Archives for August 2022

A SEP-IRA is a traditional IRA that holds contributions made by an employer under a SEP plan. You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.

Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account. However, any dollars you contribute to the SEP-IRA will reduce the amount you can contribute to other IRAs, including Roth IRAs, for the year.

Example 1: Nancy’s employer, JJ Handyman, contributes $5,000 to Nancy’s SEP-IRA at ABC Investment Co. based on the terms of the JJ Handyman SEP plan. Nancy, age 45, is permitted to make traditional IRA contributions to her SEP-IRA account at ABC Investment Co., and she contributes $3,000 in 2019. If Nancy also wants to contribute to her Roth IRA at XYZ Investment Co. for 2019, she can contribute $3,000 ($6,000 maximum contribution less the $3,000 already contributed to her SEP-IRA) by April 15, 2020.

Example 2: Nancy, age 45, is the owner and sole employee of JJ Investment Advisors. Nancy contributes the maximum allowable amount to her SEP-IRA for 2019, or $56,000. Nancy may also make regular, annual IRA contributions to her SEP-IRA, if her SEP-IRA allows this, or contribute to her Roth IRA at XYZ Investment Co. Her total traditional IRA and Roth IRA contributions cannot exceed $6,000 for 2019 and may be made in addition to her SEP contributions.

by Patricia M. McDermott, Esq.

Arkansas Governor Asa Hutchinson has signed legislation that cuts the top individual income and corporate tax rates; conforms with IRC § 179, which provides an income tax deduction for the expensing of certain property; and provides an inflationary relief income tax credit for full-year Arkansas residents. (L. 2022, S1 (3rd Extra. Sess.) (Act 2), effective 08/11/2022 and as otherwise noted.)

Rates. The top individual income tax rate in Arkansas is reduced from 5.5% to 4.9% for tax years beginning on or after January 1, 2022, and the corporation income tax rate imposed on both domestic and foreign corporations is reduced from 5.9% to 5.3% for tax years beginning on or after January 1, 2023. The change accelerates rate reductions that originally were scheduled to take effect in the 2025 tax year.

Individual income tax bracket adjustments. The legislation recalculates the bracket adjustments based on the reduced tax rates. Every resident, individual, trust, or estate having net income greater than or equal to $84,501 but less than $89,100 (previously, $90,600) will reduce their income tax due by the appropriate bracket adjustment amount.
Deduction for depreciation and expensing of property. The legislation conforms with IRC § 179 as in effect on January 1, 2022, for the purpose of computing Arkansas income tax liability for property purchased in tax years beginning on or after January 1, 2022. This raises the Arkansas depreciation deduction limitation for the expensing of certain property from $25,000 to $1,000,000. Furthermore, prior to amendment, Arkansas reduced the deduction available in any year based on the amount by which the cost of property placed into service by the business during that year exceeded $200,000. Under IRC § 179, the threshold is $2.5 million.

For the tax year beginning January 1, 2022, a resident individual taxpayer who files an Arkansas full-year resident income tax return, other than a joint return, having net income up to $101,000 is allowed an individual income tax credit. The top credit amount is $150 for individual taxpayers with net incomes up to $87,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $101,001 or more.

Spouses filing separately: Spouses filing separately on the same income tax return each may claim one credit against the tax on the return of each spouse.

Joint returns: For the tax year beginning January 1, 2022, resident individual taxpayers who file a joint Arkansas full-year resident income tax return having net income up to $202,000 are allowed an individual income tax credit. The top credit amount is $300 for taxpayers with net incomes up to $174,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $202,001 or more. Spouses filing jointly on the same income tax return will only receive one credit against their aggregate tax.

Claiming the credit: The credits cannot be claimed by a taxpayer for any tax year other than the tax year beginning on January 1, 2022, or who files a nonresident return or a part-year resident return. The amount of the income tax credit that may be claimed by the taxpayer in a tax year must not exceed the amount of income tax due by the taxpayer.