Employee Relocation in a Suffering Market

Posted by Bruce Mc on Sep 28, 2010 in Information, saving money, Tax Preparation | 0 comments

Many companies are asking what to do about an employee’s home when he or she is moved to a new job location. With the real estate market in a downturn throughout much of the country, this is a tough and costly question.

Typically, the employer wants to protect the employee against financial loss on a “forced” sale of the home. Here are the most common ways to do that, and their consequences to the employee:

The employer reimburses the employee’s financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between that appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee’s costs of the sale.

Note: The financial loss here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax loss on the sale of one’s residence is not deductible.

The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross-up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $14,575 for an employee in the 35% bracket – more where Social Security taxes or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through use of relocation firms acting as the employers’ agents. An IRS ruling shows how to do this with no tax on the employee:

Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee and the gain is tax exempt under the above limits.

Tip: Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

Caution: If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

Note: It’s fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.

Note: Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Questions?

Are you an employee being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? Are you an employer with a need to move an employee. I can answer your questions. Just give me a call.

Hiring Family Members For your Business

Posted by Bruce Mc on Jul 8, 2010 in Employee, Information | 0 comments

Employing your Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (aka Medicare or HI) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. accordingly, the child will not be required to pay the employee’s share of the FICA taxes and the business won’t have to pay its half either.  In addition, by paying the child, and consequently reducing the business’s net income.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.  However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings – Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2010, the child can make a tax-deductible contribution of up to $5,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($5,700) and the maximum deductible IRA contribution ($5,000) for 2010, a child could earn $10,700 of wages and pay no income tax.

Hiring Your Spouse – Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction.  The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled.  In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse.  While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee.

If the spouse was unemployed (worked less than 40 hours) during the prior 60-day period, the employer will qualify for exemption from the employer’s 6.2% share of the Social Security payroll tax on the spouse’s wages for the remainder of 2010.  If the spouse continues to work for an uninterrupted period of 52 weeks, the business would also be entitled to a retention credit of up to $1,000 in 2011. (Unemployed relatives such as children, siblings or parents whom you may hire are not qualified employees for this credit.)

Originally written for another blog.  Edited here by Sandi and republished for your information.

Do I have to File a Tax Return?

Posted by Bruce Mc on Feb 17, 2010 in Form 1040 Information, Information, Tax Preparation | 0 comments

IRS Tax Tip 2010-17

Do I have to File a Tax Return? 

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

Check the Individuals section of IRS.gov or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with the IRS this year.

Even if you don’t have to file, here are eight reasons why you may want to file:

1. Federal Income Tax Withheld If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.
2. Making Work Pay Credit You may be able to take this credit if you have earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.
3. Government Retiree Credit You may be eligible for this credit if you received a government pension or annuity payment in 2009. However, the amount of this credit reduces any making work pay credit you receive.
4. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.
5. Additional Child Tax Credit This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
6. Refundable American Opportunity Credit This education tax credit is available for 2009 and 2010. The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.
7. First-Time Homebuyer Credit The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. The credit applies to homes bought anytime in 2009 and on or before April 30, 2010. However, you have until on or before June 30, 2010, if you entered into a written binding contract before May 1, 2010. If you bought a home after November 6, 2009, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.
8. Health Coverage Tax Credit Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2009 tax return.

For more information about filing requirements and your eligibility to receive tax credits, visit IRS.gov.

Links:

• Forms and Publications
• Earned Income Tax Credit
• First-Time Homebuyer Credit Information Center
• Health Coverage Tax Credit
• 1040 Central

IRS on Publication 17

Posted by Bruce Mc on Jan 27, 2010 in Form 1040 Information, Information, Tax Preparation, Things forgotten | 0 comments

Five Facts about IRS Publication 17 

While the Internal Revenue Service provides publications about a wide range of topics, there is one publication every taxpayer should have with them when they are preparing their federal tax return. Publication 17, Your Federal Income Tax is available at IRS.gov and contains a wealth of information for individual taxpayers.

Here are the top five things the IRS wants you to know about Publication 17 and how it will come in handy when you prepare your taxes.

1. The online version of Publication 17 contains electronic links that make finding your answer simple.  Both the downloadable PDF and online 2009 Publication 17 have more than 6,000 hyperlinks.
2. Publication 17 features details on recent tax law changes and legislation that can help you save money at tax time. You’ll find lots of helpful information about the American Recovery and Reinvestment Act of 2009, including the Making Work Pay Credit and the First-time Homebuyer Credit.
3. This publication is packed with basic tax-filing information and tips on what income to report and how to report it. Publication 17 also includes information on figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and using IRAs to save for retirement.
4. Publication 17 is also available in Spanish. – Publicación 17 también está disponible en español. Formato pdf
5. You can get a hard copy of Publication 17 for free. To get a copy, visit IRS.gov or call 800-TAX-FORM (800-829-3676).

 
Links:

• Publication 17, Your Federal Income Tax
• Publication 17, Your Federal Income Tax (PDF 2085K)

this is IRS Tax Tip 2010-18

How do I know if I have to worry about the AMT?

Posted by Bruce Mc on Nov 19, 2009 in AMT, Information, Opinions | 0 comments

          One of the big problems with the AMT, there’s no good answer to this common question. You can owe AMT liability due to any number of reason/s. Could be just one thing, could be a lot of little things. Some things that can contribute to an AMT liability are mundane items that appear on many tax returns. (See this list Top 10 Things that Cause AMT Liability.)

          If you use computer software to prepare your tax return, the program should (I would hope) be able to do the AMT calculations for you. If you’re preparing your return by hand, the only way to know for sure is to fill out IRS Form 6251 – a very laborious process, on that I charge almost $80.00 for, and that price is adjusted (usually up) almost every time.

         The best way to understand the alternative minimum tax liability is to see how it’s calculated. So, here’s what you do.

         First, you figure the amount of tax you would owe under the different rules. What’s different about these rules? Roughly speaking, there are three things:

1. Various tax benefits that are available under the regular tax are reduced or eliminated.
2. You get a special deduction called the AMT exemption, which is designed to prevent the AMT from applying to taxpayers with modest income. This deduction phases out when your income reaches higher levels, a fact that causes significant problems with the alternative minimum tax.
3. You calculate the tax using AMT rates, which start at 26% and move to 28% at higher income levels. By comparison, the regular tax rates start at 10% and then move through a series of steps to a high of 35%.

          The result of this calculation is the amount of income tax you would owe under this “alternative” system of tax.

          Okay, got that number? Now then, compare this “tax” with your regular tax. If the regular tax is higher, you don’t owe any AMT. However, if the regular tax is lower, the difference between the two taxes is the amount of AMT you have to pay.

         You should definitely run the numbers if your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest. if your income is over $150,000, run the numbers just because.

        Running the numbers means filling out Form 6251. In effect, you are simply adding back some tax deductions and income exclusions to your regular taxable income to arrive at your new alternative minimum taxable income (AMTI).

“Here is where the middle class gets screwed by the goat. If you are planning on doing all this on your own please call a tax pro for some guidance and a better understanding.”

         The AMT form has quite a few other pluses and minuses, but you can probably ignore them unless you own a business, rental properties or interests in partnerships or S corporations. If you do, you may need a tax pro to prepare at least the Form 6251 part of your return for you.

         Finally, you get to deduct the AMT exemption however, this exemption is reduced by 25 cents for each dollar of AMT taxable income above $150,000 for couples ($112,500 for singles and $75,000 for married filing separate status), and it’s not adjusted for inflation, which is one of the reasons why more people owe the AMT every year.

         After the exemption (if any) has been deducted, the result is subject to AMT rates. Again, the AMT brackets are not adjusted for inflation, which causes much greater exposure to the tax as the years go by. If the AMT exceeds your regular tax, you have to pay the greater amount. Basically, the AMT is just more tax, above and beyond your regular tax. Technically, the AMT is just the liability over and above the regular tax, and this figure is entered on page 2 of Form 1040.

Other notes:

         To calculate and report your AMT liability you need to fill out Form 6251, Alternative Minimum Tax – Individuals. If you use this form by all means please read the instructions.

         You’re required to take your AMT liability into account in determining how much estimated tax you pay. For information about estimated tax payments, see this Guide to Estimated Tax.

The Truth About Paying Fewer Taxes.

Posted by Bruce Mc on Feb 28, 2009 in Deductions, Form 1040 Information, Opinions, Tax Preparation, Taxes | 4 comments

             I read a lot about the taxing world. Often I am searchingto find books to recommend to my clients to give them a better understanding how a tax return works and what is needed to make it work best and what they can do to minimize their liability. The Truth About Paying Fewer Taxes is by far the best book I have ever come across to accomplish just that.

The Truth About Paying Fewer Taxes is a book with “52 Truths” about taxes. It plainly answers questions like ”do you have to file?”, to “when?”, to figuring out just what is taxable all the way through to retirement. Also covering Compliance, Audits, and Special Tax Situations The Truth About Paying Fewer Taxes will give you a better understanding of taxes, thus giving you what you need to cut your taxes.

            The Truth About Paying Fewer Taxes, is a book written by Kay Bell. Kay is a fellow tax blogger (Don’t Mess With Taxes, Taxes: Eye on the IRS), She helped create Bankrate.com’s tax channel and continues to be a major contributor to Bankrate’s Tax Guide. I have had occasion to talk with Kay on the phone, and I communicate regularly with her via Twitter.

Kay’s writing is beautiful and gentile, like reading a great novel.

You can see a full list of the 52 truths just by looking at Barnes and Nobel’s Feature tab for The Truth About Paying Fewer Taxes Each one of the truths is explained in detail and in plain language, so you can save money and understand why you’re saving money.

I have been recommending this book to every one of my clients, and will continue to do so from now on.

I have a signed copy (yes, signed by Kay Bell the author) of The Truth About Paying Fewer Taxes and will be giving it away here.

How to enter:

Each of the following will count as one entry for a chance to win.

Please read the Contest Terms below.

ü  Leave a comment on this post stating how you prepared or will prepare your taxe return. (self, fast-food chain, CPA, software, free-file, Other-please describe)

ü  Subscribe to my RSS feed and leave a comment below to let me know you did so, or

ü  Subscribe to my email feed leave a comment here using the same email address with which you subscribed. (this will gain you two entries for the drawing)

ü  Blog about this contest and link back here from your blog. (Leave me a comment and link to your blog post here to let me know.)

ü  Follow me on twitter – @bruce_taxguy. Leave a comment here with your twitter username.

ü  Tweet about this contest and leave a comment to let me know you did so.

Bonus Entries: Leave comments on other posts on this blog. If you’re new to taxguy, visit earlier posts. The comment(s) must show some thought and not just “I agree” or “Great idea.” Come back to this post and let me know which post(s) you commented on. Each approved comment will gain you an additional entry.

Contest Terms

Ø  The contest begins now and ends at 11:59PM EST on March 17^th, 2009. Comments to this post will be closed at that time.

Ø  1 winner will be randomly selected using a random integer generator at random.org.

Ø  I will contact the winner via the email address used to comment here.

Ø  The winner will have 3 days to respond with necessary contact information for mailing prize. (I will send a 2nd notification email after 2 days if we have not heard back.)

Ø  If the winner does not respond after 4 days, a new winner will be selected from remaining entrants.

Prize Terms

While I will do my best to ensure proper delivery of the winners autographed copy of The Truth About Paying Fewer Taxes, I am not liable for non-delivery due to:

v  Incorrect mailing and contact information provided by the winner

v  Loss or error on the part of the postal service or delivery personnel

v  Any other matter beyond my control

Some IRS History. . .

Posted by Bruce Mc on Aug 29, 2008 in Form 1040 Information, History, Taxes | 4 comments

             The U.S. government’s privilege to levy taxes was incorporated into the Constitution in 1787. The responsibility for how to collect these taxes fell to the Treasury Department where it has stayed. 30years later the issue of taxes was abandoned due to our governments needs were being met by taxes on imports. So no more taxes for citizens.

            45 years later the Revenue Act of July1, 1862 was signed by President Lincoln due to the outbreak of the Civil War and the governments need for funding it. This established our nation’s first real income tax. The Internal Revenue Service is officially born.

            When the war ended, as before, the nation’s financial needs were being met by the taxes on imports, along with taxes on tobacco and alcohol. This resulting in some 90% of our internal revenue. In 1872 (10 years after its birth) the “income tax” was once again abolished.

            Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.

            18 years after the Supreme Court ruling, Wyoming ratification of the 16^th Amendment, provided the three-quarter majority of states necessary to amend the Constitution. The 16^th Amendment gave Congress the authority to more or less re-enact an income tax. That same year, the first Form 1040 appeared after Congress levied a one percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.

            Five years later, during World War I, the top rate of the income tax was raised to 77 percent to help finance the war effort. In the post-war years, that dropped down to 24 percent by 1929, and rose again during the Depression.

During World War II, Congress introduced payroll withholding and quarterly tax payments.

I am compiling a historical highlight section for my website that I don’t have completed (not that my site is up yet either) yet but when it is going I will be directing more to it and from it.

If you want to get a look at what the first 1040 form looked like with it’s instructions follow the link below to where the IRS has as a pdf file reproduction.

“first 1040 form and instructions”

Some things of interest to notice:

1.                           Taxes were only paid on income above $3,000, equivalent to $61,000 in today’s dollars, at the initial rate of only 1%.

2.                            The highest marginal tax rate in 1913 was 6%, which applied to income above $500,000, equivalent in today’s dollars to a little over $10 million.

3.                           The entire 1040 tax form in 1913, including all forms and instructions, and was only 4 pages. All instructions in 1913 were contained on a single page, compared to the 2007 1040 Instructions, which held 92 pages long, (without any forms).