Masonry Magazine February 1970 Page. 28
Taxes
(Continued from page 10)
base his estimated itemized deductions not only on the deductions actually claimed in the prior year but also on events that can reasonably be demonstrated will affect his tax liability.
WITHHOLDING EXEMPTION CERTIFICATE
As a result of the new Act, an employer shall not be required to deduct withholding tax from the wages of an employee who provides his employer with a withholding exemption certificate. The certificate will be to the effect that the employee 1) incurred no liability for income tax the prior year and 2) anticipates that he will incur no liability for income tax in the current taxable year.
This provision of the law is aimed at eliminating the necessity of filing a return solely for the purpose of obtaining a refund of withheld taxes. This would primarily apply to the student, who works parttime during the year, or the employee with large itemized deductions.
This withholding exemption certificate is to be available for wages paid after April 30, 1970.
SUB AND ANNUITY PAYMENTS
After December 31, 1970, am employer will be required to withhold tax on any payments of taxable supplemental unemployment compensation benefits. SUB payments are to be treated as wages. Note: The payments are subject to withholding only to the extent that they are taxable. Also, after December 31, 1970, withholding is available for payments of certain pensions and annuities-if the payee so requests.
TAX-OPTION CORPORATION-RETIREMENT PLANS
In an attempt to bring the treatment of the qualified employees pension, profit-sharing, etc. plans of tax-option corporations more in line with the limitations on H.R. 10 (self-employed) plans, certain restrictions were added by the new Act.
You will recall that a tax-option corporation is one that can elect to have its shareholders pay taxes in proportion to their shareholdings on the corporate income and thus avoid a corporate tax. In order to make an election not to be taxed as a corporation, there may be no more than 10 shareholders.
Beginning with contributions made in 1971, a shareholder-employee owning more than 5% of the outstanding stock of a tax-option corporation will have to pay tax on the amount by which the corporation's contribution on his behalf to a qualified employees' pension, profit-sharing, etc. plan exceeds either 1) 10% of his compensation received from the corporation, or 2) $2500, whichever is the lesser. Obviously, a stockholder-employee owning 5% or less of the corporation's stock would not be affected by this new provision. Any amount that is taxed to the employee on a current basis is to be recovered by him tax-free later on when he starts receiving benefits from the plan.
Should a shareholder-employee die or in some way forfeit his rights under the plan before he is able to recover the entire amount of his previously taxed employer contributions, the Act does permit the shareholder-employee (or his beneficiary) to deduct the balance of the previously taxed employer contributions.
EMPLOYEES' PLAN-LUMP SUM DISTRIBUTIONS
Prior to the Act, the taxable portion of a lump-sum distribution to an employee of the total amount due him from a qualified pension, profit-sharing, etc. plan rated capital gains treatment provided the distribution was received in one taxable year. However, now only the difference between the taxable portion of the distribution and the employer's contributions are to be given capital gains treatment. The employer's contributions, subject to a certain ceiling, are to be treated as ordinary income.
MINIMUM TAX
This is a new tax that is to be paid on certain types of income and this tax is to be paid in addition to other taxes. The Act imposes a 10% tax on what are called "tax preference" items. The tax applies only to the sum of tax preference items in excess of $30,000. Prior to the imposition of this tax, there is another deduction allowed based on the amount of income taxes paid. There are several of these tax preference items that will be subject to the new tax. One is "excess investment interest." This can occur where a taxpayer buys some property from which he hopes to some day make a profit out of its sale. However, in the meantime the interest expense paid to carry the property is deductible from ordinary income. Often taxpayers deliberately incur this interest expense as it will exceed the net income from the property and such interest had been fully deductible from ordinary income.
Some of the other tax preference items that are to be covered by the minimum tax are depletion, accelerated depreciation on real property; and excess amortization of pollution control facilities and several others.
CAPITAL GAINS
The Act makes numerous changes in the area of capital gains and losses. The most significant one of course, is the increase in the capital gains rate for individuals in three annual steps, reaching 35% in 1972. In 1970, the rate will be 29½%; for 1971, 32½%; and for 1972 and thereafter will be, in effect, 35%. However, the 25% alternative capital gains rate will continue to apply to aggregate long term capital gains which do not exceed $50,000. Also, capital gains resulting from certain contracts and corporate liquidations will continue to qualify for the 25% rate.
The alternative capital gains tax on corporations is increased in two steps. In 1970, the rate will be 28% and in 1971 and thereafter it will be 30%. No change has been made in the tax rate on a corporation's ordinary income of 22% on the first $25,000 and 48% on taxable income in excess of $25,000. Therefore, a corporation with a total taxable income (including capital gains) of $25,000 or less will continue to enjoy a 22% rate on capital gains.