Tuesday, December 8, 2015

Are Gift Cards Taxable Income to Employees?

This time of year we get lots of questions about giving gifts to employees.  

Are employee gifts taxable to the employee?  What about gift cards or certificates?
The answer depends on the type of bonus or gift that you give.  Each have varying tax consequences.  Let's take a look at some of the most popular ones and their tax treatment.

Cash Bonus
Giving a cash bonus to employees during the holidays, or anytime throughout the year, is treated as taxable income to the employee regardless of the amount.  
The amount of the bonus will be subject to payroll and income taxes as if they were normal wages.   
Non-cash Gifts
A small property gift given to an employee will most likely be excludable from income as a de minimis fringe benefit. 
The term de minimis is generally used to describe something that is too small or insignificant to be considered, something unimportant.  It actually comes from a Latin phrase, "de minimis non curat lex," meaning the law does not deal with trivial matters.

So from a tax standpoint, a de minimis is a small amount not subject to taxation. The IRS says a de minimis fringe is "small in value compared to the amount of total compensation."

The IRS provides some examples of de minimis awards which can be excluded from employee's W2 wages:

  • Holiday turkeys or hams
  • Flowers, plaques, or coffee mugs for special occasions
  • A gold watch on retirement
  • Parking for an employee of the month, if the amount doesn't exceed certain limits
  • Occasional award dinners or holiday dinners
 

Gift Certificates or Gift Cards

This has led to many questions about gift certificates and gift cards given to employees.  Since they aren’t cash and tend to be relatively low in fair market value, many assume they are de minimis fringe benefits.  
Just today a client texted me this question:
"We want to give $50 Macy's gift cards to our employees.  Do we have to include this in their taxable income?"

According to the IRS,

  1. Cash or cash equivalent items provided by the employer are never excludable from income.
  2. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
Because gift certificates and gift cards are cash equivalents, or easily convertible to cash, they do not meet the requirements to be excluded from income. 
Also, since the value of the gift card or gift certificate is easily determinable, they must be treated as wages, subject to payroll and income taxes.
Therefore, in the example above, the client must include the value of the gifts cards in the employee's gross wages, subject to payroll and income taxes.
How Do I Gross Up the Gift or Bonus?
Most employers want to give employees a nice round check for the holidays, like $500.  They don't want to give them a check for $396.88 after taxes. 

You can "gross up" the payroll so that the employer covers the taxes and the employee net check is $500 or whatever amount you want. 

Paycheckcity has a "gross up" calculator you can use to help determine the net amount of a bonus check, allowing for payroll taxes.  If you are one of our clients you can send us your bonus amounts and we will do the calculation for you.
 

What's the Moral of the Story?

If you give your employee a holiday ham, it will be excluded from their income.  If you give your employee a VISA gift card to purchase a holiday ham, it is income to the employee, subject to payroll and income taxes!

Get More Help


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Wednesday, November 18, 2015

What Is The Penalty For Not Having Health Insurance?

If you can afford health insurance but choose not to buy it, you must pay a fee called the individual shared responsibility payment.  You might also see it referred to as the "penalty," "fine," or "individual mandate."
But you may be wondering, "Which costs less, health insurance or the penalty?"
That is a good question since the decision of whether you will purchase health insurance for 2016 needs to be made NOW.   If you want coverage to begin January 1, 2016 your last day to sign up is December 15th.  

Also, many people are under the false impression that the tax penalty is only $95 and that it's cheaper to pay the penalty rather than purchase health insurance.    

So what is the tax penalty for not having insurance in 2016?  Let's find out.


As the table above shows, you will pay…
  1. Either a fixed fee OR 
  2. a percentage of your income, whichever is greater.
The fixed fee penalty usually hits low income families and ensures everyone pays at least a minimum penalty. 
The percentage of income penalty usually hits middle class or wealthier families and ensures that the penalty isn't so small it's just an inconvenience.
How do I estimate my tax penalty?
The penalties started in 2014 and go up each year.  Using the table above, follow these steps to estimate your penalty:  (You can also use the penalty calculator and miss all the fun!)
  1. Calculate the fixed fee penalty
  2. Calculate the percentage of income penalty
  3. Compare the two results; you owe the larger of the two
There are a few situations that might decrease your family’s penalty.
  • Will your family have health insurance for part of the year?
    Only pay the penalty for the months your family is uninsured. For example, if your family was uninsured for seven months of the year, you would only pay seven-twelfths of the yearly health insurance penalty.
  • Do you have a large penalty?
    The penalty amount is capped at the national average cost of a bronze-tier health insurance plan for that year. This amount changes every year, so the IRS announces each year's new average figure several months before people start preparing their tax returns. For your 2015 taxes, the amount is $207 per month or $2,484 per year for individuals and $1,035 per month or $12,420 for families.
  • Can’t find affordable health insurance?
    If you can't find health insurance that costs you less than 8% of your household income, your family may be exempt from the penalty.

Let's take what we've learned so far and apply it with the following example...
Example
Luke and Krystal have 3 young children.  Nobody in the family has health insurance.  
Step 1: Calculate the fixed fee penalty
They need to calculate the family's minimum penalty for the year 2016.
The table shows the minimum penalty is $695 for each individual in the family. But only the adults owe the full amount. The minimum penalty for each of the kids is half that amount, or $347.50.
$695 (for Luke) + $695 (for Krystal) + $347.50 (for child 1) + $347.50 (for child 2) +$347.50 (for child 3) = $2,432.50 (for the family)
But, a family’s minimum fixed-fee penalty maxes out at three times the individual minimum penalty, or $695x 3 = $2,085. Since the fixed-fee maximum of $2,085 is less than the $2,432.50 we calculated, they’ll use $2,085 for the amount of their minimum family penalty as they move forward with their calculations.
Step 2: Calculate the percentage of income penalty
From the table above, the penalty percentage for 2016 is 2.5% of the income above the filing threshold.
Luke and Krystal estimate their combined household income will be $150,000 in 2016. They file their taxes as a married couple filing jointly, so they’ll use $20,300 as an estimate of their filing threshold, subtracting it from their income before they calculate the percentage.
$150,000 - $20,300 = $129,700
The family’s income - the filing threshold = the portion of their income to be penalized.
$129,700 x 0.025 = $3,242.50
The portion of income to be penalized x the 2.5% penalty (0.025) = their percentage of income penalty.
Step 3:  Compare the two and use the larger
Now that you’ve calculated your family’s minimum penalty and your family’s percentage of income penalty, you need to compare them. Your family’s shared responsibility payment will be based on the larger of those two amounts.
Luke and Krystal's minimum family penalty for 2016 was $2,085 from step 1. Their family’s percentage of income penalty was $3,242.50 from step 2. Since their percentage of income penalty is larger than the minimum penalty, that’s the figure their family penalty will be based on. If their family is uninsured all year, they will owe a shared responsibility payment of $3,242.50 when they file their 2016 income taxes by April 15, 2017.
TIP> Don't forget to check if you can reduce the penalty by one of the items mentioned above.
Do you have a large penalty?
The $3,242.50 they owe is well below the national average cost of a bronze-tier health plan for a family of five, $12,240, so that penalty cap doesn't affect them. 
Will the family have coverage part of the year?
If they are only uninsured part of the year, their penalty will be lower. Let's say Krystal switches jobs in July, and her new employer offers health insurance. If the entire family is covered by health insurance starting in September, then they will only be uninsured for the first 8 months of the year. In this case, they only have to pay the penalty for the portion of the year they are without coverage.
$3,242.50 x 8/12 = $2,161.67
The yearly penalty amount x the part of the year they were uninsured = the final family penalty owed.
In this case, Luke and Krystal will owe a shared responsibility payment of $2,161.67 because their family lacked health insurance coverage for 8 months of 2016. Along with their 2016 income taxes, this penalty tax is due to the IRS by April 15, 2017.
 A simple penalty calculator
Click the calculator above to estimate penalty
So which costs less, health insurance or the penalty?
Well, unfortunately, like everything in life the answer is not that simple.  You can't know for sure because it's impossible to know what kinds of health care expenses you will incur in the upcoming year. 
Ultimately, the reason for having health insurance isn't so you only have to pay $30 for a doctor's visit.  It's to protect you from financial losses in the event you have serious medical problems.  While you may save a few hundred or few thousand dollars a year by forgoing health insurance and paying the penalty instead, those savings are small in comparison to the losses you'll face if you have to pay $400,000 out of pocket for open heart surgery because you didn't have health insurance.

So get started today and check out the resources below.  Let me know if you have any questions.

Resources
Start a 2016 application now
Get quotes or speak with a licensed agent
Use calculator to estimate tax penalty

If you have questions about your specific situation please visit our website www.kinzeyarndt.com or call 417-882-9000 and schedule an appointment.

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Wednesday, November 11, 2015

What Happens to My 401(K) if I File For Bankruptcy?

In most cases, your retirement accounts including a 401k are protected from your creditors in bankruptcy. 
What Happens to my Property in Bankruptcy? 
Many people mistakenly believe that they will have to give up almost all of their property if they file bankruptcy relief. 
While a Chapter 7 bankruptcy trustee has the power to liquidate your nonexempt assets to pay back creditors, state and federal laws provide exemptions that protect a certain amount of your property in bankruptcy. Specifically, retirement accounts have some of the broadest protections in bankruptcy.
Are 401k's Excluded Property in Bankruptcy?
401k and other retirement accounts that are qualified under the Employee Retirement Income Security Act (ERISA) are typically not part of your bankruptcy estate.  This means they can't be taken by the trustee to pay your creditors.  Most employer sponsored retirement plans are ERISA qualified. But if you are considering filing for bankruptcy, check with your employer to make sure your 401k is qualified.
The United States Supreme Court ruled that ERISA qualified retirement plans are not property of the bankruptcy estate, and cannot be taken from you by the trustee.  Examples of ERISA qualified retirement plans include:  
  • 401(k)s
  • 403(b) or profit sharing plans
  • 457(b) deferred compensation plans
  • governmental plans, and
  • tax exempt organizational retirement plans.  

The major advantage is that these types of plans are protected up to an unlimited amount – you don’t have to worry about the trustee distributing any of these assets to your creditors.  
Are Traditional and Roth IRA's Also Protected in Bankruptcy?
Federal bankruptcy law also protects non-ERISA retirement accounts.  Non-ERISA plans include:
  • IRA’s
  • Roth IRA’s
  • SEP-IRA’s (for small business owners)
  • SIMPLE IRA’s (for self-employed individuals), and
  • similar retirement plans.  

Unlike ERISA plans, the protection for traditional and Roth IRAs is capped at $1,245,475. If you have more than one traditional or Roth IRA, you can only protect $1,245,475 combined (not per account). This means the bankruptcy trustee may be able to take any amount over $1,245,475 in order to repay your creditors.  This cap is adjusted every three years for inflation, and was last adjusted in April 1, 2013.  
The new bankruptcy law, however, did give unlimited protection to SEP-IRAs and SIMPLE IRAs.  That means that if you have a SEP-IRA or a SIMPLE IRA, the trustee cannot take any of it, regardless of its value or amount. 
When Is a Retirement Account Not Protected?
Although your retirement accounts are generally safe from your creditors when you file for bankruptcy, there are a few exceptions.
  • If you withdraw money from a retirement plan, it is no longer protected.
  • These rules only apply if you file for bankruptcy.
  • If the IRS has filed a valid tax lien against you, it may be able to reach your retirement assets.
  • Divorcing spouses may have access to your retirement accounts.


This is just a high level overview of a complicated area of law.  If you are considering filing for bankruptcy it is advisable to consult a bankruptcy attorney.

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Monday, April 20, 2015

How Did Someone Hijack My Tax Refund?!

People who waited until Wednesday’s deadline to file their tax returns may have found that someone hijacked their refund.  That’s what happened to several of my clients this year.  Here are a couple of their stories:

One client arrived home to find a letter from the IRS that they were conducting a review of questionable income amounts and claims for credits listed on his return.  His conversation went like many thousands before...

Client: "What return?  I haven't even filed yet.
IRS: "Ummm…yes you have". 

Well my client was right of course; he hadn't filed his return...but someone else had filed it for him.

Other clients discovered the identity theft when I attempted to electronically file the return.  The IRS will not accept a return that has already been filed.

Naturally, the first question they ask me is:  "How can this happen?"  That's a good question and one I myself wanted to know the answer too. This is how it works: 

A criminal steals your identity (more on that later), files a bogus tax return in your name and collects a refund check from the IRS.  Then when you go to legitimately file your return, it’s rejected by the IRS because someone else already filed as you!

It’s such a simple scam you would think surely the IRS is protecting themselves and taxpayers from it….but they aren't.


Corey Williams told his story to 60 minutes.  He used to be a legitimate tax preparer until his boss turned him on to the scam.  Before he was arrested and sentenced to 40 months in prison, he made millions of dollars.   He said all you need for this fraud is a laptop, internet access, someone's SSN, date of birth, not even their name.  

According to Mr. Williams, it's as easy as one, two, and three.

1.       Collect or buy a list of stolen identities (available for sale on the black market for $3 - $5)
2.       Go to one of dozens of tax preparation sites on line, and using the stolen social security numbers and dates of birth you fill out a completely bogus W-2 form, claiming a modest refund of a few thousand dollars.
3.       Tell the IRS where to send the money, your house, wired to your bank account or loaded onto a prepaid debit card.

That's it.  You simply put down a name and a SSN, make up an employer or the amount of money that was earned and withheld.  Send it off to the IRS and they will send you a check back for the refund.

But how did the IRS not catch this?


You would think the IRS computers would notice that they were sending thousands of checks to a single address.  But they don't. 

And you might expect the IRS would match taxpayer returns with legitimate W-2 forms filed by employers.  It doesn't do that either because the law requires refund checks to be sent out within six weeks; and employer W-2's are often not available until months later.  So if a bogus return is received before a legitimate one, the check will go to the criminals. 

It’s a pay first, ask questions later tax refund system. 

This scam has been around since 2008 and the IRS still cannot tell if the person filing the return and claiming the refund is actually the real taxpayer.  In 2014 the IRS lost $6.5 BILLION in fraudulent refunds. 

Yes that's B for billions. 

The IRS is well aware of the magnitude of the problem.  But with budget cuts and an outdated system there is only so much they can do.   

Image result for jfk"We’re running applications we were running when John F. Kennedy was president. “  
 John Koskinen
    IRS Commissioner

But despite the $200 million IT budget cut this year the most notable step the IRS has taken to protect taxpayers has been the roll-out of an identity protection PIN.  Essentially, if you’ve been a victim of tax fraud, the IRS will issue a PIN number to use when filing electronically.

This is designed to address the problem inherent to this kind of fraud: Unlike passwords or a credit card, you can’t “reset” your SSN – you’re stuck with it for life.

Unfortunately, the PINS are currently only available to filers with past resolved fraud cases as well as to taxpayers in Georgia, Florida and the District of Columbia—areas with high incidences of fraud. They are also available to taxpayers with suspicious activity on their accounts.

To get a unique PIN number or find out if you are eligible, visit the IRS website or call 1-866-704-7388. You will be asked for information from last year’s tax return and can then select a six-digit PIN to file your return. The PIN is only good for one tax year, so the IRS will send you a new one in December. 

April 15th has come and gone but tax refund fraud will be sticking around until some major changes are made to how we file returns.  Researching this issue has helped me realize how serious identity theft is and the measures that everyone should be taking to protect their personally identifiable information.   No one is immune no matter how tightly held your personal information is.

Stay tuned for articles and resources on what you can do to minimize your exposure. 

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Sunday, March 1, 2015

Fake IRS Phone Calls Tops List of Tax Scams

Earlier this week I received a call from a client who came home from work to find the following message on his voicemail:

"Hello, we have been trying to reach you. This call is officially a final notice from the IRS, Internal Revenue Service. The reason of this call is to inform you that IRS is filing a lawsuit against you."

Fortunately, my client knew better than to call the number in the message.  Instead he called me to confirm this really was a scam.  But not everyone is so fortunate.

“Oh I would never fall for a scam like that”, you say?  Hopefully not.  But sadly many have.  

In fact the IRS impersonation phone scam has claimed nearly 3,000 victims who have collectively paid over $14 million, according to a recent TIGTA report

Phones are ringing in every state.  Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer.

If the victim refuses to cooperate, they are threatened with arrest, lawsuit, deportation, or suspension of a business or driver’s license.

These calls can be so intimidating that many start looking for an attorney and others rush out to load up thousands of dollars on prepaid cards.  

It’s no accident that calls are popping up during tax season when many are stressed out about their finances; scammers are looking for vulnerable people who don’t know how things work. 

So how do things work with the IRS?

Five Easy Ways to Spot Suspicious Calls
Here are five things the scammers often do that the IRS will not do.  The IRS will never:

  1. Call to demand immediate payment, nor will we call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
What should I do if a caller says they are with the I.R.S.?
Don’t provide any personal information and don’t engage with the caller (other than, perhaps, to ask their name so you can include it in a complaint). Then, hang up.

You can report the incident to the Treasury inspector general for tax administration by:
·         Calling 1-800-366-4484
·         Emailing  complaints@tigta.treasury.gov
·         Or filling out an online form

When you file the complaint, you will be asked to choose a five-digit PIN. If you are contacted about the incident, you should ask for the PIN, so you can be sure you are speaking to a legitimate agent.

You can also file a complaint with the Federal Trade Commission on its website using the FTC Complaint Assistant.  

What if I think I may actually owe taxes?
If you are concerned, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.

What else should I watch out for?
Fake phone calls and emails are just some of the "Dirty Dozen" of tax scams the IRS is alerting tax payers about this year.

Be on the lookout for preparers who try to steer you towards cheating on your taxes, by falsifying income to claim tax credits, hiding income with fake documents, using abusive tax shelters, or making excessive claims for tax credits.

Following the loss of over 80 million records in the Athem insurance breach in late January, you need to be extra cautious of tax-related scams this tax season. Millions of Social Security numbers were also taken in the breach. With just that number and your date of birth, criminals can file fake tax returns in your name and try to steal your tax refund.

Be smart and protect yourself.  

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Tuesday, February 24, 2015

Missouri Income Tax Deduction for New Workers

One of the fun parts about my job is finding cool tax deductions or credits that people don’t know about but can be a real tax saver.  The one I want to talk about today is called the “Missouri Income Tax Deduction for New Workers”.


Notice this is a “state” tax deduction.  The thing about state deductions is that most of them won’t just pop up on your tax software.  You have to actually know about them and specifically request the forms to come up.   How sneaky is that.

Here’s how it works:

If you are a small business you may qualify to claim a special state tax deduction for each new job you create in 2013 and 2014.

Eligible Small Business:
  • Employ fewer than 50 full-time and part-time employees at all times during the tax year for which the deduction is taken.

Eligible Employee:
  • Completed at least 52 consecutive weeks of full-time employment (average 35-hours/week).
  • Earned wages for the 52 week period above the “county average wage” as determined by the department of economic development.  – click here for average wages by county   
    • (Greene County Average wage for 2013 was $36,840)
  • Not previously employed in Missouri by the small business or any business affiliated with the small business for a period of 12 months prior to the creation of the new job.

State Tax Deduction:
  • The deduction equals $10,000 for each new job created or $20,000 for each new job created in which employer paid at least 50% of the employees’ health insurance.

“New” Jobs Created:
  • The small business must choose a single date to compare the number of full-time employees on that date in the deduction year, to the number employed on the same date in the immediately preceding year.
Example: 

ABC, Inc., an S-Corporation, had fewer than 50 full-time and part-time employees in Greene County for all of 2013. ABC chooses December 31st as its comparison date. On December 31, 2014, ABC employed 35 full-time workers, and on December 31, 2013, ABC had only 33 full-time workers. The two new full-time employees made more than the county average wage of $36,840.

ABC, Inc. is allowed to deduct an additional $20,000 (2 times $10,000) on their 2014 state income tax return. The $20,000 deduction is passed through to the S-Corporation shareholders, who take the deduction on their Missouri state income tax return. Total tax savings to the shareholders would be $1,200 (6% state tax rate times the $20,000 deduction).

If your business is growing and you meet the criteria above let me know and we will take the deduction on the 2014 return.  


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Thursday, February 19, 2015

Relief for the $100/Day ACA Penalty

The IRS issued Notice 2015-17 clarifying the application of Notice 2013-54 to certain situations. The notice provides relief for employers who are not applicable large employers (ALES), as defined in §4980H. In summary, the IRS will not assess any penalties for reimbursement arrangements for 2014 through June 30, 2015. After June 30, 2015, the IRS states they may start assessing penalties. Specifically, the IRS addresses:
  • The transitional relief through June 30, 2015.
  • The treatment to 2% S corporation shareholders.
  • Reimbursing for Medicare, TRICARE or Medigap.
  • Increasing employee compensation on an after-tax basis in a way that is not tied to health insurance.
  • Treating insurance reimbursements as taxable wages.
The IRS confirmed that for the time being, they'll allow an S corporation shareholder to deduct reimbursed insurance as a self-employed health insurance under §162 (l). 

The IRS has also clarified that treating insurance reimbursements as after-tax is still in violation of Notice 2013-54; however, the IRS will not assess penalties for 2014. 

Lastly, the IRS clarified that if an employer offers a group health plan, it may be integrated with a reimbursement for Medicare premiums without violating the Market Reforms.

Stay tuned for further guidance as this impacts every business who has reimbursed, or are currently reimbursing, employees for health insurance.

If you need further assistance, please contact me at Kinzey & Arndt, CPA.  


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