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Thursday, December 27, 2018

Pass-Through Business Alternative Income Tax Act

New Jersey may be getting a lot tax friendlier for small business owners.  I hesitate to even write this blog post, as I generally prefer to wait until legislation is actually passed before I write on a topic (mainly because it is a waste of everyone's time to read about something that may never come into law).  However, the NJ State Senate has already passed the "Pass-Through Business Alternative Income Tax Act" by vote of 40-0, so there's a good chance that this may become law, and very soon.

Here's the gist of how the new law is supposed to work:
1)  NJ will start implementing a new business tax, effective January 1, 2018, on pass through business entities (such as limited liability companies, S-Corporations, and Partnerships).
2) This new business tax will be roughly equal to the tax the owners of the business are already paying on their NJ income tax returns.
3) The owners of the business will receive a dollar for dollar credit on their personal NJ income tax returns for any business taxes paid.  

The legislature was effectively trying to make this a wash from a NJ revenue standpoint, but let's be clear, this will raise significant revenue for New Jersey because the tax rates don't align perfectly with the income tax rates for either individuals or married couples.  

For example, under the new business tax law, there is a:
1) 5.525% tax on the distributive proceeds less than $250,000 (per owner);
2) 6.37% tax on distributive proceeds between $250,000 and $1M (per owner);
3) 8.97% tax on distributive proceeds between $1M and $3M (per owner); and
4) 10.75% tax on distributive proceeds over $3M.

For a single person, the NJ income tax rates are as follows:

NJ Tax Bracket - Single PersonNJ Tax Rate
$0.00 - $19,9991.4%
$20,000.00 - $34,9991.75%
$35,000.00 - $39,9993.5%
$40,000.00 - $74,9995.53%
$75,000.00 - $499,9996.37%
$500,000.00 - $4,999,9998.97%
$5,000,000 +10.75%
For a married couple, the NJ income tax rates are as follows:

NJ Tax Bracket - Married CoupleNJ Tax Rate
$0 - $19,9991.4%
$20,000 - $49,9991.75%
$50,000 - $69,9992.45%
$70,000 - $79,9993.5%
$80,000 - $149,9995.53%
$150,000 - $499,9996.37%
$500,000 - $4,999,9998.97%
$5,000,000.00 +10.75%

However, if this new law goes into effect, it will be a significant net savings for NJ business owners because they will not be as badly impacted by the new federal law.   Remember, the Tax Cuts and Jobs Act signed by President Trump stated that State income taxes and local property taxes are capped at $10,000 per year.  The reason that NJ business owners will not be adversely affected by this new (and usually higher) business tax is that NJ is converting a non-deductible state income tax (from your personal return) into a deductible business expense.

Let's run through an example.  Let's say that Joanne owns a nearby estate planning law firm structured as a limited liability company.  Joanne's net income after all expenses (except state income taxes) is $150,000.  (For purposes of this example, let's assume that she is single and has no other income and is not entitled to any other deductions other than a $10,000 property tax deduction for her primary residence.)  

If the New Jersey Pass-Through Business Alternative Income Tax Act does not come into law, then she would have a state income tax liability of approximately $7,365 and a federal income tax liability of $19,533 (after factoring in the 199A deduction of 20% and the $10,000 property tax deduction).  Total tax liability of approximately $26,898.  Joanne does not get to deduct the $7,365 from her federal income taxes.

If the New Jersey Pass-Through Business Alternative Income Tax Act does come into law, then there would be a NJ business tax of $7,875, no NJ personal income tax, and a federal income tax liability of approximately $18,118 after reducing the $150,000 of income by $7,875 and then factoring in the 20% 199A deduction.  Total tax liability of $25,993.  

As you can see, the big difference is that the $7,875 should be considered a deductible business expense for purposes of the federal tax law.  So even though there is an additional $510 of NJ state taxes, there is $1415 less of federal income taxes, for a total savings of $905.  

If and when the NJ law actually passes, I will provide another update.

* Note - all calculations for taxes done using free software with minimal assumptions, so please do not rely on them.  I am just trying to illustrate how the new tax law should work in theory.

Monday, December 24, 2018

Elizabeth Ketterson named as Partner to The Pollock Firm LLC

We are Pleased to announce

Elizabeth C. Ketterson, Esq.

has been named Partner to our firm and
Director of the estate administration department.
Our firm name has changed from:
Law Office of Kevin A. Pollock LLC 

The Pollock Firm LLC

Friday, December 21, 2018

Excellent Social Security Strategy Link

As part of the estate planning process, we frequently need to analyze how much a person is likely to have upon death.  As part of an overall wealth analysis, this invariably leads to questions such as:

  1. How much are you earning now?
  2. When are you expecting to retire?
  3. How much should you gift to your children to minimize taxes while still having enough to live on?
  4. What do you expect to earn/spend in retirement?
  5. How much are you likely to receive from Social Security?

Many clients are concerned with running out of money and have a lot of difficulty calculating the best strategies for how and when to start claiming their Social Security.  After all, the strategy of wait until as late as possible simply doesn't work for everyone.  From a pure return on investment strategy, it might be worthwhile for a low income earner in a marriage to take the benefits early. This is particularly true when there is a big age disparity between spouses.

In looking around online, I found a wonderful website to help you analyze the best strategies.  The site Open Social Security has a great calculator for spouses that let's you know, based upon your ages and the amount Social Security expects you to receive at full retirement, when is the best time for each of you claim your social security. 

We still recommend speaking with your attorney and other advisors to fully flush out all the issues, such as factoring in the health of your and your spouse, discussing when other income should come in, and what type of guaranteed money is otherwise likely to be available.  Nevertheless, this is definitely one of the better calculators I've seen.

Happy holidays!

Wednesday, December 12, 2018

What is the first thing an executor of a Will should do?

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our second video in which Elizabeth Ketterson, Esq., the Director of our estate administration department, is being interviewed by Kevin A. Pollock, Esq., LL.M. regarding the first things a person who is in charge of an estate should do.

If the person is named under a Will, that person is known as the executor.  If there is no Will, that person can apply to the court to be appointed as an administrator of the estate.

We recommend that you meet with an attorney that your are comfortable with to help you prepare the paperwork necessary to be appointed as Executor or Administrator.  The Court will then give you the necessary paperwork to speak with banks, set up an account, and make any claim for funds owed to the estate.  Once you have started collecting assets, then you can arrange to pay the estate's bills.

We strongly recommend that you do NOT distribute money to any beneficiaries until all the bills have been paid and you have received a waiver or release from the beneficiaries stating that they approve of your actions as executor.

To learn more about estate administration or hiring a probate Attorney, please visit us at: https://pollockfirm.com/estate-administration-2/