Author: Carrie Christensen

KT Insights
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Tax Tip: Changes to Traditional IRA Rules

The Secure Act, which went into effect January 1, 2020, changed the rules on traditional IRA contributions and required minimum distributions (RMDs).  The old rules disallowed traditional IRA contributions once you reached age 70 ½.  The new rules allow traditional IRA contributions to be made at any age (as long as you have earned income).  Additionally, the old rules required you to start taking RMDs once reaching age 70 ½.  The new rules allow you to wait until age 72.

Consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and Tax Reform affects or questions.

March 10, 2020
| Carrie Christensen
KT Insights
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Tax Tip: Stretch IRAs

The Secure Act, which went into effect January 1, 2020, eliminated stretch IRAs which allowed non-spousal beneficiaries to withdraw funds from inherited IRAs over their lifetimes.  The new law requires inherited IRA funds to be withdrawn within 10 years.  The good news is that there are exceptions to this rule.  In addition to the surviving spouse exception, the following IRA beneficiaries can continue to use the stretch IRA rules:

  • A minor child
  • A disabled individual
  • A chronically ill individual
  • An individual who is not more than 10 years younger than the original owner of the IRA

Consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and Tax Reform affects or questions.

February 25, 2020
| Carrie Christensen
KT Insights
 |

Tax Tip: Extenders

The Consolidated Appropriations Act of 2020, which was signed into law December 20, 2019, included a wide range of tax provisions and extenders.  The Act extended many tax provisions retroactively to January 1, 2018 and are effective through December 31, 2020.  The following extended tax breaks could impact your individual tax return:

  • Exclusion from income for cancellation of acquisition debt on your principal residence
  • Mortgage insurance premiums allowed as mortgage interest deduction if you itemize
  • Floor for medical expense deductions goes back to 7.5% from 10%
  • Tuition and fees deduction allowed for qualified education expenses
  • Credit for energy-efficient improvements to your residence (subject to $500 lifetime credit limit)

Multiple business related tax provisions have also been retroactively extended to January 1, 2018.  Many of these extended business tax breaks are industry specific are not applicable to most taxpayers.  The following are a few of the extenders that we see most frequently in our area:

  • Indian employment credit
  • Accelerated depreciation for business property on Indian reservations
  • Empowerment zone tax incentives
  • Biodiesel and renewable diesel credit
  • Energy-efficient commercial buildings deduction

You will need to amend your 2018 tax return in order to take advantage of the extenders. 

Consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and Tax Reform affects or questions.

February 5, 2020
| Carrie Christensen
KT Insights
 |

Qualified Opportunity Zones

The Tax Cuts and Jobs Act of 2017 included a number of tax saving incentives for individuals and businesses.  Sponsored by over 100 legislators, and included in this bill, are Qualified Opportunity Zones which have created a new capital gain tax incentive for investors.  This article is part of a two part series.  This initial article will outline the basics of Opportunity Zones.    

What are Qualified Opportunity Zones?

Qualified Opportunity Zones are specific geographic areas which have been nominated by state governments and certified by the Secretary of the U.S. Treasury.  These zones are census tracts generally composed of economically distressed communities.  There are more than 8,700 Opportunity Zones located in all 50 states, Washington, DC, and 5 U.S. territories.  There are 25 Qualified Opportunity Zones located in the state of South Dakota, with 4 of those being in Pennington County.  In fact, there are Opportunity Zones located right in Rapid City!   The areas include much of downtown, north Rapid City, and the School of Mines campus.  This website has a good interactive link. 

List of South Dakota Opportunity Zones & OZ Funds

The Internal Revenue Code defines the qualifications which are required for a geographical area to be certified as a Qualified Opportunity Zone.  Generally, these requirements include factors such as minimum poverty rates of at least 20%, maximum median family income levels of 80% of the statewide median family income amount, and proximity to another Qualified Opportunity Zone.  Based on these requirements, 57% of all neighborhoods in the U.S. were eligible to be considered as an Opportunity Zone. 

Why were Opportunity Zones Created?

Opportunity Zones were created as a means to stimulate economic growth in specific geographical areas that need it the most.  It is estimated that U.S. taxpayers hold an estimated $6.1 trillion of unrealized private gains.  By offering immediate and long term capital gain tax incentives to investors, the government is encouraging private investors to channel their dollars into economic development in these communities rather than using direct taxpayer dollars.  Opportunity Zones are designed to be less restrictive and less costly than traditional tax credit programs.

How do I Invest in an Opportunity Zone?

The vehicle for utilizing the capital gain tax incentives relating to Opportunity Zones is called a Qualified Opportunity Fund.  In order to take advantage of deferred and reduced capital gains, investors must invest their gains in Qualified Opportunity Funds.  A Qualified Opportunity Fund is a U.S. partnership or corporation that invests at least 90% of its holdings in one or more Qualified Opportunity Zones.  Opportunity Funds are restricted to investing in the following types of Qualified Opportunity Zone Property:

  • Partnership interests in businesses that operate in a Qualified Opportunity Zone
  • Stock ownership in businesses that conduct most or all of their operations within a Qualified Opportunity Zone
  • Real estate located within in a Qualified Opportunity Zone
    • New building construction
    • Substantial improvement of existing unused buildings
      • Must invest more in the improvement of the building than the purchase price
      • Building development must be completed within 30 months of purchase for both new construction and improvements

Stay tuned for my next article in which I will discuss the specifics of investing in Opportunity Funds and provide an illustrated example of how capital gains can be partially deferred and even permanently excluded.

January 30, 2020
| Carrie Christensen
KT Insights
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Reminder to Review Your Withholding

Were you surprised with such a small refund, or worse yet you unexpectedly had to write a check on April 15th?  If the answer to this question is yes, and you have not yet adjusted your federal income tax withholding, the impact may be even greater for the 2019 tax year.  This is because the new withholding tables will be in effect for all twelve months, versus about nine months for 2018.

Last summer, we urged our clients to review their federal income tax withholding, shortly after the IRS released the new withholding tables.  We are reminding you again now of the importance of evaluating your withholding.

Taxpayers most likely to be negatively affected by the 2018 withholding tables included households with two wage earners, individuals with multiple employers, and taxpayers affected by the new rules on itemizing.  This current version of Form W-4, which is used to update your withholding amounts, is just not capable of accounting for all of the changes brought about by tax reform.

The IRS has been working on creating a new Form W-4 which will be more aligned with the changes brought about by tax reform.  A draft version is expected by the end of May, with a second draft planned for later this summer.  The final version will be released by the end of 2019 in time to use for the 2020 tax year.  You can expect the new Form W-4 to be significantly more complex than the current version.

The IRS does have a withholding calculator available on its website to assist you in completing Form W-4.  The calculator is available at www.irs.gov/payments/tax-withholding.  In order to use the calculator you will need to have your most recent pay stubs and be able to answer questions about your estimated 2019 income.

Alternatively, your tax professional at Ketel Thorstenson can perform the calculations for you.  You will need to provide us with your most recent paystubs and inform us of any family or tax changes that may affect your 2019 tax situation.  Now is the time to evaluate your federal withholding to avoid surprises next April.  Contact your KTLLP tax professional today at 605-346-5630 for assistance.

 

 

 

 

June 6, 2019
| Carrie Christensen
KT Insights
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Tax-Free IRA Distributions to Charity

Upon reaching age 70 ½, owners of traditional IRAs must begin taking required minimum distributions.  If you are in a position to not need the funds from your IRA distribution for living expenses and have a desire to donate to charity, qualified charitable distributions may be a tax saving tool you can use.

What is it?
Qualified charitable distributions (QCDs) are IRA distributions that are distributed directly from the IRA custodian to the charitable organization.  This makes an otherwise taxable IRA distribution, tax-free.  However, since the distribution is not subject to federal income tax, the charitable deduction is likewise disallowed.

What are the benefits?
Since the standard deduction has doubled, many people no longer itemize their charitable deductions.  As such, QCDs can equate to a 100% above-the-line tax deduction.  For example, a QCD might save someone $2,500 in tax on a $10,000 donation.  That’s real money!  Second, donating to charity in this way bypasses the annual 60% of adjusted gross income (AGI) limitation on contributions.  Third, since QCDs are not included in a taxpayer’s AGI, the chances are minimized of being negatively impacted by other AGI based tax provisions such as the taxability of social security benefits and the phase-out rule for the $25,000 rental real estate loss exception.

What are the Specifics?

  • On the date of distributions, QCDs are only available to taxpayers age 70 ½ and older.
  • The QCD satisfies the required minimum distribution requirements.
  • The distribution must be distributed directly by the IRA custodian to the charitable organization. The taxpayer cannot receive the distribution and then donate the funds to charity.  This is very easy to do by the way, as IRA custodians do this all the time!
  • The charitable organization must be a qualified public charity [501(c)(3)] and cannot be a private foundation or donor advised fund.
  • QCDs may be made from traditional IRAs, inactive SEP IRAs, inactive SIMPLE IRAs, and Roth IRAs (in certain circumstances). It is typically more advantageous to make the distribution from a traditional IRA over a Roth IRA.  The rule cannot be used for distributions from ongoing SEP accounts, ongoing SIMPLE accounts, or qualified retirement plan accounts such as 401(k) or 403(b) accounts.
  • The maximum amount allowed per taxpayer per year is $100,000.

If you are interested in learning more about how you may benefit from making qualified charitable distributions, contact your Ketel Thorstenson tax professional at 605-342-5630.

January 14, 2019
| Carrie Christensen
KT Insights
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Update on South Dakota Online Sales Tax Collection

In the wake of the Wayfair case, the South Dakota Legislature met for a special session on September 12, 2018 to discuss issues related to remote sellers and e-commerce.  Senate Bill 1 and Senate Bill 2 were signed into law by Governor Daugaard.  For more information relating to South Dakota v. Wayfair, see my July 31, 2018 blog post at www.ktllp.cpa/blog.

Senate Bill 1

Senate Bill 1 (SB1) will go into effect on November 1, 2018.  SB1 removes the injunction currently prohibiting South Dakota from enforcing the collection of sales tax from remote sellers meeting the thresholds defined in Senate Bill 106 (SB106).  The removal of this injunction does not apply to the three sellers involved in the recent U.S. Supreme Court case (Wayfair, Overstock, and Newegg).  As a reminder, SB106 requires remote sellers (businesses without a physical presence in South Dakota) to collect and remit sales tax to the state of South Dakota once they either:

  1. Have annual gross sales of $100,000 delivered to customers in South Dakota or
  2. Engage in 200 or more separate transactions per year of goods or services delivered to customers in South Dakota

Additionally, SB1 eliminates the State’s ability to sue remote sellers as it will no longer be necessary with the passage of this bill.  The bill also includes a clause declaring a state of emergency as of the signing date.

Senate Bill 2

Senate Bill 2 (SB2) will go into effect March 1, 2019.  SB2 defines the following key terms relating to online sales:

  • Marketplace – any means by which any Marketplace Seller sells or offers for sale tangible personal property, products transferred electronically, or services for delivery into this state, regardless of whether the Marketplace Seller has a physical presence in the state
  • Marketplace Provider – any person that facilitates a sale for a Marketplace Seller through a Marketplace by:
    • Offering for sale by the Marketplace Seller, by any means, tangible personal property, products transferred electronically, or services for delivery into this state and
    • Directly, or indirectly through any agreement or arrangement with third parties, collecting payment from a purchaser and transmitting the payment to the Marketplace Seller.
    • An example of a Marketplace Provider is Amazon.
  • Marketplace Seller – a retailer that sells or offers for sale tangible personal property, products transferred electronically, or services for delivery into this state, through a Marketplace that is owned, operated, or controlled by a Marketplace Provider.

SB2 requires marketplace providers to collect and remit sales tax to the state of South Dakota for a Marketplace Seller if the Marketplace Provider:

  1. Is also a seller meeting the SB106 thresholds described above or
  2. Facilitates the sales of at least one Marketplace Seller that meets the SB106 thresholds or
  3. Facilitates the sales of two or more Marketplace Sellers that when the sales are combined meet the SB106 thresholds, even if the Marketplace Sellers do not meet the thresholds separately.

SB2 does allow for a five percent margin of error allowance until June 30, 2024.  This relief is granted to Marketplace Providers if the failure to collect or remit sales tax is due to incorrect or insufficient information provided by the Marketplace Seller.  The five percent allowance does not apply if the Marketplace Provider and Marketplace Seller are related parties.

How to Become Licensed

Remote sellers and Marketplace Providers meeting the requirements in the bills discussed above should register for a South Dakota sales tax license at https://sd.gov/taxapp.  Alternatively, remote sellers and Marketplace Providers can register with multiple states through the Streamlined system at www.streamlinedsalestax.org.

Additional information relating to remote sellers and Marketplace Providers is available on the South Dakota Department of Revenue website at www.dor.sd.gov.  The tax professionals at Ketel Thorstenson, LLP are also here to assist you.  Please call the professionals at KTLLP with any questions or concerns at 605-342-5630.

October 2, 2018
| Carrie Christensen
KT Insights
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What You Should Know About South Dakota v. Wayfair, Inc.

At Ketel Thorstenson, we are closely monitoring the recent United States Supreme Court ruling of South Dakota v. Wayfair, Inc. and considering the implications the decision will have on our clients.  This article highlights the significance of the ruling and provides a brief overview of events leading up to the decision.  We will keep you updated as events unfold in subsequent articles beginning with the fall issue of the KT Addition.

Background
On May 1, 2016, South Dakota Senate Bill 106 went into effect requiring remote sellers to collect and remit sales tax to the state.  Online retailers are subject to the law once they either:

  • Have annual gross sales of $100,000 delivered to customers in South Dakota or
  • Engage in 200 or more separate transactions per year of goods or services delivered to customers in South Dakota

South Dakota estimates that it loses $48 to $58 million annually in lost sales tax revenue and has declared a state of emergency due to the loss.  Subsequently, South Dakota sued three of the largest online retailers in the United States (Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc.) for not collecting and remitting sales tax in accordance with the bill.  The heart of the issue is whether a state can legally require online sellers to collect and remit sales tax without having a traditional physical presence in the state.

On June 21, 2018, the United States Supreme Court ruled on South Dakota v. Wayfair, Inc., et al.  In a 5-4 vote, the Court overturned two prior rulings, Quill Corp. v. North Dakota (1992) and National Bellas Hess v. Department of Revenue of Illinois (1967) and remanded the case back to the South Dakota Supreme Court.  This landmark case will have far reaching effects on retailers and consumers.

Precedence
The requirement to collect and remit sales tax has long been based upon the concept of substantial nexus within the taxing state.  Historically, a seller has substantial nexus, and thus must collect and remit sales tax, when it has a physical presence within the state.  In the prior court rulings which were overturned, substantial nexus meant having a physical storefront, salesperson, or warehouse in the taxing state.  This definition allowed online retailers to avoid collecting sales tax and has subsequently put local retailers at a disadvantage.

We are no longer operating in the same environment as we were back in 1967, or even 1992, when those cases were decided.  Due to advances in technology and the Internet, consumers and retailers are more closely connected now than ever before regardless of their closeness to a physical store.

What Happens Next?
The U.S. Supreme Court remanded the case back to the South Dakota Supreme Court to determine if the law meets three other tests for constitutionality.  The June 21st ruling only considered the issue of substantial nexus.  The three additional issues to be evaluated are:

  • Fair apportionment
  • Non-discrimination against interstate commerce
  • Fair relationship to the services provided by the taxing state

Future Questions
As events unfold, these are some of the questions we will be considering:

  • What counts as a “transaction”?
  • When does a seller start collecting the tax?
  • Once registered, is a seller required to continue collecting regardless of sales volume?
  • Will South Dakota’s law become a model for other states?
  • How will substantial nexus for sales tax translate to income tax provisions?
  • How can we minimize compliance burdens for our clients?

Stay tuned for further discussions in the development of this topic.  Call the professionals at KTLLP at 605-342-5630 with any questions or concerns.

August 1, 2018
| Carrie Christensen
KT Insights
 |

Review Your Withholding Now to Avoid Surprises at Tax Time

The recently enacted Tax Cuts and Jobs Act (TCJA) will result in lower 2018 tax bills for millions of Americans.  In response to the newly lowered tax rates, the IRS has revised the federal income tax withholding tables for 2018.  Thus, you may have noticed less federal income tax being withheld from your paycheck, retirement distributions, and/or social security benefits.

The new withholding tables are designed to give you more take home pay during the year, but by doing this, your anticipated tax refund may be totally eliminated.  We have recently learned that many taxpayers may even have a balance due when they file their 2018 tax return next April.  Taxpayers with multiple jobs may be more greatly impacted.  We are especially concerned about our clients who have become accustomed to receiving a tax refund every year.  We know our clients do not like these kinds of surprises and neither do we!

If you have federal income tax withholding, whether it be as a W-2 employee, or from retirement benefits such as IRA’s, pensions, and Social Security, we strongly encourage you to contact us so that we can evaluate your 2018 tax situation.  There is still time to make withholding adjustments for 2018, but we must act quickly as we are already halfway through the year.

In order to perform the necessary calculations, we will ask that you provide us with copies of your most recent paystubs showing year-to-date payments and withholdings.  We will also ask you about any changes to your family and/or tax filing status that may affect your tax situation.  We will use the information you provide to project your 2018 tax liability and will provide you with an estimate of the amount of tax that you will either owe to the IRS or be due a refund when filing your tax return.

If you do not like the outcome of the tax projections and would like to have additional federal income tax withheld, we can also assist you with completing a new W-4 to give to your employer, W-4P to give to your pension administrator, or W-4V to give to the Social Security Administration.  At Ketel Thorstenson, we are here to help you!  Please contact us today at 605-342-5630 to discuss your individual tax needs.

June 27, 2018
| Carrie Christensen
KT Insights
 |

Are Business Meals Still Deductible After Tax Reform?

While we can definitively say that the Tax Cuts and Jobs Acts (TCJA) has eliminated the deductibility of business entertainment expenses, there has been much confusion as to the deductibility of business meals.  As written, some interpretations of the TCJA make all meals with clients’ not deductible beginning in 2018.  However, we believe, as do other professionals in the industry, including the American Institute for Certified Public Accountants (AICPA), that that was not the intent of lawmakers.

The AICPA has made recommendations to the IRS to clarify that under the TCJA, business meals are still 50% deductible.  While nothing is certain except the current uncertainty, we believe that regulations will be forthcoming which will clarify the intent of lawmakers.  The intent of which we believe was not to change the deductibility of business meals, only to eliminate the deductibility of business entertainment.  As such, we are recommending that our clients continue to keep documentation of business meals with the anticipation that they will continue to be 50% deductible in 2018.

We offer the chart below as a guideline to how the Tax Cuts and Jobs Act treats certain meal and/or entertainment events:

  Amount Deductible for Tax Year 2018
Description 100% 50% Zero
Meals with clients and prospects   X*  
Entertainment with clients and prospects     X
Employee meals for convenience of employer   X  
Employee meals for required business meeting   X  
Meal served at Chamber of Commerce meeting   X  
Meals while traveling away from home overnight   X  
Year-end party for employees and spouses X    
Golf outing for all employees and spouses X    
Year-end party for customers     X
Meals for general public at marketing presentation X    
Team-building recreational event for all employees X    
Golf, theater, or hockey game with your best customer     X

As a reminder, you should keep the following records to substantiate business meals:

  • Name of person dining with
  • Name of restaurant
  • Brief description of business discussed
  • For meals of $75 or more, you should have a receipt with the name of restaurant, number of people at the table, and itemized list of food and drink

* Technically, the TCJA may have made meals with clients and prospects not deductible. We believe that the tax writers will modify the law to make “so called non-entertainment meals” with clients and prospects deductible.

June 1, 2018
| Carrie Christensen