Weinberg & Company

Simply Stated Newsletter – January 2018

By January 20, 2018 No Comments


High Tax States Seek Workarounds

High taxing states did not fare well under the new tax overhaul which now severely limits filers from deducting state and local taxes (SALT) on their federal tax returns. The new law hits California and New York the hardest, as well as Connecticut, New Jersey and the District of Columbia which claim the largest average SALT deductions.

Bloomberg News reports that New Jersey’s governor-elect joined “a chorus of leaders in Democratic states who are proposing workarounds for their residents to avoid the new caps on state and local tax deductions, even as a top Trump administration official suggested the federal government might act to limit such strategies.”
New Jersey’s new Democrat Governor, Phil Murphy is working on a plan that would convert his state’s property tax into charitable gifts. On January 4th, California Senate President Pro Tem Kevin de León introduced a bill offering a dollar-for-dollar tax credit to state taxpayers who make donations to an entity called the California Excellence Fund — a proposal that, like Murphy’s, would seek to use the federal deduction for charitable gifts to shield residents from the cap on SALT deduction.
“I understand what they’re trying to do for their cities and their states and their taxpayers,” said Gary Cohn, director of the National Economic Council, during a Bloomberg Television interview. “We at the federal government still have to collect revenue.”

While New York’s Governor Cuomo likened the federal tax reform law to “economic civil war” and promised strategies and lawsuits to counter the SALT cap, most of these creative workarounds could easily be quashed by further Congressional action, if not by administrative rulings.

Proposals from New York and California are “interesting, but unlikely to succeed for both legal and practical reasons,” said Jared Walczak, a senior policy analyst at the Tax Foundation.

“If states are genuinely concerned about the effects of their tax codes absent an uncapped state and local tax deduction, they should consider revisiting their tax rates rather than devising increasingly convoluted and legally suspect workarounds,” Walczak wrote.


Fake IRS Withholding Tables?

Ranking Democrats on the tax-writing House Ways and Means Committee and Senate Finance Committee believe the IRS might succumb to political pressure by releasing withholding tables this year that cause employers to withhold too little in federal taxes from their employees’ paychecks to make it appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year.

Industry trade publication, Accounting Today reports that Senate Finance Committee ranking member Ron Wyden (D-ORE), and House Ways and Means Committee ranking member Richard Neal (D-Mass) have penned a letter to Acting IRS Commissioner and Assistant Secretary for Tax Policy David Kautter.

The letter warns that, “Congress and American public need to be assured that there is no political influence in the formulation of IRS withholding tax tables.”

“We recognize that Treasury will be under substantial pressure to make good on the promise by the President and various Administration officials that the new tax law will provide households with a $4000 tax cut,” say the letter’s authors. Wyden and Neal demand the name and title of each Treasury employee or official who received the draft IRS withholding tables and a statement as to whether or not such person suggested changes to the tables; along with assorted dates and times of who knew what and when.

New Fiduciary Rule in the Making

The Securities and Exchange Commission (SEC) is expected to issue its version of a fiduciary rule that will require brokers to apply a customer best-interest “fiduciary” standard to all brokerage accounts. Brokerage firms that offer non-retirement accounts have a less rigorous suitability standard that allows them to recommend products that may personally compensate them more, as long as the investments meet a client’s risk and investment goal requirements.

Though the SEC is not commenting, the Wall Street Journal reported that SEC Chairman Jay Clayton is accelerating work on their own version of the fiduciary rule, and expects a vote to propose its rules by the second quarter of this year. The SEC version, according to the Journal, would affect all brokerage accounts — not just those for retirement funds — and could ban brokers from calling themselves financial advisers unless they accept a strict duty of loyalty to clients.

The fiduciary rule, first proposed by the Department of Labor under the Obama administration, quickly came under fire by the deregulatory-missioned Trump administration. The Department of Labor has delayed full implementation of the fiduciary rule until July 2019 and is reassessing enforcement provisions that would allow investors to bring class action lawsuits alleging fiduciary violations.

New Chair and Board at PCAOB

William D. Duhnke III has been sworn in as the new Chair of the Public Company Accounting Oversight Board (PCAOB). He replaces James R. Doty.

Mr. Duhunke previously served as majority staff director and general counsel of the U.S. Senate Committee on Rules and Administration. He has also served as the Staff Director and General Counsel for the Senate Committee on Banking, Housing, and Urban Affairs.

Representing a complete change in the composition of the PCAOB, new Board Members will include Kathleen Hamm, J. Robert Brown, James Kaiser and Duane DesParte.

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws to promote investor protection.


Final Settlements

Michael Jackson Estate: Beat it!

The estate of Michael Jackson looks to have escaped a possibly hefty penalty for allegedly undervaluing the late singer’s assets. A U.S. Tax Court judge denied the Internal Revenue Service’s bid to provide additional evidence in a case that was tried in Los Angeles in February 2017. Because the agency didn’t show that it complied with certain procedural requirements, it’s barred from seeking as much as 40 percent of the allegedly understated tax in penalties.

“What happens if a party with the burden of production on an issue fails to introduce sufficient evidence at trial to meet that burden? Well, he loses.” That is what Judge Mark Holmes said in his Dec. 20, 2017 order.

Whitney Houston Estate: Didn’t We Almost Have it All

The estate of the late award-winning singer and actress Whitney Houston has reached a deal with the Internal Revenue Service to pay $2,275,366 in taxes, far less than the $11.7 million the IRS said it was owed.

The IRS concluded the estate had “underreported the singer’s royalties, residuals, and value of her image by $22.6 million.” The estate, however, claimed the feds’ calculations were incorrect, and insisted Houston’s “music royalties, digital performance royalties, motion picture, and TV residuals, and publicity rights” were worth $11.7 million.
“How the IRS came to its valuation is unclear, but this provides further evidence that the federal tax agency intends to pursue money from the name and image of dead stars,” says the Hollywood Reporter.


Why California Employers Pay Such High FUTA

The Federal Unemployment Tax Act imposes a federal employer tax used to help fund state workforce agencies (such as California’s Employment Development Department EDD). Best known as FUTA, employers report this tax by filing an annual Form 940 with the IRS. FUTA pays one-half of the cost of extended unemployment benefits during periods of high unemployment and provides for a fund from which states may borrow, if necessary, to pay benefits.

To assure that these loans are repaid, the federal government is entitled to recover those monies by reducing the FUTA credit it gives to employers, which results in an overall increase in the FUTA tax that employers pay.
The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. Employers may receive a credit of 5.4% when they file their 940s. However, if a state borrows from the FUTA fund account and does not fully repay the loan within two years it is designated as a Credit Reduction State.

According to California EDD, the demand for unemployment benefits was unprecedented through the course of the long and difficult recession and the state’s UI Trust Fund continued to have a deficit. A continuing loan from the FUTA fund account has helped cover the cost of regular unemployment benefits.

At its peak, California offered 63 weeks of unemployment benefits, and beginning in January 2009, California began borrowing to cover the shortfall. It soon became designated as a Credit Reduction State. Each year thereafter, the 5.4% FUTA tax credit was reduced by an additional 0.3% and each year employers payed more FUTA tax. From what was just $42 per employee before the state went delinquent on its loan, it will be $147 per employee for the 2017 tax year.

It could have been worse.

States passing their fifth consecutive January 1 with an outstanding balance may be subject to an additional credit reduction, known as add-ons. However, a waiver may be requested and California has been granted several such waivers over the years.
Without any change in the California’s UI funding by the State Legislature, FUTA costs for California employers are anticipated to increase by an additional 0.3 percent each year until the UI Trust Fund regains solvency.

According to a 2016 report by payroll and workforce management firm Accuchex, the impact on California employers from the FUTA credit reduction has been $292.5 million for 2012, $606.2 million for 2013, $947.1 million for 2014 and expected amounts of $1.3 billion for 2015 and $1.7 billion for 2016.

Thanks to California employers, the state’s UI fund loan may eventually be fully repaid and the state can begin to build a reserve. But, cautions Accuchex, this reserve will be depleted again when the next recession hits California unless changes are made to the state’s UI financing structure.

Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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