WASHINGTON TAX UPDATE

Transcription

1 WASHINGTON TAX UPDATE JUNE 27, 2012 Welcome to Washington Tax Update, where you will find useful information about taxes, including current events in our nation s capital, as well as informed opinions and predictions about what is expected to happen. Tax Look Inside Tax Planning Tip of the Week IRS Courts What s New from the IRS What s New from the Courts It Bears Repeating Tax Laughs Congress

2 tax planning tip of the week Graduate, get a job with benefits and pay your taxes If your child recently graduated from high school or college and is starting a full-time job with benefits, now is a good time to review relevant tax issues. New hires should make sure they set the right level of withholding. They are asked to complete Form W-4, Employee s Withholding Allowance Certificate, to allow the employer to calculate how much federal and state income tax to withhold from each paycheck. More withholding allowances result in less income tax being deducted. Graduates starting a new job may be eligible to receive benefits provided by their employer. The type of benefits offered will vary from employer to employer. Typical employee benefits include: Health insurance benefits Some employers subsidize the cost

3 of health insurance premiums, with the employee paying a portion and the employer paying the remainder. Other employers have employees pay the full cost of the benefits. Amounts paid by the employer aren t added to gross pay. These payments are not subject to the federal income tax, Social Security and Medicare taxes, and possibly state income taxes. Medical expense reimbursement Some employers offer reimbursements for out-of-pocket medical expenses. Reimbursements may be made directly by the employer or through a flexible spending account (FSA) or a health savings account (HSA). These two types of accounts have subtle differences. FSAs must be used up during the year, and any unspent funds are forfeited. HSAs can accumulate funds year after year without a forfeiture feature. tax planning tip of the week

4 tax planning tip of the week Some employers fund all or part of the HSA, which is tax-free to the employee. Funds contributed by an employee to an HSA may be tax-deductible. Life insurance coverage Some employers sponsor a group term life insurance plan. These plans provide employees with the opportunity to purchase term life insurance at a group rate. If the employer pays part or all of the cost of the insurance, premiums on the first $50,000 of coverage are tax-free to the employee. Retirement savings plans Many employers offer a group retirement savings program for their employees. Such plans are designed to enable employees to set aside either a percentage of their income or a fixed-dollar amount each paycheck. The earlier people start saving, the less they may need to set aside later in life to reach their retirement goals. Those savings are deposited in a separate trust managed by the employer.

5 There are several types of retirement savings plans offered by employers. The most common are the 401(k) plan and the 403(b) plan. These plans provide the opportunity for employees to save money on a pretax basis. As an option, the employer may contribute additional funds. While investments in these accounts generally accumulate tax-free, taxes may be imposed when funds are distributed from the account, and additional penalties may occur if an employee withdraws funds prior to reaching retirement age. Some plans also permit additional after-tax contributions. Transit benefits Some employers offer subsidies for taking public transit, carpooling or bicycling to work. Depending on how the plan is designed, these benefits can be tax-free to the employee. Education benefits Some employers offer subsidies for employees to continue their college studies. Employers can reimburse employees tax-free for tuition expenses of up to $5,250 per year. For 2012, this benefit is also available for graduate-level courses. tax planning tip of the week

6 what s new from the IRS Going strong at 70½: Delay required minimum distributions? If your company has discovered the advantages associated with hiring older workers like know-how, experience, work ethic, etc. you may be interested in the conclusion articulated by the IRS in its spring 2012 issue of Retirement News for Employers. This IRS publication addressed the required minimum distribution (RMD) question when a new hire who is 70½ or older rolls over a distribution from a prior employer s retirement plan to a new employer s plan. As a general rule, RMDs must begin when a person reaches age 70½.

7 However, an employer s plan may permit the delay of required minimum distributions until the employee retires. The IRS has stated that when a new hire must begin to receive RMDs from amounts rolled over into the new employer s plan depends on the terms of the new employer s plan. If the terms of the plan allow employees over 70½ to delay required minimum distributions until they no longer work for the company, the plan is not required to make RMDs to the newly hired employee until that time unless the new employee owns 5 percent or more of the company. If the terms of the plan call for RMDs to be paid to employees over 70½, even if they continue working for the company, the plan must make these distributions to the new employee, too. If the employee is a 5 percent or greater owner of the business, the plan must make required minimum distributions even while the new employee continues to work for the company. Read the IRS analysis. what s new from the IRS

8 what s new from the courts Court settles donation deductibility question A recent decision of the Second Circuit Court of Appeals has allowed deductions for a charitable contribution of a façade easement and a related cash contribution, which previously had been disallowed by the Tax Court. In 2003, Huda Scheidelman applied to a charity to donate a façade easement for a building she owned in Brooklyn. She hired an appraiser who valued the easement at $115,000. Before accepting the donation, the charity insisted that Scheidelman make a cash contribution of $9,275 to defray the charity s operating cost for managing the easement. The IRS denied both deductions. It said the appraisal was inadequate and that, in exchange for the cash contribution, Scheidelman received valuable services from the charity acceptance of the easement. In a 2010 decision, the Tax Court agreed with the IRS.

9 The appellate court accepted the appraisal. More importantly for taxpayers who make cash contributions along with property contributions, the court ruled that Scheidelman received nothing of value in return for her cash contribution. The court concluded that a cash contribution even a mandatory one that helps to administer another charitable contribution is itself deductible (Huda T. Scheidelman v. Commissioner, 109 AFTR 2d 2012-XXXX, CA2, June 15, 2012). A charity s agreement to accept a gift does not transfer anything of value to the donor, even though the donor may desire to have the gift accepted and may expect to derive benefit elsewhere, such as by deductibility of the gift on an income tax return.

10 it bears repeating If it looks like a tip and feels like a tip is it a tip? The IRS has updated its rules concerning businesses whose employees receive tips from customers as part of their compensation primarily affecting restaurants and certain other businesses. As a general rule, employees who receive tips must pay income tax on the amounts they receive. In addition, employees are supposed to report tips to their employer so the employer can withhold the appropriate amount for income taxes, Social Security taxes and Medicare taxes. Although employers normally pay an amount equal to the amount the employee pays into the Social Security and Medicare systems, in most

11 cases, employers receive a credit against their income tax to offset their share of the Social Security and Medicare taxes applied to tips. An exception applies, and the employer must pay the taxes, to the extent the employee s total compensation is less than $5.15 per hour. In the new guidance, the IRS reiterates the fact that a customer payment is a tip only if four conditions are met: The payment is made free of compulsion. The customer has an unrestricted right to determine the amount. The payment is not the subject of negotiation, nor is it dictated by employer policy. The customer has the right to determine who receives the payment. As an example, the IRS guidance addresses a situation in which a restaurant automatically adds an 18 percent tip for parties over a certain number of persons. The restaurant then takes this amount and distributes it among employees who served the party. In this situation, the IRS restates its previous position that this type of service charge is not a tip. As such, the restaurant is liable for its share of the Social Security and Medicare taxes on the amounts distributed to employees. The IRS also issued a memorandum to its field examiners specifying that, in limited circumstances, the examiner may apply the service charge rule prospectively to amounts paid after Jan. 1, 2013, to allow businesses not currently in compliance additional time to amend their business practices and make needed systems changes. However, the additional time is small comfort to businesses that all along have correctly complied with the service charge rule. The IRS will not allow them to apply for a refund of their previously paid Social Security and Medicare taxes, even though businesses out of compliance were able to receive and keep credits to offset those taxes. Read more in Revenue Ruling it bears repeating

12 tax laughs Now that s a refund! An Oregon woman has been charged with tax fraud. How did she allegedly do it? She bought herself a home-use tax preparation program. She prepared and electronically filed an Oregon state income tax return erroneously showing $3 million of income and claiming a $2.1 million refund. Apparently, the Oregon Department of Revenue has some checks and balances in place. According to news reports, the return was flagged because of the large refund, and several people at the department reviewed the filing before allowing the system to process the refund. Eventually, a debit card was issued with $2.1 million on it. Apparently, no one at the card issuer thought to question the amount on the card. In a shopping spree that lasted several weeks, the perpetrator managed to spend about $150,000. How was she caught? She reported another debit card from the same issuer as lost or stolen. Finally, that action caused someone to look at the unusual circumstances and contact the authorities. All good is hard. All evil is easy. Dying, losing, cheating, and mediocrity is easy. Stay away from easy. Scott Alexander, American author

13 Courts Tax IRS Congress The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS CPAmerica International