As its market and technological needs evolve, every company needs to change. There’s even a formal term for the undertaking: “change management.” From an operational standpoint, change involves opening up the hood and switching out old engine parts for new ones. Even if it affects the business as a whole, change means focusing on specific areas and making alterations over relatively short periods.
At some point in the existence of many companies, the organization needs to go beyond change to transformation. This is much different. Business transformations aren’t so much about switching out parts as overhauling the entire engine, possibly modifying the frame and even applying a new coat of paint. Let’s look a little more closely at the distinction.
Say a large commercial construction company was having trouble meeting its sales goals because of environmental regulations. So, it decided to augment its sales teams with environmental engineers who could better assess the compliance impact. The company applied change management principles — such as building a case for the idea and adjusting its business culture — and was successful. This was no doubt an important change, but the business itself wasn’t transformed.
The objective of a true transformation is to essentially reinvent the company and implement a new business model. And that model needs to be a carefully, formally devised chain of interlocking strategic initiatives that apply to the entire organization.
Perhaps the most obvious and universal example of a business transformation is Apple. The technology giant, once a head-to-head competitor with IBM on the personal computer market, found itself struggling in the 1990s. So, under the tutelage of the late Steve Jobs, it transformed itself into a mobile technology company. It still makes computers, of course, but the company’s transformative success can really be attributed to its mobile devices and operating systems.
Every business transformation differs based on the history, nature and size of the company in question. But there are best practices to keep in mind. For example, start with your customers, visualizing what they need (even if they don’t know it yet). Also, build a chain of initiatives, so you’re not trying to do everything all at once. And use metrics, so you can track specific dollar amounts and productivity goals throughout the transformation.
Above all, be ready for anything. Even the best-planned transformations can produce unpredictable results. So keep expectations in line and take a measured, patient approach to every initiative involved.
Successful business transformations can be spectacular and profitable. But, make no mistake, the risk level is high. So if you decide to embark on this journey, bring along your trusted financial, legal and strategic advisors.
© 2017
Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 66 million Americans will increase just 2.0% in 2018, the federal government recently announced.
The 2.0% cost-of-living adjustment (COLA) will begin with benefits that more than 61 million Social Security beneficiaries will receive in January 2018. Increased payments to more than 8 million SSI beneficiaries will begin on December 29, 2017.
The purpose of the COLA, the Social Security Administration explained, is to ensure that the purchasing power of benefits is not eroded by inflation. The COLA is based on inflation changes as measured by the Consumer Price Index.
| Type of Benefit or Family | Before 2.0% COLA | After 2.0% COLA | Increase | |
| Benefit Type | All retired workers | $1,377 | $1,404 | $27 |
| All disabled workers | $1,173 | $1,197 | $24 | |
| Family Type | Disabled worker, spouse and one or more children | $2,011 | $2,051 | $40 |
| Aged couple, both receiving benefits | $2,294 | $2,340 | $46 | |
| Aged widow or widow(er) alone | $1,310 | $1,336 | $26 | |
| Widowed mother and 2 children | $2,717 | $2,771 | $54 | |
| — Source: Social Security Administration | ||||
Through the Years: Social Security Cost-Of-Living Adjustments |
|||||||
| Year | COLA | Year | COLA | Year | COLA | Year | COLA |
| 1975 | 8.0 | 1986 | 1.3 | 1997 | 2.1 | 2008 | 5.8 |
| 1976 | 6.4 | 1987 | 4.2 | 1998 | 1.3 | 2009 | 0.0 |
| 1977 | 5.9 | 1988 | 4.0 | 1999* | 2.5 | 2010 | 0.0 |
| 1978 | 6.5 | 1989 | 4.7 | 2000 | 3.5 | 2011 | 3.6 |
| 1979 | 9.9 | 1990 | 5.4 | 2001 | 2.6 | 2012 | 1.7 |
| 1980 | 14.3 | 1991 | 3.7 | 2002 | 1.4 | 2013 | 1.5 |
| 1981 | 11.2 | 1992 | 3.0 | 2003 | 2.1 | 2014 | 1.7 |
| 1982 | 7.4 | 1993 | 3.6 | 2004 | 2.7 | 2015 | 0.0 |
| 1983 | 3.5 | 1994 | 2.8 | 2005 | 4.1 | 2016 | 0.3 |
| 1984 | 3.5 | 1995 | 2.6 | 2006 | 3.3 | 2017 | 0.3 |
| 1985 | 3.1 | 1996 | 2.9 | 2007 | 2.3 | 2018 | 2.0 |
| *The COLA for December 1999 was originally determined as 2.4% based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5%. | |||||||
First, the good news. The Occupational Safety and Health Act (OSHA) generally doesn’t cover your employees’ home offices. The Department of Labor (DOL) states that home-based workplaces aren’t explicitly excluded by OSHA, but the law doesn’t hold employers responsible for home offices and won’t conduct inspections.
An exception to this policy exists for situations “where hazardous materials, equipment, or work processes are provided or required to be used in an employee’s home.” Chances are, not even OSHA with its rigorous regulations, would classify simple office items — for example, staplers, shredders and letter openers — as hazardous equipment.
It’s also worth keeping in mind that, while it seems improbable, if the DOL decided to reverse course, doing so wouldn’t require an act of Congress. That’s because the mandate of OSHA is very broad: “To assure, so far as possible, every working man and woman in the nation safe and healthful working conditions.” The law also states that employers are required to furnish employees “a place of employment which is free from recognized hazards.”
Today, state workers’ compensation laws and standards are where the action is. Consider a relatively recent case in Oregon. The state’s court of appeals upheld a claim filed by a woman who tripped over her own dog and was injured while working at home. The case warrants a closer look, however, to clarify why the employer was held liable.
The employee in question spent four out of five workdays each week on the road, showing window treatments, upholstery and other interior decorating samples to customers. Due to a lack of space at the company showroom (which was the employee’s base of operations) the employer required her to keep excess samples at her residence. While walking to the garage to collect the samples she needed for a particular day’s work, the employee tripped over her dog causing her to break her leg.
The employer’s defense stated it was protected from liability by the “going and coming rule, under which injuries suffered while commuting are generally not compensable,” according to the court record. The judge, however, rejected that argument, and focused instead on whether the employee “established a causal connection between her injury and her employment — whether the claimant’s injury resulted from a risk connected to either the nature of her work or her work environment.”
The court’s careful dissection of the precise circumstances suggests that if the employee had tripped over her dog while walking into her kitchen to get a cup of coffee, she would’ve lost the case.
And there’s another factor that played a role in the judge’s decision. That is, the impetus for the employee’s working at home. “If an employer, for its own advantage, demands that a worker furnish the work premises, the risk of those premises encountered in connection with the performance of work are risks of the work environment, even if they are outside of the employer’s control.” That suggests that if this employee had simply telecommuted for her own convenience, the ruling might have gone the other way.
Even so, that’s just one state court ruling. It’s important to learn how similar issues have been decided in your state, so that you don’t become the next test case.
One insurance company recommends that, unless you’re going to actually inspect an employee’s home office, you should create a workplace safety checklist. It could cover such items as whether furniture is ergonomically correct, the adequacy of the lighting and ventilation, and the presence of fire extinguishers and smoke detectors, to name a few examples. Have prospective telecommuting employees complete and return the checklist to you before they begin working at home.
The Society for Human Resource Management has also weighed in on this topic, and recommends the following:
A key advantage of telecommuting employees is scheduling flexibility, so that last recommendation might not fly. Just be aware that its purpose is to make it easier to establish whether an injury was incurred “in the course of” employment, which is a key legal requirement.
There are practical limits to your ability to prevent work-related injuries when employees are telecommuting. However, doing what you can is better than not trying, both for the well-being of those employees, and avoiding workers’ compensation claims.
Business owners may not be able to set aside as much as they’d like in tax-advantaged retirement plans. Typically, they’re older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan.
The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount.
In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history.
The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan.
A cash balance plan offers significant advantages for business owners — particularly those who are behind on their retirement saving and whose employees are younger and lower-paid. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). And nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can reduce an owner’s contributions even further.
But cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $215,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable.
Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees.
There are some potential risks. The most notable one is that, unlike with profit-sharing plans, you can’t reduce or suspend contributions during difficult years. So, before implementing a cash balance plan, it’s critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations.
Although cash balance plans can be more expensive than defined contribution plans, they’re a great way to turbocharge your retirement savings. We can help you decide whether one might be right for you.
© 2017
If the Age Discrimination in Employment Act (ADEA) were a person, he or she would have been subject to its own protections a decade ago, when the law turned 40. On the ADEA’s 50th birthday earlier this year, Victoria Lipnic, the acting chair of the Equal Employment Opportunity Commission (EEOC) gave the law’s effectiveness mixed reviews.
The landmark legislation’s philosophical underpinning is that “age is just a number; it doesn’t define one’s ability, potential or value,” Lipnic said. And yet “outdated assumptions about age and work persist as stereotypes and barriers to older worker employment,” she noted. Lipnic solicited input on how the ADEA could be improved, and got plenty of suggestions.
Employers that have never been hit by any of the thousands of age discrimination claims filed each year might be forgiven — though not by the EEOC — for being a little fuzzy about how ADEA defines age discrimination. Here’s an overview, based on an EEOC summary:
The ADEA does allow reverse discrimination — that is, policies favoring older employees over younger ones, even if both are at least 40. In some states, the the age threshold is even lower than 40, so be sure you know how your state defines “older.”
The meaning of a “reasonable factor other than age” referenced above was the subject of regulations finalized in 2012. According to the EEOC, that regulation reflected recent Supreme Court rulings. It “clarifies that the ADEA prohibits policies and practices that have the effect of harming older individuals more than younger individuals” without a provable job-related justification.
Suppose you have a policy requiring employees to be able to run up and down a flight of stairs five times in five minutes (this example is extreme, but useful for illustrative purposes). Chances are, a lot of employees 40 and older would have a tough time meeting that standard. Possibly a lot of younger workers would, too. If that rule had the effect of discriminating against older employees, you would have to show why the policy is necessary from a business standpoint. Companies that genuinely need such restrictions would be wise to get the opinion of a labor law attorney to back them up.
How employment recruiting notices are worded is regulated by the ADEA. It’s generally illegal to include “age preferences, limitations, or specifications,” in the job description, according to the EEOC. Also, while the ADEA doesn’t explicitly prohibit an employer from asking an applicant’s age or date of birth, don’t ask unless there’s a nondiscriminatory reason why the information is needed.
Job notices “may specify an age limit in the rare circumstances where age is shown to be a bona fide occupational qualification reasonably necessary to the normal operation of the business,” the EEOC states. The devil is often in the details.
Keep in mind, employer efforts to determine a job applicant’s age obliquely don’t go unnoticed. When asked by the EEOC to weigh in, the American Association of Retired Persons (AARP) highlighted some practices that employers use to attempt an end-run around the ADEA. For example, “Specifying a minimum number of years of experience is legitimate, but expressing a maximum number of years of experience has a clear and predictable disparate impact on older participants,” the group stated.
Here are other recruiting practices the AARP believes should be viewed as discriminatory:
According to the AARP’s testimony, the “newest and perhaps most pernicious frontier of age discrimination is the use of ‘big data’… to recruit and refer job applicants.” Using that technology, “discrimination is buried in datasets and algorithms that will be more difficult to detect.” This might represent a cat-and-mouse game with the EEOC, or simply an unintended consequence of the advancement of technology.
One thing is clear: With watchdogs such as the AARP and others nipping at the EEOC’s heels, employers cannot rest easy just by believing they don’t engage in age discrimination in the most visible ways. Keeping attuned to the ever-evolving legal standards and enforcement trends is essential. As for thinly-veiled attempts to determine an individual’s age, rest assured, the EEOC has seen it all. They won’t likely be amused by employers who think they’ve outsmarted the system.
School is back in session. So, it’s time for a refresher on tax breaks for work-related education expenditures. Here’s what individual taxpayers need to know.
The American Opportunity credit equals 100% of the first $2,000 of qualified postsecondary education expenses plus 25% of the next $2,000 of qualified education costs (subject to certain income-based phaseouts). The maximum annual credit is $2,500, and it’s potentially available regardless of whether your classes are work-related.
Self-employed individuals may be eligible to deduct qualified work-related education expenses on their business tax forms. Self-employeds don’t have to worry about the 2%-of-adjusted-gross-income limit for itemized deductions or the alternative minimum tax rules. But they should heed the warnings about undergraduate degrees and MBAs provided in the main article.
Qualified expenses include:
What costs are not eligible? You can’t claim the American Opportunity credit for the costs of student activities, athletics, health insurance, or room and board.
You’re ineligible for the American Opportunity credit if you’ve already completed four years of undergraduate college work as of the beginning of the tax year. You’re also ineligible for the credit if you’re married and don’t file jointly with your spouse. On a more favorable note, you can claim the credit for your own expenses and additional credits for your spouse and dependent children if they also have qualified expenses.
To qualify for this credit, you must attend an eligible institution. Fortunately, most accredited public, nonprofit, and for-profit postsecondary schools meet this definition, and some vocational schools do, too. The two main criteria are that 1) the school must offer programs that lead to a recognized undergraduate credential, such as Associate of Arts, Associate of Science, Bachelor of Science (BS) or Bachelor of Arts (BA), and 2) the school must qualify to participate in federal student aid programs. Additionally, the American Opportunity credit is allowed for only a year during which you carry at least half of a full-time load, for at least one academic period beginning in that year.
You do have to be a fairly serious student to be eligible for the credit, but you don’t have to go to school full time or actually intend to complete a degree or credential program.
Finally, the American Opportunity credit may be partially or completely phased out if your modified adjusted gross income (MAGI) is too high. For 2017, the MAGI phaseout ranges are:
The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses, with a maximum credit amount of $2,000. In addition to applying this credit to the costs of the first four years of full-time undergraduate study, you can use this credit to help offset costs:
The credit is potentially available regardless of whether your classes are work-related. Only one Lifetime credit can be claimed on your return, even if you have several students in the family. You also can’t claim both the American Opportunity and Lifetime Learning credits for the same student for the same year. However, you can potentially claim the American Opportunity credit for one or more students and the Lifetime Learning credit for another.
The requirements for the Lifetime Learning credit are similar to the requirements for the American Opportunity credit. Qualified expenses are tuition, mandatory enrollment fees, and course supplies and materials (including books) that must be purchased directly from the school itself. Other expenses — including optional fees and room and board — are off limits.
In addition, the school you attend must be an eligible institution. If you are married and don’t file jointly with your spouse, you are ineligible for the Lifetime credit, and the credit is phased out if your modified adjusted gross income (MAGI) is too high. However, the ranges for the Lifetime credit are lower than for the American Opportunity credit, which means they’re more likely to affect you. For 2017, the MAGI phaseout ranges are:
If you’re fortunate enough to work for a company that offers an educational assistance plan, you can potentially receive up to $5,250 in annual tax-free reimbursements for your education costs. These plans are also called Section 127 plans. The tax rules permit Sec. 127 plans to cover just about anything that constitutes education, including graduate coursework, regardless of whether it’s job-related. However, some plans only reimburse for education that is, in fact, job-related. That’s up to your employer.
There are only two restrictions under the tax rules:
1. The education must be for you, the employee, rather than a family member, and
2. The plan can’t pay for courses involving sports, games or hobbies unless they relate to company business.
Your employer can also give you an unlimited amount of tax-free reimbursements to cover qualified education expenses. In a nutshell, you have qualified expenses if the education:
1. Is required by your employer or by law or regulation in order for you to retain your current job, or
2. Maintains or improves skills required in your current job.
Qualified expenses don’t include the cost of education that sets you up for a new occupation or profession. If your employer pays for that kind of education, the payments count as taxable compensation — unless they’re run through a Sec. 127 educational assistance plan.
If your employer doesn’t provide any financial assistance, you still may be able to write off all or a portion of your qualified education expenses as a miscellaneous itemized deduction for unreimbursed employee business expenses. These expenses are combined with other miscellaneous itemized deduction items, such as union dues, investment expenses, and fees for tax preparation and advice. If the sum total of all your miscellaneous expense items exceeds 2% of your adjusted gross income (AGI), you can write off the excess.
The IRS says an undergraduate degree automatically prepares you for a new profession, so costs to obtain a BA or BS aren’t qualified education expenses, and you can’t deduct them. The IRS makes the same argument about Master of Business Administration (MBA) degrees, but several U.S. Tax Court decisions disagree. Those decisions say MBA costs are qualified expenses if the extra degree simply maintains or improves skills needed in your current job, which is often the case.
The IRS also says the cost of a law school degree can’t be deducted because law school prepares you for a new profession, even if you don’t actually intend to practice law.
Finally, the cost of any other advanced degree that prepares you for a new profession isn’t deductible. For instance, if you’ve been working as a car rental agency representative since you graduated with a BS in chemical engineering, you can’t deduct the cost of going back to school to obtain a master’s degree or doctorate in chemical engineering to prepare you to enter that field.
Unfortunately, under the current alternative minimum tax (AMT) rules, you get no write-off for miscellaneous itemized deduction items. So if you’re subject to AMT, you may be ineligible for any work-related education deductions.
The issue of tax breaks for education expenses can be confusing. There are multiple breaks with multiple sets of rules, and several breaks may potentially be available for the same expenses. Your tax professional can sort out the rules and advise you on how to get the most tax savings from your work-related education expenses.
Are you planning to sell real estate before the end of the year? Naturally, you hope to entice a qualified buyer who has plenty of cash on hand. But being open to the idea of an installment sale may help you seal the deal. Fortunately, installment sales also offer tax savings for sellers. Here’s how these deals work.
When you sell real estate on the installment basis, you can elect out of installment sale reporting by paying tax on the entire gain in the year of the sale. Why would you ever do that? There are several possible reasons.
For example, you might expect to pay lower tax rates in 2017 than in 2018 or 2019. In that case, you may prefer to pay the full amount of tax due on your 2017 tax return.
Or you might have capital losses or suspended passive losses that will offset the tax on an installment sale gain. Therefore, you may benefit by reporting all your gain in the year of the sale, instead of spreading it out over time.
Not sure how to report your sale? Your tax advisor can calculate your cumulative tax liability with and without installment sale reporting. Then you’ll have the information needed to make an informed choice on your 2017 tax return.
With installment sales, the buyer makes payments to the seller over time, rather than handing over a lump sum at closing. The buyer’s obligation to make future payments to the seller may be spelled out in a deed of trust, note, land contract, mortgage or other evidence of debt.
Under the tax code, an installment sale allows the buyer to defer tax on a gain from the sale and possibly reduce the overall tax liability by spreading out the tax liability over several years. So, it’s a popular tax planning technique for real estate owners.
To qualify as an installment sale under the tax law, you must receive at least one payment after the year of the sale. For example, if you sell real estate in October and receive a total of three monthly payments in October, November and December, you aren’t eligible for installment sale reporting. Conversely, if you arrange to receive only two payments — say, one in December 2017 and the other in January 2018 — you qualify.
Moreover, if it suits your needs, you can “elect out of” installment sale treatment when you file your 2017 tax return. (See “Should You Elect Out of Installment Sale Treatment?” at right.) Also note that the installment sale rules apply only to gains, not losses.
The following types of transactions are not eligible for installment sale reporting:
For these types of transactions, you must report the entire gain on the sale in the year in which it occurs.
Although installment sales require you to wait several years to receive the property’s full fair market value, they offer three key tax advantages:
The taxable portion of each payment is based on the “gross profit ratio.” To calculate this ratio, divide the gross profit from the sale by the price.
For example, in November 2017, you sell a small apartment building that you acquired in 2005 with an adjusted tax basis of $600,000. The buyer agrees to pay $1.5 million in three annual installments of $500,000 each. Because your gross profit is $900,000 ($1.5 million – $600,000), the taxable percentage of each installment received is 60% ($900,000 / $1.5 million). When you report the sale on your 2017 tax return, you have to pay tax on only $300,000 of the gain (60% x $500,000). You’ll also be taxed on $300,000 of gain in 2018 and 2019.
Beware: The tax law contains some hidden “tax traps” for the unwary when property is sold on the installment sale basis. First, any depreciation claimed on the property must be recaptured as ordinary income to the extent it exceeds the amount allowed under the straight-line method. The adjusted basis of the property is increased by the amount of recaptured income, thereby decreasing the gain realized in future years.
In addition, if the sales price of your property (other than farm property or personal property) exceeds $150,000, interest must be paid on the deferred tax to the extent that your outstanding installment obligations exceed $5 million.
Finally, sales of depreciable property to related parties are prohibited unless you can demonstrate that tax avoidance wasn’t a principal purpose of the sale. Furthermore, if the related party disposes of the property within two years, either by resale or some other method, the remaining tax is due immediately.
Important note: The definition of a “related party” isn’t limited to immediate family members, such as your spouse, children, grandchildren, siblings and parents. It also includes a partnership or corporation in which you have a controlling interest or an estate or trust that you’re connected to. To avoid any negative tax results when deals involve related parties, consider adding a clause that stipulates that the property can’t be disposed of within two years.
Installment sales aren’t right for every real estate transaction, but for patient sellers who aren’t strapped for cash, installment sales can help finalize an agreement. Your tax advisor can help you cement a profitable deal with favorable tax consequences.
© Copyright 2017. All rights reserved.
Brought to you by: McClanathan, Burg & Associates, LLC
Well-crafted, up-to-date estate planning documents are an imperative for everyone. They also can help ease the burdens on your family during a difficult time. Two important examples: wills and living trusts.
A will is a legal document that arranges for the distribution of your property after you die and allows you to designate a guardian for minor children or other dependents. It should name the executor or personal representative who’ll be responsible for overseeing your estate as it goes through probate. (Probate is the court-supervised process of paying any debts and taxes and distributing your property after you die.) To be valid, a will must meet the legal requirements in your state.
If you die without a will (that is, “intestate”), the state will appoint an administrator to determine how to distribute your property based on state law. The administrator also will decide who will assume guardianship of any minor children or other dependents. Bottom line? Your assets may be distributed — and your dependents provided for — in ways that differ from what you would have wanted.
Because probate can be time-consuming, expensive and public, you may prefer to avoid it. A living trust can help. It’s a legal entity to which you, as the grantor, transfer title to your property. During your life, you can act as the trustee, maintaining control over the property in the trust. On your death, the person (such as a family member or advisor) or institution (such as a bank or trust company) you’ve named as the successor trustee distributes the trust assets to the beneficiaries you’ve named.
Assets held in a living trust avoid probate — with very limited exceptions. Another benefit is that the successor trustee can take over management of the trust assets should you become incapacitated.
Having a living trust doesn’t eliminate the need for a will. For example, you can’t name a guardian for minor children or other dependents in a trust. However, a “pour over” will can direct that assets you own outside the living trust be transferred to it on your death.
There are other documents that can complement a will and living trust. A “letter of instruction,” for example, provides information that your family will need after your death. In it, you can express your desires for the memorial service, as well as the contact information for your employer, accountant and any other important advisors. (Note: It’s not a legal document.)
Also consider powers of attorney. A durable power of attorney for property allows you to appoint someone to act on your behalf on financial matters should you become incapacitated. A power of attorney for health care covers medical decisions and also takes effect if you become incapacitated. The person to whom you’ve transferred this power — your health care agent — can make medical decisions on your behalf.
These are just a few of the foundational elements of a strong estate plan. We can work with you and your attorney to address the tax issues involved.
© 2017
In today’s economy, many individuals are self-employed. Others generate income from interest, rent or dividends. If these circumstances sound familiar, you might be at risk of penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are three strategies to help avoid underpayment penalties:
1. Know the minimum payment rules. For you to avoid penalties, your estimated payments and withholding must equal at least:
2. Use the annualized income installment method. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income — especially if it’s skewed toward year end. Annualizing calculates the tax due based on income, gains, losses and deductions through each “quarterly” estimated tax period.
3. Estimate your tax liability and increase withholding. If, as year end approaches, you determine you’ve underpaid, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Because withholding is considered to have been paid ratably throughout the year, this is often a better strategy than making up the difference with an increased quarterly tax payment, which may trigger penalties for earlier quarters.
Finally, beware that you also could incur interest and penalties if you’re subject to the additional 0.9% Medicare tax and it isn’t withheld from your pay and you don’t make sufficient estimated tax payments. Please contact us for help with this tricky tax task.
© 2017
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only if they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.
Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. If tax reform legislation is signed into law, it might be especially beneficial to bunch deductible medical expenses into 2017.
Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but only to the extent that they exceed 10% of your adjusted gross income. The 10% floor applies for both regular tax and alternative minimum tax (AMT) purposes.
Beginning in 2017, even taxpayers age 65 and older are subject to the 10% floor. Previously, they generally enjoyed a 7.5% floor, except for AMT purposes, where they were also subject to the 10% floor.
By bunching nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.
Normally, if it’s looking like you’re close to exceeding the floor in the current year, it’s tax-smart to consider accelerating controllable expenses into the current year. But if you’re far from exceeding the floor, the traditional strategy is, to the extent possible (without harming your or your family’s health), to put off medical expenses until the next year, in case you have enough expenses in that year to exceed the floor.
However, in 2017, sticking to these traditional strategies might not make sense.
The nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27 proposes a variety of tax law changes. Among other things, the framework calls for increasing the standard deduction and eliminating “most” itemized deductions. While the framework doesn’t specifically mention the medical expense deduction, the only itemized deductions that it specifically states would be retained are those for home mortgage interest and charitable contributions.
If an elimination of the medical expense deduction were to go into effect in 2018, there could be a significant incentive for individuals to bunch deductible medical expenses into 2017. Even if you’re not close to exceeding the floor now, it could be beneficial to see if you can accelerate enough qualifying expense into 2017 to do so.
Keep in mind that tax reform legislation must be drafted, passed by the House and Senate and signed by the President. It’s still uncertain exactly what will be included in any legislation, whether it will be passed and signed into law this year, and, if it is, when its provisions would go into effect. For more information on how to bunch deductions, exactly what expenses are deductible, or other ways tax reform legislation could affect your 2017 year-end tax planning, please contact us.
© 2017
