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Beneficiary Designations and Joint Titles: Careful Planning Avoid Overriding Will

Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will
Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will 850 500 smolinlupinco

A careless approach to beneficiary designations and jointly titled assets can easily undermine your estate plan. 

For example, you may specify in your will that all of your property should be divided equally among your children. But say that your IRA accounts for half of your estate and names your oldest child as the beneficiary. In this case, your oldest child will inherit half of your estate in addition to a third of the remaining assets. It’s hardly an equal division of your assets, and probably far from what you intended.

Jointly owned property requires similarly careful treatment. Regardless of the terms of your will, the surviving owner takes title to the property after your death. What many people fail to realize is that their wills exert no control over disposition of nonprobate assets. 

Understanding nonprobate assets

Nonprobate assets include life insurance policies, IRAs and retirement plans, joint bank or brokerage accounts, and even savings bonds. When you pass away, nonprobate assets are generally transferred automatically according to a beneficiary designation or contract. Because of this, they override your will. 

To ensure your estate plan remains in line with your wishes, it’s important to regularly review beneficiary designations and property titles, especially after significant life events such as a marriage or divorce, the death of a loved one, or the birth of a child. 

Planning to use POD and TOD designations

Payable-on-death (POD) and transfer-on-death (TOD) designations allow you to transfer assets outside of probate in a simple and cost-effective way. While POD designations are used for bank accounts and certificates of deposit, TOD designations can be used to transfer stocks, bonds, or brokerage accounts. In many states, you may even be able to use TOD designations to transfer real estate.

All you need to do to set up these designations is provide a signed POD or TOD beneficiary designation form. To claim the money or securities after you pass away, your beneficiaries will simply need to present their identification to the bank or brokerage, along with a certified copy of the death certificate.

Although they are useful and convenient, POD and TOD designations must be carefully coordinated with the rest of your estate plan. Without careful planning, your POD or TOD may conflict with your will, trusts, or other estate planning documents.

You should also take care not to use POD and TOD designations for too high a proportion of your assets. If you use these designations for the majority of your assets, there may not be sufficient assets left in your estate to settle your debts, taxes, or other expenses. In this case, your executor will need to initiate a proceeding to bring assets back into the estate.

If you hold joint accounts, use POD or TOD designations, or have large retirement accounts or life insurance policies, proper planning is essential to avoid overriding your will. We can help you identify potential conflicts in your estate plan.

Startup Businesses Research Tax Credit Payroll Taxes

Startup Businesses May Be Able to Apply the Research Tax Credit Against Payroll Taxes
Startup Businesses May Be Able to Apply the Research Tax Credit Against Payroll Taxes 850 500 smolinlupinco

If your business has increased research activities, you may be eligible to claim a valuable tax credit often referred to as the research and development (R&D) credit. Although claiming the R&D tax credit requires complex calculations, we can help take care of these calculations for you.

In addition to the tax credit itself, you should also be aware of two features that are especially advantageous to small businesses:

  1. Small businesses with $50 million or less in gross receipts are eligible to claim the R&D credit against alternative minimum tax (AMT) liability
  2. Certain startup businesses may claim the credit against the employer’s Social Security payroll tax liability

It’s worth taking a closer look at this second feature.

If your business is eligible, your business can elect to apply some or all of the research tax credit you earn against your payroll taxes, rather than your income tax. With this payroll tax election in mind, some small startup businesses may wish to undertake or increase their research activities. And if your business is already engaged in or is planning to undertake research activities, you should be aware that some tax relief may be available to you.

Benefits of the election

Many new businesses pay no income tax and won’t pay tax for some time, even if they have a net positive cash flow and/or a book profit. 

Because of this, new businesses typically have no amount to apply business credits, including the research credit, against. However, even a new wage-paying business will have payroll tax liabilities. 

The payroll tax election thus offers new businesses a chance to more quickly use the research credits they earn. Since every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, this election can serve as a major boon to businesses during the start-up phase when help is most needed.

What businesses are eligible?

In order to be eligible for the election, a taxpayer must:

  • Have gross receipts for the election year that are less than $5 million
  • Be no more than five years past the startup period (the period for which it had no receipts)

Only the gross receipts from the taxpayer’s business are taken into account in making these determinations. Other income such as an individual’s salary or investment income aren’t taken into consideration. 

You should also note that an entity or individual can’t choose to make the election for more than six straight years.

Limitations

If an individual chooses to make the payroll tax election, the research credit for which the election is made may only be applied against the Social Security portion of FICA taxes. The credit can’t be applied against the “Medicare” portion of FICA taxes or any FICA taxes that are withheld and remitted to the government on behalf of employees.

In addition, the election can’t be made on research credit amounts in excess of $250,000 annually. For C corporations and individual taxpayers, the election can only be taken for research credits that would have to be carried forward in the absence of an election. This means that C corporations can’t make the election for amounts that the taxpayer could use to reduce their own income tax liabilities.

Identifying and substantiating expenses eligible for the research credit is a complex undertaking, and these are only the basics of the payroll tax election. If you have further questions or believe you may benefit from the payroll tax election, contact us.

IRA Contribution Reduce Tax Bill

IRA Contributions: You May Still Be Able to Reduce Your Tax Bill
IRA Contributions: You May Still Be Able to Reduce Your Tax Bill 850 500 smolinlupinco

If you haven’t filed your 2021 tax return yet, you may still be able to lower your tax bill by making a contribution to an IRA.

Eligible taxpayers can make deductible contributions to a traditional IRA at any time before the filing date on April 18, 2022. Making a deductible contribution now could allow you to save on your 2021 return.

Eligibility requirements

Generally speaking, taxpayers are eligible to make a deductible contribution to a traditional IRA as long as:

  1. They (or their spouse) aren’t an active participant in an employer-sponsored retirement plan, OR
  2. They (or their spouse) are an active participant in an employer plan, but their modified adjusted gross income (AGI) is below specific levels that change from year-to-year by filing status.

For 2021, deductible IRA contribution phases out over $105,000 to $125,000 of modified AGI for joint tax return filers who are covered by an employer plan. This phaseout range is:

  • $66,000 to $76,000 for taxpayers who are single or a head of household
  • $0 to $10,000 for those who are married and filing separately
  • $198,000 to $208,000 for taxpayers aren’t active participants in an employer-sponsored retirement plan but have spouses who are

Although a deductible contribution to a standard IRA will reduce your tax bill for 2021 and earnings within the IRA will be tax deferred, every dollar you take out will be taxed in full. In addition, any amount taken out is subject to a 10% penalty for taxpayers under the age of 59½, unless certain exceptions apply to you.

Even if you don’t work, you may still be able to lessen your tax bill by making a deductible IRA contribution. Generally speaking, taxpayers must have wages or other earned income in order to make deductible contributions to an IRA. However, an exception may apply if your spouse is the primary earner of the home. In this case, you may be able to make a deduction to a spousal IRA.

It’s worth noting that most IRAs are called “traditional IRAs” to differentiate them from Roth IRAs. 

Although you can still contribute to a Roth IRA before April 18, contributions to a Roth IRA aren’t deductible. However, you can make tax-free withdrawals from a Roth IRA as long as you’re age 59½ or older and the account has been open at least five years. (To contribute to a Roth IRA, you will also need to be under certain income limits.)

Contribution Limits

For 2021, eligible taxpayers may make a deductible contribution of up to $6,000 to a traditional IRA (if you’re age 50 or older, this limit is $7,000).

Small business owners may also set up and make contributions to a Simplified Employee Pension (SEP) until the date their return is due, including extensions. The maximum contribution for SEPs is $58,000 for 2021.

If you have questions or need more information about IRAs or SEPs, contact us. We can guide you through your savings options as you consider your tax bill.

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