored; Disregarded Restrictions Expansion. Any onerous restrictions beyond what would exist...

Pennsylvania Subjects Digital Goods to Sales/Use Tax and Establishes a Tax Amnesty Program

Pennsylvania Subjects Digital Goods to Sales/Use Tax and Establishes a Tax Amnesty Program

Aug 24, 2016

On July 13, 2016, Pennsylvania Governor Tom Wolf (D) signed into law H.B. 1198, 2015-2016 Reg. Sess. (Pa. 2016), which broadens the sales and use tax base to include digital goods (whether digitally or electronically delivered, streamed, or accessed), and includes provisions that require the Department of Revenue to revise the tax due upon review of an amended corporate tax return. In addition, H.B. 1198 makes various changes to the Bank and Trust Company Shares Tax, establishes a 60 day tax amnesty program, and amends and creates several tax credits and incentives. Sales/Use Tax on Digital Goods Effective as of August 1, 2016, H.B. 1198 broadens the sales and use tax base to include digital goods whether digitally or electronically delivered, streamed, or accessed. Specifically, H.B. 1198 defines tangible personal property to include video, photographs, books, music, games, canned software, applications (or “apps”), satellite radio service, and any other taxable tangible personal property digitally or electronically delivered, streamed, or accessed. These items, including updates, support, and maintenance, are subject to tax whether purchased by subscription, singly, or in any other manner. Previously, the Department had administratively taxed canned software accessed electronically. Taxpayers should consider updating their sales and use tax systems to collect the appropriate tax on sales of digital goods beginning August 1, 2016. In addition, taxpayers should assess whether use tax is due on a purchase of a digital good where no sales tax has been paid. Tax Amnesty Program H.B. 1198 requires the governor to establish a 60 day tax amnesty program for a period ending no later than June 30, 2017. In addition, H.B. 1198 requires the Department to develop and publish guidelines for the program within 60 days of July 13, 2016. The amnesty program applies to any tax administered by the Department and to liabilities delinquent as of December 31, 2015, including a liability related to an unfiled return. H.B. 1198 imposes a 5-percent non-participation penalty. The amnesty program entitles a participating taxpayer to waiver of all penalties and 50 percent of interest and a limited look back period for any unknown liabilities due prior to January 1, 2011. However, the amnesty program requires the taxpayer to file...

IRS Extends Deadline for WOTC Filings (Again)

IRS Extends Deadline for WOTC Filings (Again)

Aug 1, 2016

Employers who wish to increase workforce diversity and benefit disadvantaged workers can get a significant tax credit for their efforts. The work opportunity tax credit (WOTC) is a credit that is available to businesses that hire members of “targeted groups,” generally employees with economic or physical disadvantages. The following are targeted groups: Unemployed veterans, recipients of various government assistance programs (TANF, SSI, and SNAP), residents of designated areas who meet certain age criteria, disabled individuals, and ex-felons. The amount of the credit is based on a percentage of wages paid, with the maximum allowable credit ranging from $1,200 per employee for summer youth employees residing in designated areas to $9,600 for certain qualified veterans. Although the signing of the PATH Act in December 2015 resolved many uncertainties regarding 2015 tax filings, it also left some unanswered questions. One of those questions concerned the WOTC, which had actually expired at the end of 2014 before Congress retroactively extended it through December 31, 2019. A significant prerequisite for taxpayers wishing to claim the credit is the filing of Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This form is generally due no later than 28 days after the eligible employee begins work. When the PATH Act retroactively extended the credit to the beginning of 2015, a question arose as to how employers should file the necessary forms for employees who had already been hired before the credit was extended. In March, the IRS announced that employers would be granted an extension of time to file the Form 8850. Recently, the IRS announced an additional extension of time: For employees beginning work between January 1, 2015 and August 31, 2016, the filing deadline is moved to September 28, 2016. In addition to extending the credit, the PATH Act added “long-term unemployment recipients” as a new targeted group. If an employee was hired from this group between January 1, 2016 and August 31, 2016, the filing deadline is also September 28, 2016. Additional information on the credit is provided by the IRS at https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit-1. Employers who are interested in learning more about this opportunity should contact their Hertzbach Tax Advisor at 410-363-3200 or 800-899-3633....

Foreign Compliance – June 30 Deadline for FBAR

Foreign Compliance – June 30 Deadline for FBAR

Jun 6, 2016

With June filing deadlines approaching for Americans living abroad, the IRS has been reminding taxpayers to consider their U.S. filing requirements. U.S. citizens or nonresident aliens who are living or traveling abroad must generally file tax returns in the same manner as those living in the U.S. The U.S. assesses taxes on worldwide income of taxpayers. Certain significant benefits are available to taxpayers with foreign sources of income, such as the foreign earned income exclusion and the foreign tax credit, but these are only available to taxpayers who properly file their returns. An automatic two month filing extension is granted to individuals who were considered to be living outside the U.S. on the regular tax due date, meaning that these returns are due by June 15. A second important approaching date is the June 30 deadline for filing FinCEN Form 114, also known as FBAR. This form is required for individuals who have a financial interest in or signature authority over foreign financial accounts during the year, if the total value of those accounts exceeded $10,000 at any point during the year. Individuals holding such accounts or other foreign financial assets may also need to file IRS Form 8938 if the balances exceeded certain thresholds. The deadline for FBAR cannot be extended, and the penalties for failing to file can be severe, so taxpayers are urged to consider their need to file as soon as possible. Please call your Hertzbach tax advisor with any questions or concerns at 410-363-3200 or 800-899-3633. We look forward to speaking with...

Last Minute IRA Contributions to Reduce Income Tax

Last Minute IRA Contributions to Reduce Income Tax

Mar 15, 2016

Did you think that the window of opportunity was closed for 2015 tax planning? It’s not too late! If you have not already done so, making a 2015 contribution to your retirement account is an excellent way to reduce your income tax. Contributions must be made by April 18, 2016, in order to receive a deduction on an individual’s 2015 tax return. In addition to providing an immediate tax deduction, contributing to a traditional IRA also provides a tax-deferred method to save for retirement. The amount that can be contributed to an IRA depends on an individual’s age. Everyone can contribute up to $5,500, while individuals age 50 or older are entitled to make an additional $1,000 “catch-up contribution,” which results in a total contribution of $6,500. In addition, it’s not too early to make a contribution for 2016 and get a head start on tax-deferred retirement saving. The contribution levels for 2016 will remain at $5,500 and $6,500 (for individuals age 50 and over). Please note that the amount that can be contributed and deducted may also be affected by participation in other retirement...