A Primer on Disregarded Entities

Disregarded Entity Tax Reporting Ownership

Disregarded Entities

If you spend a substantial amount of time around tax professionals, there’s a decent chance you will encounter the phrase “disregarded entity” at one point or another. This phrase, fear-inspiring though it sounds, is a fairly straightforward concept which has relevance in a variety of contexts. In this article, we will introduce disregarded entities and explain why you and other HTW readers should be familiar with this concept.

Tax Reporting

Not all business entities are the same. As we have discussed in our webcast on the topic, businesspeople can select between a number of distinct corporate entities depending on which entity best suits their particular situation. Once an entity has been selected, one of the remaining steps is for the owner to determine whether that entity will be “disregarded” for tax reporting purposes. In simple terms, if an entity be disregarded, then it will not file its own separate tax return to the IRS; it is disregarded to whomever is the current owner, and so the current owner will include the financial data of the entity within his or her own return. Disregarded entities, therefore, can be thought of as assets which are fully traceable to the owner, rather than wholly distinct entities.

Only certain corporate entities may be disregarded. For instance, a single member LLC is typically disregarded to the single member unless the single owner specifically elects to treat the LLC as regarded. And so income generated by such an LLC would be included on the owner’s tax return rather than a tax return prepared and owned by the entity itself.

Certain corporate entities can never be disregarded. S Corps, C Corps, and multi-member LLCs in which the two members are not husband and wife in a community property state cannot ever be disregarded and must report income independently.

1031 Exchange Context

Another context in which disregarded entities may show up as an important concept is the 1031 exchange industry. The tax code requires that whichever entity owns the relinquished property in a 1031 exchange must also acquire title to the replacement property. As I’m sure our readers are aware, title to real estate can be held by corporate entities, and so if a regarded corporate entity hold title to real property then this preexisting ownership must kept consistent throughout the exchange. If the entity doesn’t remain consistent then a valid tax-deferred exchange cannot occur.

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How to Estimate Your Tax Refund

It is possible to estimate your tax refund or the amount that you might owe before getting your tax documents from employers. Doing so helps you budget for expected payments or make plans for your refund. There are a few options to help you compute your estimate accurately.CalculatorTax

Online Tax Estimating Software

Nearly every online tax preparation service has a refund estimate tool available. If you have filed online with a specific service for multiple tax years, the information from previous returns is likely saved in the system. This information will help you complete the refund estimate quicker.

Use the IRS.gov Website

The IRS website is the most secure option for completing a tax refund estimate. A tool is available directly on their website and will use information from recent pay stubs and last year’s tax return. The tool will let you know if you will owe or obtain a refund with approximate amounts.

Complete a Test 1040 Form

You can take the old way and complete a test 1040 form. This can be printed from the IRS.gov website. It will give you an idea of what your estimated refund or payment would be based upon last year’s return, if your wages have not fluctuated much.

Estimating your tax refund is not necessary, but is helpful for those that have struggled with finances. It is also helpful for families that wish to plan a special vacation or major purchase. You can make changes to your withholdings from income if it does not appear that your refund will be what it needs to be.

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Why Your 2015 IRA Contribution Will Hurt Your Children’s 2016-2017 College Aid

College aid is a huge help for students to afford college. You probably need it to help them get a good standard of living while they are studying in higher education. But your IRA contributions for 2015 may ruin their ability to receive the funding they need.CollegeMoneyPic

This article will explain why.

The Formulas

There are formulas used to calculate whether someone is eligible for college aid, and to how much they are entitled. Unfortunately, it depends on parental household income. These formulas incorporate IRA contributions into the formula, even if for tax purposes they are made exempt.

This means your IRA contributions could prevent your children from gaining the financial aid they need.

Assets in the Plan

On the other hand, the assets already in your plan will not be used within the formula. This is a message that starting to save early will ultimately make it easier for you to deal with things later on. Those in the worst position are parents trying to make ‘catch up’ contributions to make up for lost time.

Is it Worth It?

You may be in a position where you have to choose between IRA contributions and college aid. For many parents, they will reason that they won’t have to pay off the student debt anyway so it’s not their problem. This is really a matter of your personal situation.

Richer families may be able to get away without worrying about college aid, whereas poorer families may choose to decline making IRA contributions, at least for a year or so in order for their children to qualify.

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Five of the Most Taxing Taxes

Paying taxes is among the most dependable parts of life. But certain taxes are more painful than others. Today we will identify and discuss the five types of tax that Americans hate the most.IncomeTaxScrabble

  1. State Income Tax

There’s nothing more annoying than having to pay tax to both your state and the Federal government. Thankfully, there are seven states with no state income tax, and two states only tax interest income and tax dividends.

  1. Self-Employment Tax

As an employee, your employer pays half of your social security taxes. If you are self-employed, the whole amount has to come out of your pocket. This is known as the self-employment tax and it can make setting up a business difficult.

  1. Social Security Taxes

You are paying for the baby boomers. In addition, the kicker is the current generation will never reap the same benefits as the people they are paying for now. Sure stings, doesn’t it?

  1. State Sales Tax

Sales tax is the most hated tax in the country. The less you earn the more it’s going to hurt because this isn’t a progressive tax. Only the richest people benefit here.

  1. Property Tax

Local governments change property taxes very frequently. It can also feel unfair because like the state sales tax it isn’t progressive, so a small house will warrant the same tax as a large house. This can make selling a house for a poorer person an extremely expensive venture.

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Least Tax Friendly States for Retirees

Many retirees today live on a fixed income. Those who do not are still likely to live on a limited amount of retirement savings. One of the best things that you can do as a retiree is to settle down at a home base. Before you set down your golden year roots, be sure your state is retirement friendly. As a retiree here are the least tax friendly states that you will want to avoid.EmpireStateBuilding

New York City

The tax rate for the state of New York averages to just over 12% in taxes. If you live in New York City, you will also pay city income tax. Therefore, you will owe federal, state, and city income taxes, which is a big chunk of your income. If you own a home in New York that is worth six figures, expect a hefty property tax bill each year.

Rhode Island

Rhode Island does not tax social security income for seniors with an $80,000 individual or $100,000 for married couples. All other forms of retirement income, including pensions are taxed by the state. Property tax bills in Rhode Island are among the highest in the United States.

Vermont

The state of Vermont is one of the worst states for retirees. All retirement income is subject to taxation, including much of Social Security income. Income deductions are limited to around $15,750 for a single person and $31,500 for a couple. Restaurants and prepared foods in the state have a heavy tax rate of 9% decreasing your quality of life if you enjoy dining out.

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Three Money Moves Which Will Help during Tax Season

If you want to pay the least amount of money in taxes this tax season, make sure you are making the right money moves. Today, we are discussing some of the money moves to make before the year ends to lower your tax bill.IncomeTaxImage

Convert to a ROTH Account

If you think taxes are going to rise, convert to a ROTH account. When you withdraw from your ROTH account, it will be tax and penalty free as long as you are 59 ½ years of age and the account has been open for at least five years. However, before deciding if this would be a good move for you, make sure you are aware that you will have to pay taxes on your pretax contributions and earnings for the traditional IRA.

Give Big to Charity

Those old items that you have sitting around the house that have not been used in months can shave hundreds off your tax bill as long as you donate to a qualified charity. You can even donate cash to your favorite charity up until the last day of the year to be able to deduct. It’s better if your money goes to a good cause instead of Uncle Sam right?

Give to Family or Friends

Is a family or friend having a hard time financially? You both can win when you help them out. You can give out up to $14,000 before you have to pay gift taxes.

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The Best States for Paying Taxes in 2015

We already covered the MonopolyTaxworst states for paying taxes in 2015, so today we thought it would be a good idea to cover the states with the lowest taxes. Below you’ll see the states where people enjoy spending the least amount of money in taxes.

Delaware

Delaware residents have a 2.2% tax rate, which is very low compared to some of the other northern states. However, this rate applies only to those with an income under $5,000. For incomes over that amount, you will be taxed at a 6.6% tax rate.

Wyoming

People love living in Wyoming because they do not have a state tax. Instead, residents only have to pay 4% on the purchases that they make in the state and there is a 24-cent tax for gas.

Alaska

If you can handle the weather, Alaska is a great place to live this year. Residents there enjoy no tax at all (even on sales). However, gas is taxed at a rate of 12 cents per gallon.

Louisiana

Some parts of the south are known for being affordable and Louisiana happens to be one of them. Residents enjoy a 2% state income tax unless they make $50,000 ($100,000 for joint filers) and then they have a 6% tax rate. Sales tax is also 4% and there is a fee of 20 cents per gallon for gas.

Closing Thoughts

If you want to pay the least amount of money in state taxes, planning a move to one of these states would be beneficial to you.

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The Worst States for Paying Taxes in 2015

On average Americans, pay about $17,000 in taxes each year. While this may seem like a lot imagine if yoMapUnitedStatesu had to pay more. Today we are discussing some of the worst states for paying taxes in 2015.

Maine

Maine ranks in #10 in the country when it comes to taxes. If you are able to move to New Hampshire or Massachusetts, you will find that your tax burden would be lower.

Iowa

Iowa has the #9 spot when compared to other states. If possible, you may consider moving to South Dakota because you will receive a tax bill that is approximately $3,700 on average.

New Jersey

New Jersey comes in #8 and residents here can expect to pay about $8,830 in taxes. However, just over in Delaware residents are enjoying an average tax bill of $5,195.

Connecticut

Connecticut has the #4 spot and it’s no surprise that residents here can pay over $9,000 in taxes. However, what is shocking is the average household income is $48,000.

Nebraska

Nebraska takes the third slot on the list, because residents spend about $9,400 each year on state and local taxes. Wyoming, one of the neighboring states only asks their residents for a little over $2,000 a year though.

Closing Thoughts

If you live in one of the states that we have mentioned today and feel like you are paying too much in taxes, it may be time to consider a move. Check out some of the neighboring states and you may be surprised to learn that they pay less than half in state and local taxes than what you pay now.

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Three Tax Benefits for the Self-Employed

SelfEmploymentTaxWhen you first begin your self-employment journey, it can seem overwhelming. There are so many things that you are responsible for handling. When tax time comes around your taxes are even more complicated. However, the good news is there are tax benefits for the self-employed. Listed below are some of the more significant tax benefits for self-employed taxpayers.

Home Office Deduction

For those who are working out of your home, you get to claim the home office deduction. This deduction allows you to write off a percentage of your mortgage or rent, based on how much space your home office takes up and the percentage of time you work from your home office. While this deduction is complex, if you qualify for it, it will allow you to see that your hard work is paying off.

Internet and Phone

If you use your phone and internet exclusively for your business, you can deduct it 100%. Additionally, if you have one phone/internet that you use for personal and business use, you may still be able to deduct a percentage of the bill based on your usage percentages.

Interest

Did you take out a loan for your business or maybe you have a business credit card. Whatever the case may be, as long as you used the funds for your business, the interest is tax deductible.

Closing Thoughts

There are numerous tax benefits available for those who are self-employed; you just have to make sure that you claim them so you can get some of your hard-earned money back.

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Celebrities Who Cheated on Their Taxes

If there is one thing that you should learn from celebrities, it is not to follow their example when it comes to finances. Below you can see some of the celebrities who cheated on their taxes and had to pay for the consequences in not so pleasant ways.

Wesley Snipes
Back in 2008, the IRS caught up with Wesley Snipes for not filing taxes at all from 1999 to 2001, and his consequence was spending three years in prison. Turns out, he thought it was a good idea to challenge how the IRS would collect taxes. They sure showed him, right?

Richard Hatch
Richard Hatch, the winner of Survivor, decided he was not going to report the million that he won as a prize. He was punished by the IRS with three years in prison and was sent back for another nine months because not filing taxes in 2009 was a violation of his probation.

Al Capone
This person may have gotten off easy since the government was not able to catch him in the act of doing alleged crimes. However, when he slipped by not filing taxes he was given a penalty of serving approximately half of his eleven year sentence for tax evasion.

Overall, it is probably best to learn from these celebrities mistakes. Not filing taxes can turn into jail time and other things can happen too. Unless you are trying to have your five minutes of fame for tax evasion, do not think of trying to pull a slick one over on Uncle Sam. Call our Seattle CPA firm at (425) 483-6600

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.