The Sensible Taxation and Equity Promotion (STEP) Act
What is the STEP Act?
Several United States Senators, including Bernie Sanders and Elizabeth Warren, have proposed a bill, called the Sensible Taxation and Equity Promoted (STEP) Act.
What Does the STEP Act Do?
STEP Act would allow individuals to exclude up to $1 million in unrealized capital gains from tax, which are the potential profits from an asset, as well as to pay the tax in installments over a 15-year period for capital gains that apply to any illiquid asset like a farm or business. See below for more details on how illiquid assets affect the process.
An Example to Help Further Explain:
To better understand how the STEP Act works, here is an example: if someone dies holding $7 million in property for which they paid $4 million for, they would only pay taxes on $1 million of that $2 million gain. Additionally, if someone dies holding $3 million in property assets for which they paid $2 million for, none of that $1 million gain would be taxable.
Would The STEP Act Affect Retirement?
Currently, it seems that assets held in a retirement account would not be subject to capital gain taxes under this Act.
Would The STEP Act Affect Gifts and Bequests?
Currently, it seems that gifts and bequests would be exempt from the capital gain taxes under this Act.
How does STEP Act Work During an Individuals Lifetime?
During an individual’s lifetime, any completed transfer to a trust or to any individual other than a spouse will allow for the first $100,000 of cumulative gain to be tax free. However, any excess will be subject to a transfer tax after the first $100,000. Second, this Act will eliminate the ability to use trusts to transfer property or sell other assets. Non-grantor trusts, which is a trust where the grantor retains certain powers over the trust, would have to report gain on all of their appreciated assets every 21 years. Third, this Act would require trusts more than $1 million of assets or more than $20,000 of gross income to provide additional information to the IRS, including a balance sheet, income statement, and list all trustees, grantors, and beneficiaries.
What Transfers Are Exempt from The STEP Act?
Items transferred to a spouses, charitable trusts, qualified disability trusts, charity, and cemetery trusts are exempt from the tax.
Is Illiquid Property Affected by STEP Act?
Illiquid property is property that is not easily sold. Common examples of illiquid property include businesses and farms. For STEP Act purposes, the law will affect transfers of illiquid property. Thus, property owners can pay the tax over a 15-year period. It would be interest only for up to 5 years and then 10 equal payments for the remaining 10 years. However, selling the property would require payment in full. KAASS LAW guides you through the STEP Act with expert legal advice tailored to your needs.
The Impact of the STEP Act on Businesses and Farms
A particular focus of the STEP Act is the impact on illiquid assets such as:
- Farms
- Small businesses
Owners of such assets will be able to spread their capital gains tax liability over 15 years. This is a relief to those who own such businesses where the value of the assets may make it difficult to sell. This will allow owners of farms or businesses to avoid immediate tax consequences. Instead, they will be able to pay taxes gradually. This allows them to continue to operate their business or farm without serious financial hardship. However, when the asset is sold, the tax is paid in full. This also helps owners avoid asset sales that could result in the loss of the asset.
Benefits and Risks for Asset Owners
The STEP Act will provide owners with significant tax relief in the event of the death of the asset owner. It allows assets to pass without paying capital gains tax if they are worth less than $1 million. This innovation will be an important step in preserving family businesses and farms. It will allow for long-term succession planning without significant financial loss. It is important to note, however, that the transition to a 15-year capital gains tax system may present certain risks. If market conditions change or the owner's financial situation deteriorates, meeting tax obligations may become problematic. It is also important that asset owners properly plan and document all their transactions. This will help avoid potential legal exposure.
How the STEP Act Affects the Taxation of Asset and Debt Transfers
The STEP Act limits the use of trusts and other wealth transfer instruments. This may make it difficult to transfer assets between families or between businesses. It is important to consult with professional legal counsel to avoid tax liability issues.
Consult with KAASS LAW
To learn more about how the STEP Act may affect your tax situation, contact KAASS LAW. Our experienced attorneys can help you understand how the new laws may affect your assets and assist you in developing an effective tax planning strategy.
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How to Dissolve a Corporation in California?
A corporation registered with the State of California can cease its corporate existence in two ways:
- Involuntary dissolution;
- Voluntary dissolution.
Each way of dissolution has its grounds and specific legal procedure. While a corporation may be involuntarily dissolved under a court decree, the voluntary dissolution is carried out by a corporation’s shareholders, as well as in special cases by the Board of Directors. This article will address voluntary dissolution, leaving involuntary dissolution for a separate discussion.
What are the Laws Covering the Issue of Voluntary Dissolution of a Corporation in California?
The Corporations Code of California, chapter 19, sections 1900-1907, covers the legal regulations pertaining to the procedure of voluntary dissolution. These rules help an interested person to comply with the requirements of the law in the process of voluntary dissolution.
Who is Entitled to Dissolve a Corporation?
In general, someone may initiate voluntary dissolution by:
- The shareholders of the corporation;
- The board of directors.
Shareholders may dissolve their corporation for a variety of reasons. In this regard, they are not accountable to anyone else. Shareholders holding shares representing 50% or more of the voting power should vote to wind up and dissolve the corporation, unless the articles of incorporation prescribe a higher threshold. Whereas, the board of directors may approve to wind up and dissolve a corporation which comes within one of the following descriptions:
- It has issued no shares;
- A court has adjudicated it bankrupt.
- It has disposed of all of its assets and has not conducted any business for a period of 5 years immediately preceding the adoption of the resolution electing to dissolve the corporation.
What are the Next Steps for Voluntary Dissolution?
Winding Up
Once the resolution on a voluntary dissolution is in place, the corporation steps into the stage known as “winding up”. This aims to finalize the debt-clearance process. It assumes paying outstanding debts and discharging pending liabilities. Afterwards, the corporation resolves the issue of distributing the remaining assets to the shareholders entitled thereto.
Notification
The corporation must notify its creditors about the commencement of dissolution, allowing them to submit their claims. Such notification shall include all the relevant information necessary for sending claims, for instance the mailing address, the deadlines for submission etc.
Certificate of Dissolution
Further, you need to file a certificate of dissolution with the Secretary of State (SOS). The certificate of dissolution shall include the following information:
- A statement that the corporation has elected to wind up and dissolve;
- A statement that shareholders representing at least 50% of the voting power made the resolution.
- An assurance that the corporation pays all debts in full with no deficiency and does not incur any liability.
- A statement that the corporation’s assets have been distributed properly;
- A statement affirming that a final franchise tax return for the corporation has been filed or will be filed
The official website of SOS provides the form of the certificate. You must submit the certificate via email or in person. Thereupon the corporate powers, rights, and privileges of the corporation ceases. The Secretary of State notifies the Franchise Tax Board of the dissolution.
Additional Legal Obligations Upon Voluntary Liquidation of a Corporation
However, in addition to the above actions, the corporation must consider a number of additional legal obligations. For example, the corporation must file a final tax return with the California Franchise Tax Board. Also, all applicable taxes must be paid before or at the time the Certificate of Dissolution is filed. In addition, if the corporation had employees, all requirements under the California Labor Code must be met. These include:
- Timely payment of wages
- Paying withholding taxes
- Filing the appropriate forms with the taxing authorities
Failure to meet these obligations can result in civil liability and penalties. In addition, if the company holds any licenses or permits, they must be formally revoked or transferred. This is especially important for businesses in regulated industries. Such as:
- Health care
- Insurance
Corporations are advised to retain accounting and corporate records for at least three years after liquidation. This may be necessary in the event of an IRS audit or creditor lawsuit. Contact KAASS LAW for legal assistance in all stages of liquidation.
Get Help for Voluntary Dissolution for a California Corporation
If you need to initiate and finalize the process of a voluntary dissolution of your corporation, we invite you to contact an attorney at KAASS LAW at (310) 943-1171 and speak to our Glendale business attorney to assist with the process.
What is the American Rescue Plan Act of 2021?
This bill was passed on March 6, 2021. Provides relief to address the continued impact COVID-19 has had on the economy, public health, individuals, and businesses.
What will the American Rescue Plan Act Provide?
The American Rescue Plan Act of 2021 will provide funding for individuals and entities. Including but not limited to, schools and institutions of higher education, small businesses, and emergency rental and homeowner assistance. The Act will also provide an extension on unemployment benefits, expand and otherwise modify certain tax credits, including the child tax credit and the earned income tax credit.
What is the Child Tax Credit?
This credit is for parents who have children under the age of 17 years old. Taxpayers can claim a child tax credit of up to $2,000 for each child under the age of 17 years old who is an American citizen. The credit reduces by 5% of adjusted gross income over $200,000 for a single parent and $400,000 for married couples.
What is the Earned Income Tax Credit?
The earned income tax credit is a way to support working parents who are either of low or moderate income. Working parents can get a credit equal to a percentage of their earnings for up to a maximum credit. In 2019, this credit could be up to $6,557 and $6,660 in 2020. However, once the credit reaches its maximum, the credit will lower with each additional dollar of income made until no credit is available.
In What Way Specifically Will the American Rescue Plan Act Effect Taxes?
As mentioned, the American Rescue Plan Act of 2021 alters existing tax policies. For example, the child tax credit will be increased from $2,000 to $3,600. Per child that is under the age of 6. Also, those who have children ages 6 to 17 years old and low tax bills can expect a tax credit of $3,000 per child. This is a new system that will pay a portion of the child tax credit in advance over the last 6 months of the year. Additionally, tax credit will be extended for single individuals who make more than $75,000 and married individuals who make more than $150,000. The existing credit tops out for single individuals making more than $200,000 and married individuals making more than $400,000. The legislation also effects the tax credits that parents receive to subsidize the cost of child care this year. Currently, the credit is worth 20% to 35% of eligible expenses with a maximum value of $2,100 for two or more qualifying individuals. The stimulus bill increases that amount to $4,000 for one qualifying individual or $8,000 for two or more. KAASS LAW will guide you through the complexities of the American Rescue Plan Act of 2021 and help you maximize your tax credits and relief benefits.
Expanded Health Insurance Tax Credits and State Support
The American Recovery and Reinvestment Act of 2021 (ARRA) has a significant impact on health care by expanding access to insurance and easing the financial burden for millions of Americans. The Act significantly modifies the current Premium Tax Credit (PTC) provisions. which is designed to reduce the cost of health insurance policies purchased through state exchanges Under the provisions of ARPA, taxpayers with incomes above 400% of the federal poverty level became eligible for tax subsidies in tax years 2021 through 2022. Only if the cost of the insurance policy exceeded 8.5% of their income. Prior to the passage of ARPA, these taxpayers were completely excluded from the PTC program. This change allowed more people to purchase affordable health insurance. Especially in light of the economic instability caused by the COVID-19 pandemic. In addition, ARPA included a special provision for individuals who received unemployment benefits for at least one week in 2021. In such cases, the taxpayer was eligible for the maximum premium tax credit regardless of actual income for the year. This provision temporarily removed barriers to health insurance coverage for unemployed individuals.
Funding for State and Local Governments
The act also provided significant funding for state and local governments to recover from the effects of the pandemic. In total, ARPA provided $350 billion to support various levels of government. These funds will be used to ensure:
- Keep critical infrastructure running
- Pay the salaries of government employees
- Fund health care, education
and other socially important sectors. States have flexibility in how they use the funds. However, they must comply with federal transparency and accountability requirements. Some of the funds have also been earmarked for investments in:
- Broadband Internet
- Water supply
- Sanitation
This is especially important for rural and sparsely populated areas. If you would like to learn more about your eligibility for tax credits, the attorneys at KAASS LAW are available for a free consultation. Call (310) 943-1171 for professional assistance.
Transfer of Property After A Death in California
Did you know that a tax applies when someone transfers property after passing? This is typically called a death tax, where the estate pays taxes before transferring assets to the beneficiary.
What are Death Taxes?
Death taxes are taxes that are enforced by the federal and sometimes by the state government on someone’s estate upon their death. These taxes can be either charged on the beneficiary who receives the property in the deceased’s will or the estate which, pays the tax before transferring the inherited property. Essentially, the government taxes individuals on the right to transfer property to heirs after death. Therefore, that tax can be based on the total value of the decedent’s estate or the value of a single bequest.
How Death Taxes Calculate?
The government charges estate tax based on the property and assets’ value at the time of the owner’s death. This tax typically applies only to amounts exceeding certain exemptions, not to the entire value of the estate. In 2020, the federal estate tax exemption was $11.58 million, based on the Tax Cut and Jobs Act. This will terminate in 2025 unless Congress decided to renew it. In the event Congress chooses not to renew, it will return back to $5 million. However, back in 2001, the estate tax exemption was $675,000. Thus, the estate's net value over that amount taxed at 55%.
Why Do Death Taxes Matter?
Depending on what the exemption level is at the time of someone’s passing, the death tax may or may not be owed. For younger individuals who have not yet perhaps established their careers, the thought of owning millions seems impossible. However, with a long life ahead, the idea is not so unimaginable as to achieving financial success that is more than the estate tax exemption.
What You Can Do Now
Taking steps now while the exemption is high is a great idea as to ensure financial security for beneficiaries. For example, placing shares of a successful business or real estate into a trust can shield them from the death tax. Take for instance setting up a domestic trust. This is an idea to consider because one can shield a portion of their assets from death taxes in this way. For example, Sally decides to open a new business that over time becomes worth $13 million. Sally should set up a revocable trust and place 45% of her business shares into this trust for tax protection. Upon Sally's death, she will only owe 55% of the business shares and avoid exceeding the exemption level. KAASS LAW can help you navigate death taxes and protect your estate.
