Month: October 2019

Job applicants look at more than just wages when evaluating potential employers. They consider the whole compensation package, including fringe benefits and perks. These add-ons enable employers to cast a wider net in the job market, helping them attract and retain top-quality workers.

Unfortunately, tax breaks for some fringe benefits were eliminated or suspended by the Tax Cuts and Jobs Act (TCJA). (See “Some TCJA Provisions Could Cost You” at right.) However, some other fringe benefits are still deductible by employers and tax-free to employees.

Some TCJA Provisions Could Cost You

The Tax Cuts and Jobs Act (TCJA) includes tax breaks for both individuals and businesses. But some breaks were limited or eliminated. Notably, the rules for some employer-provided fringe benefits are less taxpayer friendly than before.

For example, tax-favored treatment for certain transportation fringe benefits has been cut by the TCJA. Employers can no longer deduct the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. Employers also can’t deduct qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. These benefits are still tax-free to recipient employees. But the tax-free amount can’t exceed a maximum monthly dollar limit, adjusted for inflation, which is $265 for 2019.

The TCJA also temporarily eliminates tax-free employer reimbursements for job-related moving expenses (except for certain military personnel). Any employer reimbursements must be reported as taxable income on a nonmilitary employee’s W-2. This provision is effective for 2018 through 2025.

In addition, under the TCJA, employers can deduct only 50% of the cost of meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. (Under the pre-TCJA rules, these meals were 100% deductible by the employers and tax-free to the recipient employee.)

After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises won’t be deductible at all. Nevertheless, the meals will continue to be tax-free to employees as a de minimis benefit.

Other benefits that remain taxable to employees and nondeductible by employers under current law include:

• Excessive mileage reimbursements,
• Excessive education benefits,
• Work clothing suitable for regular wear,
• Cash awards and prizes, and
• Personal use of a company vehicles.

For more information about the tax rules for fringe benefits, contact your tax advisor.

Here are 14 popular benefits that remain on the books after the TCJA.

1. Achievement awards. The tax law defines “achievement award” as an item of tangible personal property granted to an employee for either length of service or promoting safety. Examples include gold watches and smartphones. For a written qualified plan, the maximum tax-free award is $1,600, while the maximum for a nonqualified plan is $400.

2. Athletic facilities. Employees can benefit from tax-free use of an onsite athletic or health club facility if the employer operates it. Such a facility is available to the employee, his or her spouse and any dependents. Furthermore, it may be used by retired employees and shareholder-employees. This category of benefits includes gyms, tennis courts and pools.

3. Company vehicles. As a general rule, the use of a company-provided vehicle for business is tax-free to the employee. However, the value of personal use (other than “de minimis” use) must be included in the employee’s taxable income, based on special IRS computations.

4. De minimis benefits. These tax-free perks can range from free use of the company’s copying machine for personal reasons to free coffee, soft drinks and donuts. It also includes most birthday gifts from the company and holiday hams or turkeys.

5. Dependent care assistance. The first $5,000 of dependent care assistance paid by an employer under a written plan is tax-free to employees. To qualify, the dependent must be:

A child under age 13, A child who is physically or mentally unable to care for himself or herself, or A spouse who is physically or mentally incapable of self-care. However, the amount of the exclusion can’t exceed the earned income of a single employee or the earned income of the lower-paid spouse if the employee is married.

6. Educational assistance plans. A company can provide tax-free payments of up to $5,250 for college or graduate school tuition, books, fees and supplies under an educational assistance plan. The courses covered under the plan do not have to be related to the job. But any payments for courses involving sports, games or hobbies are covered only if the course is job-related or required as part of a degree program.

7. Employee discounts. A company can provide tax-free discounts to employees on its products or services. For products, the discount percentage can’t exceed the gross profit percentage of the price at which the product is offered to regular customers. For services, the discount percentage can’t be more than 20% off the price at which the service is offered to regular customers.

8. Group-term life insurance. This is usually a prized perk for highly-paid executives, even though there’s a tax price attached to “excess” coverage. Only the first $50,000 of coverage under a group-term life insurance plan is tax-free. For instance, if an executive earning $150,000 is covered at three times salary, he or she owes tax on $400,000 of coverage ($450,000 – $50,000). The tax hit, which is computed under an IRS table based on the employee’s age, is generally reasonable.

9. Health insurance. Premiums paid by an employer under a health insurance plan are tax-free to the employees and deductible by the employer as long as the plan is open to rank-and-file workers. Additionally, employees can take advantage of tax-favored flexible spending accounts (FSAs) for qualified healthcare expenses and Health Savings Accounts (HSAs) funded by employers.

10. Mobile phones. The value of the business use of an employer-provided mobile phone provided primarily for noncompensatory business reasons is excluded from taxable income. Generally, this covers employer-provided devices that are to be used for business purposes.

11. Professional and civic organization dues. Dues paid by an employer on behalf of employees to professional and civic organizations are tax-free. But there must be a business purpose to having membership in the organization. It can’t just be a social club.

12. Qualified retirement plans. Generally, contributions provided under 401(k), pension, profit-sharing or other qualified retirement plans are exempt from tax and these amounts can grow without any current tax erosion until employees make withdrawals. Also, contributions are subject to generous annual limits, including potential matching contributions to a 401(k) by an employer, but strict nondiscrimination requirements must be met.

13. Supper money. This is tax-free to employees if it’s 1) provided only on an occasional basis and 2) due to special circumstances. In the case of meals or meal money, the benefit must be provided to enable the employee to work overtime, even if the need to work overtime was foreseeable. The employer can deduct 50% of the cost.

14. Working condition fringe benefit. This includes property or services provided to employees so they can do their jobs. Examples include job-related education and business-related travel costs.

As you can see, there are still plenty of opportunities for employers to reward employees with tax-free benefits even after the TCJA changes. Contact your tax advisor to discuss the best options for your situation.

Reducing your current-year adjusted gross income (AGI) is usually a tax-smart idea. Here are ten ways to reduce your AGI (and modified AGI) over the short and long run.

Closeup on AGI

AGI equals all taxable income items minus selected deductions for such items as deductible IRA and retirement plan contributions and alimony payments required by pre-2019 divorce agreements.

Lowering your AGI reduces your taxable income for the year and your exposure to unfavorable AGI-based provisions. For example, lowering AGI can increase the amount of Social Security benefits that you can receive federal-income-tax-free and increase your allowable higher education tax credits.

5 Ideas for 2019

It’s not too late to reduce your AGI for the current tax year. Consider these last-minute tax planning strategies:

1. Sell loser securities held in taxable brokerage firm accounts. The losses can offset earlier gains in such accounts. This will also help higher-income taxpayers reduce their exposure to the 3.8% net investment income tax (NIIT). Note: Without gains to offset, losses aren’t that helpful because they’re limited to $3,000 per year. If your net capital loss is more than this limit, you can carry the loss forward to later years.

2. Gift soon-to-be-sold appreciated securities to family members. Assuming the recipient is in a lower tax bracket, this strategy also can help reduce tax owed on the gain. But beware of the kiddie tax, which can potentially apply until the year your gift recipient turns 24.

3. Donate appreciated securities, rather than cash, to IRS-approved charities. The charity won’t owe tax on the gain — and you’ll get a deduction for the full fair market value of the donated securities if you’ve held them for more than a year. This strategy can also help higher-income taxpayers reduce their exposure to the 3.8% NIIT.

4. Maximize deductible contributions to tax-favored retirement accounts. Contribute as much as is allowed (and you can afford) to 401(k) accounts, self-employed SEP accounts, self-employed SIMPLE IRAs and other tax-favored retirement accounts. As a bonus, you’ll have a bigger nest egg when you retire.

5. Defer revenue from small businesses and accelerate business expenses. If you’re a cash-basis self-employed individual, you can take steps to postpone collections until 2020 or, conversely, accelerate deductions taken in 2019. For example, you might delay billing a customer until January for work completed near year end, or you might prepay deductible business expenses using a credit card.

5 Long-Term Strategies for Future Years

Sometimes taxpayers need to consider the long-term view — even if they might have to pay extra taxes in the short run. The following moves could help significantly over the long run, especially if tax rates are higher in future years:

1. Convert traditional retirement account balances to Roth accounts. The deemed taxable  distributions that result from Roth conversions will increase AGI and potentially your exposure to the 3.8% NIIT in the conversion year. However, income and gains that build up in a Roth IRA won’t be included in your AGI in future years. That’s because qualified Roth distributions are federal-income-tax-free. Qualified Roth distributions are also free of the 3.8% NIIT.

In contrast, the taxable portion of distributions from other types of tax-favored retirement accounts and plans will be included in your future-year AGI. Plus, they’ll increase your future-year exposure to the 3.8% NIIT.

2. Invest taxable brokerage firm account money in growth stocks. Gains aren’t taxed until the stocks are sold. At that time, the negative tax impact of gains often can be offset by selling other securities that will incur losses for tax purposes. In contrast, stock dividends are taxed currently, and it may not be as easy to offset them.

3. Invest more taxable brokerage firm money in tax-exempt bonds. This would reduce your future AGI and your future exposure to the 3.8% NIIT. You can use tax-favored retirement accounts to invest in securities that are expected to generate otherwise-taxable gains, dividends and interest.

4. Invest in rental real estate and oil and gas properties. Rental real estate income can be offset by depreciation deductions; oil and gas income can be offset by deductions for intangible drilling costs and depletion. These deductions will reduce AGI.

5. Invest in life insurance products and tax-deferred annuity products. Life insurance death benefits are generally exempt from both federal income tax and the 3.8% NIIT. Earnings from life insurance contracts and tax-deferred annuities aren’t taxed until they’re withdrawn.

Multiple Levels of Tax Savings

Some of these strategies can reduce both your regular federal income tax (FIT) bill and, if applicable, your NIIT bill. If you’re self-employed, some may also lower your self-employment tax bill. Finally, these strategies can also reduce your state income tax bill, if you live in a state that assesses a personal income tax.

Some strategies may take some time to implement, however. There’s no time like the present to identify AGI-reduction strategies that can help your situation. Contact your tax advisor for more information.