1-866-829-8295

Tax Reform May Include Upfront Tax On Retirement Savings

elderly man holding caneOur tax attorneys in San Jose have been closely following Republicans in Congress as they prepare to battle out tax reform and attempt to cut taxes. However, this leaves individuals to wonder who pays for the cuts. A solution currently being considered is an upfront tax on retirement savings. Many individuals in the retirement savings industry are concerned that Congress may decide to “Rothify” employees’ 401(k) contributions, in whole or in part.

The Fate of Future Contributions

Currently, the funds you put in a conventional 401(k) are not taxed when you contribute. Rather, the growth of the money is tax-deferred. However, when you begin withdrawing funds for retirement, these funds are taxed as standard income. The latter is the exact opposite of the way both Roth IRAs and Roth 401(k)s work. With Roth accounts, you make contributions after taxes are paid, but tax-free status comes into play regarding your gains and withdrawals. Should Congress decide to “Rothify” 401(k)s, it could enable them to regard all or some of your future contributions to 401(k) accounts as taxable income during the year the contributions are made.

Nothing New in This Approach

It is not the first time this approach has been considered: in 2014, under then House Ways and Means Committee chairman, Dave Camp, a version of this plan was discussed during conversations focused on tax reform.

Under this plan, it would be possible for you to contribute up to half of the allowed annual contribution limit before taxes. That limit is currently $18,000. Pretax status would also apply to your employer’s match; however, other monies you invest in the fund would be taxable immediately.

Tax Reform or a Fiscal Gimmick?

Because the taxes on long-term savings would be front-loaded under this plan, revenue could be raised in the short term by Rothifying 401(k)s. In fact, it was estimated that the proposal made by Camp in 2014 would raise almost 144 billion dollars over 10 years, seemingly “paying for” the permanent tax cuts desired by Republicans.

I can tell you as a tax attorney, that making such a change would result in lost money over time. This is because money collected by the federal government would decrease once employees begin making tax-free withdrawals upon retirement. According to the Committee for a Responsible Federal Budget, shifting the timing in this manner is little more than a fiscal gimmick. A spokesperson for the Committee stated that the plan would merely produce short-term savings by pushing costs into the future.

These facts and figures, however, do not really tell individuals who are saving for retirement whether the deal would be good or bad. The answer is that no one truly knows.

In a recent blog post, Nevin Adams, who works at the American Retirement Association as communications chief, noted that there is essentially no research that addresses the subject of how employers and workers might react to this plan.

However, this may soon change: The Employee Benefit Research Institute is in the process of studying

Read More

IRS Announces Relief For Those Affected by Hurricane Harvey

Hurricane Harvey floodingIn the wake of the Hurricane Harvey, our San Jose tax attorneys have learned that The Internal Revenue Service has announced hardship distribution and plan loan relief for individuals affected by the disaster. These include individuals who have their principal residence or workplace in the counties of Texas or other states that are designated for individual assistance by FEMA. (Currently, only certain counties in Texas are designated for assistance, although these can be expanded later. For a list of designated areas, visit https://www.fema.gov/disasters.) The benefits will also extend to employees who have any dependants—parents, grandparents, children, spouses—living in those affected areas. The relief will stay in place for the period of 23rd Aug, 2017 through to 31st January, 2018.

The qualified retirement plans that are eligible for relief according to Announcement 2007-11 include, among others, 401(k), 457(b), 403(b) and 401(a) plans. Loan procedures have been streamlined and hardship distribution rules relaxed for these plans. The announcement however does not allow IRA participants to take out loans, though they will be permitted to accept distributions under relaxed procedures.

The IRS’s relaxing of administrative and procedural rules related to distributions and plan loans means that the participants in eligible retirement plans will be able to receive the money more quickly than is usual. Additionally, the employees will not have to face the stipulated six month ban that applies to hardship distributions on 403(b) and 401(k).

The maximum distribution amount that can be taken out will still be restricted as per the IRS rules and regular tax rules will apply to all such distributions. However, the plan will be permitted to ignore the normal reasons for hardship distributions. If certain documentation is required for a plan to make a distribution, it can also relax this requirement. In addition, qualified plans that don’t come with provisions for loans and hardship distributions will also be permitted to make these distributions and loans given the plans make necessary amendments for such provisions by Dec 31, 2017.

Some additional relief has been announced by the Department Of Labor for benefit plans whose participants reside within the designated disaster area. This includes extension of the filling date for Form 5500, enforcement relief for delays/failures to provide blackout notices or to forward participant distributions as well as relief to certain insurance carriers and welfare plans and more.
For more information on relief announced by DLO, visit this page.

Alongside loans and hardship distributions, emergency PTO or leave- sharing plans have been proposed for employees affected by the hurricane. According to this proposal, an employer can adopt a PTO (paid time off) sharing plan and establish a PTO bank where employees can donate their PTO so that those who have been adversely affected by Harvey can access PTO in addition to their own share of paid time off. The PTO bank would be administered by the employer who retains the rights to grant additional PTO to an employee who, due to the severe hardship caused him by the natural

Read More

San Francisco Home Owners May Take a Hit Under The New Tax Reform Plan

San Francisco HomesWe all know how important the home mortgage deduction is, and as far as our tax attorneys can tell, it should be safe for the foreseeable future — even though there’s an upcoming tax reform debate.

However, this deduction doesn’t need to be completely revoked by lawmakers in order to be deemed useless by homeowners and taxpayers in San Francisco.

It seems as though lawmakers are currently trying to replace the cash flow that they would ultimately lose as a result of the trillions of dollars in tax cuts they would like to make. As a tax attorney in San Francisco, I can tell you that the mortgage deduction is one of the most expensive tax breaks we have in America. The estimated cost for the next decade is in excess of $80 billion a year.

As the law stands today, San Francisco homeowners that itemize deductions may deduct the interest they pay on their mortgage, up to one million dollars between a primary residence and secondary property. You may also deduct loan interest from home equity loans, up to $100k, as long as you’re not subject to the Alternative Minimum Tax. Seeing as how the median price for a home in San Francisco is over one and a half million dollars, these deductions are absolutely critical for home owners in the bay area.

What’s the average price of a home for the rest of the country? Not as much as you might think. A paltry $250k is the median price for a home in the United States.

So what kind of salary do you need to be pulling down in order to be a home owner in San Francisco? It’s estimated that you would need over $180k in order to own a home and make ends meet.

Under our current tax law, a lot of the expenses associated with home ownership are deductible. Eliminating these deductions could cause a hardship on San Francisco residents who rely on them in order to maintain their budget.

Of course, you don’t need a tax lawyer to tell you that any change to the mortgage deductions could cause a disruption to the housing market. In fact, the National Association of Realtors predicts that eliminating tax incentives for home ownership could cause home values to plunge across the country.

It’s been reported that we may see even more eliminations of itemized deductions that would significantly decrease the tax benefits of owning a home.

We’ve also seen reports that lawmakers are trying to increase the standard deduction, which would greatly reduce the amount of people who would itemize their deductions.

It’s important to remember that none of these laws are set in stone yet. Lawmakers are beginning to debate about what the upcoming tax reform would look like, and our tax attorneys want to make sure that the public is well informed a head of time so that you can have an informed opinion, and let your representatives know how you feel about the

Read More

The Impact of Trump’s Proposed Tax Cuts

man calculates his taxesWhile plans to reorganize tax brackets, get rid of alternative tax, and eliminate several itemized deductions would save American taxpayers $4.8 trillion, it would appear that some Americans may disproportionately benefit more than others. According to a report prepared by the Institute on Taxation and Economic Policy, 61.4% of the savings would go to 15% of the top taxpayers. In contrast, 14% of the middle-income earners would pay more.

Over the past few months, the newly proposed tax cuts have been keeping our San Francisco tax attorneys busy. We’ve been studying what the possible changes could mean, and have put together the following predictions.

Likely Winners of Trumps Tax cuts

The biggest winner of this law would be Wyoming. The state would save $1.38 million in taxes if Trump’s proposed tax cuts were enacted. The middle-income taxpayers would get $940 while the richest would keep an average of $308,540 every year. The wealthiest residents of Connecticut would also benefit from the tax cuts, as they will receive 60% of the pie; while the middle income tax payers would only get 3.7%. The same goes for District of Colombia. The wealthiest residents of D.C. will receive 70% of the tax cuts while the bottom would pay an average of $600 more in taxes per year.

Other states that would win include:

• North Dakota: The state’s richest taxpayers would receive more than half of the savings. The middle income earners would only get 44% of the tax cuts received by North Dakota.

• Massachusetts: The richest from this state would save approximately $215,670 on taxes while middle-income earners would receive $1,150.

• Florida: The poorest in the state of Florida would get 5.5% of the tax cuts; the middle taxpayers would get around 8% while the wealthy would get 86%.

• South Dakota: The poorest residents of South Dakota would save around $410 while the richest would get $203,110.

Trump Tax reform losers

Evidence suggests that several states would not benefit from the tax cuts. In fact, things might actually get worse for them.

The state of Mississippi would be the biggest loser if the proposed tax became law. The poorest of Mississippi would receive less than 1% of tax cuts going to that state. The wealthiest would receive 47.8% while middle- income taxpayers would get 13%. West Virginia would not benefit much from the new cuts either. Middle-income tax payers would save $500 annually. Around three quarters of the cuts would benefit the top 20% of the richest tax payers in West Virginia.

Others that have a lot to lose include:

• Arkansas: The richest 1% of this state will receive almost half of the tax cuts while 20% of the middle income tax payers would keep1.3 % of their income.

• Kentucky: In this state, the middle-income earners would save $640 annually and the rich would get $68,550 every year.

• New Mexico: Middle-income taxpayers in this state would save around $580 annually, if that proposal were enacted. The

Read More

The Tax Reform Controversy

dollar billsOver the past few weeks we’ve been closely following the news as Democrats and Republicans are gearing up for an upcoming tax reform battle. Let me tell you, it certainly is an interesting time to be a tax attorney in San Francisco.

Chuck Schumer, the Senate Minority Leader, and his members are having ongoing dialog about how tax reform will be handled. However, for now, the main takeaway is that the Democrat representatives will not blindly consent to a Republican bill that profits the top 1 percent of earners. In an interview with CNN, Schumer stated that the notion that individuals will back large tax cuts for the wealthy when the rest of the population are offered crumbs will no longer work.

In a letter dated August 1, 2017, Democrats highlighted their principles to the White House and Republican leaders. If the latter want assistance in giving tax cuts to Americans or overhauling the tax code, certain conditions had to be met. The conditions outlined include:

• The tax reforms could not increase the deficit
• They could not cut taxes for the ‘1 percent’
• They could not increase taxes on the middle class

However, it does not seem as if the Republicans feel the pressure to meet the demands of the Democrats. After that letter was sent, it was announced by Mitch McConnell, the Senate Majority Leader, that reconciliation will be used to overhaul the tax system. Only 51 votes are required by this process, which is 9 fewer votes than the usual 60. This provides the option for McConnell to pass tax cuts without the help of any Democratic vote.

He said this move is necessary as the letter highlighted that the Democrats are clearly not interested in addressing what is necessary to promote the growth of the country. So, it seems as if Republicans are willing to go it alone where tax reform is concerned; they have 52 chamber seats.

During his CNN interview, Schumer stated that he still wants McConnell to reconsider using reconciliation. Schumer believes that this approach will not be as easy as it seems. Democrats are doubtful that their opponents are as close on tax reform as they claim to be. He further stated that he believes rank-and-file members of the Republican Party have more interest in a bipartisan approach.

It has been widely highlighted that without health care, the governing party has less funds to finance tax cuts. In addition, there is still fighting among Republicans about their budget. The GOP would have to pass this vehicle in order to use reconciliation. A Senate Democratic aide, in an interview with CNN, stated that he is doubtful that congressional Republicans will all come together on tax reforms as there is in-fighting within the party.

However, as it relates to Republican attempts to reform the tax code, Democrats face their own challenges. In contrast to the health care dispute in which it could be clearly pointed out that millions of Americans

Read More