Representor Winter 2018 - The Subject is Taxing!

IRS changes — some pointers for the immediate future

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by Stanton B. Herzog, CPA

Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Northbrook,Ill., serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can call Stan Herzog at 847-564-1040, fax him at 847-564-1041, or e-mail him at

One of the items that the IRS is apparently looking into relates to retirement plans. They have money, and the usual idea is that they are non-taxable.

As this issue of The Representor prepares to go to press, the tax bill is not law, but it may be by the time you read this, and it would likely be different from anything that I have covered in this column.

There are a few items that I can feel sure to write about. Let’s start with the maximum wages subject to Social Security tax in 2018.

The FICA maximum wage limit is $128,700, another increase in taxable wages from $127,200 in 2017. The maximum profit sharing contribution has increased to $54,000 from $53,000 in 2017 on maximum income of $270,000. Most of the other items of deferral have gone up $50 each from 2017. For example, the flexible spending account (section 125) deduction for medical reimbursement is increased to $2,650 from $2,600. The gift allowance from one individual to another was to increase to $15,000, but the whole estate tax program is in debate as we go to press.

One of the items that the IRS is apparently looking into relates to retirement plans. They have money, and the usual idea is that they are non-taxable. Non-taxable entities can get into trouble in only a few instances, but here is the one the IRS is looking into.

Some of the plans are purchasing publicly traded partnerships, the kind that taxpayers have been purchasing for some time. Most brokers regard them the same as corporations on the stock exchanges, like every other corporation, but they are not. As investors know, they throw off K-1 forms instead of 1099-DIV forms at the end of the year and contain numerous items that individuals must enter into their form 1040s.

Retirement plans don’t have to make those entries, with one important exception. All non-profit entities must pay tax on Unrelated Business Taxable Income (UBTI). Most UBTI is related to interest or dividends, and retirement plans are not taxable on investment income. However, oil and gas companies in particular — and other companies — can have operating income that is considered UBTI. This would require the retirement plans to file a form 990-T and pay tax on the pass-through UBTI in excess of a $1,000 deductible. Most trustees are not aware of this and are not filing the 990-Ts.

Because the most common entity for a retirement plan is a trust, the taxation of a trust reaches the maximum tax bracket at a very low level (in 2017 the 39.6 percent rate is reached at $12,500 of taxable income). You can see the reason for IRS attention.

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