Tag Archives: Tax Reform

What Nonprofits Need to Know About the New Tax Law

The number of taxpayers who itemize deductions on their federal tax return — and, thus, are eligible to deduct charitable contributions — is estimated by the Tax Policy Center to drop from 37% in 2017 to 16% in 2018. That’s because the recently passed Tax Cuts and Jobs Act (TCJA) substantially raises the standard deduction. Many not-for-profit organizations are understandably worried about how this change will affect donations. But this isn’t the only TCJA provision that affects nonprofits.

Donors have fewer incentives

In addition to reducing smaller-scale giving by shrinking the pool of people who itemize, the TCJA might discourage major contributions. The law doubles the estate tax exemption to $10 million (indexed for inflation) through 2025. Some wealthy individuals who make major gifts to shrink their taxable estates won’t need to donate as much to reduce or eliminate their potential estate tax.

UBIT takes a bigger bite

The new law mandates that nonprofits calculate their unrelated business taxable income (UBTI) separately for each unrelated business. As a result, they can’t use a deduction from one unrelated business to offset income from another unrelated business for the same tax year. However, they can generally use one year’s losses on an unrelated business to reduce their taxes for that business in a different year. The TCJA also includes in UBTI expenses used to provide certain transportation-related and other benefits. So, the unrelated business income tax (UBIT) a nonprofit must pay could go up.

High compensation risks new tax

Nonprofits with highly compensated executives may now potentially face a 21% excise tax. The tax applies to the sum of any compensation (including most benefits) in excess of $1 million paid to a covered employee plus certain large payments made to that employee when he or she leaves the organization, known as “parachute” payments. The excise tax applies to the amount of the parachute payment less the average annual compensation.

Bond interest exemption revoked

The TCJA repeals the tax-exempt treatment for interest paid on tax-exempt bonds issued to repay another bond in advance. An advance repayment bond is used to pay principal, interest or redemption price on an earlier bond prior to its redemption date.

Be informed

Note that other rules and limits may apply. We can provide you with a detailed picture of the new tax law and explain how it’s likely to affect your organization. Contact Langdon & Company for more info.

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New Tax Law Impacts Retirement Benefits

As you’re likely aware, Congress passed and the president signed into law a new tax bill in December. The technical name of the act is rather long and unwieldy, so it’s commonly referred to by an earlier and simpler title: the Tax Cuts and Jobs Act (TCJA). Naturally, most of the TCJA’s provisions have to do with income taxes. But it also impacts retirement benefits.

Loan balances

The new law gives a break to plan participants with outstanding loan balances when they leave their employers. Ordinarily, participants with outstanding loans who fail to make timely payments after separation from an employer are deemed to have received a distribution in the amount of that outstanding balance. Under pre-TCJA law, they could, however, roll that amount (assuming they have sufficient funds available) into an IRA without tax penalty if they do so within 60 days.

Under the TCJA, beginning in 2018, former employees in this situation will have until their tax return filing due date (including extensions) to move funds equal to the outstanding loan balance into an IRA or qualified retirement plan without penalty. They’re given the same opportunity if they’re unable to repay a loan because of the plan’s termination.

Roth conversions

The TCJA also restricts individuals’ ability to recharacterize conversion contributions to a Roth IRA as if they were still making contributions to a traditional IRA. In other words, beginning in 2018, individuals can no longer convert a traditional IRA to a Roth IRA and then later recharacterize that Roth IRA contribution back to a traditional IRA contribution to essentially undo the conversion. However, taxpayers can still recharacterize new Roth IRA contributions as traditional contributions as long as they do it by the applicable deadline and meet all other rules.

This provision may portend additional 401(k) restrictions in years to come. Roth 401(k)s are favored by revenue-seekers in Congress, because the after-tax nature of contributions to Roth plans — IRAs or 401(k)s — enables the federal government to collect more tax revenue in the present, pushing off into the future the drain on tax revenue because of the tax-free nature of Roth withdrawals.

Future possibilities

Indeed, the federal government will likely continue to look at changes to retirement plans as a means of generating revenue. One proposed, but eventually eliminated, provision would have required that all contributions to any defined contribution plan sponsored by the same employer (including mandatory employee contributions to a defined benefit plan) be aggregated when determining whether contributions to a participant’s account satisfy IRC Sec. 415(c) limits. This would have raised $1.7 billion over a 10-year period, the Committee’s staff estimated.

Similarly, Congress considered imposing a low ($2,400) cap on pre-tax 401(k) contributions, requiring the balance of the total $18,000 limit on contributions ($18,500 for 2018) to be made on an after-tax basis. Congress could someday revisit this concept and push employers to convert traditional 401(k) plans to Roth plans.

Far beyond

The TCJA goes far beyond tax rate reductions. Let our firm help your organization fully understand how both its tax liability and employee benefits are affected by the new law. Contact Landgon & Company today!

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Now Available – 2018 Income Tax Withholding Tables

01_12_18_106439659_ftnp_560x292_1.jpgEmployers and employees: Withholding tables reflecting Tax Cuts and Jobs Act (TCJA) changes are now available, and employees could see paycheck changes by February. The IRS has issued new income tax withholding tables for 2018 and advised employers to begin using them as soon as possible, but no later than Feb. 15. Find the IRS’s information release at http://bit.ly/2D2ihJn and the percentage method tables themselves in IRS Notice 1036 at http://bit.ly/1Ne91he Answers to frequently asked questions about using the new tables can be found at http://bit.ly/2D5iWJm

Out tax department is happy to answer any questions you may have regarding the new tax laws. Please contact us at (919) 662-1001 or send us an email here.