How can you motivate employees? One way is to set up an achievement award plan that rewards length of service or safety measures. If certain requirements are met, both your company and the recipients can collect tax breaks.
Achievement awards 101
Generally, employees aren’t taxed on tangible personal property given under an achievement award plan.
Recent tax legislation clarifies that “tangible personal property” does not include cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than those where from the employer pre-selected or pre-approved a limited selection) vacations, meals, lodging, tickets for theatre or sporting events, securities and other non-tangible personal property.
However, items like electronic devices, watches, golf clubs and jewelry do qualify. The cost of these items is deductible by the company and tax-free to the employees.
To qualify for this favorable tax treatment, these requirements must be met:
- Any employee may receive a length-of-service award, but you can’t give safety awards to managers, administrators, clerical workers and other professional employees.
- The award doesn’t qualify if the company granted safety awards to more than 10 percent of the eligible employees during the same year.
- The award must be part of a meaningful presentation.
- The employee must have worked for the company for at least five years for a length-of-service award.
If a company uses an award plan that doesn’t meet these qualifications, an employee may receive only up to $400 in awards without owing any tax. The limit is raised to $1,600 for awards through a qualified plan. (Any excess is taxable to the employee and can’t be deducted by the employer.)
There are two additional requirements for qualified plans:
- It must be a written plan that doesn’t discriminate in favor of highly-compensated employees.
- The average cost of all employee achievement awards for the year can’t exceed $400.
Call Carl Heinemann, your Chattanooga CPA, if you have questions about setting up an tax-friendly achievement award plan for your employees.
You may already know that contributions to a traditional IRA may be deductible on your personal tax return (subject to certain limits). You’re allowed to deduct a contribution on your 2018 return that is made as late as April 15.
But are you aware that you can use this year’s tax refund to make your IRA contribution for the 2018 tax year?
How to fund your IRA with a refund
The IRS says it’s OK to use this year’s tax refund to make your 2018 IRA contribution as long as you meet the April 15 deadline. If you want to use this strategy, however, you’ll want to file your tax return early.
Here’s how it works: You can contribute up to $5,500 to a traditional IRA for 2018Â ($6,500 if you’re age 50 or older). All you have to do is claim the IRA contribution on your 2018 return and then ensure the same amount is deposited in your IRA by April 15.
The ability to deduct contributions is phased out if you (or your spouse) actively participate in an employer’s retirement plan, and your income exceeds a certain level. For instance, the deduction is gradually reduced for a single filer with a modified adjusted gross income (MAGI) between $63,000 and $73,000 on a 2018 return. Further calculations to determine your maximum contribution amount will be needed if your income falls inside a phaseout range.
The IRA refund strategy is especially beneficial for taxpayers who are struggling to make ends meet, but still want to save for retirement
Extensions are not allowed for IRA contributions, so don’t procrastinate! Typically you can file your tax return starting as early as late January.
If you’re married, it’s better to file a joint tax return, rather than separately … right? That’s usually true, but not always. It depends on your situation.
Deductions may play a role in your return status
Generally, the tax rate structure encourages couples to file joint returns. Nevertheless, you may be better off filing separately if one spouse has a disproportionate amount of expenses subject to a deduction “floor.”
For example, say your annual adjusted gross income (AGI) is $150,000, while your spouse is a part-timer with an AGI of $20,000 a year. In 2018, you had unreimbursed medical expenses of $1,000, but your spouse incurred $9,000. Under recent legislation, the floor for deducting medical expenses in 2018 is 7.5 percent of AGI. (It reverted to 10 percent of AGI in 2019.)
If you file a joint return, you get no medical deduction even if you itemize, because your total expenses of $10,000 doesn’t exceed 7.5 percent, or $12,750, of your combined AGI.
However, things change if you and your spouse file separately. While you still won’t get a deduction, your spouse will be able to deduct the excess above 7.5 percent of their AGI, or $1,500. So your spouse’s deduction is $7,500 — a big difference!
Filing separately wont help with state and local taxes (SALT)
The new law limits the annual SALT deduction to $10,000 for 2018. So if you live in a high-tax state, you may think that filing separately would provide a higher combined SALT deduction. No so. The annual limit is $5,000 for married couples filing separately.
For instance, if you pay $9,000 in SALT and your spouse pays $1,500, you can deduct $10,000 if you file jointly. But filing separately would provide a $5,000 deduction for you and $1,500 for your spouse, for a total deduction of only $6,500.
Truth be told, your return status depends on your unique circumstances. Call Carl Heinemann, your Chattanooga CPA, for help with determining the best approach on your tax return.
Suppose you need cash quickly. Then you remember that you have an IRA. While you can’t take out a loan from your IRA, you may have other options — including access to funds short-term without any tax consequences.
- 60-day IRA rollover: IRA withdrawals are generally taxed at ordinary income rates, plus a 10 percent penalty applies to distributions before age 59 1/2. However, you can avoid the tax and any penalty by redepositing (“rolling over”) the funds into an IRA before the 60-day deadline. Only one such IRA-to-IRA rollover is allowed each year.
Of course, using money from an IRA like a short-term loan is often a last resort. Consider your other options first.
- 401(k) loans: Other retirement plans often do allow loans. If your plan permits it, you may borrow 50 percent from your account balance, up to a maximum of $50,000. The loan must be repaid within five years. Although you’re paying interest at a relatively low rate to yourself, the loan effectively reduces your retirement savings.
- Home equity loans: Banks generally offer lower rates for home equity loans than credit cards. However, the loan must be secured by your home. Also, recent tax legislation eliminates deductions for most home equity loans.
- Personal loans: With a personal loan, you don’t have to put up your home as collateral, but the interest rate is likely higher than the rate for a home equity loan. Generally, the loan term is one to five years.
- Credit cards: This is a common way to borrow money, but it’s costly. Typically, the interest rates hit double digits. If you’re buying an expensive item you may benefit from an introductory no-interest card.
You’ll need to consider the best solution for your situation. Call Carl Heinemann, your Chattanooga CPA, if you have questions about tax consequences surrounding IRA withdrawals and contributions.
You’re approaching that long-awaited day when you can say goodbye to full-time employment. But you’ve been listening to the dire predictions of financial pundits. Not exactly encouraging stuff. Should you continue to plug along at work and ride out the storm? Or should you retire as planned, even if the market’s headed for a significant downturn?
Tough questions. Unfortunately, there’s not a one-size-fits-all answer.
Take a deep breath. Forget about the stuff you can’t control: the stock market, interest rates, government programs, the world economy… etc. One of the biggest hazards of retiring into a declining market is “sequence of returns” risk. That’s the problem of taking withdrawals — especially early in retirement — from a portfolio that’s headed in the wrong direction. Once shares are sold, fewer shares are available to profit from future market recoveries.
Nevertheless, you can take steps to cushion the transition even when retirement accounts are performing poorly. Here are four suggestions:
- Think about pulling funds from other assets. If you have cash in “buffer accounts,” tap those sources first. If not, consider reverse mortgage or home equity lines of credit. Both may have significant upfront costs, but establishing a line of credit early in retirement can help you defer substantial withdrawals from your retirement accounts.
- Consider selling your house and moving. Many people find that retirement is a great time to downsize and move to a less-expensive location. Proceeds from the sale can provide enough cash to cover expenses as you wait for the market to recover.
- Set a realistic budget. Don’t just guess what you’ll need. Do the math. Establish the habit of living within your means, before and after you leave your job.
- Seek professional help. A financial advisor can help you map out a plan for your golden years.
Early in the year is a perfect time to reassess your business, including organizational structure, policies, marketing and more. Reviewing company costs can also pay huge dividends throughout the year if you can create an expense-cutting plan and stick to it. Here are a few ideas for reducing costs with your bottom line in mind:
- Review the lease. Do the terms of your lease still make sense? Landlords like to keep good tenants, so look for ways to revise lease terms to make them more favorable to your company. If you own a building but don’t use the entire space, consider subletting to another business to generate additional revenue.
- Reassess insurance policies. It doesn’t hurt to review your insurance needs on a regular basis. The policy you bought five years ago may not be competitive today. Your company may be carrying coverage you don’t need. Discuss existing arrangements with your agent. You may be eligible for trade association discounts or an umbrella policy.
- Consider buying in bulk. For some items, such as office supplies that your staff regularly uses, buy in quantity. By renegotiating supplier contracts, you may be able to generate additional discounts.
- Do a technology audit. Take a look at what your business uses and what can be made more efficient. Maybe you don’t need an inter-office phone system when all your employees have cell phones. And replacing desktop computers with laptops may help save in energy costs.
- Update the schedule. By closing the front door of your business one day a week and asking staff to work longer shifts on the other days, you can often save utility costs and other overhead expenses. Ask your employees for help. They may suggest the perfect cost-saving alternative to the standard workweek, especially if it means saving the business and their jobs.
- Rethink lighting. Utilities are often one of the largest expenses on a company’s profit and loss statement. Consider installing motion sensor lights to reduce costs. And solicit staff suggestions for additional savings.
Take cost-cutting measures now to help your company reduce wasteful spending and save big.