Financial Planning

IRS launches easy-to-use tax reform webpage

The IRS has launched an easy-to-use webpage,, with information about how the Tax Cuts and Jobs Act affects your taxes, with a special section focused on tax exempt entities.

The tax reform page features three areas designed specifically for:

  • Individuals – For example, standard deduction increase, child tax credit, withholding. Use the Withholding Calculator to make sure you’re withholding enough tax from your paycheck.

  • Businesses – For example, depreciation, expenses and qualified business income deductions.

  • Tax Exempt Entities – For example, tax reform affecting retirement plans, tax-exempt organizations and governments.

Under the Tax Exempt Entities tab, you’ll find highlights of how tax reform affects retirement plans, tax-exempt organizations and tax-advantaged bonds.


Retirement plans

  • Rollovers of retirement plan loan offsets – If your plan offsets an outstanding loan balance when you leave employment, you have until the due date of your individual tax return, plus extensions, to rollover those amounts to another plan or IRA.

  • Roth recharacterizations – You can no longer recharacterize amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans, or a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA.

Tax-exempt organizations

  • Tax reform imposes a 1.4 percent excise tax on the investment income of certain educational institutions.

  • An exempt organization with more than one unrelated trade or business must calculate unrelated business taxable income separately for each trade or business.

Tax-advantaged bonds

  • Tax reform repealed the authority to issue tax-credit bonds and direct-pay bonds.

  • The IRS will not process applications for, or issue allocations of, the remaining unused authority to issue new clean renewable energy bonds.

At Zhong & Sanchez, we provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first consultation today at

Source: IRS

5 ways to hone retirement plans under new tax regime

The Tax Cuts and Jobs Act passed by Congress late last year represents the most significant changes to the tax code since 1986. The changes are biggest for corporate taxpayers. C corps will see their statutory tax rate decline from 35 percent to 21 percent, and pass-through corporate entities — partnerships, sole proprietorships and S corps — where income is taxed at the individual level, will also see permanent and dramatic reductions in their tax liabilities.

The decreases in individual tax rates, on the other hand, are smaller and less certain, with rates set to revert back to current levels by 2026. As a matter of fact, the tax plan will help out corporations a lot more than average Americans. Middle-class Americans itemizing their deductions may actually get hurt by tax reform.

The rule changes regarding deductible expenses, exemptions, credits and the tax brackets pose new income-tax planning challenges for all Americans. They also have implications for retirement planning — most prominently for wealthy Americans — but for taxpayers of more modest means, as well.

Here are five strategies worth considering to improve your retirement planning in the new tax environment.

1. Move to a low-tax state. The lure of the Sunbelt for retirees got a little stronger with tax reform. The capping of the so-called SALT (state and local taxes) deductions at $10,000 will hit taxpayers in high-tax (and invariably blue) states such as California and New York particularly hard. New York Gov. Andrew Cuomo has threatened to sue the federal government over the roughly $14 billion his Department of Finance says it will cost New Yorkers annually.

While the standard deduction on federal tax returns was nearly doubled to $12,000 for individuals, the average SALT deduction on federal returns for New Yorkers in 2015 was $22,000, according to the Tax Policy Center. In California — which also has high income-tax rates — an all-in property tax rate of 1.25 percent on a $1 million home would already put taxpayers over the $10,000 cap.

2. Convert your traditional IRA to a Roth IRA. Roth IRAs provide the ultimate benefit in retirement — tax-free income. You can't deduct your contributions to a Roth IRA, but the investment returns in the account are tax-free and so are account withdrawals (optional-not required) as long as you make them after age 59½.

People need to diversify their tax risk. A tax-free retirement account is important over the long haul because higher rates in the future may hurt you in retirement.

The lower marginal income-tax rates that take effect this year make the conversion of a traditional IRA to a Roth IRA significantly less expensive. With those rates potentially reverting back to current levels by 2026, paying the taxes now could be far less expensive than in retirement. 

One major consideration: The tax bill did away with the option to undo a conversion by the tax-return date of the following year. If the market has a big downturn, you will owe tax on the full amount at conversion even if the account value drops by 30 percent before year-end. We suggests waiting until after Thanksgiving to make a conversion. Taxpayers could also consider converting smaller amounts over several years to reduce taxable income and potentially their marginal rates.

3. Give to charity in a smart way. The deduction for charitable donations was preserved in the tax bill, but with the standard deduction raised to $24,000 for a married couple, you'll have to give a lot to warrant itemizing deductions.

One strategy is to front-load your anticipated donations over multiple years into one tax year. People can bundle up their anticipated donations for the next five years in a donor-advised fund. Of course, that means it's likely only a one-year tax-saving strategy.

If you're over 70½ years old, make your charitable donations directly from your IRA — whether you itemize deductions or not. The donation counts against your required minimum distribution from the retirement account but is excluded from taxable income. The qualified charitable distribution enables a taxpayer to claim the standard deduction and still get the charitable deduction. If you qualify, it's the only way you should give to charity.

4. Mind your business and estate. The tax bill doubled the estate-tax exemption to $11.2 million per person ($22.4 million per married couple) and kept it indexed for inflation. In 2026 it will revert back to 2017 levels indexed for inflation. For the vast majority of Americans, the increase is meaningless, but for high-net-worth taxpayers — particularly business owners — it raises new issues.

Individuals with a net worth of close to or more than $11 million ($22 million for couples) can still lower the tax hit to their heirs with the use of trusts and estate-planning strategies. With the estate and gift tax still unified, it may also make sense to gift large amounts of assets tax-free to heirs now given the bigger but potentially temporary exemption.

The downside of gifting assets before you die is that heirs do not get a step up to market value in the cost basis of the assets. If and when they sell them, they will be on the hook for capital gains taxes. In a perfect world, people would pay no estate taxes and get a step up in cost basis at death. That sweet spot, however, may require your dying before the exemption reverts back to a lower level.

We suggests that married couples with an estate valued at less than $20 million take a "wait and see" attitude regarding the value of their business or assets before a potential in life transfer.

5. Talk to a financial advisor or CPA. The numerous changes to the tax code provide a lot of income-tax planning opportunities, which can translate into more retirement savings. But it is complicated. Any decision regarding something like a Roth conversion should be made in conjunction with other issues.

At Zhong & Sanchez, we are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at

Picture credit: USA Today; Source: CNBC

Capital Gains Tax on a House Sold From a Trust

Source: The Motley Fool

Figuring your tax liability is more complicated when you don't own a home in your own name. Most people don't think much about capital gains tax on the sale of a home, because the tax laws offer a capital gains exclusion of $250,000 to single filers and $500,000 to joint filers when they sell their main home. However, some people use estate planning strategies involving trusts to own their homes, and understanding the effect of having a home within a trust is crucial to make sure that you don't miss out on this key tax break. Below, we'll go into more detail about how to calculate capital gains tax on a house sold from a trust.

The key question: What kind of trust owns the home?

The tax laws treat various types of trusts differently. One key distinction is between revocable trusts and irrevocable trusts. If you have a revocable trust, then the tax laws treat that trust as what is known as a grantor trust. What that means is that even though the trust owns legal title to property contributed to the trust, including real estate, the trust assets are treated for tax purposes as if they still belong to the grantor, or the person who put the assets into the trust in the first place.

As a result, if you meet the tests for the capital gains exclusion, then you can claim the exclusion even if you own the home through a revocable trust. In general, to get the benefits of the exclusion, you need to have owned your home for at least two out of the five years prior to the date of sale, and you have to have lived in the property as your main home for at least two out of the past five years.

By contrast, the rules are much different for an irrevocable trust. Irrevocable trusts are separate legal entities, and so transferring your home to an irrevocable trust makes it impossible for you to claim the exclusion on capital gains. The proceeds from the sale of a home within an irrevocable trust typically stay within the trust, and the trust itself owes the resulting capital gains tax on the profit. Because tax brackets covering trusts are much smaller than those for individuals, you can quickly rise to the maximum 20% long-term capital gains rate with even modest profits on the sale of a home.

However, there is one aspect of an irrevocable trust that you should keep in mind. Often, revocable trusts become irrevocable after the person who created the trust dies. If the home was included in the estate of the deceased owner, then the property will get a step-up in tax basis. That means that even if the trust becomes irrevocable after the deceased owner's death, the trust won't have capital gain if it immediately sells the home. Only if the trust holds onto the property for a time after death will new gains have a chance to start accruing.

Trusts can be complicated, so it's important to know exactly what trust you're working with in a home-sale situation. With the right planning, you can often reach a tax result that will be advantageous to you.

When in doubt, consult a trustworthy CPA! Zhong and Sanchez is dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at

The New Employer 401(k) Match: How Generous Is Your Boss?


Between the corporate tax cut and the tight labor market, more companies are moving to increase pay and benefits, including their contributions to retirement plans.  In a January survey, one out of four employers told Willis Towers Watson that they have increased their 401(k) match this year or plan to do so next year.

But there’s a catch: If you don’t pay attention and pick the right percentage of salary to save, you could miss out on getting the full increase in the match.

Under the most common match formula, an employer contributes $1 for every $1 the employee saves up to some percent of salary---say 6%. Under the next most common arrangement, the employer contributes 50 cents for every $1 the worker puts away, up to some percent.

In a typical match increase, the employer raises the percentage of salary they’ll match—say from 5% to 7%. But to get that increase you’d have to save at least 7% of your salary. It’s called “stretching” the match in retirement-speak. “As an employee, you’ve got to put more skin in the game,” says Rick Unser, a retirement plan consultant in Hermosa Beach, California, who says he sees employers starting to make employees stretch to contributing 8% or 10% in order to get the full match.

Robert Lawton, a retirement plan consultant in Milwaukee, Wisconsin, has seen some radical employers moving to a 25% match on 12%, meaning workers would need to contribute 12% of pay to get the maximum employer matching contribution of 3% of pay. “You get the employees to contribute more even though the employer is contributing the same amount,” Lawton says. Usually, the employer is contributing more, and the employee is contributing more as well.

The rule of thumb is you should save 15% of your salary (including any employer match) each year for 40 years. The problem is that many workers haven’t saved anywhere near that much in the beginning of their careers, some have been in and out of the workforce, and others have been in the gig economy, where they don’t have access to a workplace retirement plan, Lawton points out, noting that a lot of workers need to be saving more than 15% of pay.

That said, here are two ways employers are trying to get their employees to at least 15% of pay saved (employee and employer contributions combined). Honeywell recently announced that in April, for workers currently getting a 75% match on the first 8% of pay, the match will increase to 87.5% (for a maximum employer match of 7%, up from 6%). For workers currently getting a 37.5% match on the first 8% of pay, the match will increase to 43.75% (for a new maximum employer match of 3.5%, up from 3%).

At Visa, employees will have to start saving 5% of salary to get the new, increased employer match, which can bring them to the 15% goal. Today Visa matches 200% of employee contributions up to 3% of salary, for a maximum employer match of 6% of pay. The new Visa match, effective in late February, will be 200% of employee contributions up to 5% of salary, for a maximum employer match of 10% of pay. In a paternalistic move, Visa will be changing its default employee pre-tax contribution from 3% to 5%—for workers who contribute less than 5%.

What if you work for a company—or are considering a job switch to one—that has a match that’s less than $1 for $1 on 6% of pay? Check if there's a profit sharing plan or a pension plan, says Rob Austin, director of research at Alight Solutions. “If not, maybe you’re behind the competition,” he says.

When in doubt, consult a trustworthy CPA! Zhong and Sanchez is dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at

Picture credit: shutterstock

Phantom stock: Termination of right to buy or sell, treatment of asset and basis

In Hurford Investments No. 2, Ltd., No. 23017-11 (Tax Ct. 4/17/17) (order), the Tax Court considered whether the redemption of phantom stock was treated as a sale of a capital asset and what the tax basis in the redeemed phantom stock was.


Gary Hurford owned "phantom stock" in Hunt Oil Co. The phantom stock was a form of deferred compensation that Hunt Oil paid to its employees; a share of phantom stock was valued at approximately the share price of Hunt Oil's common stock and would be adjusted for its increase or decrease in value at the end of each calendar year.

Under the terms of the phantom stock agreement, after Hurford's death, which was considered a "qualified termination of service," a five-yearcountdown was started. During this time Hunt Oil would continue to pay out dividends and adjust the stock for any growth or decline in value. At the end of the fifth year Hunt Oil would automatically redeem the stock; both parties had the right to liquidate the account at any time.

When Gary Hurford died in 1999, Thelma Hurford, his wife, inherited the phantom stock. Thelma decided to transfer the phantom stock into Hurford Investments No. 2 Ltd. (HI-2) in 2000, one of three limited partnerships Thelma's attorney formed as part of her estate plan after Thelma was diagnosed with cancer. On March 22, 2000, Hunt Oil formally recognized HI-2 as the holder of this stock. At the time of the transfer, the value of the stock was $6,411,000, and the receipt was reported on HI-2's Form 1065, U.S. Return of Partnership Income, as a short-term gain.

Thelma died in 2001, and the value of the stock on the date of her death was $9,639,588. In 2004, the five-year period that began on Gary's death was up, and Hunt Oil exercised its right to terminate the phantom stock. In 2006, Hunt Oil distributed $12,985,603 to HI-2. The IRS argued that the difference between the $12,985,603 distribution and $6,411,000 should be treated as ordinary income (deferred compensation) and argued that HI-2 should be considered an invalid partnership for federal income tax purposes since there was no transfer of phantom stock until after Thelma died. HI-2 and the estate argued the phantom stock should be treated as a long-term capital asset in HI-2's hands, which would also establish HI-2'svalidity as a holder and recognize it for income tax purposes.

Is phantom stock a capital asset?

In Thelma Hurford's hands, the termination of phantom stock generated ordinary income (deferred compensation), but it is pertinent to note that the character of property may change depending on who holds it, e.g., a laptop is inventory for a retailer but a capital asset for most buyers. "Capital asset" has a broad definition under Sec. 1221, which defines the term as all property that is not specifically excluded in a list of exceptions. The types of property excepted from Sec. 1221 are (1) stock in trade; (2) depreciable property used in a trade or business; (3) a copyright or other similar item; (4) an account or note receivable acquired in the ordinary course of business; (5) a U.S. government publication; (6) a commodities derivative financial instrument; (7) a hedging transaction; or (8) supplies used or consumed in the ordinary course of business.

Because HI-2's interest in the phantom stock does not fit into one of the exceptions listed in Sec. 1221, the Tax Court found that it was a capital asset. This designation makes more sense when one thinks about the nature of the asset. HI-2acquired an asset that had its value linked to the stock value of Hunt Oil, and HI-2 had no influence over the underlying Hunt Oil common stock, holding it in the hope that it would appreciate. According to the Tax Court, this distinguishing characteristic is enough to conclude that the phantom stock was a capital asset.

Does Hunt Oil's redeeming the phantom stock constitute a sale?

Under Sec. 1234A(1), the gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation for property that is a capital asset in the taxpayer's hands is treated as a gain or loss from the sale of a capital asset. HI-2 argued and the Tax Court agreed that when Hunt Oil liquidated the phantom stock and distributed the proceeds to HI-2, it ended HI-2's right to sell the phantom stock. Thus, under Sec. 1234A, there was a termination of a right to buy or sell a capital asset, and HI-2 was entitled to capital gain treatment.

What is the basis of the stock?

The IRS argued the basis of the stock should be $6,411,000, which was HI-2's original interest in the phantom stock upon Gary Hurford's death; the difference between the value at termination of $12,986,603 and $6,411,000 would be the long-term gain. HI-2 argued that the basis in stock should be stepped-up to the value of $9,639,588 as of Thelma's death. Because the phantom stock was included in Thelma's estate, the Tax Court found that HI-2 was entitled to a step-up in basis under Secs. 1014(a) and 1014(b)(9). The court noted that Sec. 1014(c) specifically excludes from step-up in basis "property which constitutes a right to receive an item of income in respect of a decedent under section 691." However, it concluded that Sec. 1014(c) did not apply because the phantom stock had been converted into a capital asset in HI-2'shands and as such was no longer an item of income in respect of a decedent.

'Appreciation' is a hallmark of a capital asset

According to the Tax Court, the phantom stock was a capital asset in HI-2's hands as determined by Sec. 1221; it was treated as long-term capital gain when Hunt Oil terminated the program and liquidated the phantom stock account. The partnership could not affect the value of the stock in any way and could only hope for the phantom stock value to appreciate; this characteristic was enough to classify the stock as a capital asset. Per Sec. 1234(A), it was also determined that Hunt Oil's liquidation of the stock was a termination of HI-2's right to sell the phantom stock and constituted a sale of an asset. Lastly, the partnership had basis in the phantom stock equal to its fair market value as of Thelma's death. The fair market value of $9,639,588 was included in Thelma's estate, and under Sec. 1014(b)(9), that was the partnership's basis in the stock.