Why You Should Never Name Minors as Your Beneficiaries.

Most parents want to pass their assets to their children or grandchildren but naming a minor as a
beneficiary can have unintended consequences. It is important to do some estate planning to
avoid leaving assets directly to a minor.

There are two main problems with naming a minor as the beneficiary of your will, life insurance
policy, annuity, IRA or retirement account. The first is that a large sum of money cannot be left
directly to a minor. Instead, a Pennsylvania Orphan’s court will likely have to appoint a
guardian over the estate of the minor to hold and manage the money. Your Estate will have to
pay attorney fees to handle the guardianship proceedings to appoint the guardian, and the
guardian may not be someone you want to oversee your children’s money. The Guardian of the
Estate will have to file annual accountings with the County Orphan’s court, generating more
costs and fees to your Estate.

The other problem with naming a minor as a beneficiary is that the minor will be entitled to the
funds from the Guardian when he or she reaches age 21. There are no limitations on what the
money can be used for, so while you may have wanted the money to go toward college or a
down payment on a house, your child may have other ideas. 

One way to get around these problems is to create a pour over trust in your will and name the
minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until
a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are
drafted. The trust can state any number of specifics on who receives property and when,
including allowing you to distribute the funds at a specific age or based on a specific event, such
as graduating from college. You can also spread out distributions over time to children and

If you do create a trust, remember to name the trust as beneficiary of all your life insurance, IRA,
annuity or retirement plans. For example if the minor’s name was John Smith, you would have
language that states “In Trust for John Smith under my will dated August 20, 2020, and as the
same which maybe superseded or amended by a later will.”
If you forget to take that step, the money will be distributed directly to the minor when he or she
turns 21, negating the work of creating the pour over trust in your will. If you have any
questions or need help with your estate plan, call Gregory J. Spadea at 610-521-0604.

Checklist of What Must be Done After Your Loved One Dies

Clipboard with checklist

  1. Locate original will, trust, insurance policies and deeds.
  2. Contact both the funeral home and church to make arrangements and publish obituary notice.
  3. Obtain 10 Certified Death Certificates from the Undertaker.
  4. Contact Social Security, the Veterans Administration, and any other payers of pensions to stop direct deposits.
  5. Contact life insurance company to determine death benefits.
  6. Contact utility companies, cable TV, cell phone, pest control and lawn care to cancel service or change billing status.
  7. Contact homeowners, auto and health insurance to cancel coverage or change policy.
  8. Remove your loved one’s name from the car registration if held jointly.
  9. Contact all three credit reporting agencies (Transunion, Experian and Equifax) and cancel all the credit cards in your loved one’s name.
  10. Cancel or change all memberships and magazine or newspaper subscriptions.
  11. Contact an attorney to see if probating the estate is necessary and bring a list of all the assets.
  12. Have the mail forwarded to the executor if needed.
  13. If probating the estate is not necessary, transfer title on all the jointly owned assets such as bank and brokerage accounts to the surviving owner and remove your loved one’s name and social security number. You may leave one joint account open for 8 months after the date of death in case you need to deposit a check in their name.
  14. Update your life insurance policy and retirement accounts to remove your loved one as beneficiary.
  15. If your spouse and yourself own any real property jointly you do not need to change the deeds but you will need their death certificate when the property is sold.

Feel free to contact Gregory J. Spadea, Esquire of Spadea & Associates, LLC online or at 610-521-0604 to help you probate your loved one’s estate.

Ten Exceptions Allowing You to Deduct 100% of Your Business Meals in 2018


Beginning in 2018 Entertainment is no longer deductible but business meals are still 50% deductible. Most clients are aware of the tax rule that disallows 50% of their business meals. What is not nearly as widely known is that there are ten exceptions to this 50% disallowance rule. When one of these exceptions applies, you get a 100% deduction for the business meal expense.

1. Meals Served on the Employer’s Premises
An employer may provide employees with meals at work and claim a full deduction without the employees having to report the value of the meals in their income. The key is the meals have to be provided (a) for a valid business reason, (b) on or near your businesses premises, and (c) primarily for the convenience of the employer rather than merely as an added fringe benefit for employees. An example would be a hospital providing meals to hospital staff so they are nearby if a patient needs immediate care.2. Employee’s reimbursed expenses
If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. The employer can deduct the expenses although it is subject to the 50% limit.

3. Reimbursed Expenses Treated as Compensation to the Employee
If the employer does not have an accountable plan and the employer includes the reimbursed expenses in the employee’s wages the expenses are not subject to the 50% limit for the employer. A reimbursement or expense allowance arrangement is an “accountable plan” if it satisfies the requirements of business connection, substantiation, and requires the employee to return amounts in excess of the substantiated expenses.

4. Meals and Entertainment Expenses for Employees
Employers can deduct the full cost of providing food and beverages at recreational, social, or entertainment gatherings primarily for the benefit of rank and file employees. Examples include company golf outings, Christmas parties, or other gathering for employees and their guests.

5. Items Available to the Public
Expenses incurred for meals available to the general public are 100% deductible. Examples include free food at concerts hosted by a Cable Company, free dinners for potential restaurant customers, free hot dogs at a Furniture store promotion, free wine and food at an exhibition sponsored by a winery, and free brownies furnished by a realtor at an open house.

6. Meals and Entertainment Sold to Customers
When services are provided to a client the service provider can deduct 100% of job-related meal and entertainment expenses by billing the client separately for these costs. However the client is then stuck with the 50% disallowance limit. If separate billing doesn’t occur, the 50% disallowance rule applies to the service provider. For example, many of our clients adequately account for meal and entertainment expenses to a client who reimburses them for these expenses. They are not subject to the directly-related or associated test, nor are they subject to the 50% limit. If the client can deduct the expenses, that client is subject to the 50% limit.

7. Sale of meals or entertainment to the Public
You are not subject to the 50% limit if you actually sell meals, entertainment and services. For example, if you run a nightclub, your expense for the food and entertainment you furnish to your customers is not subject to the 50% limit.

8. Meals Provided to Raise money for Charity Through Sports Events
The allowable deduction for the cost of a ticket to a qualifying charity sports event isn’t reduced by the 50% meal disallowance rule even when meals are included. The ticket package must include admission to the event, but it can also include meals and refreshments. To qualify, the charitable event must give 100% of its net proceeds to a charity and use volunteers to do almost all the work. The classic example is a charity golf tournament with a meal included in the deal.

9. Meeting of Business Leagues Exempt under Internal Revenue Code Section 501(c)(6)
Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit to deduct the entire cost of meals provided to members at meetings.

10. Department of Transportation Hours of Service Limitations are 80% Deductible
In lieu of the regular 50% disallowance, individuals whose work is subject to the hours of service limitations of the Department of Transportation (e.g., interstate truck drivers, certain air transportation employees, certain railroad employees) can deduct 80% of their business food and beverage expenses.

As you can see, there are enough exceptions to the 50% disallowance rule that most businesses can meet at least one, if not more of them. If you have any questions please contact Gregory J. Spadea at (610) 521-0604.

Determining How Much State Income Tax To Be Withheld From Your Retirement Plan Distributions

TaxThe Law Offices of Spadea & Associates assists clients with their taxes from all over the country. From time to time our clients need help determining how much state income tax should be withheld from their pension or retirement account distributions. Listed below are the sixteen states that tax pensions and retirement accounts. Obviously, if you do not reside in one of the states listed below you should not have any state income tax withheld from your pension distribution. However if you do live in one of the 16 states listed below, when you fill in IRS form W-4P, you should have state income tax withheld at the following rates:

State Name Income Tax Withholding Percentage of Gross Distribution
 Arkansas  5%
 California  9%
 District of Columbia  8.95%
 Delaware  5%
 Georgia  6%
 Iowa  5%
 Kansas  4.50%
 Massachusetts  5.10%
 Maine  5%
Michigan  4.25%
North Carolina  4%
Nebraska  5%
Oklahoma  5%
Oregon  8%
Virginia  4%
Vermont  9%


You can find a W-4P on my website resource page under IRS Tax Forms. If you have any questions or need help with your taxes call Gregory J. Spadea at 610-521-0604.

What Every Trustee Should Know About Making the Election To Use the 65 Day Rule

2 people looking over documents.

If you are serving as the trustee of a complex trust, it’s not too late to take action that may reduce the total taxes paid by both the trust and the beneficiaries in 2018. A “complex trust” is a trust that retains current income in the trust, or distributes trust principal, or has a charitable organization as a beneficiary. A “simple trust” is a trust that is required to distribute all of its annual income to the beneficiaries, but no principal may be distributed. Income of the trust is taxable to the beneficiary in the year received.

Trusts pay the highest federal income tax rate of 37% which starts at $12,500 as opposed to $500,000 for a single individual in 2018. Most trust beneficiaries have a lower tax rate than the trust; therefore, income that is distributed to the beneficiaries is then taxed to the beneficiaries instead of to the trust which ultimately results in a tax savings between the trust and the beneficiaries.

One of the tax planning tools available to trustees of estates and complex trusts is the IRC Section 663(b) election, also known as the “65-day rule.” Simply put, a 663(b) election allows distributions made to beneficiaries within 65 days of year-end to be counted as prior-year distributions.

Sometimes a trustee realizes there is excess income remaining after accounting for all expenses and distributions made in the prior year. In addition trustees must wait until February to receive the 1099s to determine if a distribution under IRC 663(b) is beneficial. To manage the tax burden IRC Section 663(b) allows trustees to elect to make distributions to trust beneficiaries in the first 65 days of the new calendar year. Therefore the trustee of a trust that has a tax year ending on December 31, 2018 has until March 6, 2019 to make distributions that count toward 2018. Keep in mind the 65-Day Rule applies only to estates and complex trusts, because by definition, a simple trust’s income is already taxed to the beneficiary at the beneficiary’s presumably lower tax rate.

In order to use the 65-Day Rule, the trustee must make the 663(b) election by checking the box on line 6 under other information on page two of IRS Form 1041, the trust’s fiduciary income tax return. To be valid, the election must be made by filing form 1041 by its due date, including extensions. Once made, the election is irrevocable. If you have any questions or need help preparing an estate or trust income tax return, call Gregory J. Spadea at 610-521-0604.

What Services Are Subject to Pennsylvania Sales Tax?

Calculator and the word tax

Most of my clients understand what goods are subject to Pennsylvania sales tax but may not realize there are also some services that are also subject to sales tax in Pennsylvania. Therefore here is a list of services subject to Pennsylvania sales tax:

  1. Printing or imprinting of tangible personal property of another.
  2. Washing, cleaning, waxing, polishing or lubricating of motor vehicles.
  3. Inspecting motor vehicles as required by law.
  4. Repairing, altering, mending, pressing, fitting, dyeing, laundering, dry-cleaning or cleaning tangible personal property other than wearing apparel or shoes.
  5. Applying or installing tangible personal property as a repair or replacement part of
    other tangible personal property.
  6. Lobbying services.
  7. Adjustment services, collection services or credit reporting services.
  8. Secretarial or editing services.
  9. Disinfecting or pest control services.
  10. Building maintenance or cleaning services.
  11. Employment agency services or help supply services.
  12. Lawn care services.
  13. Self-storage services.
  14. Mobile telecommunications services.
  15. Premium cable and video programming services including streaming of videos.
  16. Non-residential electric, steam, and gas services.
  17. Intrastate and interstate telecommunications services billed to PA service addresses except subscriber line charges and basic local residential phone service for residential use and payphone service.

You can also find additional information about Pennsylvania taxable and non-taxable sales tax items by reading the Retailers Information Guide Pennsylvania REV-717 which is on my website resource page. Feel free to contact Gregory J. Spadea at 610-521-0604, if you have any questions or need help with a Pennsylvania Sales Tax Audit.

Who Inherits Your Pennsylvania Estate When You Die Without a Will (Intestate)

Signing Last Will and Testament

It is important to remember that a Will only covers assets in your name alone which are called probate assets. A Will does not cover assets with a named beneficiary or assets titled jointly. Those assets are called non-probate assets and pass by operation of law.

In Pennsylvania, if you are married and you die without a Will, what your spouse gets depends on whether or not you have living parents or children or grandchildren. If you don’t have living parents or children, then your spouse inherits all of your intestate property. But if you do, they and your spouse will share your intestate property as follows:

If you die with a surviving spouse and parents but no children. Your surviving spouse inherits the first $30,000 of your intestate property, plus 1/2 of the balance.
Example: Charles is married to Lisa, and his father is still alive. Charles owns a house in joint tenancy with Lisa, and Lisa is also the named beneficiary of Charles retirement account. When Charles dies, Lisa automatically inherits the house and any remaining retirement funds; those things are not probate property. Charles also has $350,000 worth of additional property that would have passed under a Will if he had made one. Lisa inherits $190,000 worth of that property – that is, $30,000 plus $160,000 worth of the remaining $320,000. Charles parents inherit the remaining half or $160,000.

If you die with children from your surviving spouse. Your surviving spouse inherits the first $30,000 of your intestate property, plus half of the balance. Your children with that spouse inherit the remaining half.

Example: Sam is married to Jane, and they have two grown children. Sam and Jane own a large bank account in joint tenancy, and Bill took out a life insurance policy naming Jane as the beneficiary. When Bill dies, Jane receives the life insurance policy proceeds and inherits the bank account outright. Bill also owns $450,000 worth of property that would have passed under a will, so Karen inherits $240,000 worth of that property – that is, $30,000 plus $210,000 of the remaining $420,000. Their two children inherit the remaining half $210,000 or $105,000 each.

If you die with children who are not the descendants of your surviving spouse. Your spouse inherits 1/2 of your intestate property, and your children inherit the other half.
Example: Tom is married to Kim and also has a 12-year-old daughter, Sara from a previous marriage. Tom owns a house in joint tenancy with Kim, plus $200,000 worth of additional assets that would have passed under a Will if Tom had one. When Tom dies, Kim inherits the house outright and $100,000 worth of Tom’s probate property. Tom’s daughter Sara inherits the remaining half or $100,000 of Tom’s probate property.

These rules do not apply if you are separated from your spouse and your spouse has willfully neglected you or refused to physically, financially or emotionally support you for at least one year. They also do not apply if you die in the state of Pennsylvania during divorce proceedings from your spouse.

If you die without a Will and don’t have any family, your property will “escheat” to the Commonwealth of Pennsylvania after remaining unclaimed for 7 years. However, this rarely happens because the laws are designed to get your property to anyone who was even remotely related to you. For example, your property won’t go to the state if you leave a spouse, children, grandchildren, parents, grandparents, siblings, nieces, nephews, or cousins.

If you have any questions regarding Pennsylvania Intestacy Laws contact Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC specializes in Probate, Estate Administration and Estate and Tax Litigation.

How Pennsylvania Students Can Avoid Criminal Convictions For Disorderly Conduct and DUI on Their College and Job Application

Applicant Filling Up the Online Job Application

I have represented many high school and college students who were charged with criminal offenses like:

  • Disorderly conduct
  • Underage drinking
  • Driving Under the Influence (DUI)

The student’s parents are not only concerned about the immediate consequences of these minor offenses, but their long term effect on their child’s academic and professional careers.

Most employer applications often require a minimum degree of education and in many cases background checks. These background checks are not only concerned with criminal convictions but also focus on any type of contact with law enforcement which would include arrest and citations.

Disorderly Conduct

If your child is charged with disorderly conduct the prosecution will need to establish beyond a reasonable doubt that he or she created a public disturbance which ultimately lead to his or her arrest. If your son or daughter was charged with disorderly conduct it is important that your defense attorney negotiate a favorable non-trial disposition such as Accelerated Remedial Disposition (ARD). ARD provides for the expungement of the criminal record after completing the program. If your defense attorney isn’t able to negotiate such a non-trial disposition, he should never have your child plead guilty to this charge. Again, disorderly conduct isn’t a serious offense but many employers and colleges often deny applicants based on withdrawn charges or arrests even without a conviction. That is why it is critical to have your child’s record expunged before they apply for college or an internship.

Underage Drinking

In Pennsylvania, underage drinking for a first time offender can result in a 90 day license suspension. This driver’s license suspension will not only increase car insurance rates but it can also limit college internships as many colleges require their students to have a driver’s license in order to travel to and from different locations.

Again, a student should never simply plead guilty to an underage drinking charge but rather your defense attorney should either negotiate a favorable non-trial disposition or contest the charges. Contesting the charges means forcing the prosecution to prove each element of underage drinking beyond a reasonable doubt. This may be difficult especially if the prosecution’s case relies on non-government witnesses such as bartenders or waitresses who are often transient and unwilling to come to court, even with a subpoena, because they are not being paid for their time outside of work


In Pennsylvania, a minor (who is under the age of 21) commits a DUI when his or her BAC is .02. This is an extremely low blood alcohol content so practically any alcohol consumption will result in a BAC of this level. Minors, can still receive programs such as ARD which would only result in a 90 day license suspension as opposed to a one year license suspension for a first time offense. If a minor doesn’t accept ARD or isn’t eligible for it because of some prior offense, the mandatory minimum is 2 days in jail, a 1 year license suspension, and a $500.00 fine.

If your son or daughter is charged with a criminal offense please contact the Law Offices of Spadea & Associates, LLC at 610-521-0604.

7 Ways to Use Impeachment Against Criminal Trial Witnesses in Pennsylvania

Witness taking an oath in the court room

A proper defense must always consider calling a defense witness or even the accused if the prosecution has presented compelling evidence. Calling a defense witness, however, isn’t an easy decision because this person will have to face cross examination by the prosecution. While a good defense attorney can protect the witness with objections, a judge may overrule those objections and require the witness to answer.

Before any attorney calls a witness to testify, he must thoroughly review their background to make sure that this decision doesn’t ultimately hurt the case more than it helps. While an accused’s character is never admissible at trial unless the defense offers it into evidence, there are separate rules that cover the impeachment of a witness’s credibility including the accused.

The Pennsylvania rules of evidence allow the prosecution and the defense to impeach the credibility of any witness.

Impeachment can expose a witness’s partiality, motive, prior convictions, character for untruthfulness, prior inconsistent statements, and a witness’s inability to recall certain facts. Here are the seven most common forms of impeachment:

  1. Competency – a witness’s ability to communicate, understand the consequences of lying, recalling facts and understanding what is occurring;
  2. Partiality – a witness’s bias, prejudice, financial interest, or corruption;
  3. Motive – a reason explaining a witness’s testimony;
  4. Prior inconsistent statements – a witness’s earlier statements that are inconsistent with the witness’s trial testimony;
  5. Prior convictions – a witness’s convictions for crimes of dishonesty and false statements that help prove the witness’s untruthfulness;
  6. Untruthful character – a witness’s reputation for untruthfulness which may be based on their previous acts;
  7. Contradiction – a witness’s testimony may be contradicted by physical evidence, other witness accounts, or by witness’s own inconsistent conduct.

Even if a witness has credibility issues the defense can still call this witness but needs to be prepared to rehabilitate the witness after the prosecution attacks their credibility. If you have any questions about impeachment or are charged with a crime call Gregory J. Spadea of the Law Offices of Spadea & Associates, LLC at 610-521-0604.

2018 Tax Cuts and Jobs Act Highlights

Individual Tax Provisions:

Pile of Tax Cuts And Jobs Act Buttons With US Flag

New Tax Rates and Brackets: For tax years 2018-2025, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For tax years 2018-2025, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. The new law leaves the preferential rates on capital gains and dividends unchanged.

Personal Exemption Deduction Eliminated: Under pre-act law, the deduction for each personal exemption was $4,150 for 2017, subject to a phaseout for higher earners. For tax years 2018-2025, the deduction for personal exemptions is eliminated.

Standard Deduction Increased: For tax years 2018-2025, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.

Medical Expense Deduction Threshold Temporarily Reduced: For tax years 2017-2018, the threshold for medical expense deductions is reduced from 10%-of-AGI to 7.5%-of-AGI for all taxpayers. In addition, the rule limiting the medical expense deduction for Alternative Minimum Tax (AMT) purposes to the excess of such expenses over 10%-of-AGI doesn’t apply to those tax years.

State and Local Tax and Property Deduction Limited to $10,000: For tax years 2018-2025, a taxpayer’s itemized deduction for state and local taxes is limited to $10,000 ($5,000 for a married taxpayer filing a separate return) of the aggregate of (1) state and local property taxes and (2) state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Warning: The provision also includes a rule stating that an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years beginning after 2017. It’s interesting to note that on December 22nd New York’s Governor Cuomo signed an emergency Executive Order that allows New Yorkers to prepay next year’s property taxes this year, before the new tax law takes effect. Payments must be postmarked by December 31, 2017. The order authorizes localities to issue warrants for the collection of early property tax payments and to accept partial payment— allowing New Yorkers to pay a portion or all of their 2018 property taxes before the end of the year to keep the deductibility.

Mortgage and Home Equity Indebtedness Interest Deduction Limited: For tax years 2018- 2025, the deduction for interest on home equity indebtedness is eliminated and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).

Charitable Contribution Deduction Limitation Increased: For contributions made in tax years after 2017, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling. Charitable Contribution Deduction for College Athletic Seating Rights Eliminated. For tax years after 2017, no charitable deduction will be allowed for any payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event.

Casualty and Theft Loss Deduction Eliminated: For tax years 2018-2025, the personal casualty and theft loss deduction is eliminated, except for personal casualty losses incurred in a federally declared disaster. However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed gain. Note: The ACT includes special relief provisions for tax years 2018-2025 for taxpayers who incurred losses from certain 2016 major disasters.

Gambling Loss Limitation Modified: For tax years 2018-2025, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

Miscellaneous Itemized Deductions Eliminated: For tax years 2018-2025, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is eliminated.

“Pease” Limitation on Itemized Deductions Eliminated: Under pre-act law, higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions (commonly known as the “Pease limitation”). For tax years 2018-2025, the “Pease limitation” on itemized deductions is eliminated.

Income and Losses New Deduction for Business Income from Pass-through Entities and Sole Proprietorships: This gets tricky but here goes. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. The 20% deduction is not allowed in computing Adjusted Gross Income (AGI), but rather is allowed as a deduction reducing taxable income. Alas, the deduction comes with numerous restrictions:

  • For the most part, this deduction cannot exceed 50% of your share of the W-2 wages paid by the business. Alternatively, the limitation can be computed as 25% of your share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis (the original purchase price) of property used in the production of income.
  • The W-2 limitations do not apply if you earn less than $157,500 (if single; $315,000 if married filing jointly).
  • Certain personal service businesses are not eligible for the deduction, unless their taxable income is less than $157,500 for singles and $315,000 if married. In this regard, a “specified service trade or business” means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.

The exception to the W-2 limit and the general dis-allowance of the deduction to personal service businesses is phased out over a range of $50,000 of income for single taxpayers and $100,000 for married taxpayers filing jointly. Thus, by the time income for a single taxpayer reaches $207,500 or $415,000 for a married-filing-jointly taxpayer, the W-2 limitation will apply in full (i.e. personal service professionals get no deduction).

Alimony Deduction by Payor and Income Inclusion by Payee Repealed: For any divorce or separation agreement executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

Moving Expense Deduction and Reimbursements Eliminated: For tax years 2018-2025, the deduction for moving expenses and the income exclusion for qualified moving expense reimbursements is eliminated, except for members of the Armed Forces on Active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.

Alternative Minimum Tax (AMT) Retained with Increased Exemption Amounts: The act retains the individual AMT but with increased exemption amounts and phase-out thresholds for years 2018-2025 (indexed for inflation). There are now higher exemption amounts ($109,400 for married taxpayers as compared to $84,500 under current law). In addition, with the deduction for state and local income taxes largely eliminated, as well as the deductions for unreimbursed employee expenses and personal exemptions, the AMT should catch in its web fewer taxpayers then it does under current law.

Child Tax Credit Increased: For tax years 2018-2025, the child tax credit is increased from $1,000 to $2,000 per qualifying child under the age of 17, and other changes are made to phase-outs and refund ability during this same period. Under the act, the income level at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).

Education Incentives: Under current law, a taxpayer who pays tuition to a college or university may be eligible for a Lifetime Learning Credit, a Hope Credit, or an American Opportunity Tax Credit, depending on the facts and circumstances. In addition, employers may pay up to $5,250 on behalf of an employee to obtain work-related education without the payment being included in the taxable income of the employee, PhD candidates may receive tax-free tuition waivers, dependents of college or university employees may also receive tax-free tuition waivers, a deduction is permitted for student loan interest of up to $2,500 and K-12 teachers may deduct up to $250 of their out-of-pocket supplies.

529 Accounts: These plans can now be used to pay for private elementary and secondary school expenses, whether the schooling is public, private (not including homeschooling) or religious. However, the tax-free treatment of such 529 withdrawals will be limited to $10,000 per student, per year.

Exclusion on Sale of Primary Residence Despite heated discussion on changes, the new law continues the law that a taxpayer who sells his or her home may exclude up to $250,000 of gain ($500,000 if married filing jointly), provided the taxpayer has owned and used the home as his or her primary residence for two of the previous five years.

Affordable Care Act Individual Mandate Repealed: Under pre-act law, the Affordable Care Act required individuals, who were not covered by a health plan that provided at least minimum essential coverage, to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return ($695 for 2018). Unless an exception applied, the tax was imposed for any month that an individual did not have minimum essential coverage. For months beginning after 2018, the amount of the individual shared responsibility payment is permanently reduced to zero.

Re-characterization of Roth Conversions Eliminated: For Roth conversions in tax years beginning after 2017, the act repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be re-characterized as a contribution to the other type of IRA. Thus, re-characterization cannot be used to unwind a Roth conversion, but is still permitted with respect to other contributions.

Estate and Gift Tax Retained with Increased Exemption Amount For estates of decedents dying and gifts made after 2017 and before 2026, the act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple). Many of our wealthier clients have been postponing certain lifetime estate planning initiatives due to the legislative uncertainty and the act now provides some clarity. However, many of the new law’s provisions expire at the end of 2025. Remember the “fiscal cliff” situation at the end of 2012 where estate tax exemptions were scheduled to revert back to lower figures. The prospect of this sunset will unfortunately cause there to be some continued level of uncertainty as it relates to gifting for federal estate tax planning purposes after 2025.

Business Corporate and Nonprofit organizations Tax Provisions: C Corporation Tax Rates lowered. For tax years beginning after 12/31/17, the act lowers the corporate tax rate to a flat 21%. This applies to personal service corporations as well. According to the GOP, a significantly lower corporate tax rate is needed to promote economic growth and global competitiveness.

Dividends Received Deduction Corporations are generally permitted a special deduction for dividends received. If the corporation owns at least 20% of another corporation, an 80% dividend received deduction is permitted. Otherwise, the deduction is limited to 70%. If the payor and recipient corporations are members of the same affiliated group, a 100% dividend received deduction is allowed. Under the act, the 80% dividends received deduction is reduced to 65%, and the 70% deduction is reduced to 50%. This applies to tax years beginning after 12/31/17.

Alternative Minimum Tax (AMT): The act repeals the corporate AMT for tax years beginning after 12/31/17. For tax years beginning after 2017 and before 2022, the AMT credit is refundable and can offset regular tax liability in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the year over the amount of the credit allowable for the year against regular tax liability. This means the full amount of the minimum tax credit will be allowed in tax years beginning before 2022.

Expensing and Depreciating Property (Section 179): Under pre-act law, the maximum Section 179 deduction was scheduled to be $520,000 for 2018. In addition, the qualifying property phase-out threshold was scheduled to be $2,070,000. The act increases the maximum Section 179 deduction and phase-out threshold to $1 million and $2.5 million, respectively, for property placed in service in tax years beginning after 12/31/17. The act also expands the definition of Section 179 property to include certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property such as roofs, HVAC, fire protection, alarm and security systems.

Immediate Expensing of Qualifying Business Assets: The act establishes a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods). This applies to new and used property. In later years, this first-year deduction phases down as follows: • 80% for property placed in service in 2023. • 60% for property placed in service in 2024. • 40% for property placed in service in 2025. • 20% for property placed in service in 2026. Note: For qualifying property placed in service after 9/27/17, business owners can take advantage of this provision on their 2017 tax returns. Or, under a first-year transition rule, they can stick with current law and claim 50% bonus depreciation.

Increased Luxury Automobile Depreciation Limits: There are limits for the annual amount of depreciation that can be claimed for passenger autos. For passenger autos placed in service after 12/31/17 for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the placed-in-service year, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. For passenger autos eligible for bonus first-year depreciation, the increase to the first-year depreciation limit remains $8,000.

Shortened Recovery Period for Real Property: For property placed in service after 12/31/17, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. The act requires any real property trade or business that elects to be excluded from the interest deductibility limitations must utilize the alternative depreciation system (ADS) with respect to its depreciable real property. The act imposes a general 15-year recovery period (20 years for ADS) for qualified improvement property.
In addition, the ADS recovery period for residential rental property is shortened from 40 to 30 years.

Interest Expense Limited: Regardless of its form, every business will be subject to a net interest expense disallowance. For tax years beginning after 12/31/17, net interest expense in excess of 30% of the company’s adjusted taxable income will be disallowed. However, taxpayers (other than tax shelters) with average annual gross receipts for the prior three years of $25 million or less are exempt from this limitation. The amount of any business interest not allowed as a deduction for any taxable year may be carried forward indefinitely and utilized in future years, subject to this and other applicable interest deductibility limitations and to certain restrictions applicable to partnerships.

Net Operating Loss (NOL) The act generally repeals the two-year carryback rule for NOLs. For losses arising in tax years beginning after 12/31/17, the NOL deduction is limited to 80% of taxable income. NOLs can be carried forward indefinitely.

Domestic Manufacturing Deduction Repealed: Section 199 allows a deduction equal to a percentage of the income earned from certain manufacturing and other production activities conducted within the U.S. For tax years beginning after 12/31/17, the Section 199 deduction is repealed.

Like-kind Exchanges Limited to Real Property (Section 1031): The act limits the like-kind exchange rules so they apply only to real property that is not held primarily for sale.

Research and Experimental Expenses: For amounts paid or incurred in tax years beginning after 12/31/21, the act requires specified research and experimental (R&E) expenses to be capitalized and amortized ratably over five years or 15 years if R&E is conducted outside of the U.S. Specified R&E expenses include costs for software development.

Deduction for Fringe Benefits: The act makes the following adjustments to the fringe benefit rules (for amounts paid or incurred after 12/31/17): • Disallows deductions for entertainment, amusement, or recreation activities expenses. The denied deductions would also include any membership dues, fringe benefits provided to employees in the form of an on-premises gym, and other athletic facilities. It also expands the current 50% limit on the deductibility of business meals to those provided in an in-house cafeteria or otherwise on the employer’s premises. For amounts paid or incurred after 12/31/25, the act disallows an employer’s deduction for expenses associated with meals provided for the convenience of the employer on its business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements.

Denies a deduction for employee transportation fringe benefits: However, the act retains the exclusion from income for such benefits received by an employee. Eliminates a deduction for transportation expenses that are the equivalent of commuting for employees, except as provided for the safety of the employee.

New Credit for Employer-paid Family and Medical Leave For tax years beginning after 12/31/17 and before 1/1/20, the act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave.

Expansion of Cash Method of Accounting: For tax years beginning after 12/31/17, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income producing factor. In addition, such taxpayers are not required to account for inventories. Instead, they may treat inventories as non-incidental materials and supplies or conform to their financial accounting treatment of inventories.

Long-term Construction Contracts: Generally, construction companies with average annual gross receipts of $10 million or less in the prior three years are exempt from the Percentage of Completion Method (PCM). The act expands this exemption to contracts for the construction or improvement of real property if the contract (1) is expected to be completed within two years and (2) is performed by a taxpayer that meets the $25 million gross receipts test discussed earlier. This change is effective for contracts entered into after 12/31/17.

As you can see, the act is going to bring a lot of changes to individual and business taxpayers. On the plus side, this means more planning opportunities for many as we all try to navigate through uncertain territory. This blog only touches the surface of one of the biggest tax overhauls in the nation’s history. If you need help with your taxes or have any questions please call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns year round and is conveniently located in Ridley Park, Pennsylvania.

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