Taxes Archives

TurboTax owner to pay for charging to file taxes

Consumers who were misled by TurboTax’s owner, Intuit, into paying for free tax service should soon be reimbursed.

State Attorney General Michelle Henry Thursday said the reimbursement will come from a $141 million multistate settlement of which Pennsylvania will recive more than $4.76 million.

Henry said 158,779 Pennsylvania consumers are among the approximately 4.4 million consumers nationwide who should receive checks in the mail as the result of the multistate settlement.

Eligible consumers will be contacted by email about the settlement, and checks are expected to be mailed in May.

“By requiring consumers to pay for tax-return services that should have been available for free, Intuit cheated taxpayers out of their hard earned money,” Henry said. “Intuit’s deceptive practices and aggressive advertising campaign were unnecessary and illegal; especially when the IRS offers free tax-return services for eligible consumers.”

In 2022, Attorneys General from Pennsylvania, Tennessee, Florida, Illinois, New Jersey, North Carolina, New York, Texas, and Washington, announced a $141 million multistate agreement with Intuit for deceiving millions of low-income Americans into paying for tax services that should have been free. All 50 states and the District of Columbia have signed onto the agreement.

Eligible consumers include those who paid to file their federal tax returns through TurboTax for tax years 2016, 2017, and 2018 — but were eligible to file for free through the IRS Free File Program. Consumers will receive a check in the mail automatically, without filing a claim, Henry’s office said.

The amount each consumer receives will be based on the number of tax years for which they qualify. Most consumers are expected to receive between $29 and $30.

For more information about who is covered by the settlement, and information about the settlement fund, visit www.AGTurboTaxSettlement.com.

Can Keystone Saves bill rescue Pa. from fiscal cliff?

Financial security in retirement is important for all Pennsylvania taxpayers, and especially for Pennsylvanians aged 65 and older. But what happens when residents do not have enough money for retirement?

Such is the dilemma facing Pennsylvania as the state seeks to deal with a looming fiscal crisis – “a fiscal cliff,” Pennsylvania State Treasurer Stacy Garrity called it – created by insufficient retirement savings.

An online seminar addressing the impact of insufficient retirement savings on Pennsylvania’s fiscal health was hosted recently by Garrity and John Scott, project director for retirement savings for The Pew Charitable Trusts. Information in the online seminar was based on analysis prepared for the Pew Charitable Trusts by Econsult Solutions, Inc. (ESI), an economic consulting firm.

ESI provided a 2018 analysis of economic and fiscal impact of insufficient retirement savings in Pennsylvania from 2015 to 2030 for the Pennsylvania Treasury Retirement Savings Task Force. Subsequent analysis of county-level impacts was undertaken by ESI for Pew in 2020. ESI’s report updates findings of statewide impacts of insufficient savings to cover the period from 2020 to 2035.

According to ESI’s findings, Pennsylvania’s elderly population is expected to grow by more than 550,000 in the next 15 years, increasing from 19% to 23% of PA’s population. The share of Pennsylvania households headed by an elderly resident is expected to increase from 30% in 2020 to 36% by 2035. Pennsylvania’s dependency ratio is also projected to increase from 43 households aged 65 and older for every 100 working-age households in 2020 to 56 households aged 65 and older in 2035.

As working age households are major drivers of tax base, the change in ratio creates fiscal pressure. The reason being there will be fewer taxpaying households age 20-64 to support an elderly population that is projected to grow from 2.49 million in 2020 to 3.04 million in 2035.

“There is a growing share of older people, older households in the Commonwealth, but the tax base that’s supporting a lot of the programs that support the elderly has not grown as quickly,” Scott said. “So that’s going to be placing more stress on taxpayers in Pennsylvania.”

How much stress was revealed by Garrity, who noted that two million Pennsylvanians, approximately 44% of the state’s private-sector workforce, cannot save for retirement at work. The resultant cost to taxpayers, she said, is more than $1 billion annually.

“I really want to emphasize this point,” Garrity said. “Pennsylvania taxpayers are footing a bill of more than $1 billion per year to account for unprepared retirees. That includes costs for social services and lost revenue.”

Garrity added that research conducted by the Independent Fiscal Office confirms that Pennsylvania will reach a fiscal cliff by Fiscal Year 2025-26.

“Common sense says we should prepare for it now,” said Garrity. “And here’s another fiscal challenge for Pennsylvania: The research we’re discussing shows the retirement savings crisis will cost Pennsylvania a total of $17.8 billion through 2035. So that’s the scope of the problem.”

The problem having been defined, what’s the solution? Garrity and Scott said one way to address the retirement savings crisis is to implement a simple, business-friendly plan to help working Pennsylvanians save for retirement. Not a government handout, Garrity emphasized, but a program that makes it easy for people to save for retirement.

“The goal,” she said, “is to make it easy for people to save their own money.”

In December 2021, Garrity and Rep. Tracy Pennycuick (R-Berks/Montgomery) and then-Rep. Michael Driscoll (D-Philadelphia) announced the introduction of “Keystone Saves”, a retirement-savings program for Pennsylvanians who do not have access to retirement savings through their employer.

As is the case with automated savings programs across the country, Keystone Saves would enroll employees automatically in a voluntary individual savings account (IRA) to which they can use direct deposit to make regular contributions.

Estimated to help Pennsylvania reduce state spending by close to $1 billion annually, Keystone Saves is supported by The Pew Charitable Trusts, the Pennsylvania Institute of CPAs, the American Association of Retired Persons (AARP), the United Way of Pennsylvania, the Pennsylvania Health Care Association, the Pennsylvania Association of Sustainable Agriculture, and members of the state’s General Assembly.

As many employers are unable to provide retirement savings due to administrative capacity and high startup costs, state automated savings programs are seen as a practical solution to provide savings opportunities to workers who lack them.

Scott noted that 12 states in the U.S. have enacted legislation creating such programs, and programs in six states are operational. Participants in state-sponsored automated savings programs have an average annual savings of $1,500 to $2,000.

“These programs are showing this can be done,” said Scott. “This is a very feasible and practical solution.”

The Keystone Saves bill has received bipartisan support in the Pennsylvanian legislature but has yet to pass. As Gov. Josh Shapiro is a Democrat who stresses bipartisanship, the opportunity exists to work with Garrity, a Republican, to guide the bill through the legislature.

“The time to solve this problem,” Garrity stated, “is now.”

Shapiro: $2,500 tax credit for new teachers, nurses, police officers

Last week, Gov. Josh Shapiro announced he will propose a three-year tax incentive of up to $2,500 a year for newly certified teachers, nurses and police officers in his upcoming Budget Address.

“Gov. Shapiro understands the critical workforce shortage the commonwealth faces and is committed to taking action to support workers and businesses,” a release said. Building an economy that works for everyone, ensuring that every Pennsylvania child receives a quality education, and making communities across the commonwealth safer are the top priorities that will be reflected in his March 7 address.

“I’ll be proposing a new $2,500 personal income tax credit to hire new cops, teachers and new nurses every year for at least the next three years,” Shapiro told KYW Newsradio and KDKA. “It’s going to help us put more teachers in the classroom, more nurses in the hospital, and more police officers and troopers in our communities.”

Shapiro previously shared that his upcoming budget proposal will include a 50% increase for the Manufacturing PA Innovation Program and a 25% increase in funding for computer science and STEM education through Pennsylvania’s PA Smart Program.

Paula Wolf is a freelance writer

Pa. closes 2022 with strong December revenue, budget surplus

Pennsylvania collected $4 billion in General Fund Revenue in December 2022, which was $319.9 million more than anticipated, Gov. Tom Wolf and the Department of Revenue announced Tuesday.

Collections for the fiscal year-to-date General Fund total $19.7 billion, $503.1 million above the estimate.

Wolf said in a statement that Pennsylvania is in a strong fiscal position heading into 2023. “Year to date, we are 2.6 percent above our estimated revenue collections, which means we have $503.1 million in the bank above and beyond what we expected. That’s money that can be used to better support the people of Pennsylvania in the coming year, and I look forward to seeing what the new administration and the General Assembly will accomplish on behalf of Pennsylvanians.”

Pennsylvania was operating with a $2-3 billion budget deficit when Wolf took office eight years ago, and the Rainy Day Fund was just $231,800. Pennsylvania ended the most recent fiscal year with $5.537 billion in the General Fund, and an investment of more than $5 billion in the Rainy Day Fund.

Revenue Secretary Dan Hassell noted it was only a couple years ago that Pennsylvania was dealing with a $3.2 billion shortfall at the end of the 2019-20 fiscal year. “Fortunately, we are facing a much different situation today — and that is very much a testament to the strong fiscal management of Gov. Wolf. Pennsylvanians should be encouraged that we are on such solid financial footing as the Governor closes out his term.”

Wolf said the goal of his administration has been to build a strong foundation for Pennsylvania so that government can invest in the things that improves the lives of Pennsylvanians, including an historic $3.7 billion investment in education.

“The strong fiscal foundation that my administration has built will empower the next administration and the General Assembly to continue making life-changing investments in the people of Pennsylvania in the years to come.”

Most of the surplus in December is attributable to personal income tax revenue that was deposited on the first day of the month, rather than on the last day of November, as initially expected. Sales tax receipts totaled $1.2 billion for December, which was $2.3 million below estimate. Year-to-date sales tax collections total $7.1 billion, $134.8 million more than anticipated.

Personal income tax (PIT) revenue in December was $1.4 billion, $204.9 million above estimate. This brings year-to-date PIT collections to $7.5 billion, which is $27.1 million above estimate.

December corporation tax revenue of $1 billion was $116.3 million above estimate. Year-to-date corporation tax collections total $2.7 billion, $328.7 million above estimate.

Inheritance tax revenue for the month was $138.0 million, $6.1 million above estimate, bringing the year-to-date total to $725.7 million, $16.3 million below estimate. Realty transfer tax revenue was $55.8 million for December, $23.3 million below estimate, bringing the fiscal-year total to $351.9 million, $26.7 million less than anticipated.

Other General Fund tax revenue, including cigarette, malt beverage, liquor, and gaming taxes, totaled $174.2 million for the month, $5.1 million below estimate and bringing the year-to-date total to $939.6 million, $32.5 million below estimate. Non-tax revenue totaled $55.5 million for the month, $23.3 million above estimate, bringing the year-to-date total to $346.7 million, $88 million, above estimate.

In addition to the General Fund collections, the Motor License Fund received $203.0 million for the month, $8.2 million above estimate. Fiscal year-to-date collections for the fund – which include gas and diesel taxes, as well as other license, fine and fee revenues – total $1.4 billion, $25 million above estimate.

State revenue in October exceeds expectations by 6.4%

Last month, Pennsylvania collected $3.1 billion in general fund revenue, 6.4% more than anticipated, the Department of Revenue reported.

Fiscal year-to-date general fund collections are $12.9 billion, or 3.1% above estimate.

Among the highlights for October:

· Sales tax receipts were $1.3 billion, or $94.2 million above estimate. Year-to-date sales tax collections total $4.8 billion, or 2.9 percent more than anticipated.

· Personal income tax revenue was $1.3 billion, or $68.7 million above estimate. Year-to-date collections total $5.0 billion, which is $0.5 million more than expected.

· Corporation tax revenue of $183.4 million was $17.4 million above estimate. Year-to-date collections come to $1.5 billion, or 16.1 percent more than anticipated.

· Inheritance tax revenue was $123.3 million, or $2.1 million below estimate. The year-to-date total of $478.4 million is 2.1 percent under estimate.

· Realty transfer tax revenue reached $64.3 million, $0.7 million below estimate, bringing the fiscal-year total to $250 million. That cumulative amount is 5.2 percent more than anticipated.

Other general fund tax revenue, including cigarette, malt beverage, liquor and gaming taxes, generated $156.8 million for the month, $2.1 million below estimate. The year-to-date total of $598.2 million is 1.7 percent less than anticipated.

Non-tax revenue totaled $45.4 million for October, $13.5 million above estimate, bringing the year-to-date total to $155.2 million, which is 35.9 percent more than expected.

In addition to general fund collections, the Motor License Fund received $217.6 million in October. Fiscal year-to-date collections for the fund – which include gas and diesel taxes and other license, fine and fee revenues – are $951.1 million, 0.9 percent above estimate.

Paula Wolf is a freelance writer

Tax bill to reduce Corporate Net Income Tax on way to governor

Reducing the Corporate Net Income Tax in Pennsylvania will improve the business climate when the new legislation is signed by Gov. Tom Wolf, according to the Pennsylvania Chamber of Business and Industry.

The chamber applauded state lawmakers and Wolf for the passage of House Bill 1342, which reforms the state’s tax structure, including a reduction to the state’s Corporate Net Income Tax rate and notable tax relief for small businesses.

“This monumental tax reform package is a win for businesses and the people of Pennsylvania,” said Luke Bernstein chamber president and CEO. “Pennsylvania has so much to offer potential investors and entrepreneurs. These tax reforms instantly make us more globally competitive and allow us to focus on Pennsylvania’s strengths as a hub of global commerce and opportunity – our prime location, world-class educational institutions, innovative workforce and more.”

The bill passed the senate last night by a vote of 38-12. The house approved the measure 184-16.

“We are proud to stand with the leaders of the House and Senate, Governor Wolf and other legislative champions of business who supported these vast improvements to our state’s competitiveness,” Bernstein said.

The tax reform package, which was a top legislative priority for the chamber for decades, is a major step towards showing that Pennsylvania is open for business, he said.

For decades, Pennsylvania’s CNIT rate, which at 9.99% was the highest flat rate in the country, served as a barrier to growth, Bernstein said.

The budget cuts the rate in half over the course of nine years – starting with a full one percent reduction in 2023 to 8.99% and then phasing down each year by half a percent until reaching 4.99% in 2031.

Based on current state corporate tax rates, the full reduction takes Pennsylvania from the highest CNI tax rate in the country to the sixth lowest by 2031 and is the first change in the rate since 1995 – giving the state’s economy a vigorous boost in its post-pandemic recovery, he said.

The benefits of a more competitive business tax code go far beyond just improving the state’s business climate, according to the chamber. Studies have shown that a decrease in the corporate tax rate leads to increased GDP, higher wages and increased home values, all of which create family sustaining jobs and attract and retain new talent.

The newly passed tax reform package also includes additional relief for small businesses, affording businesses the opportunity to defer personal income tax liabilities through “like-kind exchanges” of certain property, another long-sought after member-centric goal of the PA Chamber, Bernstein said.

This provision allows employers to invest in the job-creating assets businesses need to stay competitive. Previously, Pennsylvania was the only state in the country that did not offer this type of deferral, he said.

An additional component of the package aligns the state Tax Code with federal tax law by allowing small businesses to deduct qualifying equipment purchases from personal income tax liabilities, just as federal tax law provides for under Section 179. This change makes it easier for employers to buy equipment and invest, which in turn promotes job growth.

“This long sought-after overhaul of Pennsylvania’s business tax structure would not have been possible without a bipartisan, collaborative effort,” Bernstein added.

“We thank our legislative leaders for working with Governor Wolf and ensuring this tax reform package was part of this year’s budget, prioritizing the Commonwealth’s competitiveness and working alongside the Chamber, together for Pennsylvania,” he said. “We look forward to seeing the Governor sign this historic reform into law.”

State Senate Finance Committee approves Corporate Net Income Tax plan

The Pennsylvania State Senate Finance Committee approved legislation (SB 771) to reduce the state’s Corporate Net Income Tax (CNIT) rate, the highest non-graduated rate in the country.

Pennsylvania Gov. Tom Wolf PHOTO/SUBMITTED –

Gov. Tom Wolf, a former businessman, said the bill would reduce the CNIT from 9.99 to 7.99 percent on January 1, 2023, with a reduction to 6.99 percent in tax year 2026 on a path to 4.99 percent, with the legislation sponsored by State Senator Steve Santarsiero, D-Bucks County, and Representative Mary Jo Daley, D-Montgomery County, to pave the way for new business opportunities, jobs, and a stronger economy.

“In Pennsylvania, our Corporate Net Income Tax is one of the highest in the nation and it’s holding our commonwealth back,” Wolf said. “Businesses are asked to pay more than their fair share; it’s a barrier to new business growth and limiting opportunities for our workers and new student graduates.

“My plan to lower this tax on Pennsylvania’s businesses is an opportunity to support Pennsylvania’s businesses and families, to ensure that students can find good jobs, and to remove barriers to new business and innovation in the commonwealth,” he said.

The bill must pass the Senate and move through the House of Representatives before becoming law.

“Pennsylvania has too many attributes to consistently lose out to other states for investment and job growth, but that’s been the case for too long due in large part to excessively high CNI,” said Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry. “If reduced to a more competitive level, we can focus on enacting the policies that will jumpstart our economic recovery, train and retain a globally competitive 21st century workforce.”

According to the governor’s office, Wolf has put Pennsylvania back on track through sound fiscal management. Over the past seven years, his administration has turned a $2-3 billion structural budget deficit into a $2-3 billion budget surplus and built the Rainy-Day Fund to more than $2.8 billion, more than 12,000 times what it was when he took office.

Wolf will be the first governor since Dick Thornburgh, who left office in 1987, to turn over a budget surplus to his successor, the administration said.

In addition to reducing taxes, the legislation would also modernize the current structure to level the playing field for all businesses. Combined, this lower tax rate and modernization will immediately make the commonwealth more competitive with surrounding states and improve the overall business climate.

“It is past time we level the playing field for our Pennsylvania-based businesses,” said Santarsiero. “Fiscally, the commonwealth is in a position right now to improve our corporate tax system and set the stage for a more vibrant economy. The changes we are proposing today will support our local businesses and incentivize new start-ups in Pennsylvania.”

“Next year, when the CNIT is cut to 7.99%, over 95% of corporations will be held harmless or will get a tax cut, said Daley. “That leaves only five percent of corporations that will have a higher tax bill; and that would be the corporate taxpayers who do business inside and outside of Pennsylvania.”

What the ‘Build Back Better’ plan could mean for you

In December of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Only four years later, another piece of major tax legislation is expected to be enacted. Like the TCJA, proposed 2021 tax legislation would be far-reaching and only require a simple majority in the Senate.

Recently, the U.S. House Ways and Means Committee released the latest version of President Biden’s Build Back Better plan. As a proposal, it’s likely many of these measures will never see the light of day. However, savvy investors need to be aware of five key areas of the Ways and Means proposal which, sooner or later, may become paramount issues for families and institutions alike:

Corporate Taxes

The Change: Changes in the corporate tax rate impact nearly every part of American life. At present, the corporate tax rate is set at a flat 21%. Ways and Means proposes moving from a flat rate to a graduated rate, starting at 18% and capping at 26.5% at $10 million. Many experts find this proposed approach unpalatable as the nation still grapples with the pandemic. Others are relieved that it’s a more modest increase than expected.

How it Impacts You: Changes to the corporate tax rate could impact job creation and the cost of goods in the U.S. Additionally, the proposal introduces changes to the taxes on international partnerships that would make it more difficult for businesses to avoid paying U.S. taxes when operating overseas.

Capital Gains

The Change: The proposal introduces an increase to the capital gains tax, from 23.8% to 31.8% on long-term capital gains. This includes a 3.8% surtax on income over $5 million.

How it Impacts You: Investors in the process of considering long-term risk mitigation steps for their investment portfolio should pay attention to this change as it might impact their decision-making. That said, there is a large amount of ambiguity surrounding this change, and investors should speak to their financial advisers before making any decision.

Individual Taxes

The Change: Like capital gains, the proposal also increases individual tax rates to 39.8% for individuals making more than $452,700. Additionally, state and local tax (SALT) deductions would be increased from $10,000 to $40,000.

How it Impacts You: Changes in the SALT tax will impact high-income taxpayers in high-income tax states, like New York and New Jersey, allowing for greater deductions when itemizing taxes in 2022. This adjustment to the SALT tax is already planned for 2025, and this measure would speed up that timeline to be implemented in time for the 2022 tax season.

Estate & Gift Taxes

The Change: The most punitive tax code changes in the Ways and Means proposal would be visited on estate and gift taxes. The proposal would lower the estate tax exemption from $11.7 million to $5.8 million. Additionally, changes to grantor trusts may cause such trusts to be includable for estate tax purposes.

How it Impacts You: Grantor trusts are some of the most utilized vehicles for preserving inter-generational wealth. These changes would impact trusts drafted after the legislation and could significantly impact common planning techniques. Those who have or are about to begin planning their estate should pay particular attention to these changes.

Retirement Plans

The Change: The Ways and Means proposal would address retirement plans in a myriad of ways. For starters, one change may include auto-enrollment mandates for 401(k) and 403(b) plans; the goal being to increase participation. An increase to the mandatory distribution age is also on the table as is increasing the catch-up contribution amounts.

How it Impacts You: If enacted as written, these changes to U.S. retirement plans will impact current saving strategies, especially if individuals are taking advantage of retirement catch-up provisions. Additionally, several of these changes will encourage early retirement savings, allowing those savings to remain in place until age 75.

While current investors should be aware of these proposed changes, it’s difficult to make financial decisions based on legislative motions that have yet to be passed, and without knowing what – if any – aspects of the proposal might ultimately make it into the tax code. Investors should speak with their financial adviser to better understand the potential implications for their investment strategies, their retirement plans and their estate.

Malcolm “Skip” Cowen II is president and co-founder of Cornerstone Advisors Asset Management, LLC. He can be reached at (610) 694-0900. This material is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal or tax advice. For a comprehensive review of your personal situation, always consult with a tax or legal adviser.

What is my Lifetime Income Tax Bill, and how can I try to reduce it?

The media has been full of headlines discussing various income tax proposals, many of which focus on the “wealthy.” Fortunately, many business owners fall into that category, and many are concerned about higher future tax rates. Let’s look at why taxes might increase and how to think differently about your personal and business tax plan. Many of you have seen headlines highlighting a variety of income tax proposals, with many of them focused on the “wealthy.” Fortunately, many business owners fall into that nebulous description. When we talk to clients like you, many of them are concerned about tax rates increasing in the future. Let’s look at what you can do and why, to think differently about your personal and business tax planning and why.

The primary

challenge is that most simply do not understand income taxes and how they work. Do you drop off your tax documents to the tax preparer, then pick them up, sign them and never look at them?

Let’s rethink taxes, not on a year-by-year basis, but instead over your lifetime. Each time you file an income tax return there is a line called “Total Tax.” That was your annual tax bill, the amount you had to pay the government.

Your Lifetime Income Tax Bill is simply the total of your annual tax bills. Planning each year and trying to forecast the future are important, especially if you are concerned about higher future tax rates.

Do not be alarmed if you find this difficult… most people do. Most people, especially business owners, are too busy to read the thousands of pages in the Tax Code. What probably makes more sense is to simplify your thoughts and start addressing your personal situation. The first hurdle is to consider where tax rates will be in the future; the same, lower or higher? Consider the data.

According to the Federal Reserve Bank of St. Louis, as of April 26, 2021, the US Total Public Debt was $28.529 Trillion. With the current US population at 332.841 million,i that equates to $85,713 of government debt for each American. Combined with projected future fiscal deficits, and the potential infrastructure and other stimulus packages, and that debt may climb.

Congress seems to be intent on increasing taxes on corporations and the wealthy. One concern is that the wealthiest Americans, the 650 billionaires, do not have enough to impact the overall debt. According to Forbes, the total wealth of these billionaires is $4.6 trillion, not nearly enough to reduce the debt, even if the government confiscates 100% of their assets.

Wouldn’t it seem likely that tax rates would have to increase on middle America at some point? Do you want to take the risk that tax rates remain the same?

What can you do today?

Tax Planning is simply the art of paying more income tax at the lowest rate possible. Much of your income, like your salary, has to be paid each year, making planning difficult. More people are concerned is what will happen to their investment and retirement income down the road?

Income tax rates are as low as they have been for several decades. Might it make sense to pay taxes now, rather than deferring them until later? A couple potential tax planning options might include the realization of capital gains, along with Roth IRA or Roth 401(k) conversions.

As investors, purchasing and holding an investment for more than one year typically allows special tax treatment, called long-term capital gains. Might this “tax break” be reduced in the future? Congress has discussed increasing these capital gains rates in the future. Many business owners are selling their businesses before year-end, along with realizing gains in their investment portfolios. These strategies are designed to lock in current capital gains rates in case they increase in the future.

In addition, many of our clients have been converting IRAs and 401(k)s to Roth IRAs/401(k)s. Typically, in a Traditional IRA/401(k), no tax is assessed until you withdraw it. The potential problem is that taxes will have to be paid at the rate the government decides. Essentially, you have a “debt” to the government which has to be paid. By converting those traditional retirement plans into Roths, you pay the taxes now, at today’s rate and the money will never be taxed again (provided you meet the IRS requirements). Another option is to change your Traditional contributions to Roth contributions moving forward.

There are many tax planning strategies, many too complex for this article. Realize that every family is different, so what makes the most sense for you depends on your unique set of circumstances. Either way, seek guidance from your tax professional and create a long-term strategy to potentially lower your Lifetime Income Tax Bill.

Paul Marrella is a wealth manager at Marrella Financial Group LLC/Raymond James Financial Services, Inc., in Wyomissing, public speaker and author. He coaches successful families in managing multi-generational wealth throughout Southeastern Pennsylvania. He can be reached at (610) 655-9700.

Thinking of selling your business? Here’s why now might be the best time.

Business owners looking to sell or transfer their business to a family member may have some tax decisions to make if the Biden administration gets its tax code revisions through Congress this year.

Don Petrille, senior lawyer with High Swartz, Doylestown, said the 2017 Tax Cut and Jobs Act created a lot of exemptions for business owners. However, many of those could go away by 2026, if not sooner.

The Biden administration’s American Jobs Plan would change the current Step-up in Basis law that Petrille explains using stock purchases as an example. “If you buy a stock at $10, that is your basis. If it appreciated to $15, your capital gain is $5,” he said. “If you give the stock to someone, they get your basis. So, under the current rules, the basis is based on what it is worth (when bought).”

That relates to selling a company. If an owner sells a company, the basis is what it is worth when it was started. Under the Biden proposal, the basis would be what the company is worth when sold. That will increase capital gains taxes.

John Reed, partner with Barley Snyder, Lancaster, expected capital gains to increase last year. “We all think change is coming, but we don’t know when.”

The takeaway, he said, “if someone is thinking about retiring, they should do it now when we know what the rules are.”

Colin Keefe, partner with Fitzpatrick, Lentz & Bubba, Allentown, agreed. “It’s a good time to sell because we believe taxes will go up in 2022.”

Reed said succession planning comes with many challenges. The proposed changes could make the financial challenges even greater.

“There is risk inherent in this,” he said. “If (the owner) needs to get money out of the business (to live on), he may sell to others and rely on monthly income. There is risk in that,” he said. “You hand control over to someone else and you no longer have control over the running of the operation.”

Petrille said owners have to take a holistic approach to keep the business going. “You have to look at what the departing owner is taking with him; his knowledge, vendor relationships, and what he contributes daily to the operation. How are you going to finance that?”

Insurance can offer some protection, he said. It can be used to retain people who can run the business or to get through rough times during the transition.

Many entrepreneurs will use a self-directed IRA to start a business, he said. The ownership is then tied to that. The Setting Every Community Up for Retirement Enhancement Act (SECURE) of 2019 says if you inherit an IRA, or a business funded by one, you have to liquidate it and pay income tax and penalties or pay income tax on the money over a 10-year period.

“This is also integrated with estate planning because you own a business and that business has value which is taxed by Pennsylvania,” he said. “So, you need to have liquidity to pay the taxes owed nine months after the person’s death.”

Inheritance tax now stands at 4.5 % for children and 12% for siblings.

“Business owners are perceived to be wealthy,” Petrille said. “But wealth doesn’t always mean you have liquidity.”

Consider the construction worker who starts his own business using his personal truck, he said. The basis for this business is zero. But, as the business grows, and the owner hires more workers, buys more trucks and maybe even establishes a shop, the business value goes up. And though the value has increased, there may be no extra cash flow. If the owner sells the capital gains would be on the basis of zero.

If the Biden plan is passed, the basis would be on the value of the company at time of sale. “So, if the business is worth, say $10 million, the taxes could total $4 million. Where do you get the cash to make the transaction?”

Keefe said it is a good time to sell if a business owner is thinking of retiring. “There are lots of buyers right now and the interest rates are still low.”

Biden’s tax plan is in committee. The proposed $4 trillion of new federal spending over 10 years will be partially funded with higher taxes on individuals and businesses. Members of the House and Senate have put forth bills that include everything from increases in capital gains and corporate income taxes to new individual and business tax credits, according to the Tax Foundation.

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Tag: Taxes

Can Keystone Saves bill rescue Pa. from fiscal cliff?

Shapiro: $2,500 tax credit for new teachers, nurses, police officers

Pa. closes 2022 with strong December revenue, budget surplus

State revenue in October exceeds expectations by 6.4%

Thinking of selling your business? Here’s why now might be the best time.

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