36 th Annual Congress May 15 19,

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1 The Tax Reform Waves Keep Breaking Over Payroll Speaker Michael P. O Toole, Esq. Senior Director of Publications, Education, and Government Relations American Payroll Association Tax Cuts and Jobs Act Pub. L Enacted 12/22/ th Annual Congress May 15 19,

2 A tax loophole is something that benefits the other guy. If it benefits you, it s tax reform. Russell B. Long Senator from Louisiana Agenda Tax Rates Income Tax Withholding Tax Reform May Impact State Income Tax Repeal of Certain Itemized Deductions Agenda Federal Tax Levies Inflation Adjustments Fringe Benefit Taxation Tax Deductions & Credits 36 th Annual Congress May 15 19,

3 Tax Rates New Tax Rates Effective for wages paid after 12/31/17 IRS has authority to issue withholding tables Discretion to treat 2018 withholding as if 2017 rules were in effect Even though no more personal exemptions Really???? 8 Form W-4 IRS says 2018 withholding will work with existing forms Use W-4s on file No further action required 9 36 th Annual Congress May 15 19,

4 Tax Tables Single Tax Rate Taxable Income Tax Rate Taxable Income 10% $0 - $9,325 10% $0 - $9,525 15% $9,326 - $37,950 12% $9,526 - $38,700 25% $37,951 - $91,900 22% $38,701 - $82,500 28% $91,901 - $191,650 24% $82,501 - $157,500 33% $191,651 - $416,700 32% $157,501 - $200,000 35% $416,701 - $418,400 35% $200,001 - $500, % $418, % $500, Tax Tables Married Tax Rate Taxable Income Tax Rate Taxable Income 10% $0 - $18,650 10% $0 - $19,050 15% $18,651 - $75,900 12% $19,051 - $77,400 25% $75,901 - $153,100 22% $77,401 - $165,000 28% $153,101 - $233,350 24% $165,001 - $315,000 33% $233,351 - $416,700 32% $315,001 - $400,000 35% $416,701 - $470,700 35% $400,001 - $600, % $470, % $600, Personal Exemptions & Standard Deduction FIT withholding tables Before 2018 Used standard deduction Personal exemptions for allowances Percentage & Wage-bracket methods th Annual Congress May 15 19,

5 Standard Deduction 2018 before TCJA 2018 after TCJA Married filing jointly $13,000 $24,000 Married filing separately $6,500 $12,000 Single $6,500 $12,000 Head of Household $9,550 $18, Suspended Personal Exemptions 14 Tax Credits Child tax credit Increases from $1,000 to $2,000 For qualifying child under age of 17 $500 credit for qualified dependents other than children th Annual Congress May 15 19,

6 Income Tax Withholding FIT Withholding New withholding tables ; ERs to use by 2/15/18 Most employees saw a reduction in withholding! 17 FIT Withholding Supplemental wages Up to $1,000,000 in tax year 22% down from 25% Mandatory exceeding $1,000,000 in tax year 37% down from 39.6% th Annual Congress May 15 19,

7 Nonresident alien employees FIT Withholding Two-step procedure 19 Backup withholding Was 28% Now 24% FIT Withholding th Annual Congress May 15 19,

8 Withholding Calculator Helps accurately determine FITW 22 Exemption from Withholding 2018 claiming exemption No tax liability in 2017, expects no liability in 2018 Completes Boxes 1, 2, 3, 4 (if applicable), & 7 23 Exemption from Withholding Continuing exemption from 2017 Normally exemption certificate due by 2/ extended to 2/28 Could use 2017 form th Annual Congress May 15 19,

9 Personal Allowances Worksheet 25 Deductions, Adjustments, & Additional Income Worksheet 26 Two-Earners/Multiple Jobs Worksheet th Annual Congress May 15 19,

10 IRS's Withholding Calculator Encourage employee use Helps protect from under/ overwithholding Alternative to W-4 worksheets Helps understand W-4 status 28 IRS's Withholding Calculator Who should use? Two-income families Two or more jobs Claiming the Child Tax Credit Itemizing deductions High income Complex tax returns 29 IRS's Withholding Calculator Also use IRS Pub th Annual Congress May 15 19,

11 2019 Form W-4 Coming for 2019 IRS is revising and revamping the withholding & calculation system Form W-4 completely revised 2019 Form W-4 Next draft available late August 2018 Final form available November Form W-4 Early Release Draft Issued June 8 Line 3 adds Head of Household as a filing status Lines 5-8 ask for nonwage income not subject to w/h, itemized deductions over standard deduction, tax credits, and taxable wages from EE s other jobs and/or spouse s jobs Line 9 asks for any extra w/h per pay period Line 10 is for EEs claiming exempt from withholding Form W-4 How does employer calculate w/h using 2019 W-4?? Step 1: Divide annual amounts in Lines 5-8 by pay period frequency Step 2: Start with EE s taxable wages, add amounts from Lines 5 & 8 Step 3: Subtract amount from Line 6 and value of allowances based on filing status 2 (S); 3 (HOH or MFJ) if using % method th Annual Congress May 15 19,

12 2019 Form W-4 How does employer calculate w/h using 2019 W-4?? Step 4: Calculate FITW Step 5: Reduce FITW by amount from Line 7 Step 6: Separately calculate FITW on amount from Line 8 Step 7: Subtract amount from Step 6 from Step 5 result Step 8: Add any extra withholding amount from Line 9 to get final FITW for EE Form W-4 Some problems noted in APA comments New hires with no W-4 by first payroll draft says treat as single with no adjustments ; does that mean 2 allowances? Form asks for too much personal economic information provided directly to employer Many references to IRS withholding calculator, which is tough to use for many EEs Instructions don t differentiate between income from jobs and self-employment 35 Tax Reform May Impact State Income Tax 36 th Annual Congress May 15 19,

13 State definitions Taxable income Exemptions Deductions State Income Tax 37 State Income Tax States conforming to federal tax law Before 1/1/18 does not include TCJA On 1/1/18 or later includes TCJA 38 States Following IRC on Specific Dates AK WA OR NV CA MT ID WY UT CO AZ NM ND SD NE KS OK TX VT ME MN NH WI NY MA RI MI CT IA PA OH NJ IL IN DE WV VA MD MO KY DC NC TN AR SC GA MS AL LA Before During 2016 During 2017 During 2018 Current N/A No Reference HI FL th Annual Congress May 15 19,

14 Repeal of Certain Itemized Deductions Limited or Repealed Mortgage interest State, local, and foreign taxes Charitable contributions Job-related moving expenses Miscellaneous deductions 41 Publication 15-B, Employer s Tax Guide Working condition fringe benefits Repeal of miscellaneous expense deductions does not eliminate working condition fringe benefits th Annual Congress May 15 19,

15 Repayment of Wages Repayment of wages in prior tax year Miscellaneous deduction repealed Repayments after 12/31/17 Employee loses deduction but still can take tax credit Check IRS Publication Federal Tax Levies Federal Tax Levies Personal exemptions & tax levies Exempt amount uses personal exemptions TCJA adjusts exempt amount calculation th Annual Congress May 15 19,

16 Federal Tax Levies Personal exemptions & tax levies If Form 668-W Part 3 not submitted TCJA says use married filling separately, no dependents Before TCJA married filling separately, 1 exemption 46 Federal Tax Levies Levy exempt amount tables (Pub. 1494) issued 12/31/17 Did not account for new standard deduction Did not have columns for zero dependents Revised Pub issued 5/2/18 Added TCJA changes, but has several math errors/typos APA pointed them out to IRS, no corrected tables yet 47 Federal Tax Levies New levy Form 668-W used since April 2018 New Notice 1439 Explains levy process for employers and employees Contains sample of Statement of Dependents and Filing Status from Part 3 of Form 668-W Sample can be used by employee to change number of dependents or get employer to use most current Pub th Annual Congress May 15 19,

17 Inflation Adjustments Inflation Adjustments TCJA changed inflation adjustments Before 2018, used CPI-U Adjustments after 12/31/17 Use Chained Consumer Price Index for All Urban Consumers (C-CPI-U) Smaller, slower adjustments 50 IRS Modifies Some 2018 COLAs Foreign earned income exclusion Now $103,900 Was $104,100 Housing cost exclusion Now $31,170 Was $31, th Annual Congress May 15 19,

18 IRS Modifies Some 2018 COLAs Base housing amount Now $16,624 Was $16,656 Maximum foreign housing cost exclusion Now $14,546 Was $14, IRS Modifies Some 2018 COLAs Medical Savings Accounts Family high-deductible health plan Now $4,550-$6,850 Was $4,600-$6,850 Individual out-of-pocket expenses Now $4,550 Was $4, IRS Modifies Some 2018 COLAs Health Savings Accounts Maximum annual contribution family coverage Now $6,850 Was $6, th Annual Congress May 15 19,

19 IRS Modifies Some 2018 COLAs Health Savings Accounts Burdensome retro change! 55 IRS Modifies Some 2018 COLAs Adoption Assistance Maximum exclusion Now $13,810 Was $13, IRS Modifies Some 2018 COLAs Penalties for failure to file correct information returns & furnish correct payee statements Calendar year maximums reduced th Annual Congress May 15 19,

20 2018 Retirement Plan Limits Not affected by TCJA Annual adjustments similar to social security benefit annual adjustments 58 Fringe Benefit Taxation Moving Expenses Suspended Employer-provided, job-related moving expenses paying moving expenses Taxable income th Annual Congress May 15 19,

21 Suspended Applies to Moving Expenses Payments to employees Payments to third-parties Employee deduction suspended 61 Moving Expenses Members of Armed Forces on active duty Exclusion still applies Move is pursuant to a military order Incident to a permanent change of duty station 62 State Moving Expense Rules States conforming to IRC 1/1/2018 Moving expenses included in income th Annual Congress May 15 19,

22 State Moving Expense Rules States conforming to IRC < 1/1/2018 Old moving expense exclusion rules apply 64 State Moving Expense Rules Chart State taxation Follows federal rules Exclusion 65 States Taxation & Withholding on Moving Expenses WA VT ME MT ND MN NH OR WI NY MA ID RI SD MI CT WY IA PA OH NJ NE IL IN NV UT DE CO WV VA MD CA KS MO KY DC NC TN AR SC AZ OK AK NM GA MS AL LA TX HI FL Follows federal Exclusion Other No income tax th Annual Congress May 15 19,

23 Qualified Bicycle Commuting Exclusion of $20 per month Suspended Payments after 12/31/17 = taxable 67 Personal Use of Employer-Provided Vehicle Cents-per mile method & "luxury vehicles TCJA changes luxury vehicle definition in 2019 and beyond 2018 numbers Luxury vehicle $15,600 Trucks & vans $17, Employee Achievement Awards Clarifies definition tangible personal property Taxable Cash Cash equivalents Gift cards Gift coupons Gift certificates th Annual Congress May 15 19,

24 Employee Achievement Awards Clarifies definition tangible personal property Taxable Vacations Meals Lodging Tickets to theater/sporting events Stocks/bonds 70 Employee Achievement Awards Clarifies definition tangible personal property Not taxable Right to select tangible personal property from limited list 71 Stock Options IRC 83 Requires Recognizing income in year Stock is transferred Without substantial risk of substantial forfeiture th Annual Congress May 15 19,

25 TCJA adds IRC 83(i) Allowing Stock Options Qualified employees Defer income Attributed to qualified stock transferred By qualified employer 73 TCJA adds IRC 83(i) Designed to Stock Options Allow time to accumulate funds To pay taxes 74 Stock Options TCJA adds IRC 83(i) For FICA When employee elects deferral Treated as nonqualified stock option th Annual Congress May 15 19,

26 TCJA adds IRC 83(i) Qualified employees are not Excluded employee 1% owner Current or former CEO Current or former CFO Stock Options 76 Stock Options TCJA adds IRC 83(i) Qualified employees agree in deferral election Meet FIT withholding requirements 77 Stock Options TCJA adds IRC 83(i) Eligible corporation 1) Stock is not readily tradable during preceding calendar year 2) Written plan th Annual Congress May 15 19,

27 TCJA adds IRC 83(i) When stock is included in employee s income FIT at highest rate (37%) Stock Options 79 Stock Options TCJA adds IRC 83(i) Employers are required to provide notice of 83(i) election Failure to provide notice of 83(i) election $100 penalties 80 TCJA adds IRC 83(i) Reporting on Form W-2 Boxes 1, 3, and 5 Box 12 Codes GG & HH Stock Options th Annual Congress May 15 19,

28 Stock Options TCJA adds IRC 83(i) Applies to stock options Exercised after 12/31/2017 Until regs issued Employers comply with reasonable good faith interpretation 82 Tax Deductions & Credits Corporate Tax Deductions Employer s cost cannot be deducted Qualified transportation fringe benefits 50% limitation for meals th Annual Congress May 15 19,

29 Corporate Tax Deductions APA Tip Employer s cost cannot be deducted Consult with tax department Amounts can be included in employee s income as wages Employer can deduct wages 85 Nonprofit Unrelated Business Taxable Income Includes cost of providing Qualified transportation fringe benefits Parking facility used in connection with qualified parking 86 Nonprofit Unrelated Business Taxable Income APA Tip Unrelated business taxable income Consult with tax department Amounts can be included in employee s income as wages Employer can exclude from UBIT when included in wages th Annual Congress May 15 19,

30 Paid Family & Medical Leave Tax Credit New tax credit based on paid family & medical leave General business tax credit 12.5% of wages paid To employees on family and medical leave (doesn t have to be FMLA leave) When employees are paid 50% of normal wages 88 Paid Family & Medical Leave Tax Credit New tax credit based on paid family & medical leave Credit increases 0.25% For each percentage point wage payments > 50% Maximum credit 25% of wages paid 89 Paid Family & Medical Leave Tax Credit New tax credit based on paid family & medical leave For up to 12 weeks of leave Written policy with 2 weeks of paid family and medical leave For full-time employees Proportional paid leave for part-time employees th Annual Congress May 15 19,

31 Paid Family & Medical Leave Tax Credit Qualifying employee Employed 1 year Preceding year compensation < 60% of definition of highly compensated employee 2018 highly compensated employee = $120, max $72, Paid Family & Medical Leave Tax Credit Other paid leave Vacation, personal, sick Paid by state or local government Does not qualify as family or medical leave for the tax credit 92 Paid Family & Medical Leave Tax Credit Available Wages paid in 2018 & 2019 Does not apply to wages paid after 12/31/ th Annual Congress May 15 19,

32 Paid Family & Medical Leave Tax Credit IRS FAQs Tax reform is taking the taxes off things that have been taxed in the past and putting taxes on things that haven t been taxed before. Art Buchwald Columnist and humorist th Annual Congress May 15 19,

33 Thank You For Attending! th Annual Congress May 15 19,