Self-Employed Individuals are Still Entitled to Health Insurance Deductions

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Self-Employed Individuals are Still Entitled to Health Insurance Deductions

Oct 18, 2017 Posted by deepak No Comments

Self-Employed Individuals are Still Entitled to Health Insurance Deductions

IRS makes it a point to inform individuals that there is a certain kind of tax deduction that is specifically available to those who choose to be self-employed and not work for any corporation. This deduction that the establishment speaks of is targeted to dental, medical and insurance premiums that are for the long-run. Usually, self-employed people pay for these bills themselves. They even cover those of their spouse as well as their dependents. This insurance also covers children who are under the age of 27 toward the end of the year 2016, even if said children are not dependents of the self-employed individual. Definition of a child is the daughter, son, stepchild, foster child or adopted child or the self-employed. Foster child defined is a child that has been placed with the self-employed individual by a placement agency that is authorized or by a decree, order or judgement of a court and of any competent jurisdiction.

Self-employed individuals who are entitled to this deduction meet the following requirements:

  • They have net profit that they received from their self-employment. They report and list this on Schedule C (this is the profit or the loss generated from a business), Schedule C-EZ (this is the net profit that is garnered from a business) or Schedule F (this is the profit or the loss that is obtained from farming.)
  • They have earnings from their self- employment as partners and have been reported on Form 1065 which is also Schedule K-1. This is the Partner’s Share on the income, credits, deductions and the like.
  • They figure out their net earnings and income from being self employed by using a method that is optional and this is listed on Schedule SE which is also the known as the Self-Employment Tax.
  • They have paid wages that have been reported on Form W-2 which is the Statement on wages and taxes. They are regarded as shareholders and they own more than 2% of the over-all stock of a corporation listed as a S-corporation.

There are rules that apply to how exactly this insurance plan can be established. Self-employed individuals must follow the guidelines and make sure that they qualify:

  • If they are self-employed and have filed Schedule C, Schedule C-EZ or Schedule F and the policy is possible to be listed under the individual’s name or the business’ name.
  • If they are partners of a business, the policy is listed in their name or the name of the partnership and the partners pay premiums. If the policy is in the name of the self-employed individual and he or she pays the premiums, then the partnership must reimburse said individual and include these premiums and regard them as income and list it on their Schedule K-1.
  • If they are shareholders of an S-corporation, the policy is listed in their names or the name of the S-corporation. Either the self-employed individual or the corporation pays the premiums. If the policy is under the name of the individual and he or she pays the premiums, then the S corporation reimburses the individual and also include this premium and regard is as some kind of wage income and list it on the Form W2.

As for Medicare premiums, these are voluntarily paid to obtain the insurance under the name qualified for a health insurance that is private and possible to be used in order to figure out the deduction. The total amount that is paid for coverage of health insurance obtained from distributions on retirement plans that are nontaxable cannot be used to calculate this deduction.

Health Insurance Deduction Worksheet for Self-Employed Individuals

Each business or trade must be listed under a separate worksheet which has been established by an insurance plan.

  1. Enter the over-all amount that has been paid for the year 2016 that is solely for coverage of health insurance that is established and listed under the business. This can also be listed under an S corporation that the individual has more than 2% in shares. The mentioned health insurance is for the self-employed individual, the spouse as well as the dependents.
  2. List any amounts for the months that the self-employed individual is eligible in participating in health plans that are subsidized by the individual or the employer or the spouse or the employer of the dependents or the child who is below 27 by the last leg of 2016.
  3. List any amounts that have been paid from distributions of the retirement plan that were considered non-taxable because the self-employed individual was a safety officer for the public and is retired.
  4. List any health insurance that is a coverage payment and is included on the Form 8885 and specifically on line 4 in order to obtain the HCTC.
  5. List any monthly payments for HCTC that were made in advance and that was received by the administrator of the health plan from IRS, as depicted on the Form 1099-H.
  6. List any qualified health insurance that is a coverage payment that were paid for coverage months that are considered eligible and the self-employed individual has received in the form of a benefit through the monthly payment in advance of the HCTC program.
  7. For coverage that is listed under long-term insurance and is a qualified contract, every person that was covered must be entered. Total payments that were made for the specific person during the whole tax year must be listed.
  8. The amount depends on the age of the person by the end of the said tax year. It is $390 for individuals who are 40 or even younger, $730 for those between the age range of 41 and 50, $1460 for those who are between the age range of 51 and 60, $3,900 for those between the age range of 61 and 70 and $4,870 for those who are between the ages of 71 and older.
  9. The payments that were made for months that were eligible but subsidized by the insurance plan of the self-employed individual’s spouse or the employer of the spouse. Remember that if there are more than one individuals that were covered, the amount should be entered separately. Then, once completed, enter the over-all amount.
  10. Add Line 1 and Line 2.
  11. Enter the net profit as well as earned income from the business or trade that the plan of the insurance was established. Do not put the payments for the program of Conservation Reserve because these payments are exempted from self-employment. If the business is listed as an S-corporation, proceed to Line Eleven.
  12. The amount of all profits that have been listed from Schedule C on Line 31 which is Form 1040, Schedule C-EZ on Line 3 which is Form 1040, Schedule F on Line 34 which is Form 1040, or Schedule K-1 on Box 14 and Code A which is Form 1065. Include any income that is allocable to the said profitable businesses. Do not include the payments made from the program of Conservation Reserve because these are already exempted from the tax of the self-employed. Check the instructions that are listed for Schedule SE which is also Form 1040. Net losses must not be included on any schedule.
  13. Divide Line 4 from Line 5.
  14. Multiply the Form 1040 or the Form 1040 NR which is found on Line 27 by the percentage amount listed on Line 6.
  15. Subtract the amount listed on Line 7 from the amount listed on Line 4.
  16. If there is any amount listed on the Form 1040 or 1040 NR which is on Line 28 that is considered to be attributable to the business or trade in which the plan for the insurance has been established, then this must be entered.
  17. Subtract the amount in Line 9 from the amount in Line 8.
  18. Enter the Medicare wages that are listed in the Form W-2 and on Box 5 from the S corporation in which the self-employed individual has more than 2% of the shares and which established the insurance plan.
  19. Enter the amount that is listed on the Form 2555 and Line 45 and the attributable amount that is listed on Line 4 or Line 11. Any amount that is listed from the Line 18 of Form 2555-EZ can also be attributed alongside the amount that has been entered above Line 11.
  20. Subtract the amount from Line 12 from the amount in either Line 10 or Line 11.
  21. Enter the smaller amount between the one in either Line 3 or the one in Line 13 along with the amount on either Form 1040 or Form 1040 NR which is on Line 29. When figuring the total of the deduction on the medical expense listed on Form 1040 or Schedule A, this must not be included.

 Sounds complicated – that is why people specialize in accounting. Please consult with your local CPA to discuss this.

How to Claim Health Insurance Deductions from Self-Employment

One of the reasons why more and more people choose to be self-employed is that they can deduct what they usually spend on premiums of health insurance which can be found on page 1 and above a line on the individual’s tax return. These self-employed individuals can also claim their medical expenses as a form of deduction, and this includes premium on health insurance. The catch is that they have to itemize the tax returns to get this done. The downside is that this is not always end up being a good deal to the individuals.

 Eligible Policies

The over-all cost of premiums that have been paid for insurance that is specifically for medical, dental and long-term purposes can be deducted in the policies that cover the individual, the individual’s spouse and the individual’s children, who are below the age of 27. If the self-employed individual pays supplemental premiums to Medicare, then these can also be deducted. Policies can be listed under the name of the business.

 Limitations to Claiming the Health Insurance Deduction

Self-employed individuals cannot deduct costs of insurance from their health benefits if they or their spouses were found eligible in participating in the subsidized health plan for groups that is obtained via the employer.

This is the case for those who work regular jobs and have their own businesses or their spouses are employed and is found eligible for the coverage that is under the health plan for the group.

The individual’s self-employment over-all income can be calculated and totaled on Schedule F and Schedule C and this must be the same amount or go beyond the amount of the deduction. Take this for an example. If the business has earned a total of $12,000 but the premiums cost $15,000 then the individual cannot claim the whole $15,000. He can claim only the $12,000 amount. If the business reports some kind of loss, then the individual will not be considered eligible for health insurance deduction. He or she can still obtain the health insurance amount that has been itemized on the medical deduction that is listed on Schedule A but the amount that is listed “above the line” and its adjustment is more advantageous to the self-employed.

Self-employment taxes are also based on the total business income minus the other expenses – this is the income that is calculated and listed on Schedule C, but this is not less than the individual’s insurance premium. That is regarded as a break in the double tax.

When claiming the deduction, the self-employed individual can enter this on Form 1040 located in Line 29. There is a worksheet that is provided in the Instruction Guide for Form 1040 and provides a step by step on how to calculate the total amount of the deduction. A more detailed practice worksheet can be located in the Publication 535 guide. These worksheets can be used for practice and can also amount to the deduction that can be obtained in health insurance for the self-employed individual. Worksheet P can also be used and is found in Premium Tax Credit which is Publication 974.

Say Goodby To Mortgage Insurance Premium Reduction – Welcome President Trump

Jan 21, 2017 Posted by Sanjiv No Comments

Get ready for roller coaster ride, Mr. Trump has stared to make changes

The Department of Housing and Urban Development (HUD) announced a reduction in Mortgage Premium last week.  However, Trump administrations do not feel that the US Citizen really need this benefit.  This reduction  has been suspended indefinitely.

“FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers,” the HUD statement said. “As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”

The HUD statement added that “FHA will issue a subsequent Mortgagee Letter at a later date should this policy change.”

Mortgage Banking Association is not that happy with the move. Statement was released  by David H. Stevens, President and CEO Mortgage Bankers Association (MBA) and the FHA Commissioner in the first term of the Obama Administration, following the news of the premium suspension.  “We recognize the Administration’s need to examine the overall health of the insurance program and weigh that against the benefits of lowering mortgage insurance premiums,” he said. “Given that lenders have already started preparing for the MIP decrease, it is important that any new policy be implemented in a way that minimizes disruption for borrowers and lenders. MBA looks forward to working with the new Administration to ensure the long term stability of the FHA program, creating an environment that provides clarity in regulations for lenders while at the same time promoting access to credit and protecting consumers.”

Health Insurance Deduction

Feb 7, 2015 Posted by Sanjiv No Comments

Tax deduction is a big concern, and on the other hand it is highly beneficial because it can help you in various ways. Health insurance is one of the most crucial things that you can consider in your life. And although you may compromise on many things in life, health insurance is surely something where you don’t want to take a chance. This becomes more important when you know that tax deduction can considerably help you pay for the health insurance.

The Internal Revenue Service or IRS provides various kinds of deductions for medical expenditures. There are some itemized reductions. Thus, you can make claims for standard deductions. Again some medical deductions are over-the-line exemptions and so all these can be claimed in addition to the standard deductions. With regard to healthcare tax deductions, three options as mentioned below can be chosen.

      •  In case you find that your expenditure crosses 7.5 percent of the adjusted gross earning, then you could take an itemized reduction where your expenses surpasses the brink. By qualifying medical expenses, you could consider medical, vision or dental care for your own self, your spouse or any individual dependant on you. Medical services include the ones that would prevent problems that could arise in the future, solve present problems or reduce pains. Medical drugs which need a prescription can be deductible. Further, expenses that you may incur in due course of traveling to the hospital in the form of parking fees, mileage, tolls can also be included.
      • In order to save for future medical expenditure, health savings accounts are sheltered by tax. However, in order to be eligible for this, you also need to possess a healthy insurance plan which has a high deductible. Every year, your contribution can go up to a limit set on the basis of the fact as to whether the health insurance plan is just meant for you or also includes your family.
      • Health insurance deduction can also be seen when you are self-employed. If you are in a partnership or you are the owner of greater than 2% of a corporation, you would be able to deduct the price of your health insurance policy and also that of your spouse and any other individual dependant on you. But if you have to qualify for the deductions, your policy should be in your name, that is, the name of the self-employed person, business or partnership. In this deduction, qualified long-term care premiums can be included. But again, there is a limit to the deductible amount because the age of the insured plays an important role in this. This deduction would affect your income tax. But as far as the decrease of your tax liability is concerned, this deduction would not be of any help. As a self-employed individual, you could deduct health insurance premiums from federal income taxes. As a taxpayer, you would be offered huge exemptions that could bring down the taxable income and thus lower the total amount that you would pay in federal income tax.

In order to understand more about tax deduction and the way it helps health insurance, you should have the clear idea about the following.

If there is a group health insurance provided through an employer then the tax exemption can be enjoyed. In such a scenario, probably your employer is paying the premiums of your insurance from your gross income before holding back federal tax income. This way your yearly tax income comes down and thus you will have a reduced tax bracket. In case your employer is not offering health insurance, you should ideally buy an individual health insurance policy from a private insurance organization. This might also be the case if you prefer to have a completely different coverage plan other than what is available. But again in order to avail tax deductions on health insurance in this regard, you need to note that you will only be able to deduct your private health insurance premiums on your federal income taxes if they are greater than 7.5 percent of your adjusted gross earnings

Tax deduction can also be seen in long term health care. The number of adults who need long term health care is on sharp rise. With the constant increase of health care expenditure, it seems that every single year, insurance coverage is getting lesser with respect to the total expenses for health care. Here, if you can comply with certain qualifications, then you can deduct cost of long term health care on the returns of your income tax. There are certain long term medical care expenses which are deductible. These include the costs incurred for diagnosis, medical treatment, healing and preventing an ailment. Certain drugs which need prescription are also deductible. With respect to long term medical care, the expenses include the cost incurred on nurses or certain care facility on long term basis, provided these have been prescribed specifically by a doctor. Health insurance payments can be deducted by you in the total expense; but again you would not be allowed to take health insurance deduction pertaining to life and disability.

While availing the benefits that tax deductions can do to health insurance, you need to make a note that all deductions should be the expenses paid during the year of tax filing from January 1 to December 31. In case you are mailing a payment on the last day of a year, that is 31st of December then it will surely be considered to be the expenditure for that particular calendar year.

Tax Breaks for Health Insurance

Feb 24, 2013 Posted by Sanjiv No Comments

Health insurance is one of the largest costs that most people deal with on a monthly basis other than mortgage. Health insurance for those who are self-employed is normally higher than those who have employer offset health insurance. Luckily, there is a tax break for those who are experiencing large health insurance payments.

To qualify for the IRS health care tax deductions for you and your family you must be either a self-employed individual with a net profit, have a self-employed partner who qualifies, or be shareholder with more than a 2 percent stock in an S corporation.

The insurance plan must be established under your name or the name of your qualifying partner. For the self-employed, this can be your personal name as long as this is the name the business is run under. The self-employed individual or the stockholders must be the one who is paying the health insurance premium for this credit to apply.

Stockholders must have the health insurance plan in their name or be reimbursed by the business for health costs to be eligible. This must be verifiable via W-2. To qualify for the tax credit, you must use the Schedule C or 1040 form to apply for the credit.

This tax credit can be a large offset for those who are self-employed, as health insurance costs can equal up to a large amount of self-employed income each year. Self-employed persons also pay a higher tax rate than those with an employer so this credit can decrease the tax amount in an effective manner.

Discounted Kaiser Insurance for Small Business Owners

Apr 29, 2012 Posted by Sanjiv No Comments

Our public accounting firm is focused on Small Business Owners and Individuals and many times new business owners ask us about the health insurance.   Most of us live in Bay Area and prefer  “Kaiser” as a  health care provider and therefore I gathered some basic information about Kaiser health care plans for small business owners.

Kaiser offers many health care plans but one that suites the need of small business owners is called “GROUP POLICY”.  You can buy this group policy in two flavors.  One with annual deductible and one with no annual deductible.

Plan with annual deductibles cost about $250-$300 less than the non-deductible plans.  Both policies cover doctors visit and other services offered by Kaiser.  Both plans have minimum out of pocket doctor’s visit cost but the key difference is that with annual deductible plan you have to pay the minimum deductible ($1500) before your major benefits kick in.   For example,  daily rate for hospital room may be $500/night and you will have to pay for 3 nights before your insurance pays.  However with non-deductible plans you won’t be required to pay for these three days.

So, if you and your employees are in fairly healthy and won’t be needing any major services than you can opt for deductible plan and save a significant amount on monthly basis.

How about Spouse and kids ?

Yes, off course your employees along with officers/owners of the company can also enroll their dependents including kids and spouse.  Most polices don’t allow to include your parents.

What are the requirements of this kind of policy ?

  • You must have a business in good standing.
  • You must have two or more people enrolling in the policy.
  • More than 50% of all eligible person should have an insurance.

Can I get tax deduction for the health policy ?

You can read my post about health care policy deduction for more details.

How much does the policy cost?

I found the group policy of very good value.   Rate very by age but here is a simple example. Female less than 30 years old can get this kind of policy for about $300.  Not Bad ?

How can I enroll for group policy ?

Simply call Kaiser and ask for enrolling in group policy.

Here’s How Taxes Work for Citizens and Residents Living Abroad

Mar 10, 2018 Posted by deepak No Comments

Here’s How Taxes Work for Citizens and Residents Living Abroad

For Americans or legal residents living on tropical islands or traveling, they must consider the possibility of being locked up just in case fate does not favor them. That is why it is very important to pay taxes even when one is overseas so that when something happens, the government can still protect these individuals. Contrary to popular belief, moving out of the States does not relieve the individual of tax obligations. The IRS has the knack of tracking anyone anywhere in the world.

Here are some tips on how citizens and legal residents can manage their taxes and tax liabilities while they are outside in the country and remain within good graces of the government of the United States.

  1. Understand the Foreign Earned Income Exclusion

Resident aliens as well as US citizens are subject to federal income tax when set on the worldwide income. The FEIE or the Foreign Earned Income Exclusion lets the qualified taxpayers exclude the taxable income and reach it to around $101,300 of the earned income that is subject to only two requirements. It is also very important to note that the income the individual receives must be earned because he is working. It may be as an independent contractor or an employee and also not apply to the passive income like dividends, pensions, income and rental income. Independent contractors also receive what they call a 1099-MISC and still be subjected to self-employment tax (Medicare and Social Security) on their net income. Another thing to note is that this can also be optimized simply by opening the S corp and the other potential offshore structures which depend on the individual tax situation of the person.

  1. Understand the requirements of the FEIE

There are two requirements that can be done. First, the individual must establish a “tax home” if they are in a foreign country or in other several countries. Another is that they have to satisfy the “Bonafide Resident Test.”

  1. Have a Fire Sale

The easiest way for an individual to meet the “Tax Home” requirement is to also cut the ties with the United States. This means that the individual has to give up the apartment. To be more elaborate, when the individual has to give up their apartment, cancel their lease or sell their car, all with the documentation that they will leave.

  1. Get Out

The IRS site describes that the hardest process when fulfilling the requirements is the Bona Fide Residence Test, which has already previously been mentioned. This can be done when the individual is a resident of a foreign country for a period that has not been interrupted and includes an entire tax year. This means is that the individual must plant their flag in other countries for a majority of the year. It may not necessarily be advisable to stay in just one country, for example, being confined in a jail cell, but these individuals must prove that they are there in the long run. It is not black and white and some examples that prove residency are:

  • Establishing a temporary home in foreign countries for periods that are no definite. An example is having a lease for the long run and also owning a home there.
  • Physical presence in a foreign country. This means that they have to be residing in the mentioned country.
  • The assumption as well as economic burdens including paying the local taxes
  • Actively participating in communities on a cultural and social level. Citizens and residents must acquire their library cards and gym memberships to prove that they are living there.
  • Marital status and family status – if the residents have spouses or family members in the country they are in, it is easier to file this.
  • Other documentation like local bank account info, driver’s license and health insurance
  1. Physical Presence Test

 For new generation of expats, the physical presence test is more applicable. This includes the digital nomads who usually jump from one country and then to another. According to the IRS website, these individuals must be physically present in a country for 330 days in the course of 12 months. The 330 days do not have to be consecutive. The Physical Presence Test does not really depend on the residence that the individual has established, neither is it about proving the return the United States or the reason and purpose of staying abroad. The Physical Presence test only needs the time that the individual is in that country. The intention, regarding the purpose and nature of the stay abroad are also relevant when determining whether the requirement mentioned in Step 3, “Tax Home”, is met.

The very point of this discussion is that anyone can pick up and also leave any day for that year. They can also travel anywhere in the world and physically work in the countries just on their laptop and then return to the United States after one year. As long as this individual was in the United States for 35 days or even less, as long as this is within the period, they still qualify for what they call the FEIE. They do not have to pay taxes on the very first $101,300 in the total of earned income. This case, the split is also divided on a prorated calculation. Approximately this would amount to $50,000 in 2017 and also $50,000 in 2018 for the year period that has been split between the two calendar tax years.

It is very important to understand the tax implications of a country that the citizens or residents are traveling through or possibly be living in. In general, if they are spending more than 183 days or around half a year in another country, they must file as a fiscal resident of that year. For a person who is perpetually traveling or what they call a digital nomad who is qualified under the Physical Presence Test, then this is not any problem. If the individual plans on taking a bona fide residency somewhere and then it gets tricky.

Countries such as Hong Kong, the Seychelles, Taiwan, Singapore, Panama and Costa Rica have what you call a “territorial tax system.” Only the tax income is generated within the country’s borders. There are also a number of countries that have no income taxation such as Bahamas, Bermuda, Monaco, United Arab Emirates, Cayman Island and Andorra.

The choice becomes whether the individual has to choose a country that is for tax purposes and then just pay the required tax in that country at a low income tax rate. Examples of these countries are Bulgaria, Malta and Portugal or also choose to set the residency up in the country. The resident and citizen can be a permanent resident in various countries, but it still depends on the rules of the locality. There are also some people who split the time between the places such as Colombia and Panama and also claim the residency in Panama because of the more favorable tax treatment. In any event, it is also important to be mindful of thresholds when one becomes a tax resident. The aforementioned 183 days is usually the general rule of thumb and this does not apply to various countries. In these complicated cases, it is quite prudent to also receive the counsel of a CPA or a qualified tax attorney.

  1. Staying Out

If the resident or citizen craves for Jimmy John’s and Costo and actually decides to return for these reasons, it may cost him thousands of dollars. Just like qualifying for the status of a hotel chain or an airline, the rules that comply with the Physical Presence Test are quite strict. To begin with individuals, they must be in other countries for around 330 to 365 days. This does not have to be counted within the calendar year. As long as the individual is in another country for around 330 out of the 365 days, then it can be prorated.

However, there is a different requirement if the individual is in international waters or flying over US airspace. If he or she is visiting the United States and have to give an extra hour because the flight is delayed and if it has been missed, then this will also be counted towards allotting the days. Another scenario is if they leave the West Coast around 11:00 pm that is bound for Europe and also charged additional days because this is still in the jurisdiction of the United States. It is very important that there are buffer days remaining so that the mistake would not be as costly as it would.

How to Pay Zero Taxes to the US with the Foreign Earned Income Exclusion

The IRS has built a time bomb to the FEIE. If residents or citizens fail to submit and file their US returns, then they are audited by the IRS. They won’t be able to take the FEIE as well. Even if they are working abroad and would eventually owe the United States government nothing, it would still result to the individual paying the United States 100% of their income.

The same can be said to those who filed their US returns but are not truthful about their foreign salary because they omit this. The downside to that is the minute the individual is audited, they can lose the FEIE and also pay taxes that is 100% of their salary. The way to go around this is that they have to claim the FEIE or they would lose this entirely.

The most common reason why this happens is that the individual though they only need to report their US income to the United States and the foreign source income to the foreign country that they rare residing. Not reporting your foreign salary to the IRS is a big error that can cost them big time.

The very take-away from this is that the United States require every citizen and resident alien, whether they are in the United States or not, to pay their taxes.

Consequences of not filing US tax returns

Living abroad for a number of Americans and legal residents may seem like an adventure of a lifetime. They are exposed to various experiences and their senses are constantly invigorated by events that are delightful, interesting and unexpected. For most, it is the stuff of dreams. There are also unfortunate individuals. Unfortunately, these dreams can also turn dark quickly especially when they discover that they did not comply with the Internal Revenue Service because they did not file their US income tax.

Every year the United States spends 5 billion dollars simply for enforcement activities. This includes auditing, collections, discovery and prosecutions which pretty much yields around that amount all in additional tax revenue. It is clear that their financial best interest is about to get easier for the US government. They can also assess and prosecute the Americans living abroad and who are behind the filing of the US income taxes.

Just like any US resident, if you are an American residing in any country abroad and fail to file the US or the state taxes, then they will receive penalties for not filing their taxes, even if they do not owe the taxes to the state government or the IRS. The failure to file the penalty can also be thousands of dollars and can also take part in the advantages, benefits and special reductions that are offered to the US expats that can help reduce the US tax obligation. There are also news that have been enacted and provided the United States a crystal clear picture of who among the Americans are living abroad and are also not filing, what they are worth and where they are living. The days of living beyond the grid is waning and a new era of what is focused and enforced. The United States have entered this data by sharing the agreements at a level that is most sovereign and between the five of the largest countries within a swarm of the additional countries that are asked to join into data sharing.

You will pay more taxes this year unless you set up a corporation

Feb 22, 2018 Posted by deepak No Comments

Using Corporations as Tax Shelters

A great form of protecting assets is creating a corporation. However, not a lot of people are aware that corporations can be made into tax shelters as well. Tax shelters are legal ways that allow to minimize or decrease the taxable income. This reduces the tax liability overall.

It is important to note that it is not as simple as incorporating this so that a tax shelter can be automatically granted. The real advantage of this route is that expenses are deducted in the business expense. This is not personally deductible. Businesses are taxed based on the profits that they make, and not the gross revenue that they accumulate. In a nutshell, businesses are taxed per dollar that they earn. This is extremely different from individual tax returns. The latter are taxed depending on their gross income.

To explain it thoroughly, individuals then earn money, but their income is taxed so whatever they have left from that is what they take home and spend. On the other hand, businesses and corporations earn money, spend what is necessary and are only required to pay taxes by setting it alongside the profits that they made.

There are businesses that incorporate so that they can avoid or lessen the taxes that they required to pay. This action is illegal. Business owners must have a legitimate reason and a motive to incorporate. If the business is sole proprietorship, then incorporating can also help with protecting the assets as well as time saving.

Timing Is Important

For those who are considering to start a new business, this is the perfect time. As a general rule, it is not practical to recharacterize the expenses the minute they are incurred. This means that if businessmen start their businesses, they should also incorporate this in the very year that their tax savings are captured of its costs. Failure to do so means that the entrepreneur can easily miss out on the significant cost savings.

Here is an example. There are people who can ultimately turn their hobbies into businesses they can do on the side. There are others who can also make this into a full-time business. This depends on the demand of their chosen entrepreneurial endeavor. These business owners must know that they should report this extra income that they are acquiring to the IRS. They will be taxed on it as if it was their income from the regular nine to five job.

These entrepreneurs can reduce their taxes if they can put the supplies that they purchased their expenses. However, all these costs must be listed as such or this will not be tracked. A way to do this efficiently is to be sure that this is incorporated during the tax year and then tracked. Startup costs can also be documented before the actual businesses started to make money. These can also be regarded as expense costs and can easily go through the incorporation process.

Unique Tax Deductions on Small Businesses

Small businesses can also make the tax deductions that the regular tax payers cannot. An example of this is education. If the employee is required to undergo some kind of further training in order to advance his or her skills in the profession that he or she is in, then the employee can deduct the costs related to tuition as business expenses. Education costs can also include more than just the traditional “college” setting. This also includes expenses incurred by trade shows, seminars and other avenues that are used to continue and pursue further education. CDs, books, DVDs and magazines that are purchased by industries and businesses can also be deducted. Looking at this example, it proves that investing in learning at any craft is good for a business.

Travel expenses can also make good business deductions. If individuals have to travel because they are expected to visit clients and attend shows or conferences, then the expenses from that travel are entirely deducted. This includes expenses from flights, cabs, hotels, gas and on-the-road costs. Food can also be in the budget.

Employees of a small business can also be good sources for deductions. There are small companies that resort to not hiring employees because there are complicated employment laws that also come with tax requirements but if the need for it arises because the business is growing, then it may just be worth considering. These are employee-related experience can also be regarded as deductible business expenses:

  1. Employee wages and salaries
  2. Benefits of employees (life insurance, health plans and educational assistances to name a few).
  3. Office related expenses like supplies, desks, computers and others.
  4. Profit-sharing or pension plans

Entrepreneurs who can manage to run the retirement savings of their company can also decrease the over-all taxes that they are expected to pay.

The Kind of Corporation is an Factor

“S” Corporation do not pay any income taxes by itself. It resorts to a “pass-through” entity. What this means is that the shareholders can include what they have in the company and its profits on the tax return that they file. They can pay these on the profits depending on their tax rates as individuals.

Whereas with “C” corporations, they have their own tax rules. It is also taxed separately and per entity. Because of this, there are some deductions that are only exclusive to C-Corporations. Companies pay the taxes on the profits that the shareholders do not possess. What happens is that shareholders are then taxed on the total income that is provided to them by the C Corporation. This results to double taxation. The first level is the corporate and the next level is the personal. This can be avoided by small businesses when their directors and managers expense out the profits of these companies through the form of salaries and other perks.

While both of the types of these corporations are offered in the form of tax advantages so that these can corporate the protection of the owners, then the S Corp is then viewed as the best deal for the companies that are on the start-up level. There are many businesses that tend to lose money during the first few years upon starting. The S Corporation lets these losses “pass through” so that the individual tax returns of the owners can reduce the taxable incomes. An example of these is that S Corps can enable the owners of the business to pay less on the Social Security Taxes and Medicare.

Key Facts:

  • Avoiding taxes by using corporations as tax shelters consist of 1/3 of the federal revenues.
  • US corporations amount to $90 billion in the form of dodged income taxes and this is done by shifting the profits and then turn these to subsidiaries.
  • US corporations acquire $2.1 trillion in profits – a number of this has not been taxed in the States.
  • General Electric, because of its outsourced businesses that is set offshore, managed to accumulate a total of $27.5 billion from 2008 through 2012. However, they only claimed tax refunds that amounted to $3.1 billion.
  • Apple also managed to acquire $74 billion on worldwide sales from 2009 to 2012. This excludes the United States. They paid almost nothing in American taxes.
  • There are 26 profitable firms on the Fortune 500 that did not pay federal income taxes from 2008 to 2012. 111 of these corporations are large and profitable and did not pay federal income taxes.

 Points To Consider

  1.  Tax breaks for corporations that merely ship jobs and also earn profits offshore must be ended. America is worth investing in so that there are jobs created for Americans.
  2. Whenever the corporations resort to tax havens so that they can avoid paying taxes, those that do the right thing have to do this for them. Families end up paying higher taxes and they get fewer services. Everyone else get a big deficit from this.
  3. Large corporations that dodge taxes do this by putting small businesses, so they can go around the rules and take advantage of this. Every business must be on the same level of the playing field.
  4. Corporations also claim that there are 35% in the form of corporate income tax and this is the highest when set to taxes around the world. This makes the business uncompetitive and also decreases job opportunities. Corporations fail to pay enough in taxes. There are many who even pay too little. The average American family pays more in income taxes in a year than General Electric. There are also large corporations that are highly profitable and pay tax rates amounting to less than 20%. They pay absolutely nothing. If these corporations pay less, then everyone else have to pay more. Corporations must pay what is required of them to make this fair.
  5. Corporations reason that repatriation tax holidays allow them to tabulate the profits and then invest and also create jobs. However, truth of the matter is that this can only result to failure. Companies have to cut jobs and also line up pockets for the corporate executives and the big shareholders. Tax holidays can also give tax breaks to the corporations that have accomplished the most in the aspect of dodging their taxes and paying what is expected of them.


A number of US corporations go through offshore taxes and perform a number of accounting gimmicks so that they don’t have to pay a whopping $90 billion per year just for federal income taxes. This is the large loophole when discussing US tax law. It also enables the corporations to avoid paying the taxes on the foreign profits unless these are brought home. This tactic is commonly regarded as deferral. It provides huge incentives to keep the profits offshore and for as long as this can be done. The corporations choose to not bring the profits home and at the same time not pay the US taxes that come with this.

Deferral in the corporate setting is an enormous incentive and can also be used as an accounting trick so that it would appear the profits were earned and then generated in the tax haven. The profits are eventually funneled in the form of the subsidiaries. This is often done by companies that have few employees and not as much business activities. This is effective because firms eventually launder the profits so that paying taxes can be avoided.

Loopholes used to Shift US profits to Tax Havens

  • US firms can start a subsidiary outside US soil and just focus offshore so that there are channels for the billions of dollars in profit to go through. This makes it disappear for US tax purposes. There is actually a box that can be checked on the IRS form.
  • Corporations can also sell the right to the patents as well as the licenses in a low price. This can then be licensed back to US ground and set the price so steep when sold within America. The goal is “transfer pricing” because it makes it seem that the company can generate profits in the tax havens but not in United States.
  • Wall Street banks along with credit card companies and the other corporations that have large financial units can also move the US profits offshore and then regard this as a loophole and call it “active financing exception.”
  • US corporation can also do the inversion by then buying a foreign firm and then eventually claiming this as the new company that is merged and regarded as foreign. This then reincorporates in the country that is the tax haven and put this in a lower tax rate. The process then takes place on paper and the company does not have to be moved to the headquarters in the offshore setting. The ownership is also unchanged, and the privileges can be enjoyed upon operating and for the taxes to be payed at such a low rate in foreign settings.


The way to solve this is to just end the deferral. Corporations should pay the taxes based on the income that they get offshore as opposed to indefinitely paying the income taxes in the US setting. This can also remove the incentives that are shifted by the US profits and to the tax havens.

Understanding The 2018 Tax Changes

Feb 6, 2018 Posted by deepak No Comments

President Trump signed the Tax Cuts and Job Acts on December 22, 2017. It slashes the corporate tax rate originally from 35 percent and down to 21 percent the minute 2018 starts. In other words, the highest individual tax rate is now 37 percent and it also cuts the rates of the income tax, eliminates personal exemption and then doubles the standard deduction. Corporate cuts are usually permanent whereas the changes in individual cuts end by 2025. In a nutshell, here is how this new Act changes deductions for elder and child care, business taxes and income taxes.

Income Taxes

* The Act retains the seven income tax brackets. The only difference is that the tax rates are lower. Employees will eventually see these changes reflected in their February 2018 paychecks. The income levels rise every year because of inflation. However, they increase slower compared to the past because the Act is resorting to the “chained consumer price index.” This will eventually move people to higher tax brackets.

* The new Act doubles the standard deduction. Those who are single filers increases the deduction from $6,350 and to $12,000. Those who are Married and also Joint Filers find their tax increasing from $12,700 and reaching $24,000. This means that the over-all 94% of taxpayers get the standard deduction. The National Association of Realtor and National Association of Home Builders are against this. When taxpayers take the standard deduction, only a handful of them would make the most out of the mortgage interest deduction.

* This can lower housing prices. This is why people are now concerned about the real estate market. They think it is currently trapped in a bubble which could burst anytime, therefore resulting to another collapse.

* It eliminates personal exemptions. Before President Trump signed the act, taxpayers are deducted $4,150 from their income every time they claim one dependent. This then results to families with multiple children paying higher taxes regardless the increased standard deduction that the new Act has imposed.

*It eliminates itemized deductions. This covers moving expenses. Only members of the military are exempted from this. This means that individuals paying alimony are no longer deducted for this, whereas those receiving the alimony can. This begins in 2019 for couples that signed the divorce in 2018.

*The new tax code retains the deduction for retirement savings, student loan and charitable contributions.

*It limits the deduction on the mortgage interest for every $750,000. Deductions can no longer be applied on the interest of home equity. Those who currently have mortgage are not affected by this.

Those who pay taxes can subtract to a total of $10,000 on local and state taxes. They have to choose whether the taxes will be on the property taxes, sales taxes or income. Taxpayers in California and New York, both high tax states, are in the losing end here.

The New Act Regarding Medical Expenses

The Act expands the deduction for 2017 and 2018 medical expenses. It lets the taxpayers deduct their medical expenses that range around 7.5 percent and even more of their income. Before this bill, the cutoff for medical expenses was 10 percent for insured individuals who were born after 1952. Obviously, seniors already receive the 7.5 percent cutoff. Statistics show that around 8.8 million people have already used this deduction in 2015.

The Act also repeals the much-discussed Obamacare tax for individuals who do not have health insurance in 2019. Without this mandate, the Congressional Budget Office predicts that around 13 million people will discontinue their plans. Therefore, the government would eventually then be able to save around $338 billion because there is no need to pay for the subsidies. The downside to this is that the costs of health care will increase. This is because fewer people get the preventive care required and needed in order to avoid those unexpected visits to the emergency room. Maine Representative Senator Susan Collins approved this bill because the President promised to reinstate the subsidies to the insurers. This is outlined in the Murray-Alexander bill.

The overall subsidies of $7 billion is reimbursed through lowering the costs for Americans who are within the low-income range. However, the CBO has stated that it will not offset the health care prices that are higher in value and were created by the repealed mandate.

This Act also doubles the exemption of the estate tax down to $11.2 million for the single taxpayers and around $22.4 million for those who filed as couples. This benefits those who are in the top 1 percent of that group. These higher 4,918 tax returns have a total contribution of $17 billion in their taxes. The exemption also reverts the pre-Act levels in the year 2026.

It maintains the Alternative Minimum Tax. It increases exemption from the amount $54,300 to $70,300 for the singles and as for those who filed as joint, this ranges from the amount $84,500 to $109,400. As for the exemptions, the phase out is at the amount of $500,000 for the single taxpayers and $1 million for those who filed as joint. This exemption also reverts to the Act levels of the year 2026.

Elder and Child Care

As for the Child Tax Credit, the Act raises it from the amount $1,000 to $2,000. For parents who do not earn enough in order to pay the taxes, they can claim credit as much as $1,400. It also increases income level at $110,000 to $400,000 for tax filers who are married.

This lets the parents use the 529 savings plans to pay for the tuition in private schools, as well as religious schools with the K-12 program. They can also resort to these funds to pay for the expenses that are acquired when children are home-schooled.

Every non-child dependent is given $500 credit. This assists the families in caring for their elderly parents.

Taxes on Businesses

The New Act decreases the maximum tax rate of corporations from 35 percent down to 21 percent. This is the lowest that it has been since the year 1939. For the longest time, the United States is included in the list of countries with the highest rates around the world. A number of corporations do not pay that much. Therefore, on average, the reasonable and effective rate is around 18 percent. Large corporations employ tax attorneys who assist them in coming up with ways so that they do not have to pay more.

This then raises the standard deduction to the amount of 20 percent for businesses that are referred to as “pass-through.” This deduction is said to end after the year 2025. Those considered to be pass-through businesses are sole proprietorships, S corporations, limited liability companies and partnerships. They also cover hedge funds, real estate companies along with private equity funds. The deductions are then phased out for the service professionals who reach the income amount of $157,500 for singles and as for joint filers, it’s around $315,000.

This New Act sets limitation to the corporations’ ability of deducting the interest expense down to 30 percent of the overall income. Within four years, the income is based on the EBITDA but this also reverts the earnings before the taxes and the interests. This makes it more expensive for the financial firms to borrow some money. The companies will also have less opportunities to issue the bonds and buy their stock back. Stock prices may fall. This limit generates the revenue to also pay for the other tax breaks.

It lets the businesses also deduct the overall costs of the assets that are considered to be depreciable and have this done in one year as opposed to amortizing these through several years. This, however, does not apply to the structures. To qualify, the equipment can be purchased between September 27, 2017 and January 1, 2023.

The New Act also requires the requirements to be stiffened especially on profits that carry interests. Carried interests are usually taxed at the rate of 23.8 percent as opposed to 39.6 percent. The firms are then required to hold these assets for the duration of a year so that they can qualify within the lower rate. The Act also extends this requirement to last up to three years. This may not benefit the hedge funds that have the tendency to continuously trade. It would also not affect private equity funds that are within the assets of five years. This change in taxes could increase the revenue to $1.2 billion.

It also eliminates the corporate AMT. This had a tax rate of 20% that kicked in if the tax credits pushed the effective tax rate of the firm right below that specified level. Under the AMT, these companies do not have the ability to deduct the spending budget for research and development as well as the total investments especially in a low-income neighborhood. By eliminating the corporate AMT, it adds a total of $40 billion to over-all deficit.

The New Bill also advocates the change from the “worldwide” tax system that is currently operating and turn it into a territorial system. Under this, multinationals receive taxes based on the foreign income that they have earned. They also do not have to pay the tax unless the profits are brought home. This results to corporations basing their businesses overseas. When it is set in a territorial system, these businesses are not taxed on the profit that they earned on foreign soil. There are more chances that they will invest this within the United States. This benefits the pharmaceutical as well as the high tech companies, most of all.

It lets the companies repatriate the overall $2.6 trillion that they hold in stockpiles. They only have to pay the tax rate that is usually 15.5 percent once and also 8 percent for the equipment. This repatriation could also raise the yields of the Treasury note. The corporations that hold the most of the cash in the treasury notes usually sell them because the supply that are in excess often send the yields on a higher basis.

Other Benefits of the New Tax Bill

* It lets the oil drilling within the Arctic National Wildlife Refuge. It is estimated to increase this by $1.1 billion in total revenue over a period of 10 years. When drilling this, it may not appear profitable unless it gains $70 per barrel.

* It retains the tax credits for the wind farms and the electric vehicles.

* It also cuts the deduction for the drug research targeted on orphans from 50% and to half which is 25%.

* There are cuts on the taxes of liquor, beer and wine. The Brooking Institute has an estimation that amounts to 1,550 more deaths that are related to alcohol. The studies also discovered that if the alcohol prices are lowered then there are more purchases of this product and therefore results to death tolls being higher.

How It Affects Taxpayers and Individuals

This new tax plan assists businesses, and not individuals. The tax cuts on businesses are permanent whereas the individual cuts have an expiration, and this is 2025. However, the largest private employer in the country, Walmart, has released a statement that they will increase the wages of their employees. They will also use this additional money that they have saved from the tax cuts to divide it in the form of bonuses and then also increase the benefits.

As for individuals, the clear winners are the higher-income families. Those who are within the 20-80 percent of the income range receives a 1.7% increase in their income after tax. Those who are in the 95 to 99 percentile will benefit an increase of 2.2%.

The Tax Policy Center also estimates that the ones in the lowest earning percentile would see their income at a rate of 0.4% higher. As for those who are in the next highest percentile, they are expected to receive 1.2 percentage boost. Those in the next two quintiles can see their income raise by 1.6 to 1.9 percent. The biggest increase goes to those who are earning the most.

The Next Shelter for Wealthy Americans: C Corporations

Jan 29, 2018 Posted by deepak No Comments

Because of the intricacies from the tax code, companies and businesses are encouraged to turn down the traditional kind of corporate business. This is the C corporation. Instead, they are asked to organize what is popularly known as “pass-throughs.” This has also been what is regarded as the norm. These businesses are not taxed at the corporate level but at the bracket of the individual income tax. The incentive for the business to be structured as such is so influential.

The pending reaction of the corporate tax rate form the 35% maximum and down to 20% also flips the equation for a number of taxpayers. It gives the business owners and a couple of wage earners a process to protect their income tax rates and let it reach to a 42.3% high. This is done by becoming C-corporations. The Senate tax bill also includes the rules to put a limitation on the professional’s ability. These professionals are the layers, managers and doctors. They can no longer incorporate and have the label income regarded as a corporate profit. Instead, a business that is non-corporate may also be elected to be taxed at a rate in the corporate level. That election is simple, and it requires a checkbox without even having him a form. There are no required lawyers during the interrogation.

This kind of tax sheltering does not only cost the Treasury a vast and substantial overall fiscal total, it also benefits the one with the most income and the most financially sophisticated Americans that have no influence whatsoever in the total economy. It also does not create jobs.

While there are certain elements of the proposals from the GOP that is an illustration of what may improve the current system in the corporate taxation, this is also the opportunity to shelter what can reduce the revenue and also benefit the high income taxpayers. It also introduces the new costs of inefficiency to the domestic tax system. The way to end these opportunities for the over-all tax arbitrage that very minute is to keep the rich Americans from playing with the tax system and leading it to their advantage. The point is to tax all income, whether it be individual or business, and make the rates effective. Without this approach, lawmakers must at least address that there are loopholes which will exacerbate this new kind of tax sheltering.

What is a Tax Shelter?


It is important to note that under the new bill, the payers with the higher income can transform into C corporations.

Under this newly signed bill, the rate of the wage earners will reach a high 42.3%. This includes payroll taxes and income. The highest rate of the income for pass-through businesses, especially when taken into account can also benefit how this is deducted for entrepreneurs of this kind of business. The calculation is looking like it will be 29.6%.

C-corporation shareholders can also pay the 20% corporate tax as well as pay for the dividend of the capital gains taxes on the individual tax returns that reaches up to the 23.8%. Whenever taken in practice, the effective rate on the capital gains have the tendency to be lower than the statutory rate on the capital gains and it becomes lower than the rate because of the shareholders that defer the shares and because there are a number of provisions that also eliminate the tax entirely. Aside to the lower rate, the form for the C corporation also allows that a number of taxpayers are given the ability to deduct the fringe benefits and a number of these are the pass-through business owners that are unable to be deducted, such as the premiums on health insurance and the fringe benefits. These are also used to itemize the deductions such as the paid local and state taxes which are no longer deductible for the individuals. This tax treatment is favorable for those who are earning high wages and owners of pass through businesses because they can turn their income into profits for the corporation.

Aside from this, the capability of the high earners and high-income tax payers to turn their income from a high tax wages and into corporate profits cannot be interrupted. The Senate bill includes provisions that are to limit the ability of the service businesses like those working in the aspects of law, health, engineering and architecture. This is what they do in order to make the most out of the deductions that are available in the pass through businesses. There are no prohibitions that applied to the C corporate businesses. In the 1970s, whenever the top individual income tax rates are significantly higher than the income tax rate of the corporation, there are high-income individuals that incorporate the C-corporations in order to shelter the income from the individual tax rates that are higher than the average. An example is that it can eventually be tax-efficient only for those who have bonds that bear interests in a corporation. This being said, it benefits companies more than individuals. When making the switch from the pass-through kind of business and into the C corporation form, the steps are simple. Today, the pass-through business owners essentially just check on a box on the tax form, specifically Form 8832, and therefore electing themselves into a C-corporation. It is difficult to argue that the bill favors these businesses because entrepreneurs can choose to file under this method so that they can lower their accumulated taxes.

Tax sheltering will also cost the Treasury a significant amount of the money. IT also benefits the most financially sophisticated and highest income earning Americans in methods that cannot do anything in order to help the total economy so that jobs can be created.

The magnitude of the total breakfast is expected to be quite large. In 2014, about 75% of the income from the pass-through businesses can total around $674 billion that is accrued to the taxpayers that are facing a different bracket rate, which is 25% above the norm. Meanwhile, 50% of the businesses that are pass-through also total to an amount of $464 billion that is connected to the owners. In the top brackets, a large share of the businesses can also benefit the C corporations in order to pay taxes rate that are much lower.

Wage Earning Corporate Managers will also benefit from the new bill

It is most likely that the large share of income and wages that are paid to the corporate managers are in a switch form. Take into consideration, individuals that are their own entrepreneurs because they have S-corporations and C-corporations. Closely held are the corporations with the small number of the shareholders. The stock is also publicly traded and once the managers and the owners file the corporate tax return then this is generally subject to the legal protections as that of the C-corporations. The income is then pass-through the pro-rata along with its shareholders.

Nowadays, the individuals are also generally elected so that the corporation’s income can be received in the kind of wages that let them be on the top rating. It is also well combined on the corporate profits. In 2013, total wages can also pay to the C-corporation representatives a total amount of $225. The majority of this compensation is also paid so that the managers and owners of small businesses are closely held. Aside from this, the wages of the S-corporation businesses are also paid to the individuals who are both employees and owners. When combined, these S-corporation wages equate to around 57% of the aggregate S-corporation that the business can gain the income. Around 70% of this officer compensation of the S-corporations are also accrued to the top individuals. The 1% of the income distribution can also have quite a great incentive and then shift the form of this income once the business rates of the corporation can also decline in a substantial connected to the rate of the labor income. The very cases where this exists, the manager is the owner and they decide to switch this corporation to receiving the income and then turning this into profits and wages because it is more straight forward. The higher income workers can also get in on the deal. It is so easy to declare that you are your own boss and no longer an employee. You are a person that sells your own services.

“Tax Shelter” is a pejorative term because it is a legal way to reduce liabilities in taxes. Someone who believes that this is a feature of the tax code gives the taxpayers the very right to deduct the taxes. It may not be a good idea, but it is the very label for a shelter. Most people regard this as some kind of incentive on the tax code of a shelter.

Corporations and individuals can reduce the final tax liabilities and allocate the proportion of the incomes in the tax shelters. They are also often classically connected with the high earners and established corporations and wealthy households that are also connected to the Swiss bank. Tax shelters are more widespread and easily accessible than what the suggestion implies. Take for example, the employer-sponsored of 401(k) programs. This individual retirement accounts are also accessible and widespread that the individuals can look into this as some kind of “shelter” for their income from taxation.

Whenever Sheltering Becomes Too Abusive

The IRS or the Internal Revenue Service can also make a distinction between the sheltering that encompasses the legal forms of deducting the tax liability and also serves as the aforementioned in the retirement plans. It may be abusive in the tax sheltering but this is also illegal. One example of the abusive tax-sheltering scheme which leads to the use of trusts that can reduce the liability by over-claiming the deductions are also hiding the known assets from the taxation.


Tax shelters are also beneficial whenever considered at the firm and individual levels. There are also some tax shelters can also be desirable regarding the distortionary effects that have the burden so substantive and also placed on the tax system. It has been through the tax base erosion. The erosion of the tax base is connected to the loss that has been accepted simply for the large and benefitting tax shelters. There are also shelters that gain little to even no benefits and this are very much harmful. Take for example, the individuals and firms that cannot store their wealth in the offshore accounts because they are usually found in countries that have tax rates and laws that are more advantageous than what is in the United States. In fact, around $1,200 billion of wealth has been stored in the offshore tax havens in 2014 and this results to a loss in tax revenue that is $35 billion.

Aside from eroding the tax base, the tax shelters are also the host of other effects that are considered to be quite distortionary. For example, the corporate wealth that is stored offshore in the tax havens can also be repatriated to the United States even without obtaining the tax burden that the corporation is trying to steer clear off. This lack of capability to get the wealth that can drive the firms to find debt financing can also depress the valuation on the market.

Tax Havens

“Tax havens” are specific means of tax sheltering. The tax haven is also serving as a locality – that can be the very much a region, a state or a country. It has also turned into a personal income tax rate or a lower corporate that the tax havens can also have the other properties that may store the income that is more desirable and also become the secrecy of the bank and also look into the incorporation. This is very much the reason why it has to be made clear that the new bill actually contains glitches that benefit corporations more than individuals.

Restructuring State and Local Taxes to Maintain Deductibility

Jan 22, 2018 Posted by deepak No Comments

Tax reform is expected to eliminate the local and state deductions. The reason behind this is that it encourages the local and state government to increase the taxes. If tax reform manages to eliminate the deduction, then the local and state governments will be facing a bigger and stronger pressure in keeping the taxes low.

Violating Neutrality that is Appropriate in Some Circumstances

The sole purpose of this tax reform is to liberate the economy in order to gain more strength by setting the neutral tax base and is lowered in the tax rates in a revenue-neutral manner. This can also improve the incentives for businesses as well as families along with entrepreneurs and investors that can engage in the activity.

Neutrality’s principle keeps the taxes in such a way that it does not influence the decisions of the taxpayers on an economic basis. By maximizing the economic growth, the tax reform can institute this in the neutral tax code in a reasonable level. Nonetheless, there are still some instances that violate the neutrality and is still regarded as appropriate.

Whenever there is an anomaly that is historically unavoidable, then this case is exclusive for the employer-provided health insurance. This exclusion is also a historical artifact that dates back to the 2nd World War. Because by eliminating this, there are other reforms that can create the major disruptions that are apparent in the health insurance market. There are also some sensible tax reform plans that can also retain the exclusion and also provide the credits for the families so that they can obtain the health insurance.

A similar instance is when the beneficiary of the specific policy justifies that it is more harmful than neutral. Earned Income Tax Credit is retained so that families that are in the low-income bracket can improve their situation.

Note that tax reforms must eliminate the neutral policies containing negative consequences and intention. When this is done, then neutrality will be eliminated.

State and Local Tax Deduction is Neutral and Must Be Eliminated

The tax code lets the taxpayers deduct certain local and state taxes that include income taxes and sales taxes specifically for the residents of states. These go without the income tax, personal property taxes and real estate taxes. Local and state income taxes also make up around 95% of all the local and state deductions.

According to the tax policy theory, the reductions are neutral because taxpayers may not have to pay on the income tax that they really do not save or spend. The local and state taxes also deprive the taxpayers allow the ability to do both with the taxes and the income that they can claim.

However, the downside to the theory of the tax policy usually does not keep to what is known information on the economic reality. When it comes to the local and state tax deduction is the harmful negative consequences. It also creates the benefit of ensuring the taxpayers that do not pay income tax the reality that they cannot save or spend.

The deduction from this results to another circumstance that warrant and violates the neutrality. This is the very reason why tax reform must eliminate it.

Deduction Encourages the Local and State Governments to Raise the Taxes

The harmful and unintended consequences of deduction is that it influences the local and state governments to increase their taxes. However, higher taxes also let the local and state governments grow larger because there is a need to spend the maximum amount of revenue that is possible for them to collect.

The deduction also encourages the local and state governments that can raise their taxes because it is possible to transfer some of their tax burden percentage from the residents and to the federal government. For example, every dollar that the state taxes one family that pays the 33% federal marginal tax rate, the family can also effectively pay a percentage. Specifically, this is $0.67 of the state tax. The deduction on the federal taxes of the family reduces the tax bill by $0.33.

This deduction in the mentioned price of the state and its required taxes also influences the states to increase their taxes higher. This is because taxpayers can also offer a lower amount of resistance because they really do not pay the full amount of the higher taxes. Taxpayers are also more willing in accepting the higher taxes due to the deduction that the consumers are willing to purchase a service or product especially when the prices decrease.

However, there is no connected reduction in the federal government when it comes to the revenue from the deduction. The federal government does and can borrow freely. This is why Congress spends amounts of tax revenue that is irrespective. The local and state governments have also less latitude in terms of borrowing in order to spend more that is closely matched to the tax receipts.

If this deduction is removed from the tax reform, then the overall amount that the taxpayers pay in terms of taxes are least likely to not change. Tax reform should be in the form of revenue and distributed in a neutral setting. This means that the taxpayers must pay the same amount of federal taxes like they did before. However, the federal taxes can no longer reduce this burden effectively on their local and state taxes.

The taxpayers are now faced with shouldering the burden of local and state taxes. Taxpayers are also more likely to reduce the existing tax burden. By combining these effects, they can restrain the tax burdens on both the local and state government level.

States with the Highest Taxes Would See the Greatest Pressure

The municipalities and states with the highest taxes have the biggest pressure in lowering the taxes of their residents. Taxpayers that are in states with high taxes also tend to have higher incomes. For example, based on a study conducted by the Tax Foundation, Connecticut, New York as well as New Jersey have the highest local and state taxes and burdens. They are also ranked in the top five in regard to the per capita income. The number of the high-tax states usually have relatively high per-capita compensation.

Those who are paying higher income taxes can also claim the deduction in the local and state taxes level. According to the IRS, the taxpayers who earn around $100,000 due to the claim can get a 76% deduction.

Data shows that tax payers who are residing in states with high taxes usually already pay hefty amounts on the local and state taxes. There is also a burden that is reduced through the deduction. If tax reform manages to eliminate the deduction, then the taxpayers can see a big increase in both their local and state taxes. They can also put pressure on these government ordinances in order to stop the increase in taxes and allow them to apply pressure on them so that higher taxes can be reduced.

Lower Rates are an Added Bonus

By eliminating the local and state tax deduction can only be done when it is within the context of the tax reform as an overhaul. Congress must not eliminate this without offsetting the changes in the taxes. In order for them to do this, then there would be unnecessary increases in taxes.

Eliminating the deduction in the total revenue whether it be in a neutral tax reform can also allow the marginal tax rates to be lowered for families. The local and state deduction can also reduce the taxes to $1 trillion over 10 years. Revenue can also be provided for the substantial and additional reduction in the rates. If the rates are lower, then it also enhances the growth-promoting potential of the reforms in taxes. This is also an added bonus when the deduction is eliminated.

Eliminating State and Local Tax Deduction in Order to Pay for Tax Cuts

The tax plan that President Trump and the congressional Republican ends the federal deduction that is allotted to SALT or the state and local taxes. This lets the taxpayers itemize their deductions on the income taxes from a federal level and also deduct the local and state taxes. There are proponents that argue that when this deduction ended, it will not hurt the middle and low-income households because the direct benefits are targeted to the higher-income filters. By eliminating this deduction, the federal income tax will eventually become more progressive. However, it also ignores that the actual tradeoff of the GOP tax plan is proposed. This eliminated the SALT deduction and then resorts to the revenue so that the marginal income from these tax rate cuts can be bad for most Americans, particularly those who are considered to be middle and low class.

The first thing to know is that the rate cuts in the tax plan tend to be tilted especially concerning the SALT deduction. This is the reason why the year 2027, 80% of the net tax cuts are shifted to the top 1 percent of the Americans. This is when they claim that the key elements of the current plan will completely take in effect. The Tax Policy Center has estimated this.

Secondly, the SALT deduction assists the local and states funding especially in the public services. They provide widely shared benefits. Because this deduction is of a high income and a number of people are willing to support the taxes on the local and state level, then repealing this deduction can definitely make it harder for both the locality and the state.

When the deduction is repealed and rejected, then it is harder for the localities and the states to tackle the budget strains. It raises the sufficient revenues especially in the coming years for the government to fund higher education, including K12, and above all, health care. In order to balance the budgets with revenue that is insufficient, the policy maker of the state likely makes cuts in particular services that would make it most felt. It would also push the costs to the low and middle-income people, making the local and state tax systems and make it more regressive in the over-all setting.

States and localities can also respond when raising the fees and taxes that fall heavily on the residents who are within the higher-income bracket. It would also push the costs into the low-and middle-income individuals and make the local and state tax systems more regressive than it already is.

The proposal to end SALT deduction and make it harder for localities and states to fund the current programs that they have in mind allowed the President and the Republicans to come up with a proposal of a 10-year budget that shifts the substantial and new costs to the states. It also sharply cuts the Medicaid and other funding of the health insurance and potential cuts the federal support for the local and state services such as transportation, low income housing, education and environmental protection.

Responding to the criticism of the Republican representatives of Congress who also represent varied states could be a particularly difficult approach if the intent is to end the SALT deduction. GOP leaders have considered a number of compromises that would partly, as opposed to entirely, end it. These also include capping the deduction and then ending that for the income taxes and not the real estate taxes. Letting the filers take the SALT deduction or another like interest deduction and home mortgage. Both cannot be taken. Partially ending this new deduction process is particularly harmful for middle and low-income Americans. However, since the states and localities will eventually weaken, then it is time to increase the adequate revenues.

Trump administration official pointed the estimates that show most of the deductions from SALT on the federal tax benefits go to people earning $100,000. Higher income filers can also benefit more depending on the deduction because these are likely to be itemized, claim the higher amounts of the deductions, which also include the SALT, and resort to higher federal tax rates.