For Federal purposes there is an estate tax on the on the estate of the decedent. However, the first $11.4 million dollars is exempt. So only those with significant assets pay a Federal estate tax. So, in general there is no tax on inherited money for Federal purposes. However, the exception is, if the money received is in a tax deferred account (i.e. 401K or IRA) the beneficiary will be required to pay income tax when they receive distributions from the 401K or IRA.
For Pennsylvania purposes there is an inheritance tax. For PA resident decedents the tax is imposed on all tangible property owned in PA and all intangible property. The rate varies on the relationship of the decedent and beneficiary:
0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
4.5 percent on transfers to direct descendants and lineal heirs;
12 percent on transfers to siblings; and
15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax
Pennsylvania does not tax gifts, so a strategy to reduce Pennsylvania inheritance tax is to gift money or property in advance. However, Pennsylvania does have a one-year lookback period, that will subject gifts made within one year of death to inheritance tax.
Qualified tuition programs (529 plans) - A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits at today’s prices for a child or make contributions to an investment account set up to meet a child's future higher education expenses.
Contributions to these programs aren't deductible for Federal tax. However, they are deductible for Pennsylvania tax.
The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions from qualified tuition programs are tax-free to the extent the funds are used to pay “qualified higher education expenses”—which can include up to $10,000 in expenses for tuition for an elementary or secondary public, private, or religious school. Distributions of earnings that aren't used for “qualified higher education expenses” will be subject to income tax plus a 10% penalty tax.
Tuition tax credits - You can take an American Opportunity tax credit (AOTC) of up to $2,500 per student for the first four years of college—a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school—a 20% credit for up to $10,000 in tuition and fees.
Both credits are phased out for higher-income taxpayers. The AOTC is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out (for 2019) for couples with income between $116,000 and $136,000 ($114,000 and $134,000 in 2018), and for singles with income between $58,000 and $68,000 ($57,000 and $67,000 for 2018). The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.
If paying for tuition with a 529 plan, consider paying $4,000 from funds outside of the 529 plan to allow for the maximum American Opportunity credit to be claimed. Amounts paid from a 529 plan can be either exempt from tax on the earnings or eligible for the tax credit, but not both.
Series EE U.S. savings bonds - Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child's college expenses: first, you don't have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.
To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child's) or jointly with your spouse. The proceeds must be used for tuition, fees, etc., not room and board. If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt.
If your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in during 2019, the exemption begins to phase out when joint AGI hits $121,600 for joint return filers ($81,100 for all other returns) and is completely phased out if your AGI is at $151,600 for joint filers ($96,100 for all other returns).
Scholarships - Scholarships are exempt from income tax, if certain conditions are satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies, and similar items (and not for room and board).
Employer educational assistance programs - If your employer pays your child's college expenses, the payment is a fringe benefit to you, and is taxable to you as compensation, unless the payment is part of a scholarship program that's “outside of the pattern of employment.” Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).
Tuition reduction plans for employees of educational institutions - Tax-exempt educational institutions sometimes provide tuition reductions for their employees' children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.
College expense payments by grandparents and others - Amounts paid by grandparents and others are not subject to gift tax if paid directly to the educational institution for tuition.
Student loans - You can deduct interest on loans used to pay for your child's education at a post-secondary school, including some vocational and graduate schools. The maximum deduction is $2,500. However, the deduction phases out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 (between $70,000 and $85,000 for single filers).
Donating Appreciated Stock - Consider donating appreciated stock from your investment portfolio instead of cash.
This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.
Example: Tim and Tina are twins, each of whom attended Yalvard University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago.
Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.
Tina donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.
Qualified Charitable Distribution – with the increase in the standard deduction many taxpayers are no longer seeing a tax benefit for their charitable contributions. Taxpayers age 701/2 or older are allowed to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions, or QCDs. The money given to charity counts toward the donor's required minimum distribution (RMD), but the distribution isn’t included in adjusted gross income.
Keeping the donation out of the donor's AGI could have additional benefits, because doing so can (1) help the donor qualify for other tax breaks (for example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI (for 2019 and thereafter)); (2) reduce taxes on the donor's Social Security benefits; and/or (3) help the donor avoid a high-income surcharge for Medicare Part B and Part D premiums (which kick in if AGI is over certain levels).
Timing of Charitable Contributions – Taxpayers who are on the bubble of itemizing vs taking the standard deduction should consider grouping charitable contributions in one year. For example, if John and Jane have $20,000 in itemized deductions before charitable contributions and plan to give $4,000 in Years 1 and 2, that would equal $24,000 which is the standard deduction for a married filing jointly couple. There would be no tax benefit from the contributions. However, if they gave $8,000 in Year 1 and none in Year 2, they could take the itemized deduction of $28,000 in Year 1 and the standard deduction of $24,000 in Year 2.
Despite the government shutdown, the Internal Revenue Service today confirmed that it will process tax returns beginning January 28, 2019 and provide refunds to taxpayers as scheduled.
The IRS will be recalling a significant portion of its workforce, currently furloughed as part of the government shutdown, to work.
1. Dependency exemption. You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify, (a) you must provide more than 50% of the individual's support costs, (b) the individual must either live with you or be related (so a parent in a nursing home would qualify), (c) the individual must not have gross income in excess of the exemption amount, which is $4,050 for both 2016 and 2017 (note social security income does not count towards the $4,050 limit), (d) the individual must not file a joint return for the year, and (e) the individual must be a U.S. citizen or a resident of the U.S., Canada, or Mexico.
If the support test ((a), above) can only be met by a group (several children, for example, combining to support a parent), a "multiple support" form can be filed to grant one of the group the exemption, subject to certain conditions.
2. Medical expenses. If the individual qualifies as your dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction. (Note Medical expenses are only deductible to the extent that exceed 10% of your adjusted gross income.) If the individual fails to qualify as your dependent only because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own.
Deductibility of amounts paid to the nursing home. Amounts paid to a nursing home are fully deductible as a medical expense if the person is staying at the nursing home principally for medical, rather than custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill, all of the individual's qualified long-term care services, including maintenance or personal care services, are deductible.
Qualified long-term care insurance premiums are includible as medical expenses up to the following dollar amounts: For individuals over 60 but not over 70 years old, the 2017 limit on deductible long-term care insurance premiums is $4,090 ($3,900 for 2016), and for those over 70, the 2017 limit is $5,110 ($4,870 for 2016).
Certain Home improvements may qualify as a medical expense if the main purpose is to provide medical benefit. For example exit ramps or railings in the house. The deduction is limited to the cost less the amount the fair market value of the property increases due to the improvement.
3. Filing status. If you aren't married, you may qualify for "head of household" status by virtue of the individual you're caring for. If (a) the person you're caring for lives in your household, (b) you cover more than half the household costs, (c) the person qualifies as your dependent, and (d) the person is a relative, you can claim head of household filing status. If the person you're caring for is your parent, the person need not live with you, as long as you provide more than half of the person's household costs and the person qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.
4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of him- or herself, you may qualify for the dependent care credit for costs you incur for the individual's care to enable you and your spouse to go to work.
5. Exclusion for payments under life insurance contracts. If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits or so-called "viatical" payments) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. These lifetime payments could be used to help pay the costs of your parent's nursing home.
To our valued clients:
We are pleased to announce our acquisition of Walborn Naugle Associates. It is scheduled to take place officially on January 1, 2017. Our combined firm will operate as Boles Metzger Brosius & Walborn PC.
Our firm began its professional practice in 1978. Its growth over that time has been predominantly internal, stemming from the referrals of our client base and those of other professionals. The growth and development of our professional staff has evolved in a similar manner. We have attracted high-quality, committed professionals and invested in their training, development and growth. As a result of those efforts, we have experienced tremendous growth over the past several years. This has been in no small way also directly related to the success our clients have had in their business and personal pursuits.
We decided to seek to grow our practice through an affiliation because we believe that a larger organization will allow us to provide a wider array of services and more depth. Walborn Naugle Associates shares the same values we do. We conducted an extensive search within our region looking for an opportunity like this. Walborn Naugle Associates exceeded our hopes for a firm we can combine with and continue the tradition we have for excellent service, deep expertise, and an environment our clients and associates want to be a part of. However, there are several things we want to point out that will not change:
You will continue to work with the same people in our firm you have in the past. All of our people are being retained in their current roles.
Our fee structure will not change.
The services we have provided you in the past will continue.
Walborn Naugle Associates will be moving their offices to our existing offices around January 1st. Our existing phone number will continue to be the one you will use to contact us.
If you have any questions about this exciting news and what it will mean for you, please contact any of us at any time. We look forward to introducing you to some of our new professional associates.
We are grateful to you not only for giving us the opportunity to provide you with accounting services but for your loyalty and friendship, which have enriched our relationship. We are confident that our new affiliation will serve us all well.
The Partners and Associates of:
Boles Metzger Brosius & Emrick PC
If you start a pension plan, you can take a credit of up to $500 a year for each of the first three years of the plan. The credit is for 50% of certain start up costs you incur in each of those years. Those costs include the expenses you incur in establishing and administering the plan, as well as the cost of any retirement planning education programs you sponsor for your employees. Thus, if you spend $1,200 this year in establishing a plan, and $1,100 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years.
You must meet several requirements to qualify for this credit:
If you had a pension plan in the last couple of years, you may want to consider waiting three years from the time the plan was terminated before starting a new plan so that you qualify for the credit. As an example, if you had a plan that was terminated in 2012, you would have to wait until 2016 to start a new plan and qualify for the credit.
There are several types of plans you can establish for your employees and still qualify for the credit. For example, you could start a pension, profit sharing, or an annuity plan, among other choices.
If you have a child (or a grandchild) who is going to attend college in the future, you have probably heard about qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis.
There are two types of programs: prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won't be starting college for some time; and savings plans, which depend on the investment performance of the fund(s) you place your contributions in.
You don't get a federal income tax deduction for the contribution, but the earnings on the account aren't taxed while the funds are in the program. A deduction is allowed for Pennsylvania taxes. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.
Distributions from the program are tax-free up to the amount of the student's qualified higher education expenses. These includes tuition, fees, books, supplies, and required equipment. This would include purchasing a computer and related technology and services such as internet access. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.
Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed.
The Department of Labor issued a new rule updating the overtime pay requirements. The change is effective December 1, 2016. Under the current rules, if an employee meets the following requirements they are exempt from the overtime pay requirements:
The new rule increases the threshold from $455 per week to $913 per week ($47,476 annually). This rate will automatically update every three years based on wage growth. The rule allows for up to 10% of the salary amount towards the exemption threshold to be met by non-discretionary bonuses, incentive pay or commissions. Those amounts must be paid at least quarterly.
What employees does the law effect:
Many non-profit employees will still be exempt as the $500,000 threshold is only for activities with a business purpose and does not include:
Starting December 1, 2016, to comply with the law employers with employees subject to the overtime laws will need to either: