California’s Proposition 15: Should You Vote Yes or No?

The repercussions could make a big difference for the state’s businesses and residents.

What a wild year it’s been. COVID-19, wildfires, and political kerfuffles were just the start. Now, with election day fast approaching, we have a lot to consider—not the least of which is your choice for the next president of the United States. In California, we have 12 propositions on our ballot, and one—Proposition 15—threatens to rollback a 42-year-old California Constitutional amendment.

Exploring Proposition 15

At its essence, Proposition 15 will impose steep property taxes on business, which will, in turn, raise billions of dollars for schools and local governments. On the surface, that sounds like a great payoff. After all, businesses make lots of money, right? What’s the negative of taxing them more?

If California’s Proposition 15 passes, though, it will be one of the biggest tax hikes in the state’s history. More than that, if voters choose to push the measure through, it will change property tax laws that have been in place since 1978. That’s because Proposition 15 is closely related to Proposition 13, “which established the concepts of a base year value for property tax assessments and limitations on the tax rate and assessment increase for real property.”

Because of those limitations established 42 years ago, business owners pay property taxes based on the original price they paid for the property (plus inflation adjustments), which especially here in California, is usually a lot less than its current value. By passing this legislation, property taxes for many businesses will skyrocket.

Estimates are that a “yes” vote on Proposition 15 will result in $6.5 to $11.5 billion (yes, with a B) to be split between municipalities and schools, with schools appearing to be last in line.

Only businesses would be directly affected by the change. Homeowners will not see an increase in property tax, and agricultural property will be unaffected.

The Tie to Proposition 13

California is often a leader in national policy, and Prop. 13 was no exception. Since its passing, other states have taken steps to limit how quickly property values can be reassessed. Currently, commercial and industrial property tax is based on the original purchase price with annual increases capped at 2% or equal to the rate of inflation, whichever is lower.

If Proposition 15 were to pass, it would essentially reverse Proposition 13.

Why a Yes Vote on Prop. 15 Is a Bad Thing

While there is no indication that residential property taxes would be affected, even if Proposition 15 were to pass, that doesn’t mean that many residents of California won’t feel the brunt of such a new law, should it take effect.

Consider that, if businesses have to pay higher taxes, they need to make up that loss elsewhere (most leases pass the property tax burden to the tenant). That means price increases for products and services statewide, cut employee hours, or even layoffs. Some businesses will close or leave California.

In addition to real estate taxes, Prop 15 also increases the taxes on business non-real property, equipment, machinery, improvements and more.

While a yes vote on Proposition 15 would be a detriment to the state’s economy at any time, it could be especially devastating in 2020, when we are already in one of the worst economic situations we’ve seen in generations. Californians simply can’t afford to weather this kind of sweeping increase in commercial property taxes.

What Should I Do Now?

You need to have a knowledgeable estate planning attorney on your team so you can make wise choices about your money—now and after you’re gone.  The Law Offices of Joel A Harris are more than prepared to provide you with legal counsel pertaining to your planning, execution, or, and any other legal concerns or questions you may have. The Law Offices of Joel A Harris, located in Concord, Walnut Creek, and Antioch are available to help you to the best of their abilities. Joel Harris is an attorney with over 25 years of experience and is extremely familiar with this process. If you are not sure how to begin, or you just want a few questions answered, feel free to visit us online, in person or call us by phone at (925) 757-4605.

What are the Estate and Gift Tax Limits for 2019?

Are you worried about the Estate and Gift Tax limits for 2019?  Confused about the new tax provisions? The IRS has issued tax year 2019 inflation adjustments for more than 60 tax provisions, including tax rate schedules. They also announced the official estate and gift tax limits for 2019 as follows: the estate and gift tax exemption is $11.4 million per individual, up from $11.18 million in 2018. That means an individual can leave $11.4 million to heirs and pay no federal estate or gift tax, while a married couple can shield $22.8 million.  In this article we break down the Estate Tax Exemption, the Gift Tax and what you can do now to minimize your future tax liability.

1. What Is The Estate Tax Exemption?

    The estate tax is a federal tax imposed on estates over a certain value. That value is known as the “estate tax exemption,” “combined estate and gift tax exemption,” or “unified credit.” If an estate is worth more than the exemption amount, the value over the exemption amount will be taxed. If the estate is worth less than the exemption amount, there is no tax liability. The higher the exemption amount, the less estates will have to pay in taxes. The Trump Presidency tax cuts are scheduled to expire after 2025, meaning the estate tax exemption will revert to its inflation-indexed base of $5 million. Estates of decedents who die during 2019 have a basic exclusion amount of $11.4 million; the previous year was $11.18 million. The basic exclusion amount for gift and the estate tax is $11.4 million plus deceased spousal unused exclusion amount. If you live in one of the 17 states or the District of Columbia that levy separate estate and/or inheritance taxes, there’s even more at stake, with death taxes sometimes starting at the first dollar of an estate.  California does not have a State inheritance tax.

2. What Is The Gift Tax “Annual Exclusion Amount” For 2019?

The annual gift exclusion amount for 2019 remains at $15,000 per individual each year, unchanged from 2018. This means you can give $15,000 to as many people you want each year without filing a gift tax return. You can exclude that $15,000 from a gift tax return. For most people, gift taxes will not be a concern since the combined estate and gift tax exemption is so high. However you are still required by law to report gifts over the annual exclusion amount on a gift tax return, IRS form 709. There are few significant changes to Form 706, United States Estate and Generation-Skipping Transfer Tax Return. The one change that will impact all filers is the elimination of the allowable State Death Tax Credit, for decedents dying in 2005 and later years, is a deduction.

3. What Can You Do Now? Minimize Taxes Through Estate Planning

Sometimes gifts can be used strategically to avoid estate taxes or to minimize other problems after death. There are many advanced estate planning strategies available to help reduce or minimize the estate tax. Other times, gifts can have adverse tax consequences. Estate and gift taxes are a complicated estate planning topic. It is always a good idea to talk to an attorney before making a major gift. Misunderstanding these concepts or failing to prepare for them can hold critical consequences for your beneficiaries. As always, our advice is to speak with an experienced estate planning attorney so you are able to choose the best path to protecting your assets.

Are You Worried about Your Estate Plan?

If you are not prepared with a current estate plan then your family could be vulnerable to higher tax bills, extensive legal fees, and familial conflicts. To avoid those obstacles you should visit an Estate Planning Attorney to get professional help, and create a plan that well suits your goals.

At The Law Offices of Joel A Harris located in the cities of Concord, Walnut Creek, Antioch, California, we have worked for over 25 years giving the best guidance our clients need to protect their assets. Have a question about your planning your estate? Feel free to schedule a sit-down meeting where we are happy to patiently answer every question you may have. For your free consultation reach out to us at (925) 757-4605.

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New Higher Tax on UTMA Accounts – Beware the “Kiddie Tax”

If you’re not familiar with an UGMA or UTMA account, they are accounts that make it simple to transfer property to your children. The Kiddie Tax applies to the net unearned income of a child, regardless of the source of the property that generates the income. Unearned income is income that is not attributable to earned income, which generally includes wages, salaries, professional fees, and other amounts received for personal services rendered. The child must be under the age of 19 or a full-time student under the age of 24. Additionally, the unearned income of the child must be over $2,100, Bloomberg BNA.

Are You Asking Yourself “How will the revamped Kiddie Tax rules hurt my child’s unearned income (savings)?”

  • Learning the New Law

In 2017 a newly implemented Tax Cuts and Jobs Act drastically changed the way children get taxed on their unearned income. As of 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. Forbes points out that the kiddie tax changes can actually hit families of modest means–where the parents’ tax bracket is lower –the hardest. These tax rates can be as high as 37% for ordinary income or, for long-term capital gains and qualified dividends, as high as 20%, according to Concannon Miller. These new rules prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets.

  • Changing the Way you Gift Money

Although these new rules have been implemented, there’s still ways of minimizing your tax rates. According to Forbes, you should – Name children or older, already launched grandkids as the beneficiaries of your traditional pre tax IRAs–the kind whose distributions are taxable. Young grandkids can still be beneficiaries of Roth IRAs–the ones funded with after tax dollars, whose distributions aren’t taxable. Don’t have any Roths? The new lower individual income tax brackets give retirees more room for low-tax-cost Roth conversions. If your main goal is paying for your grandkids’ education, fund 529 college savings plans now.

  • Helping Your Children

In addition, you can still gift modest amounts of low-basis stock to UTMA accounts (custodial accounts for kids ). On the first $14,800 in qualified dividends and long-term gains, the kids will owe just $1,515, an effective 10% rate. For 2018, a parent can take advantage of the annual federal gift tax exclusion to move up to $15,000 into a custodial account for each of his or her children (up from $14,000 in 2017). If the parent is married, so can the spouse. Parents can do the same thing year after year. Gifts up to the $15,000 annual limit will not reduce the parent’s unified federal gift and estate tax exemption. A minor child’s custodial account must be established under the applicable state Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), Cantrell & Cantrell.

Are You Ready To Assure Your Child/Grandchild Receives the Most Out of Their Inheritance?

Inheriting money is always a great way to help your loved one, but making sure they receive the most out of that inheritance is sometimes tricky. At  The Law Offices of Joel A Harris, we offer the best guidance for minimizing the tax rate applied towards your loved one’s inheritance, catered to your individual needs. Throughout the process, we explain everything and patiently answer every question you may have. Since 1993, The Law Offices of Joel A Harris has worked tirelessly to assure individuals create the most beneficial inheritance towards their child/grandchild. We want the best for your children too! Feel free to reach out to us at (925)757-4605.

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California May Soon Require Employers To Offer Retirement Benefits To Their Private-Sector Employees

By Special Guest Nick Gizzarelli, CPFA, QPA, QKA

The Golden State has finalized regulations for the implementation of a state-run automatic Roth IRA plan, becoming the third state to create an auto-IRA program for the private-sector.

Recently renamed CalSavers (formerly California Secure Choice), this program will require employers with five or more workers to either offer an employer-sponsored retirement plan or enroll their staff in the state-run program. Scheduled to take effect by the end of 2018, CalSavers will grant 12 months for businesses with 100 or more employees to comply, and will gradually phase in smaller businesses over the subsequent two years.

“Regardless of socioeconomic status, the hard-working people of California who have made our state a global economic powerhouse deserve a measure of financial security in their golden years,” said Senate President Pro Tem Kevin de León, who authored the legislation designed to introduce a retirement savings program to the 7.5 million Californians not covered by an employer-sponsored plan.

The Role of the Employer

As written, the regulation will require employers with at least five employees and who do not offer an employer-sponsored plan to setup automatic IRA payroll deductions for both part-time and full-time employees within 30 days. Only employees working in California will be eligible for the program. Employers must determine if and when CalSavers will impact their business and register with the state by the deadline. For employers wanting to opt-out of the state-run program, they will want to adopt an employer-sponsored retirement plan before the same deadline.

Employers will be responsible for identifying eligible employees, distributing required notices, setting up automatic payroll deductions, and transmitting the funds to CalSavers. Penalties and fees will apply for failure to enroll eligible workers or properly execute the employer’s administrative duties.

Because CalSavers is a state-run Roth IRA program, some employees may not be eligible to contribute as eligibility to participate in a Roth IRA is based on an individual’s adjusted gross income. It is unclear whether the employer or individual will be responsible for determining whether or not the worker is eligible to participate in a Roth IRA.

The plan will not allow the employer to make discretionary or employer matching contributions. Only employee IRA deductions will be allowed.

Who Pays for the Plan?

CalSavers is intended to be self-sustained, funded by fees deducted from employee account balances. California will not impose any direct fees to the employer during or after registration, however third party vendors, such as banks or payroll companies may impose fees to setup the deductions and funds transfer to the state.

When determining the financial impact on a business, the employer should carefully consider how to allocate internal resources to comply with the new regulation. While technically not considered an employer-sponsored plan, the employer will still be responsible for many of the ministerial functions related to enrollment, contributions, and employee communications. Failure to fulfill these duties may result in penalties or fees to the business.

No Qualified Plan, No Federal Tax Credit

Because CalSavers is not an employer-sponsored plan, the employer will not be eligible for the retirement plans startup costs tax credit, which reimburses employers for a portion of the costs related to implementing a new retirement plan. Currently, employers who setup a new employer-sponsored plan are eligible to receive tax credits of up to $1,500 to offset implementation and administrative fees.

Employers Have Options

California has started the countdown for businesses who do not yet offer retirement benefits for their staff. Employers scrambling to meet this deadline, should carefully research all available retirement options. Undoubtedly, more details about CalSavers will become available as we near the expected rollout date.

Keep informed by visiting www.treasurer.ca.gov/scib/ or by contacting Nick Gizzarelli at nick@thomasdoll.com.

Nick Gizzarelli-California May Soon Require Employers To Offer Retirement Benefits To Their Private-Sector EmployeesAbout Nick Gizzarelli, CPFA, QPA, QKA

Nick Gizzarelli is a Retirement Plan Specialist at Thomas Doll, an employer-sponsored retirement provider located in Walnut Creek, CA. Nick and his team have worked for over three decades to bring Fortune 100 level retirement plan services to the small- and mid-employer space. Nick is a current member of the American Retirement Association and National Association of Plan Advisors, as well as former member of the National Institute of Pension Administrators.

Have a HELOC? Here’s What you Need to Know to Protect Yourself

The new Tax Plan recently signed into law affects many homeowners, especially those that have a home equity line-of-credit (HELOC). HELOC loans are very popular among homeowners due to their low-interest rates and the option of deducting your interest payments in your taxes. Things are a little different now, but how different are they for you?

What is a Home Equity Line of Credit (HELOC)?

Home Equity Line of Credit or better known as HELOC (pronounced HE-lock) acts like a credit card: It has a credit limit you can borrow against, pay all or part of the balance, and borrow again up to the credit limit. The interest rate varies with the prime rate. Essentially, it’s still a loan but the only difference is that the interest rate is lower than all other types of loans because borrowers are required to use their home as collateral. According to Bankrate, “The first 5 or 10 years of a HELOC (the period varies by lender) are known as the draw period. During the draw period, you may borrow from the HELOC and the minimum monthly payments are interest only. After the draw period expires, the repayment period begins. Usually the repayment period lasts 20 years.” HELOC loans have been a very popular means for our clients to self-fund their long term care costs, such as paying for assisted living.

How Do the New Tax Laws Affect HELOC?

You Can no Longer Spend HELOC Loans on Anything and Everything

Not so long ago, homeowners were allowed to obtain a HELOC loan and not be limited to what they used the money for. According to a 2007 U.S Census report, “In the past, people would take out home equity loans to make renovations (45 percent), pay off their debts (26 percent), buy a car (9 percent), or pay for medical emergency/tuition (4 percent). As we can see, more than half of the homeowners in 2007 used their HELOC loan for something other than house renovation. This is called “Home Equity Indebtedness.” Unfortunately, due to Section 11043 of the new tax law, these type of HELOC loans are no longer eligible for interest tax-deduction, according to the Washington Post.

HELOC Loan Interest is No Longer Tax-Deductible

There are two types of HELOC loans, one was mentioned previously “Home Equity Indebtedness” and the other is “Acquisition Indebtedness.” As mentioned before, Home Equity Indebtedness interest will no longer be tax-deductible for homeowners, no exception. Meaning that if you obtained a “Home Equity Indebtedness” loan before the new law, you would still be subject to the new law and would no longer be able to tax-deduct your loan interest.

On the other hand, if you obtained an “Acquisition Indebtedness” loan, meaning that you can ONLY use the loan to acquire, build or substantially improve the residence, then you would be able to tax-deduct your loan’s interest. According to The Orange County Register, as long as all other terms are not violated, tax-deduction is still an option for  “Acquisition Indebtedness” HELOC loans.

Mortgage Debt Limit Has Dropped from $1.1M to $750K

According to CNBC under the bill homeowners who purchased a house before Dec. 15 of this year will be able to continue deducting the interest they pay on mortgage debt of up to $1 million. For purchases after that date, the cap drops to $750,000. That amount of mortgage debt can be for a primary or secondary residence (i.e., a vacation house). Earlier versions of the bill would have eliminated the tax break for second homes. This is for all total acquisition mortgage debt combined (i.e a split first mortgage and a HELOC).

Are you Asking “Am I Prepared for the New Tax Law?”

We know that everyone is unique and might have different situations. That’s why we encourage you to ask questions of your CPA if you have any concerns about your HELOC or other mortgages. If you don’t have a CPA, please contact us so at (925) 757-4605 so that we can refer you to an excellent local CPA to answer all of your tax questions.

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