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Previous Issues
Current Favorable Long-term Capital Gain Rates
Congress continues to discuss tax reform and whether taxes and
spending should be raised or lowered. One of the topics being bantered
about is whether long-term capital gain rates should be increased.
Although it is difficult to say where tax rates will go in the future, we have
a pretty good idea of where they will be until the end of 2012, when the
current lower rates are set to expire.
The present preferential tax treatment of long-term capital gains is
creating a significant planning opportunity. Clearly, for taxpayers in higher
ordinary income tax brackets, shifting to investments that generate longterm
capital gains rather than ordinary income should reduce taxes.
To qualify for the preferential long-term capital gain rates, the taxpayer
must hold the asset for more than 12 months. The holding period
generally begins the day after an asset is purchased and runs through
(and includes) the date of sale. These rules must be followed exactly,
because missing the required holding period by even one day prevents
the taxpayer from using the preferential rates. However, the downside of
holding assets (e.g., stocks) for a longer term is the risk that the price or
value will fall and money will be lost on that investment.
Note that it is important to consider owning assets that generate capital
gains outside of qualified (e.g., pension or profit-sharing) plans or IRAs.
Distributions from those retirement accounts are almost always ordinary
income, so the benefit of the lower long-term capital gain rates may be
wasted.
Generally, your ordinary income assets should be held inside the
qualified plan or IRA, and capital gain assets should be held directly in
taxable accounts. However, a careful analysis of your investment policy is
necessary to determine how to allocate investments between your
qualified accounts and taxable accounts.
Tax Calendar
July 15 - If the monthly deposit rule applies, employers must deposit the
tax for payments in June for social security, Medicare, withheld
income tax, and nonpayroll withholding.
August 1- If you have employees, a federal unemployment tax (FUTA)
deposit is due if the FUTA liability through June exceeds $500.
-
l The second quarter Form 941 (Employer's Quarterly Federal Tax
Return) is also due today. (If your tax liability is less than $2,500,
you can pay it in full with a timely filed return.) If you deposited the
tax for the quarter in full and on time, you have until August 10 to
file the return.
August 15 - If the monthly deposit rule applies, employers must deposit the
tax for payments in July for social security, Medicare, withheld
income tax, and nonpayroll withholding.
September 15 - Third quarter estimated tax payments are due for individuals,
trusts, and calendar-year corporations.
- If a five-month extension was obtained, partnerships should file
their 2010 Form 1065 by this date.
- If a six-month extension was obtained, calendar-year corporations
should file their 2010 income tax returns by this date.
- If the monthly deposit rule applies, employers must deposit the
tax for payments in August for social security, Medicare, withheld
income tax, and nonpayroll withholding.
Rollovers from Qualified Plans to IRAs
Deciding whether it is advantageous to roll over a qualified retirement plan
account [e.g., 401(k) account] to an IRA depends on the taxpayer's specific
circumstances. However, there are some general advantages:
1. Postmortem Tax-deferral Opportunities. Beneficiary
designations as of the date of the owner's death control the
availability of various postmortem tax-deferral opportunities.
Therefore, it is important to set up these designations to maximize
those opportunities. Greater flexibility generally is afforded in
beneficiary designations for IRAs and in stretching out the taxdeferral
period.
2. Investment Choices. Although some qualified plans offer selfdirected
accounts, many restrict the available investment choices.
However, most IRA providers offer their entire investment portfolio
for the participant to choose from.
3. Availability of Taking Withdrawals. While most qualified plans
restrict the availability of withdrawals, IRA withdrawals are available
at any time and in any amount.
4. Investment Advice. While in recent years the availability of
investment advice offered to qualified plan participants has
expanded, IRAs generally will offer greater availability. However,
the cost of that advice should be compared to the services that are
being provided.
5. Control over Funds. When funds are maintained in a qualified
plan, the employer has the right to amend discretionary provisions in
the plan, including the right to terminate it. This is not the case with
an IRA.
Please contact us if you have questions about qualified plan rollovers or the
tax aspects of retirement saving.
Attaining Independent Contractor Status
Businesses that hire employees are responsible for payroll taxes,
employee benefits, and the related administration and compliance tasks
arising when wages are paid to employees. Businesses generally do not
have these responsibilities for independent contractors; they need only
file a Form 1099-MISC for the payments they make to the contractor.
For some businesses, the reduction in human resource paperwork and
compliance administration is sufficient motivation to have work performed
by independent contractors. If potential payroll tax and employee benefit
savings are also factored into the equation, it is easy to see why many
businesses prefer to hire independent contractors for specialized tasks
and jobs of relatively short duration.
In today's economy, companies are looking for ways to reduce the cost
of doing business. Understandably, the opportunity to cut total labor
costs substantially often proves irresistible. Classifying a worker as an
independent contractor can simply be too good to pass up. However,
the IRS is concerned that some employers are classifying true
employees as independent contractors merely to avoid payroll taxes. As
the IRS continues its relentless assault on worker classification, it
becomes increasingly important that businesses take precautionary
steps to ensure compliance with all IRS requirements in order to avoid a
costly reclassification of workers from independent contractor status to
employee status.
Independent contractor status generally is available if the business meets
the following requirements:
1. Files all information returns (i.e., Form 1099-MISC) for the workers
or classes of workers at issue.
2.Has not and will not treat the workers at issue (or classes of workers
in substantially similar job positions) as employees on income tax
returns, payroll tax returns, or other returns filed by the business.
3.Has a reasonable basis for treating the workers as independent
contractors. The law provides certain safe harbors to meet this
requirement, or the business can rely on some other reasonable basis.
These requirements must be met each year. If the company fails to file
Form 1099-MISC on a worker, it loses the independent contractor status
for that worker for that year. More importantly, if the business fails to treat
the workers (and workers in substantially similar job positions) as
independent contractors during a particular year, it loses independent
contractor status for the year of violation and subsequent years for the
entire class. Thereafter, the company cannot obtain independent
contractor status for that class of workers.
Changes in the business work environment, job positions, or the
treatment of workers within particular classes may dramatically impact
the business's eligibility to classify workers as independent contractors.
Please contact us to discuss worker classification or any tax planning or
compliance issues.
Compiling and Retaining Important Records
As your personal, financial, and legal records grow in volume and
importance over the years, the task of organizing such documents may
seem overwhelming. Yet, the importance of having your vital records
readily accessible cannot be overemphasized. In the event of your
untimely incapacitation or death, your loved ones will need many of these
documents to ensure that your wishes are carried out. You certainly don't
want them to be burdened with locating numerous documents and
records during such an emotionally difficult time.
By organizing your important records, you can express your wishes, such
as how you want your property to be distributed, your intentions for lifesustaining
measures, and any special preferences for your funeral and
burial arrangements. By completing the necessary information manually
or on your computer and filing your documents in one convenient
location, your family or heirs will be able to easily locate them. This helps
ensure that your wishes are known and minimizes the risk of family
disputes. This information will also help expedite the settlement of your
estate upon your death.
Organizing your essential records can also help you understand your
financial picture, plan for the future, and communicate those plans to
the appropriate individual(s). Once you have completed this project, you
will have peace of mind knowing that your affairs are in order. You may
wish to tackle this project all at once or a little at a time, but once you've
set a goal to compile and organize your important records, you should
follow through with its completion.
Although there are a number of different ways to organize your important
records (for example, a notebook or CD, or paper or electronic files), we
encourage you to develop a system that works for you. If you save
information on your computer, be sure to let your trusted loved ones
know the logon information and password.
Your completed organizer should contain detailed information about your
estate and wealth transfer goals and intentions. Oftentimes, we find that
some of the details of estate plans (e.g., durable powers of attorney,
health care directives, beneficiary designations, etc.) need to be updated
or require further attention.
If you have questions as you gather your documents and information,
please do not hesitate to contact us.
The
Tax and Business Alert is designed to provide accurate information regarding
the subject matter covered. However, before completing any significant
transactions based on the information contained herein, please contact
us for advice on how the information applies in your specific situation.
Tax and Business Alert is a trademark used herein under license.
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