Tax-free fringe benefits help small businesses and their employees

Tax-free fringe benefits help small businesses and their employees.

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.

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Two-income Families Should Check Withholding Amount

Two income families and those who work multiple jobs typically end up under-withheld. We recommend using the IRS Withholding Calculator to help navigate the complexities of multiple employer tax situations and to determine if the correct amount of tax for each employer is being withheld.

The passage of the Tax Cuts and Jobs Act (TCJA), which will affect 2018 tax returns that will be filed in early 2019, makes checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Individuals with more complex tax profiles, such as two incomes or multiple jobs, may be more vulnerable to being under-withheld or over-withheld following these major law changes. We recommend performing check on your withholding as early as possible, as doing so gives more time for withholding to take place evenly throughout the year. Waiting means you could end up with a hefty tax bill come filing season.

The IRS calculator will recommend how to complete a new Form W-4 for any or all of your employers, if needed. Please contact us if you need assistance with a check up.

 

 

Law Change Affects Moving, Mileage and Travel Expenses

Changes to the deduction for move-related vehicle expenses

The passing of the Tax Cuts and Jobs Act  (“TCJA”) suspended the deduction for moving expenses for tax years beginning after Dec. 31, 2017, through Jan. 1, 2026. Previously, taxpayers were allowed to deduct the costs incurred for certain work related moves, given the requirements were met. Under the TCJA this deduction has been suspended for all moving expenses with the exception of those made by members of the Armed Forces of the United States on active duty who move pursuant to a military order related to a permanent change of station.

Changes to the deduction for un-reimbursed employee expenses

The TCJA at also suspended all miscellaneous itemized deductions that are subject to the 2 percent of adjusted gross income floor. This change affects unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel.

Thus, the business standard mileage rate cannot be used to claim an itemized deduction for unreimbursed employee travel expenses in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Standard mileage rates for 2018

The standard mileage rates for the use of a car, van, pickup or panel truck for 2018 are as follows:

  • 54.5 cents for every mile of business travel driven, a 1 cent increase from 2017.
  • 18 cents per mile driven for medical purposes, a 1 cent increase from 2017.
  • 14 cents per mile driven in service of charitable organizations, which is set by statute and remains unchanged.

 

 

Be Weary of State SALT Deduction Workarounds

With the pass of the Tax Cuts and Jobs Act (TCJA), a new limit has been placed on the deduction for SALT, State And Local Taxes. These limits severely impact residents of states that derive the majority of their revenue through state income taxes and high property taxes.

Several states have or are in the process of implementing workarounds to the deduction limits. For example, New York established new “charitable gifts trust funds” to which taxpayers can make deductible contributions and claim a tax credit equal to 85% of the donation. Similarly, New Jersey enacted legislation that permits localities to establish charitable funds to which taxpayers can contribute and receive a 90% New Jersey property tax credit. California and Connecticut are among the other states that have been weighing similar options.

It’s important to note that when applying the substance over form doctrine, many of these transactions would not qualify for the charitable deduction the states are hoping. Remember, charitable contributions are only deductible to the extent that no goods or services (benefit) is received in exchange. Transactions that are “quid pro quo” would reduce your charitable deduction, dollar for dollar by the fair market value of any benefit received.

The IRS is planning to issue regulations to address these transactions in the coming months. We advise our clients to wait for these proposed regulations, as our professional opinion is the IRS will not recognize a charitable contribution deduction that is a disguised SALT deduction.

Three Ways to Maximize Charitable Giving Under the New Tax Code

As many of you are aware by now, the Tax Cuts and Jobs Act (TCJA) almost doubled the standard deduction for many taxpayers, raising the limits to $12,000 for single filers and $24,000 for married joint taxpayers. Naturally, this makes it more difficult for taxpayers to write off charitable giving.

While there is a bi-partisan effort to push for charitable deductions for non-itemizing taxpayers (H.R. 5771), below are some steps you can take to maximize your charitable efforts in the meantime:

1. Bunching: Make the bulk of your charitable donations in the tax years you expect to itemize deductions and skip gift-giving in other years. For instance, if you’re already contemplating a large gift in 2018, you might be a little extra-generous toward the end of the year to include your donation goals for 2019, increasing the tax payoff for the 2018 tax year. In 2019, you can skip or reduce your gifting efforts, since you included these gifts in the 2018 tax year.

2. Donor-advised funds: With a donor-advised fund (DAF), you can make a large initial contribution this year and qualify a deduction. Then, the DAF distributes this money to your favorite charities over a period of time. This has the same practical effect as bunching.

3. Gifts of property: This is one of my favorite techniques. By giving capital gain property that has appreciated in value, like appreciated stock, art, or other collectibles, you can generally deduct the property’s current fair market value, instead of its initial cost. Thus, you increase your deduction while avoiding tax on the appreciation in value.

 

2017 Tax Reform Update

Below is a brief summary of the current differences between the House & Senate Tax Bills. Source: Thomson Reuters

2017 Tax Reform: Key differences between the Senate and House tax bills

The Senate and the House have each passed their own version of the “Tax Cuts and Jobs Act”. The two versions of the bill have many similar provisions, but they also have a number of key differences that will have to be reconciled by the Conference Committee as the two bills are merged into a single piece of legislation.

It is unclear at this point how these differences will be resolved. However, there is generally an inclination that the Senate’s provisions carry somewhat more weight because, since the Senate is subject to budgetary restraints as part of the reconciliation process, there is less flexibility to make changes to their bill.

The House voted on December 4 to go to conference with the Senate to reconcile the two bills, and the Senate is expected to name conferees later in the week. There has also been some speculation that the House might take up the Senate version and forego a conference, but this possibility is generally considered slight, especially considering the corporate alternative minimum tax (AMT) provision in the Senate bill (see below) which Conference Committee Chair Kevin Brady (R-TX) has identified as an issue that needs to be resolved.

Individual Provisions

Sunset provision. The Senate bill, in order to comply with certain budgetary constraints, provided an expiration date of Jan. 1, 2026 for many of the tax breaks in its bill, especially those for individuals. The House, on the other hand, largely made the changes in its bill permanent.

Individual rates and brackets. The Senate bill has seven tax brackets for individuals with rates ranging from 10% to 38.5%. The House bill has four tax brackets ranging from 12% to 39.6%, retaining the top rate under current law.

Individual alternative minimum tax (AMT). The House bill would repeal AMT for individuals. The Senate bill would retain the individual AMT, with increases to the exemption amounts.

Estate tax. Both bills would significantly increase the estate and gift tax exemption, but the House would also repeal the estate tax after Dec. 31, 2024.

Individual mandate. The Senate bill would effectively repeal the individual mandate (i.e., by reducing the penalty amount to zero). The House version has no such provision.

Mortgage interest deduction. The Senate bill would leave the deduction for interest on acquisition indebtedness intact but would suspend the deduction for interest on home equity indebtedness. The House bill would allow the deduction for interest on acquisition indebtedness, but would, for newly purchased homes, reduce the current $1 million limitation to $500,000 ($250,000 for married individuals filing separately), and would allow the deduction only for interest on a taxpayer’s principal residence. Interest on home equity indebtedness incurred after the effective date of the House bill would not be deductible.

Medical expense deduction. The House bill would repeal deductions for medical expenses under Code Sec. 213 outright, but the Senate bill would take a step in the opposite direction and temporarily (and retroactively) reduce the floor from 10% under current law to 7.5% for all taxpayers for tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, after which time the 10% floor would be scheduled to return.

Child tax credit. The Senate bill would increase the child tax credit from $1,000 under current law to $2,000, increase the age limit for a qualifying child by one year (for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2025), increase the income level at which the credit phases out ($75,000 for single filers and $110,000 for joint filers under current law) to $500,000, and reduce the earned income threshold for the refundable portion of the credit from $3,000 to $2,500. The House bill would increase the amount of the credit to $1,600 and increase the income levels at which the credit phases out to $115,000 for single filers and $230,000 for joint filers.

Both bills would also provide a non-child dependent credit, which would be $500 under the Senate bill and $300 under the House bill. The House bill would also provide a “family flexibility credit”; the Senate bill has no equivalent.

Business provisions

Effective date of corporate tax reduction. Both bills would reduce the corporate tax rate to 20%, but the House’s version would go into effect for tax years beginning after Dec. 31, 2017, whereas the Senate’s version would go into effect for tax years beginning after Dec. 31, 2018.

Corporate AMT. The House bill would repeal the corporate AMT. The Senate bill, however, would retain the corporate AMT at its current 20% rate.

RIA observation: The 20% corporate AMT rate is equal to the 20% corporate rate that would go into effect under the Senate bill in tax years beginning after Dec. 31, 2018—which would effectively render many corporate tax breaks worthless.

Section 179 expensing. Both bills would increase the expensing cap and phase-out under Code Sec. 179, but the Senate would increase the cap to $1 million and begin the phase-out at $2.5 million (up from $520,000 and $2,070,000 for 2018 under current law), whereas the House would increase the cap to $5 million and start the phase-out at $20 million.

Pass-through provision. The Senate bill would generally allow a non-corporate taxpayer who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship to claim a deduction equal to 23% of pass-through income. The House bill would provide a new maximum rate of 25% on the “business income” of individuals, with a series of complex anti-abuse rules to prevent the recharacterization of wages as business income.

 

Why You Should Consider Moving your Traditional IRA Into Your Current Employer’s 401(k)

Over the weekend I had a friend call for some tax advice – he was planning to purchase a duplex to occupy and rent and was considering taking a distribution from his IRA (ROTH & Traditional) and a loan from his 401(k) in addition to the cash funds he was going to use as a down-payment to avoid PMI. His proposal was this:

  • $25k loan from 401(k) – the max given his $50k vested balance
  • $10k early distribution from his Traditional or ROTH IRA
  • $35k in cash for the remainder for a total down-payment of $70k.

Long story short, I had recommended he roll his Traditional IRA into his employer’s 401(k), a little known maneuver, to increase the the amount of loan he’d be eligible for through his 401(k) (typically a maximum of 50% of the account balance or $50,000). This move saves him from draining his IRAs and their future earnings, as well as the tax on a $10,000 early Traditional IRA distribution. As an added bonus, he will now be able to contribute to his ROTH IRA in future years using the “back-door” ROTH strategy that many high earner’s utilize to navigate the contribution limits typically associated with ROTHs.

Reuters assembled an article detailing additional benefits that come with rolling your Traditional IRA into an employers 401(k), check it out here.

Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Ten Year-End Tax Moves To Minimize Your Tax Exposure

*Updated 12/28/17

With major tax reform looming, we compiled a list of year-end planning moves that can help you take advantage of the tax breaks that may be heading your way. While congress appears poised to enact tax reform this year, it’s by no means a sure bet. So keep a close eye on the news and don’t swing into action until the ink is dry on the President’s signature of the tax reform bill.

Both the tax bill passed the House of Representatives and the one before the Senate would reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, businesses may see their tax bills cut, although the final form of the relief isn’t clear right now.

The general plan of action to take advantage of lower tax rates next year would be to defer income into next year. Here’s how:

  • If you are an employee who believes a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
  • If you are thinking of converting a regular IRA to a Roth IRA, consider postponing your ROTH conversion until next year. That way you’ll defer income from the conversion until next year and hopefully have it taxed at lower rates.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment can be received this year—you can defer income until next year.

Both the House-passed tax reform bill and the version before the Senate have provisions to repeal or reduce many popular tax deductions for 2018 in exchange for a larger standard deduction. You can maximize your tax benefit by accelerating these expenses. Here’s what you can do about this right now:

  • The House-passed tax reform bill would eliminate the deduction for nonbusiness state and local income or sales tax, but would allow an up-to-$10,000 deduction for real estate taxes on your home. The bill before the Senate would ban all nonbusiness deductions for state and local income, sales tax, and real estate tax. If you are an employee who expects to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding on those taxes. That way, additional amounts of state and local taxes withheld before the end of the year will be deductible in 2017. Similarly, pay the last installment of estimated state and local taxes for 2017 by Dec. 31 rather than on the 2018 due date, or prepay real estate taxes on your home.
  • Neither the House-passed bill nor the bill before the Senate would repeal the itemized deduction for charitable contributions. But because most other itemized deductions would be eliminated in exchange for a larger standard deduction (e.g., in both bills, $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

Here are some other “last minute” moves that could wind up saving tax dollars in the event tax reform is passed:

  • The exercise of an incentive stock option (ISO) can result in AMT complications. But both the Senate and House versions of the tax reform bill call for the AMT to be repealed next year. So if you hold any ISOs, it may be wise to hold off exercising them until next year.
  • If you’ve got your eye on a plug-in electric vehicle, buying one before year-end could yield you an up-to-$7,500 discount in the form of a tax credit. The House-passed bill, but not the one before the Senate, would eliminate this credit after 2017.
  • If you’re in the process of selling your principal residence, wrap up the sale before year end. Up to $250,000 of your profit ($500,000 for certain joint filers) will be tax-free if you owned and used the property as your main home for at least two of the five years before the sale. However, under the House-passed bill and the bill before the Senate, the $250,000/$500,000 tax free amounts (“Section 121 exclusion”) would apply to post-2017 sales only if you own and use the property as your main home for five out of the previous eight years.  This proposal did not make the final cut
  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the House-passed tax bill but not the version before the Senate, alimony payments would not be deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end if the House-passed bill carries the day. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
  • Both the House-passed bill and the version before the Senate would repeal the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), so if you’re about to embark on a job-related move, try to incur your deductible moving expenses before year-end.

Please keep in mind that some of the year-end moves that should be considered in regard to the tax reform package currently before Congress—which, may or may not actually become law. If you would like more details about any aspect of how the proposed legislation may affect you, please feel free to contact our office.

Year-End Planning: Tax Strategies for Employee Stock Options

Stock options can be complex and costly if you don’t properly plan for taxes. Two common forms of non-cash employee incentives are Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs). With tax reform on the horizon, hopefully this post will help you make a more informed decision about the opportunities that exist before the end of the year.

Incentive stock options: ISO’s are qualified stock options granted to an employee that allow the employee to buy stock or ownership in the employer at a specified price. Many ISO grants have vesting schedules that need to be met as a condition of receiving the options. With ISOs, there are no regular income tax consequences when granted or exercised. A taxable event does, however, occur if/when the employee sells the stock at a gain.

An ISO has certain requirements that must be met. For example, the option price cannot be less than the market value of the stock at the time of the grant, it must be exercised within ten years from the time of grant, and the market value of the stock for any ISOs exercisable in any year is limited to $100,000.

To avoid disqualified dispositions and lock in favorable capital gain treatment, ISO’s generally can’t be disposed of within two years after the option is granted or one year after the stock is transferred to the employee.

If there is a disqualifying disposition of a share of stock, you would recognize ordinary compensation income equal to the “bargain element”. This bargain element is the fair market value (FMV) of the stock on the date of sale less the exercise price.

For Alternative Minimum Tax (AMT) purposes, when an ISO is exercised, assuming the stock is fully vested on the exercise date, the amount of the bargain element is included as an adjustment for alternative minimum taxable income. If the stock is not substantially vested in the year of exercise (still subject to forfeiture), income is includible under the Code Sec. 83 rules for AMT purposes. In future years, a tax credit may be allowed against regular tax for AMT paid on account of the adjustment for ISO exercises.

Launch Consulting Insight: Since the Republican plan for tax reform has called for the AMT to be repealed, it may be worth holding off on exercising ISOs until 2018, if the current tax bill is passed.

Nonqualified stock options: NSOs, are taxable similar to an employee receiving compensation income equal to the FMV of the option. If a NSO isn’t tradeable and has no “ascertainable market value”, a taxable event would occur when stock is received upon exercise of the options rather than at the time of option receipt. The taxable amount would be the “bargain element”, the difference between the stock’s market price on the date of option exercise, less the exercise price under the option.

Launch Consulting Insight: NSOs pose a more difficult dilemma with year-end planning. If you have NSOs, you may want to consider waiting to exercise until 2018 if you believe tax reform will be enacted and lower tax rates will apply in 2018. I would recommend factoring in market conditions, since an increase in the stock value over the waiting period could increase the amount of income subject to taxation. Alternatively, if the bargain element now is small, and you think it could increase by next year, you may want to consider exercising in 2017 to minimize the amount of ordinary income recognized on your bargain element.

Third Quarter Tax Updates

Interested in what’s happened over the last three months this year?

I’ve summarized the key tax developments that may affect you, your family, your investments, and your livelihood.

President Trump reveals tax reform plan. The Trump Administration and select members of Congress have released a “unified framework” for tax reform. This documents details a number of tax reformation changes but leaves many specifics unaddressed.

Provisions that would impact individuals include:

  • A standard deduction increase to $24,000 for married taxpayers filing jointly, and $12,000 for single filers;
  • Elimination of the personal exemption
  • A reduction in the number of tax brackets from seven to three: 12%, 25%, and 35%;
  • An increase of the child tax credit;
  • Repeal the individual alternative minimum tax;
  • Largely eliminate itemized deductions, but retain the home mortgage interest and charitable contribution deductions; and
  • Repeal both the estate tax and the generation-skipping transfer tax

Plan provisions affecting businesses would:

  • Applying a maximum 25% tax rate for “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations;
  • A reduction in the corporate tax rate to 20% (down from the current top rate of 35%);
  • Provisions for full expensing for five years;
  • Partial limitation of the net interest expense deduction for C corporations;
  • Repeal most deductions and credits, but retain the research and low-income housing credits;
  • Provide a 100% exemption for dividends from foreign subsidiaries; and
  • Tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.

 

For more information on other key tax updates and how they may impact you, feel free to contact our office.