Berdon Blogs

SALT TALK: Connecticut Fires Back at the TCJA

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jun 18, 2018 1:39:45 PM

As my readers know, I’ve been anticipating strong state responses to some of the more onerous aspects of the Tax Cuts and Jobs Act (TCJA). Well, Connecticut Governor Dannel Malloys “An Act Concerning Connecticut’s Response to Federal Tax Reform” (The Act) is a major shot in what I expect will be a long war.  One key provision of the Act is the Pass-Through Entity Tax (PET).

PET is designed to be revenue neutral to both the State and taxpayers. The TCJA limited the deductibility of state and local taxes paid by individuals to $10,000 and pass through entities (PTE) with Connecticut source income are now required to pay a tax on that income at a rate of 6.99% -- the highest individual tax rate.  Malloy is trying to work around this.   Under the Act, members of the PTE will receive a credit on their Connecticut personal income tax return equal to their pro-rata share of entity income multiplied by 93.01%.

Here’s how it works:

  • AB partnership is owned equally by A, a Connecticut resident, and B a nonresident.  The partnership earns $1,000,000 before taxes in 2018, all Connecticut source.  AB will pay a PET of $69,900 (1,000,000 * 6.99%).  A and B will each have $465,050 of income from AB (($1,000,000 - $69,900)/2).
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Topics: SALT TALK

T&E TALK: You can Repair a “Broken” Trust with the Proper Tools

Posted by Scott T. Ditman, CPA/PFS on Jun 18, 2018 12:18:38 PM

An irrevocable trust has long been a key component of many estate plans. But what if it no longer serves your purposes? Is it too late to change it? Depending on applicable state law, you may have options to fix a “broken” trust.

How Trusts Break

There are several reasons a trust can break, including:

Changing Circumstances. A trust that works just fine when it’s established may no longer achieve its original goals if your family circumstances change — births, deaths, divorce, etc.

New Tax Laws. Many trusts were created when gift, estate, and generation-skipping transfer (GST) tax exemption amounts were relatively low. Today, however, the exemptions have risen to $11.18 million, so trusts designed to minimize gift, estate, and GST taxes may no longer be necessary.  And with transfer taxes out of the picture, the higher income taxes often associated with these trusts — previously overshadowed by transfer tax concerns — become a more important factor.

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Topics: T&E TALK

TAX TALK: Don’t Gamble on your Taxes

Posted by Michael Eagan, J.D., LL.M. on Jun 18, 2018 9:20:00 AM

For anyone who takes a spin at roulette, buys a lottery ticket, or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.

Wins
You must report 100% of your wagering winnings as taxable income. The value of extraordinary complimentary items (“comps”), such as autos and jewelry, provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. The IRS has reserved its opinion on whether you can exclude “normal comps,” such as food, drink, lodging, and entertainment, from taxable income. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.

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Topics: TAX TALK

SALT TALK: Telecommuting Becomes an Inconvenient Truth in Connecticut

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jun 11, 2018 10:30:00 AM

You’re trying to do your share to stop global warming, so you persuade your employer to let you work from home. Think of the gas you will save and the burden lifted from the environment.  Well, not so fast, if you live in one of the few states with a so-called “Convenience of the Employer” rule.  You are going to be so mad when you realize the consequences that the steam rising from the top of your head is going to create more environmental damage than any reduction in carbon output from working at home. 

Currently only Delaware, Nebraska, New York, and Pennsylvania have a convenience rule.  But effective for tax years beginning on or after January 1, 2019, Connecticut will have one as well, albeit a slightly kinder version. The rule will only apply if the nonresident taxpayer in question lives in a jurisdiction that has its own version of the rule.

The inconvenient part about the convenience rule, simplified for brevity, can be best demonstrated by a simple example. 

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Topics: SALT TALK

TAX TALK: QSB Stock Offers Two Valuable Tax Benefits

Posted by Michael Eagan, J.D., LL.M. on Jun 11, 2018 10:08:49 AM

Investing in qualified small business (QSB) C corporation stock offers you the opportunity to diversify your portfolio and enjoy two valuable tax benefits:

  1. Tax-free gain rollovers. If you buy other QSB stock with the proceeds of selling QSB stock within 60 days, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
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Topics: TAX TALK

T&E TALK: For the Charitable, Consider a Donor-Advised Fund

Posted by Scott T. Ditman, CPA/PFS on Jun 11, 2018 7:00:00 AM

If you make sizable gifts to charitable causes, you can also realize personal rewards, and may be able to claim a deduction on your tax return. However, once you turn over the money or assets, you generally have no further say on how they’re used. You can exercise greater control over your charitable endeavors using a donor-advised fund (DAF). Bear in mind that under the Tax Cuts and Jobs Act, you must itemize to benefit from the charitable contributions deduction.

Setting Up a DAF

As the name implies, your recommendations are integral to a DAF. First, you contribute to a fund typically managed by an independent sponsoring organization or an arm of a reputable financial institution. The minimum contribution generally is $5,000. In exchange for handling the management of the fund, the financial institution or organization usually charges an administrative fee based on a percentage of the deposit.

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Topics: T&E TALK

SALT TALK:  “I Wanna Be a Lifeguard” – But Not in New York

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jun 4, 2018 9:35:43 AM

Memorial Day has come and gone. Visions of the beach are swirling through my head and memories from my high school and college summers take over and surmount any state tax concerns I may have at the moment. I had the second best job in the world (SALT Partner at Berdon being number one) back in those days. I was a lifeguard.

Not one of those muscle-bound Jones Beach types, but at a day camp, where I made lots and lots of extra money giving swim lessons after the camp day was done. Since one hundred percent of my income was disposable in those days (thanks Mom and Dad) I had more money to go around than I do now. A typical day consisted of getting to the pool early, commiserating about our previous night out, teaching bright eager minds to swim (to this day, I still bump into doctors, lawyers, accountants, engineers, school teachers and the like, who I taught to do so) and listening to the hit song by the Band Blotto, “I Wanna Be a Lifeguard” over and over.

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Topics: SALT TALK

TAX TALK: Receive Restricted Stock? Here’s a Tax-Saving Opportunity

Posted by Michael Eagan, J.D., LL.M. on Jun 4, 2018 9:20:13 AM

Today many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences can be complex — subject to ordinary-income, capital gains, employment and other taxes. But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election.

Convert Ordinary Income to Long-Term Capital Gains

Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it.

At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax.

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Topics: TAX TALK

T&E TALK: Does Your Family Know Where to Find Your Will?

Posted by Scott T. Ditman, CPA/PFS on Jun 4, 2018 9:12:30 AM

In a world that’s increasingly paperless, you’re likely becoming accustomed to conducting many transactions digitally. But when it comes to your last will and testament, only an original, signed document will do.

A Photocopy Isn’t Good Enough

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you’d died without a will.

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Topics: T&E TALK

SALT TALK: Battle Royal Heats Up Between IRS and States

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on May 29, 2018 9:58:08 AM

Digital or Analog? Mono or Stereo? I’ve never been much for format wars. In the classic 1961 release, “First Time! The Count Meets the Duke” you had your choice. If you bought the mono version, both bandleaders’ orchestras could be heard blaring equally out of both speakers. But if you bought the stereo release, Basie is blaring from the left and Ellington from the right. Even though the very first cut on the record is entitled “Battle Royal,” critics described the release as far from a battle of the bands and more like a mutual admiration society. Stereo or mono, pay no mind. Let’s just get to the music.

Yet since the enactment of the federal Tax Cuts and Jobs Act (TCJA) states have been fighting the format wars, attempting to repackage lost state and local tax deductions into charitable contributions and deductible business taxes. Who sounds better? In my opinion I would sooner go back to eight-tracks.

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Topics: SALT TALK

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