NEW FEDERAL OVERTIME PAY RULES PUT ON HOLD

Transcription

1 INSIDE THE WINTER 2017 ISSUE TIME IS RUNNING OUT - DON T MISS OUT ON A GREAT TAX BENEFIT! BENEFICIARY OF YOUR INDIVIDUAL RETIREMENT ACCOUNT? IRS PENSION PLAN LIMITATIONS AND TAX BENEFITS FOR 2017 NEW FEDERAL OVERTIME PAY RULES PUT ON HOLD By CJ Stroh, Esq. Due to changes in the Fair Labor Standards Act ( FLSA ) that were announced in May, certain workers that were previously exempt from overtime pay were slated to become eligible for such benefits starting December 1, More specifically, the minimum salary that an executive, administrative or professional employee would need to earn in order to be considered exempt from overtime pay would increase from $23,660, $455 per week, to $47,476, $913 per week. However, just days before the effective date of the new rule, a federal judge in Texas issued a preliminary injunction against the Department of Labor ( DOL ) in regard to the new FLSA regulations. Twenty-one states filed an emergency motion for a preliminary injunction, and the cases were consolidated in October. By definition, an injunction is only a temporary halt that preserves the status quo until either the stay is lifted or a decision is made in the case. As a result, the existing overtime rules, including the salary threshold of $23,660, remain in effect for the time being. But employers should not assume that the changes to FLSA will be permanently defeated, and should remain prepared to move forward in complying with the new rules. In the previous months, employers may have taken action in anticipation of the December 1 effective date. With the injunction in place, the opposition to the FLSA changes is not meritless. But during this time, there are a number of important items to be considered: If an employee was awarded a salary increase in order to meet the proposed minimum salary of $47,476, employers should consider the impact on the employee and within the work environment of rescinding any such salary increases. If employers have already reclassified employees as non-exempt and have communicated the changes to the employee, employers should again consider the impact on the employee and within the work environment of halting or reversing the employee s status change. Many employers have made system changes, i.e. human resource software, timekeeping, etc., that would make a reversal of employee status difficult and/or expensive to implement. BE IN A POSITION OF STRENGTH SM withum.com

2 NEW FEDERAL OVERTIME RULES PUT ON HOLD (CONTINUED) KEEP IN MIND THAT THE INJUNCTION IS ONLY A TEMPORARY HALT, SO IT MAY BE WISE FOR EMPLOYERS TO MAKE NO FURTHER CHANGES OR REVERSALS UNTIL THE ISSUE IS DECIDED. Other FLSA tests must be met in order for an employee to be considered exempt from overtime pay, such as classification as executive, administrative, professional/creative, outside sales that occur and status as highly compensated employee. Further, some roles are automatically considered non-exempt, regardless of salary. Thus, employers should not be solely hung up on the salary threshold issue. Keep in mind that the injunction is only a temporary halt, so it may be wise for employers to make no further changes or reversals until the issue is decided. With that said, these FLSA changes were put into place via executive order by President Obama. If the changes are ultimately upheld by the courts, it is unclear what action President Trump and the new administration would take, if any whether that be leaving the new rules in place, limiting the impact of the new rules or working to rescind the changes altogether. TIME IS RUNNING OUT - DON T MISS OUT ON A GREAT TAX BENEFIT! By Jim Bourke, CPA, CITP, CFF, CGMA If you are a company that innovates, there s a well-known, but so often under-utilized, tax credit sitting there, waiting for you to claim. The Research & Development credit, once only available to companies that were profitable, may now be utilized by companies in start-up mode that are spinning-off losses as a credit against the employer share of the Federal Insurance Contributions Act (FICA) beginning in If you are a technology company with employees or subcontractors engaged in code development, you are likely already contributing to the largest bucket of deductible expenses that are factored into computing the credit. Regardless, if you are a C-Corp, S-Corp, Partnership or Limited Liability Company, in business for six months or 60 years, some form of this credit could be available to you. Our team of R&D experts in our Technology Services Group is ready to jump on this year-end planning opportunity and help you to identify dollars that you might otherwise be leaving on the table.

3 SHOULD YOU CREATE A TRUST TO BE THE BENEFICIARY OF YOUR INDIVIDUAL RETIREMENT ACCOUNT? By Robert Demmett, CPA, MS From the time we started in the work world we have been advised to set aside a part of our salary in retirement savings. As I advise my children, buy less Starbucks coffee and put the weekly savings into your 401(k) plan. As a result of this good advice, most people are finding that they have a significant percentage of their assets in retirement accounts, usually an Individual Retirement Account (IRA). One of the best things about an IRA is that a non-spouse beneficiary, after the death of the IRA owner, can stretch out the time period for taking distributions over their life expectancy. Think of the compounding effect as the funds in the inherited IRA continue to grow without any tax bite. That growth can be phenomenal. The beneficiary of the IRA makes the decision as to whether to stretch distributions or to withdraw it in a lump sum. This may concern the owner of the IRA. They may be concerned that when the IRA beneficiary makes this decision they may be a minor, disabled, incompetent or unsophisticated in financial matters. In addition, a lump sum withdrawal subjects the money to creditor risk and marital risk. The decision making is now moved from the IRA beneficiary to a trustee. In addition, the owner can further restrict the beneficiary s access to the funds by limiting distributions from the trust to the discretion of the trustee, additionally limiting the beneficiary s access to the stretched distribution. While placing a discretionary trust as the beneficiary of the inherited IRA allows the owner of the IRA to provide post mortem control over the beneficiary s access to funds, it may not produce a good income tax result. If the trustee, using his discretion, decides to keep the IRA distribution in the trust, i.e. not to make a distribution to the trust beneficiary, the IRA distribution is taxed at the trust level instead of the beneficiary level. This decision may create a much larger tax. The tax rates that apply to a trust increase much faster than the tax rates that apply to individual taxpayers. A trust is taxed at the highest rate of 39.6% once the trust s income exceeds $12,300, based on 2015 tax rates, while a single person bears the highest tax rate of 39.6% when their income exceeds $413,200. As an example, if the distribution from an IRA is $100,000 and the trustee decides to not make a distribution to the beneficiary of the trust, the trustee will incur additional tax of approximately $16,800 on the IRA distribution. There is a way for the owner of the IRA to take this decision out of the hands of the beneficiary; the IRA owner can make the beneficiary of the IRA a trust. Thus, the IRA owner who wants to control the amount of the IRA distribution available to the individual beneficiary may favor naming a discretionary trust as the IRA beneficiary. WITHUMSMITH+BROWN, PC AUDIT TAX ADVISORY

4 However, the tax cost of controlling the access to the IRA distribution may outweigh the benefits. If the IRA owner has valid concerns and wishes to control the amount of the IRA distribution available to the individual beneficiary, then you should consider how to mitigate the additional tax cost. One thing to consider is having the IRA owner convert the IRA to a Roth IRA. While this will be a taxable transaction, the IRA owner may be in a much lower tax bracket than the discretionary trust. In this case, all of the income taxes will be due at the time of the conversion. After the death of the IRA owner the discretionary trust is able to withdraw the funds from the Roth IRA without incurring income tax. Therefore, if the discretionary trust does not distribute to the trust beneficiary, the trust will not be penalized by bearing the highest tax rate at a much lower income level. Using a discretionary trust as the beneficiary of an IRA allows the providers certain advantages. However, the increased tax rates that apply to a trust may force the trustee to distribute the IRA withdrawal to the individual beneficiary. This will negate the advantages of using the discretionary trust. IRS PENSION PLAN LIMITATIONS AND TAX BENEFITS ADJUSTMENTS FOR 2017 As taxpayers prepare for 2017, the Internal Revenue Service ( IRS ) has issued its annual pension plan limitations and tax benefits adjustment updates. These amounts affect all taxpayers, from business to individual filers, and range from pension plan limits to individual exemption and standard deduction amounts. The items noted below are some of the more significant adjusted figures for the 2017 tax year. While a number of items have been adjusted by the IRS for the cost of living, it is important to note that many items have remained the same. WHAT HAS CHANGED? The tax rate of 39.6% affects married taxpayers filing a joint return whose income exceeds $470,700, single taxpayers whose income exceeds $418,400. The limitation for itemized deductions to be claimed on tax year 2017 returns of married taxpayers filing a joint return begins with income of $313,800, single taxpayers begins with income of $287,650. The personal exemption for tax year 2017 remains unchanged at $4,050. The exemption phase-out begins with income of $313,800 for married taxpayers filing a joint return, single taxpayers begins with income of $261,500. Under the small business healthcare tax credit, the maximum credit is phased out based on the employer s number of full-time equivalent employees in excess of ten (10) and the employer s average annual wages in excess of $26,200 for tax year 2017, up from $25,900 for The Alternative Minimum Tax exemption amount for 2017 has increased to $84,500 for married taxpayers filing a joint return, with phase out beginning at $160,900. The amount for single taxpayers is $54,300 with phase out set to begin at $120,700. Qualified transportation benefits have been increased in Employees will be able to exclude up to $255 per month for qualified parking expenses and still up to $255 a month for the combined value of transit passes and transportation in a commuter highway vehicle.

5 Estates with decedents, who passed away in 2017, have an exclusion amount of $5,490,000 which represents an increase from the 2016 amount of $5,450,000. The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) has increased from $2,550 in 2016 to $2,600 in The maximum earnings subject to the Social Security component of the FICA tax will increase to $127,200 in 2017, up from $118,500 in This represents an increase of over 7%. Effective January 1, 2017, the limitation on the annual benefit under a defined benefit plan under Internal Revenue Code ( IRC ) 415(b)(1)(A) has been increased to $215,000 from $210,000 in The limitation for defined contribution plans under IRC 415(c)(1)(A) has been increased to $54,000 in 2017 from $53,000 in WHAT HAS NOT CHANGED? The elective deferral (contribution) limit for employees who participate in IRC 401(k), 403(b), most 457 plans and the federal government s Thrift Savings Plan remains the same at $18,000. The catch-up contribution limit for employees aged 50 and over who participate in IRC 401(k), 403(b), most 457 plans and the federal government s Thrift Savings Plan remains the same at $6,000. The limitation under IRC 408(p)(2)(E) regarding SIMPLE Individual Retirement Arrangements ( IRA ) remains the same at $12,500. The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains at $1,000. The annual exclusion for gifts remains at $14,000 for WITHUM STRENGTH STORIES Have you witnessed a colleague doing something truly innovative and special this past year? Did someone demonstrate out-of-the-box thinking that helped solve a client/customer problem or office issue? If so, nominate that special employee for their innovative actions by telling us what they did! HOW TO NOMINATE Post a brief description about the person or organization you are nominating on Facebook, Instagram, LinkedIn or Twitter using #StrengthStory That s it! We ll be in touch for more details. The winner gets a spot on Bloomberg Radio to share their story! (If your account is private, be sure to follow Withum.) For more information, campaign timeline and categories, visit: BE IN A POSITION OF STRENGTH SM withum.com

6 PRSRT STD U.S. Postage PAID New Brunswick, NJ Permit No Newman Springs Rd., Suite 125 Red Bank, NJ Return Service Requested The Journal is published by WithumSmith+Brown, PC, Certified Public Accountants and Consultants, for clients and friends of the firm. The information contained in this publication is for informational purposes and should not be acted upon without professional advice. Please contact any one of our offices with your inquiries. WITHUM FIRM NEWS Withum Winner of HLB s Accountant and International Accounting Bulletin Awards WithumSmith+Brown, PC (Withum) was announced as a winner in the Employer of the Year category. Jurors commended the Firm for its voluntary turnover rate of only 6.3% as well as its innovation in recruitment through social media and video marketing. We are absolutely thrilled to have received this prestigious award from The Accountant & International Accounting Bulletin, says Bill Hagaman, Withum s Managing Partner and CEO. To be named Employer of the Year is a reflection of the hard work and dedication of our many team members who make our firm such a great place to work, offering our staff opportunities to have a fulfilling career, and to have a little fun, too. MORRISTOWN, NJ (973) NEW BRUNSWICK, NJ (732) PARAMUS, NJ (201) PRINCETON, NJ (609) RED BANK, NJ (732) NEW YORK, NY (212) PHILADELPHIA, PA (215) BLUE BELL, PA (215) BOSTON, MA (617) ORLANDO, FL (407) WEST PALM BEACH, FL (561) ASPEN, CO (970) GRAND CAYMAN (345) withum.com