Corporations structured under sub-chapter S of the Internal Revenue Code enjoy certain tax advantages over their C corporation cousins. In addition to not being subject to federal income taxes, taxable income distributed to shareholders as dividends is not subject to self-employment tax.

So naturally, S corporation shareholders prefer dividend distributions rather than W-2 compensation. Paying shareholder dividends rather than compensation benefits the S corporation as well. Because dividends are not compensation, the corporation avoids paying payroll taxes.

The Internal Revenue Service has been challenging S corporations and examining the compensation of shareholder-employees who provide substantial services to S corporations. There have been numerous cases in which district courts have held in favor the IRS’ calculation of “reasonable compensation,” forcing the S corporation to reclassify certain distributions as compensation payments and subject to all applicable payroll taxes.

S corporations should review the reasonableness of compensation paid, versus distributions made to shareholder-employees who provide substantial services to the corporation. There are numerous factors to consider. S corporations should have a thorough understanding of the recent court cases and the IRS’ approach to determining what is reasonable.

Let us know if you have any questions on your corporation’s compensation policy.

The study, distributed to 1,000 respondents in January of this year, found that women’s confidence in their ability to plan for retirement has reached a three-year high, with 69 percent of women rating their confidence level as good or very good. And, for the first time in three years, women’s confidence is on par with their male counterparts – as 71 percent of men rate their confidence as good or very good.
Why the change?

Women’s savings tactics differ from men’s. The study found that more women are finding ways to increase their cash flow during retirement. Forty percent of women have structured their portfolios to include investments that will generate income during retirement, compared to 30 percent of men. And 51 percent of women say that generating income during retirement is more important to them now that it was one year ago.
Seventy-nine percent of women polled in the study were already saving for retirement as compared to 74 percent of men and women were more likely to feel like they were saving enough.

Women’s spending habits are also contributing to their positive retirement planning and saving momentum. While more than a quarter of men are concerned about controlling their urge to spend, only 17 percent of women share that concern – and that number is down from 27 percent of women in 2009.

In general, women are spending less than men, able to compare prices to get the better deal and are cutting back on purchases such as clothing and electronics, as well as, eating out.

These strategies, combined with their investment choices, have put women in a very good position as they prepare for retirement.

-The Small Business & Entrepreneurship Council ranked the District of Columbia dead last (51st) in terms of the costs of its tax policies to entrepreneurs.

– The US Department of Labor reported Maryland came in dead last in the nation for its pace of job creation over the past year.

- CNBC ranked Virginia as the best state in the union to do business

The above rankings come as no surprise. In January 2009, Kate Carr and I, in an op-ed piece for the Washington Post, (“How to Make D.C. and Economic Powerhouse (Hint: Tax Less)”) predicted the tax policies being pursued by the District of Columbia and Maryland were costing both states the most important thing they need… jobs. We also recognized the tax advantages Virginia had over both jurisdictions. While other states are shedding or reducing their state corporate income taxes, DC and Maryland are looking for new sources of tax revenue from business’ and individual taxpayers. Maryland is attempting to position itself as a biotech/research hub. Unfortunately, most of the biotech outfits setting up shop in Maryland do it primarily for Maryland’s research tax credits, which in effect are state subsidies of private business. When and if they ever make money, they, and their jobs, are gone.

But as bad as Maryland’s tax and economic policies are, it cant hold a candle to the job killing policies of DC. The District’s corporate tax rate (9.975%) says to business: If you operate here, you will not be competitive. The lost opportunities both jurisdictions have squandered, given their proximity to the Federal government spending machine, is hard to understand. Virginia doesn’t even have to be very good, (which it is), just better than these failing municipalities.

The study found that Baby Boomers and Gen Xers who delay their retirement past the age of 65, still wouldn’t have adequate income to cover basic retirement expenses and uninsured health care costs.

According to a recent article in U.S. News & World Report, the lowest-earning 25 percent of Americans would have to work until 84 so that 90 percent of them would have even a 50-50 chance of having enough money to afford basic living expenses and out-of-pocket medical care.

Not surprisingly, the study revealed a major factor that makes a difference in a person’s ability to meet their basic expenses and uninsured health care costs in retirement is whether they are still participating in a defined-contribution retirement plan (such as a 401(k)) after the age of 65. The increase will depend on several factors in a household, such as retirement age and preretirement income level, but participation in a retirement plan makes at least a 10-percentage point difference.

The analysis of the study is based on data from EBRI’s Retirement Security Projection Model, which is divided into four income groups. The groups are determined by adding a person’s lifetime income during their working years, adjusting the amounts for inflation, then determining a year of average income stated in 2011 dollars. According to EBRI, the dividing lines for the four groups are zero to $11,700, $11,701 to $31,200, $32,201 to $72,000, and $72,001 and higher.

For those in the lowest preretirement income quartile, only 29.6 percent of these households would have sufficient resources to avoid running short of money in retirement 50 percent of the time. For those in the second group, less than a quarter (23.5 percent) of households would have a 70 percent probability of adequate income if they retired at 65. For those households in the next to highest income group, almost half (49.1 percent) would have a 70 percent probability of adequate income if they retired at 65, while 75.9 percent of households in the last and highest group are likely to have enough money to retire at the same age.

The full report appears in the June 2011 EBRI Issue Brief, “The Impact of Deferring Retirement Age on Retirement Income Adequacy,” online at www.ebri.org.

Though the federal estate tax exemption is currently set at $5 million, tax policies in Maryland and DC target residents who have estates valued at $500,000 or higher.

Virginia repealed its estate tax five years ago, which has prompted many financial advisors in the DC metro area to tell their clients to move across the state line.

And there’s good reason: back in 2008 when Maryland legislators created a “millionaire” tax bracket (I wrote about it in more detail here) raising the top income tax rate to 6.25 percent from 5.5 percent on taxable income over $1 million, legislators were hoping the increase would fill in the state’s expanding deficit. Just the opposite occurred – the State Comptroller’s office revealed they received 1,000 less tax returns from that qualifying tax bracket. Where did those upper income families go? They chose to leave the state.

Though the 6.5 tax rate expired at the beginning of the year, those with income greater than $500,000 are still taxed at 5.5 percent. And millionaires aren’t off the hook yet – in March legislators discussed making the 6.5 tax rate permanent. It’s part of $827 million package in potential state tax increases.

It’s not only the estate tax that gets the wealthy moving. The District has the third highest state or local corporate tax rate in the country. It’s not news that higher tax rates often result in higher unemployment rates and lower tax revenue. For companies looking to set up shop in the District, it’s a deal breaker.

Virginia from an economic performance perspective is knocking the socks off Maryland and DC – it’s more business friendly, and more jobs have been created. The legislative policies pursued by Maryland and DC are job killers and the estate tax is just another nail in the coffin.

Most of our clients are coming to grips with e-filing their returns, as opposed to filing paper copies.  It’s largely a generational hesitation on the part of certain clients who object to e-filing.  However when we note tax refunds have a two week turnaround with e-filing, they warm up to the idea.

Our firm’s computer system allows 24/7 remote access to our databases and software and coupled with BlackBerrys and Smartphones; there is always the pressure for MB professionals to continue their work after they arrive home. And, some do. Like many professionals, it’s important for our tax professionals to seek a balance, stay fresh and keep the innovative and fresh ideas coming for our clients.

For the 2011 tax season at MB: so far, so good.

An individual can annually contribute a maximum of $5,000 or 100% of taxable compensation, whichever is lower. An individual older than 50 years of age before the end of the year may contribute $6,000. These limits apply to the aggregate amount of contributions made to all IRA accounts. Therefore, if you own multiple IRA accounts (Traditional and/or Roth) the sum of your contributions to all three accounts for the year cannot be greater than $5,000 (or $6,000).

Contributions may be limited or completely phased out based on AGI limitations, filing status, and whether or not a taxpayer is an active participant in an employer qualified retirement plan. The contribution limitations are described below.
Traditional IRA Limits – Active Participant in Employer Qualified Retirement Plan
• Single and Head-of-Household – Contributions are limited if modified AGI is between $56,000 and $66,000; completely phased out above $66,000.
• Married Filing Separately – Contributions are limited if modified AGI is between $0 and $10,000; completely phased out above $10,000.
• Married Filing Jointly – Contributions are limited if modified AGI is between $89,000 and $109,000; completely phased out above $109,000.

Traditional IRA Limits – Non-Active Participant in Employer Qualified Retirement Plan
• Regardless of filing status, if a taxpayer is not an active participant in an employer qualified retirement plan, contributions made to a Traditional or Roth IRA are not subject to modified AGI limitations and are fully deductible.

Roth IRA Limits
• Contribution limitations for a Roth IRA are not subject to participation rules; only modified AGI rules.
• Single, Head of Household, Married Filing Separately – Contributions are limited if modified AGI is between $105,000 and $120,000; completely phased out above $120,000.
• Married Filing Jointly – Contribution is limited if modified AGI is between $167,000 and $177,000; completely phased out above $177,000.

It’s important to note that a SIMPLE IRA and a SEP have their own contribution and limitation rules and are not impacted by rules set forth above for Traditional and Roth IRAs.

Consult your tax professional in regards to your personal investment activities.

1. How much of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:
– Add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.  Compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2010 base amounts are:
– $32,000 for married couples filing jointly.
– $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
– $0 for married persons filing separately who lived together during the year.