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.
New tax legislation provides numerous tax benefits for individuals for 2018 through 2025. But not all the changes are likely to align with your go-to tax strategy from previous years. Here are five big tax breaks that could leave you with a tax surprise come April 2019 if you haven’t adjusted your current tax plan:
State and local taxes: You may have prepaid taxes at year-end to increase your SALT deduction in previous years. Hold off this year if there’s no tax benefit. The new tax law limits the deduction for state and local taxes (SALT) to $10,000 annually. This includes any combination of property taxes AND income or sales taxes.
Entertainment expenses: You can no longer deduct 50 percent of your entertainment expenses. But there’s still some leeway. According to a new IRS ruling, you may deduct 50 percent of food and beverages paid separately from entertainment like a basketball or hockey game. Also, a business can deduct 100 percent of the cost of its holiday party.
Miscellaneous expenses: The new law eliminates deductions for miscellaneous expenses, such as out-of-pocket employee business expenses. If possible, have these expenses reimbursed by your employer’s accountable plan. Generally, the expenses are deductible by the employer and tax-free to employees.
Kiddie tax: The kiddie tax continues to apply to unearned income above $2,100 received by a dependent child under 19 or full-time student under 24. But the new law puts more teeth into this tax. The kiddie tax is now based on the tax rates for estate and trusts. This generally produces a higher tax, so plan intra-family transfers accordingly.
Home equity loans: In the past, a homeowner could deduct mortgage interest paid on the first $100,000 of home equity debt, regardless of use of the proceeds. The new law eliminates this deduction for home equity debt, unless the proceeds from the loan are used to buy, build or substantially improve your home. Fortunately, you may still deduct interest on the first $750,000 of acquisition debt. Take advantage!
Under recent tax legislation, the deduction for miscellaneous expenses has been eliminated, effective for 2018 through 2025. This wipes out any write-off for employee business expenses you pay out of your own pocket.
However, employers will often agree to authorize a plan that reimburses business expenses, like those involving travel. As a result, reimbursements you get from your employer may be tax-free to you, while the payments remain deductible by the company.
Your employer’s accountable plan
Your employer may authorize a plan that reimburses travel expenses by using an accountable plan, which helps ensure that expenses qualify for favorable tax treatment. The plan complies with tough IRS rules requiring substantiation for the date, time, place, amount and business purpose of business travel. Similarly, an accountable plan may be used to reimburse employees for the cost of tools, uniforms or other expenses.
In order for an accountable plan to qualify for tax breaks, it must meet the following requirements (and you can help):
The expenses must have a business connection. The plan may reimburse your travel expenses to a distant location on behalf of the company, but not a disguised vacation. For instance, if you go on a business trip and spend most of the time lying on the beach drinking margaritas, your expenses likely won’t be considered related to business. It may be a good idea to confirm with your employer what type of expenses qualify before you go on a business trip.
Employees must account for expenses to the employer within a reasonable time. Usually, you’ll file the paperwork with the accounting department once you return from the trip. But this process can’t drag on for months. Ask your employer how much time you have to report your business expenses.
Employees must return excess reimbursements within a reasonable time. For example, 90 days might be the max. You can avoid putting your tax breaks in jeopardy by asking your employer what the deadline is to return any excess when you first receive the reimbursements.
If the accountable plan doesn’t comply with these rules, payments won’t be deductible by your company. Even worse, you and other employees will be taxed on the reimbursements — even though you incurred the costs doing your job! Check with accounting to ensure the requirements are met.
New tax legislation eliminated the tax deferral on exchanges of like-kind exchanges of property, except for real estate. This change (generally effective in 2018) may apply to more transactions than you think. For instance, it comes into play when you trade in one business car for another.
Here’s what matters for business vehicles
Under prior law, no current tax was due on an exchange of like-kind properties, like vehicles, if certain requirements were met. You only had to pay tax on any “boot” you received (e.g., cash on a car trade-in). But now taxpayers must contend with a convoluted set of rules that could result in a taxable gain.
Let’s look at an example involving a trade-in before and after the new law:
Before the new law: You bought a truck for your business for $50,000 that has been fully depreciated. So your “basis” for computing any gain or loss is zero. If you trade in the truck for a new one costing $55,000 and give the dealer $30,000 in cash, no current tax is due on the like-kind exchange. Your adjusted basis equals your basis plus any additional amount you pay. As a result, your adjusted basis going forward is $30,000.
After the new law: Assume the same scenario above. Although you’re eligible to claim favorable depreciation deductions for the vehicle, especially in the first year of ownership, your adjusted basis under the new rules is $55,000. Therefore, you must report a $25,000 taxable gain.
There are other tax complications, but you get the basic idea.
Keep these new rules in mind when you negotiate the price of a new business vehicle and the trade-in value of your old one. Alternatively, you might sell the vehicle personally and pay the full price for a new one. Call Carl Heinemann, your Chattanooga CPA, for help determining your best approach.
Tax filing season kicks off in a few weeks. What records should you assemble? Due to recent tax law changes, you may not need all the records you’ve kept before. Here are several key areas to focus on:
Personal information: You still must provide your Social Security number (SSN), and SSNs for your spouse and dependents.
Employment information: Have all Forms W-2 for you and your spouse. A self-employed person must report income from Forms 1099-MISC and Forms K-1, plus information for calculating the new deduction on qualified business income (QBI).
Child expenses: Provide information for claiming the increased Child Tax Credit (CTC) and Child and Dependent Care Credit. This may include details for a dependent care provider.
Investments: Include all information on various Forms 1099 for capital gains and losses (including cost/basis information), dividends and interest. Fortunately, this can often be scanned electronically.
Retirement plans/IRAs: Report contributions to plans and IRAs, the value of accounts and distributions received on Forms 1099-R.
Rental properties: This requires records of income received and expenses paid in 2018, including amounts, dates and places.
State and local taxes (SALT): Recent legislation limits annual SALT deductions to $10,000 for 2018-2025, but itemizers still need relevant records of SALT payments.
Charitable donations: If you itemize, you generally need records for both monetary gifts and donations of property, plus appraisals for property valued above $5,000.
Mortgage interest: Itemizers must have Forms 1098 for mortgage interest on acquisition debts that remain deductible.
Medical expenses: Collect records and receipts for medical expenses that may push you above the “floor” of 7.5 percent of adjusted gross income (AGI) for 2018.
Education expenses: Provide information required for claiming higher education credits, including Forms 1098-T.
Under the new legislation, you may not need records this year for miscellaneous expenses, many casualty and theft losses, moving expenses and home equity debts. Call Carl Heinemann, your Chattanooga CPA, if you have tax record questions about your particular situation.
Business taxes involve a lot of paperwork, and those papers typically contain a lot of personal financial information. Are you taking steps to make sure your records are secure? Here are a few tips to help:
Secure sensitive employee materials. As an employer, you’re required to collect Social Security numbers and other identification, such as copies of drivers’ licenses. Keep this sensitive information secure by restricting physical access to printed or copied documents, using passwords on your accounting software, and creating a unique identifier for employee IDs.
Some states require that you safeguard the information obtained from job seekers, such as shredding applications after a certain period of time.
Protect important numbers. Truncate Social Security numbers on the paper copy of Forms 1099 that you send to your vendors. Instead of displaying the full nine digits, replace the first five numbers with asterisks or Xs.
Encryption is key. When sending data to your accountant for tax return or payroll preparation, be sure to use encrypted email or upload files to a secure digital storage service site.
Keeping accounting information from falling into the wrong hands is a growing concern for many businesses. Give Carl Heinemann, your Chattanooga CPA, a call if you have questions.
Health savings accounts (HSAs) have been around a long time, and little has changed since they were first introduced in 2003. They offer tax benefits, many of which you can benefit from if you know how. Here’s a refresher on how HSAs work:
An HSA has two parts. These parts include a high-deductible health insurance policy and a savings account. The idea is simple: You buy a health plan with a high deductible, and you deposit cash into a savings or investment account to pay the policy deductible and other qualified out-of-pocket medical expenses.
Contributions are tax-deductible. The tax benefit comes from the way the savings account part of the HSA works, which is similar to a traditional individual retirement account. For example, you can claim a federal income tax deduction for contributions to your HSA, and the deduction is above the line, meaning you can benefit without having to itemize.
Contribution amounts change. For 2018, the maximum tax-deductible contribution is $3,450 when the insurance plan covers only you, or $6,900 when you purchase an insurance plan for your family. When you’re age 55 or older, you can contribute (and deduct) an extra $1,000.
There are rules around withdrawals. Interest, dividends or other growth in the account is tax-free as long as you use withdrawals for qualified medical expenses. But what happens if you use the money for other purposes? The withdrawals are included in income, taxed at your regular rate, and subject to a 20-percent penalty. If you are 65 or older, you can withdraw money from your account for any reason without paying a penalty.
Keep in mind that other rules apply, including the opportunity to fund an HSA with a tax-free rollover from your individual retirement account.
Call Carl Heinemann, your Chattanooga CPA, if you have questions about how you can make the most tax-savvy choices with your HSA.