News & Articles

Tax Consequences of Borrowing From a Retirement Plan

Posted on Mon, Jun 04, 2018

If you participate in a qualified retirement plan through your job or self employment — such as a 401(k), profit-sharing, or Keogh plan — you might be allowed to borrow from the account. (The borrowing option is not available for traditional IRAs, Roth IRAs, SEPs or SIMPLE-IRAs.)

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Tags: 401k Plan, Retirement Plan, Interest, Loan

Supreme Court Spotlights Employee Status: Exempt or Not?

Posted on Fri, Jun 01, 2018

Thousands of cases are appealed to the U.S. Supreme Court every year, but usually fewer than 100 get a full-blown hearing and ruling. One case that made it through in the current court term is Encino Motorcars v. Navarro. On the surface, this case looks at whether car dealer service advisors are exempt or nonexempt. But the larger issue affecting jobs of all kinds involves just how narrowly the relevant law — the Fair Labor Standards Act (FLSA) — can be interpreted when determining between exempt status and nonexempt.

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Tags: FLSA, Employee Compensation, Employee, Exempt

6 Cool Ways to Save Taxes During the Hot Summer Months

Posted on Wed, May 30, 2018

The Tax Cuts and Jobs Act (TCJA) may have put a crimp in some of your summer plans by eliminating or scaling back certain tax breaks. But individuals and small business owners still have plenty of opportunities to save taxes. Here are six ideas to consider this summer.

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Tags: Vacation Home, Federal Taxes, Business Tax Savings, Rental Property, Tax Cuts and Jobs Act (TCJA)

New Tax Law Boosts Appeal of Qualified Small Business Corporations

Posted on Wed, May 23, 2018

Would you like to invest in a business that allows you to subsequently sell your stock tax-free? That may be possible with qualified small business corporation (QSBC) stock that's acquired on or after September 28, 2010. Sales of QSBC stock are potentially eligible for a 100% federal income tax exclusion. That translates into a 0% federal income tax rate on your profits from selling stock in a QSBC.

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Tags: Qualified Small Business Stock, Stocks, Tax Cuts and Jobs Act (TCJA)

Know the Rules Before Checking Employee Medical Records

Posted on Mon, May 21, 2018

When employees request time off under the Family and Medical Leave Act (FMLA), employers need to tread carefully.

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Tags: Department of Labor, Medical, Family and Medical Leave (FMLA)

Plan Now to Reduce AMT Exposure

Posted on Fri, May 11, 2018

First the bad news: Despite passage of the Tax Cuts and Jobs Act (TCJA), the individual alternative minimum tax (AMT) is still in place. But there's some good news: The law has made AMT rules more taxpayer-friendly for 2018 through 2025. In addition, other TCJA changes reduce the odds that you'll owe the AMT for those years. Even so, you may still benefit from taking steps now to avoid or minimize it.

Know the Basics

The AMT is connected to, but separate from, the regular federal income tax system. The difference is that the AMT taxes certain types of income that are tax-free under the regular income tax system. Also, the AMT disallows some regular tax breaks.

The maximum AMT rate is 28%, versus the 37% maximum regular tax rate. For the 2018 tax year, the maximum 28% AMT rate kicks in when AMT income exceeds $95,750 for individuals and $191,500 for married joint-filing couples. If your AMT bill for the year exceeds your regular tax bill, you'll owe the higher AMT amount.

There's an inflation-adjusted AMT exemption that you can subtract when calculating your AMT income. But the exemption is phased out when your AMT income is greater than the applicable threshold. For 2018-2025, the TCJA raises the exemption amount and greatly increases the phase-out thresholds. For 2018, the exemption amounts are $70,300 for unmarried individuals, $109,400 for married joint-filing couples and $54,700 for married individuals who file separately. The phase-out thresholds are $500,000, $1 million and $500,000, respectively.

Your exemption is reduced by 25% of the excess of AMT income over the applicable phase-out threshold. But thanks to the TCJA's much-higher thresholds for 2018 to 2025, only those with very high incomes will be affected by the phase-out rule. Middle-income taxpayers will benefit from full exemptions.

Recognize Risk Factors

Several variables make it difficult to pinpoint exactly who will and who won't be hit by the AMT under the new tax law. However, the TCJA reduces or eliminates the risk associated with some factors for 2018 through 2025, for example:

Substantial income. High income can cause your AMT exemption to be partially or completely phased out — which greatly increases the odds that you'll owe the AMT. Although this risk factor still exists, it has been substantially diminished by the TCJA's more-taxpayer-friendly AMT exemption rules.

Large itemized deductions for state and local taxes. Itemized deductions for state and local income and property taxes are disallowed under AMT rules. For 2018-2025, the TCJA limits regular-tax itemized deductions for state and local income and property taxes to a combined total of only $10,000, or $5,000 if you use married filing separate status. Because large itemized deductions for these taxes are no longer possible for 2018 through 2025, this risk factor is greatly reduced for now.

Several dependents. Previously, there was some risk to taxpayers who claimed several personal and dependent exemption deductions. These deductions are disallowed under AMT rules. But the TCJA eliminates personal and dependent exemption deductions for 2018-2025, eliminating this risk factor for those years.

Miscellaneous itemized deductions. In the past, deducting such items as investment expenses, fees for tax advice and preparation, and unreimbursed employee business expenses could raise the risk of AMT exposure. But for 2018-2025, the TCJA eliminates most miscellaneous itemized deductions for regular tax purposes. So this risk factor is gone for now.

But even following the passage of the TCJA, some factors continue to make taxpayers vulnerable to the AMT, including:

Exercise of ISOs. In-the-money incentive stock options (ISOs) feature a bargain element — the difference between the market value of the shares on the exercise date and the exercise price under the ISO. This bargain element doesn't count as income under regular income tax rules but it does count as income according to the AMT. This risk factor still exists and will likely continue to be a common cause of AMT liabilities.

Interest from private activity bonds. Such interest is tax-free for regular tax purposes but taxable under AMT rules. The TCJA doesn't change this treatment, so private activity bond interest remains a risk factor.

Disallowed standard deductions. For 2018-2025, the TCJA almost doubles standard deduction amounts, but these write-offs are disallowed under the AMT rules. Therefore, the new law actually increases this risk factor.

Depreciation write-offs. Traditionally, assets such as machinery, equipment, computers, furniture and fixtures from a business or from investments in S corporations, limited liability companies or partnerships were required to be depreciated over longer periods for AMT purposes. This increased the likelihood that you'd owe AMT. For both regular income tax and AMT purposes, businesses can now deduct the entire cost of many depreciable assets placed in service between September 28, 2017 and December 31, 2022 in Year 1. The TCJA thus reduces this risk factor for newly-acquired assets. However, if you're depreciating older assets under the prior law's rules, the depreciation write-off threat still exists.

Avoid or Minimize the Tax

As we explained above, the TCJA reduces the odds that you'll owe the AMT. Even if you do owe it, you'll probably owe less — possibly a lot less. Nevertheless, you might benefit from making some changes that will help reduce your exposure to the AMT. For example:

Some taxpayers are in the habit of prepaying state and local income and property taxes that are due early in the following year. These taxes aren't deductible under AMT rules, and it may now make sense to deduct them next year when you have a chance of not being exposed to the AMT. Prepaying also may be a bad idea because the TCJA limits itemized deductions for state and local income and property taxes to a combined total of $10,000 ($5,000 for those married filing separately). Paying next year's taxes this year might push you over the threshold for non-deductibility.

You should also be careful when exercising in-the-money ISOs. Triggering these options when there's a big spread between current market value and exercise price is one of the most common causes for AMT liabilities. Consider spreading out ISO exercises over several years.

And although the interest on municipal bonds is tax-free under regular tax rules, interest on private activity bonds is taxable under AMT rules. In general, a private activity bond is a bond issued by or on behalf of local or state government to finance the project of a private user, such as a bond used to finance a stadium for a professional sports team.

Claim the AMT Credit

A portion of the AMT that you pay can potentially generate the minimum tax credit, which we will call the AMT credit. This credit can be used to reduce your regular tax liability in future years — but only to the extent that the regular tax liability equals the AMT liability for that particular year. The AMT credit can be carried forward for an unlimited number of years.

The credit is generated only by AMT liabilities that are attributable to deferral preferences (items that are recognized at different times for regular tax and AMT purposes). By contrast, AMT liabilities attributable to exclusion preferences (items that are permanently treated differently under the regular tax and AMT rules) don't generate AMT credits.

Exclusion preferences include:

  • Itemized deductions allowed for regular tax purposes but disallowed under AMT rules (such as state and local income and property taxes and miscellaneous itemized deductions that were allowed before the TCJA),
  • Deductions for home equity loan interest that was allowed for regular tax purposes before the TCJA if the loan proceeds weren't spent on your first or second residence,
  • Your standard deduction if you claimed it instead of itemizing,
  • Personal and dependent exemptions allowed before the TCJA, and
  • Tax-exempt interest from private-activity bonds.

Most other AMT adjustments and preferences are deferral preferences that potentially will generate AMT credits. For example, the bargain element from exercising an ISO is a deferral preference as are AMT depreciation adjustments. Because the TCJA reduces or eliminates such exclusion preferences as itemized deductions for state and local taxes, home equity loan interest deductions, and personal and dependent exemption deductions, anyone who owes the AMT under the current rules is more likely to generate AMT credits than under prior law.

When to Take the Contrarian Approach

If you know you have AMT exposure this year, remember that the maximum AMT rate is 28% — compared with the maximum regular tax rate of 37%. So you might actually benefit from accelerating some income into 2018 when it will be taxed at the 28% AMT rate instead of at a higher, regular tax rate next year. Over the two-year period, you'll likely save taxes.

Conclusion

Although avoiding or minimizing the AMT is a worthy tax-planning goal, don't shoot yourself in the foot. For example, postponing the exercise of an ISO could turn out to be a bad idea if the stock price plummets. Your tax advisor can help you identify the most beneficial moves and avoid costly mistakes.

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Tags: AMT, Tax Cuts and Jobs Act (TCJA)

Self-Audit Program May Help Employers Correct Wage Errors

Posted on Wed, May 09, 2018

Eligible employers may now be able to conduct a self-audit of certain wage practices, thanks to a pilot program from the Department of Labor's Wage and Hour Division (WHD). This program — called Payroll Audit Independent Determination (PAID) — was recently launched as a tool for employers to uncover payroll errors on their own. Employers who use the PAID program and discover that they've underpaid some employees can correct their payment errors and coordinate with WHD to avoid penalties.

As a reminder, the Labor Department can pursue administrative solutions or, if necessary, court action to recover back wages when employees have been underpaid. "Violations may result in civil or criminal action, and employers may be assessed civil money penalties of up to $1,100 for each willful or repeated violation of the minimum wage or overtime pay provisions of the law," according to the Labor Department. The ability to avoid such penalties should prompt employers to seek answers and correct their own errors.

Who's Eligible?

To be eligible to use the PAID program, the following must be true:

    • Neither WHD nor a court of law has found within the last five years that your company has violated the minimum wage or overtime requirements under the Fair Labor Standards Act (FLSA) by engaging in the same compensation practices at issue in this proposed self-audit.
    • Your company isn't currently a party to any litigation (private or with WHD) asserting that the compensation practices at issue in the proposed self-audit violate FLSA minimum wage or overtime requirements.
    • WHD isn't currently investigating the compensation practices at issue in the proposed self-audit.
    • You have no specific knowledge of recent complaints by your employees or their representatives made to you, your representatives, WHD or a state wage enforcement agency regarding the compensation practices at issue in the proposed self-audit which violate FLSA minimum wage or overtime requirements.

Important note: This is only a partial list.

To become certified to participate in this program, you'll first need to read through information about the FLSA (called a "compliance assistance review") and PAID on the WHD website (https://www.dol.gov/whd/paid/). This information includes videos and links to WHD webpages that explain overtime pay requirements and who's exempt from overtime eligibility. Also available is an explanation of exemptions for executives, administrative employees, highly compensated employees, computer employees and outside salespeople.

Recordkeeping Requirements

The PAID program provides a list of FLSA recordkeeping requirements to properly document your payroll. This resource specifies which records you must keep and for how long.

Once you've completed the "compliance assistance review," gather the following information to conduct your self-audit:

    • Potential violations that may have occurred in the last two years,
    • Employees that may have been affected in the same period, and
    • Specific timeframes during that period in which each employee was affected.

After you've identified these elements, calculate the amount of back wages owed to each employee.

If a self-audit reveals that your company owes back wages to some employees, simply paying the amounts due before reporting the issue to the WHD doesn't mean that those employees have forfeited their rights to take you to court. Why? In this scenario, WHD didn't supervise the process of the determining the amounts owed, so the agency might still weigh in.

Required Data

When your self-audit is complete, supply the following data to the nearest WHD office:

    • The names, addresses and phone numbers of all affected employees,
    • Your back-wage estimates along with supporting evidence and methodology used to make those calculations,
    • Payroll records and any other relevant evidence,
    • Records demonstrating hours of work for each affected employee during the time frame at issue,
    • Records to show that you have corrected the compensation practices to comply with the FLSA,
    • Concise explanation of the scope of the potential violations for possible inclusion in a release of liability,
    • A certification that you've reviewed the PAID program's information, terms and compliance assistance materials, and
    • A certification that your company meets all eligibility criteria of the PAID program.

The Waiting Game

What happens after you've submitted all the required paperwork? You're not off the hook until WHD says so. But, according to the PAID program's description, "If WHD accepts you into PAID, WHD will provide you with the proposed scope of the release of liability for the potential violations presented."

Specifically, WHD will tell you how much it thinks you owe employees who were underpaid (which might be exactly what you already determined), and supply "settlement terms for each employee, which employees may sign to receive payment." Once you've paid all back wages due by the end of the next full pay period and provided proof to the WHD that you have done so expeditiously, then you're done.

Consult with a labor attorney before deciding to participate in the PAID program to ensure that you aren't overlooking any potential legal hazards in doing so.

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Tags: Department of Labor, Payroll, Taxes

FAQs about Deducting Interest on Home Loans under the New Tax Law

Posted on Mon, May 07, 2018

The Tax Cuts and Jobs Act (TCJA) changes the rules for deducting interest on home loans. Most homeowners will be unaffected because favorable grandfather provisions will keep the prior-law rules for home acquisition debt in place for them.

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Tags: Deductions, Mortgage, Interest, Tax Cuts and Jobs Act (TCJA)

Save or Shred? Follow These Recordkeeping Guidelines

Posted on Wed, Apr 18, 2018

Are you a recordkeeping pack rat? Many individuals and businesses hold onto paper and digital records indefinitely — just in case. But securely storing years of financial records can become burdensome. Here's some guidance to help minimize recordkeeping overload.

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Tags: Records Retention, Maintain Records

Financial Scrapbooking Event - April 23, 2018

Posted on Thu, Apr 12, 2018

In conjunction with the National Financial Literacy Month, Vanessa Birman, CPA will be giving a one hour presentation titled "Financial Scrapbooking" on April 23, 2018. This event will be held at 6:30pm at the Caledonia Branch of the Kent District Library. The presentation will highlight the importance of creating a scrapbook for essential financial records such as insurance policies, retirement accounts and investments, as well as give insight on how to organize your information. A financial scrapbook is not only beneficial for financial planning, but also for emergencies and end-of-life arrangements. Creating this valuable tool enables all information to be stored in one location.

The presentation will be held at 6:30pm on April 23, 2018 at the Caledonia Branch of the Kent District Library, located at 6260 92nd Street SE, Caledonia, MI 49316.

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Tags: Documentation, Event, EHTC, Financial