August 2021

 

Big Boost for Dependent Care Credit

New law enhances tax benefits

 

Do you pay someone to watch your young kids while you (and your spouse, if you are married) work during the day? You may be entitled to a dependent care credit that can offset your personal tax bill on a dollar-for-dollar basis. Even better: Thanks to the new American Rescue Plan Act (ARPA), the credit has been significantly enhanced for the 2021 tax year.

 

The dependent credit is available for expenses paid to a long list of providers from day care centers to babysitters to after-school programs. You can even claim the credit for summer day camp (but not overnight camp). But be aware that the tax benefits are reduced for certain high-income taxpayers.    

 

Background: The dependent care credit, which was nonrefundable, could be claimed by a taxpayer who paid expenses to care for a child under age 13 or some other qualified individual (e.g., an elderly relative who is disabled) in order to be "gainfully employed." Prior to ARPA, it was equal to 35% of qualified expenses for a taxpayer with an adjusted gross income (AGI) of $15,000 or less, reduced by one percent for each $2,000 that AGI increased. Thus, the credit equaled 20% for taxpayers with an AGI above $43,000.

 

This credit was available for the first $3,000 of qualified expenses for one child or $6,000 for two or more children. For example, if you had an AGI of $100,000 and paid $10,000 in qualified expenses for two children under age 13, the maximum credit was $1,200 (20% of $6,000).

 

Generally, if one spouse had no earned income, you could not claim the credit. However, if your spouse was a full-time student or disabled, he or she was treated as having monthly earnings of $250 if you had one qualified child or $500 per month for two or more children.

 

Key changes for 2021: ARPA includes significant improvements to the credit that apply for qualified expenses incurred in 2021. Consider the following:

 

·         The dependent care credit is fully refundable for 2021.

 

·         The maximum credit percentage is increased from 35% to 50%.

 

·         The limit on qualified expenses is increased to $8,000 for one child and $16,000 for two or more children.

 

However, the credit percentage is gradually reduced if AGI exceeds $125,000. It bottoms out at 20% if your AGI exceeds $183,000.

In other words, the maximum credit for a taxpayer with AGI of $125,000 or less is $4,000 for one child and $8,000 for two or more children. It is $1,600 or $3,200, respectively, if your AGI exceeds $183,000.

Finally, if your AGI exceeds $400,000, the credit is further reduced until it zeroes out for an AGI above $438,000.

 

The other main rules remain in effect. That means you can still claim the credit for a wide range of expenses incurred in 2021.

 

More to come? The Biden administration has supported an extension of the enhanced dependent care credit benefits beyond 2021. We will continue to keep an eye out for more developments.

 

 

Five Ways to Improve Employee Communications

Building connections within the workplace

 

Do you communicate effectively with your employees? The success or failure of a business can often be linked to the communication, or the lack thereof, in the office. This simple “best practice” is often overlooked and undervalued.

 

Caution: Before we go any further, remember that communication is a two-way street. It requires back-and-forth between managers and employees as well as employees with one another.

 

Keeping that in mind, consider these five practical methods that may be used in a small business.

 

1. Team huddles: Start each day with team meetings (or a gathering of all workers for a smaller staff). Keep them up-to-date on the latest developments and goals your team is currently focusing on. Set an agenda related to the company’s function and allow employees to participate in progress reports and troubleshooting. Also, when appropriate, take time to acknowledge accomplishments.

 

2. One-on-one get-togethers: Not all effective communication with employees takes place in a group setting. Try to establish a connection through one-on-one meetings.  Even if the time is relatively short—for example, 10-15 minutes may suffice—this is a proven method for keeping employees engaged. Dig deeper than the usual chitchat to find out what really makes your employees tick.

 

3. Developmental meetings: When employees feel you are interested in them, they are more likely to put forth their best effort. Do not be surprised if a clear path toward a career objective is as important to employees as their actual compensation. Set aside time for developmental meetings—perhaps on a quarterly basis—where employees can discuss where they are now and where they want to be heading.

 

4. Question-and-answer sessions: Hold a gathering in a manner similar to a “town hall” meeting. Essentially, you answer questions from employees in a group setting that allows everyone to hear the responses. The meeting should be carefully structured so it doesn’t turn into an deluge of grievances being aired, but enables employees to become engaged and more familiar with the company’s priorities. Some give-and-take can go a long way toward smoothing over problems.

 

5. Inspirational stories: Are your employees aware of all of your company’s recent accomplishments? Occasionally, carve out time for an office-wide meeting that provides real-life example for employees to draw upon. You might even invite a vendor supplier, customer or client to speak to the group for a more personal touch. Employees may leave the meeting more determined to do their part.

 

Finally, impromptu meetings with employees can lead to beneficial communication. For instance, if the company president sits down with a lower-level employee for a cup of coffee in the break room, it may build a rapport that carries over. The employee may offer some good suggestions to ponder.

 

In conclusion: Make improved communication with employees a top priority at your company. This can foster greater loyalty and commitment from the rank-and-file. At the very least, your employees should appreciate the effort. 

 

 

Explore the Benefits of SERPs

Supplemental plan is valued perk

 

A SERP may sound like a creature from a science fiction movie, but it is actually a popular retirement savings vehicle for the top brass. Typically, the SERP—an acronym for supplemental executive retirement plan—is used to complement a 401(k) or other qualified plan. It offers generous benefits to a chosen few and enables an employer to attract and retain “the best and brightest” employees.

 

Background: Generally, a qualified retirement plan like a 401(k) must meet strict nondiscrimination requirements and adhere to various other rules. For 2021, an employee can defer up to $19,500 of wages to a 401(k) on a pre-tax basis, plus another $6,500 if he or she is age 50 or older. To sweeten the pot, the employer may provide a SERP.

 

This is a kind of nonqualified deferred compensation plan that does not have to be offered to all employees. Instead, it can be set up to benefit only several people or even one person. Thus, it is a valuable perk for certain high-ranking employees.

 

The SERP is designed to pay out benefits at a specified future date, like the employee’s retirement. It may be paid in a lump sum or a series of payments. These benefits are taxable to the employee when received and deductible by the employer at that time. In some cases, the SERP will be funded by a cash value life insurance policy on the employee’s life.

 

Accordingly, a SERP provides the following advantages.

 

·         Although distributions are taxed at ordinary income rates, the tax is deferred until withdrawals are made. In the meantime, funds continue to accumulate without current tax.

 

·         The rules for required minimum distributions (RMDs) do not apply to SERPs. Usually, you must begin taking RMDs from a qualified retirement plan in the year after the year in which you turn age 72 (recently increased from age 70½) and in each succeeding tax year.

 

·         Distributions from a SERP are not subject to the usual 10% penalty tax on plan withdrawals made prior to age 59½. This may provide more flexibility for an early retirement.

 

·         The employer can carve out generous benefits for a select few. This may convince a “star” employee to come to or stay with the company.

 

On the downside, there are potential risks. For starters, the employee is not entitled to the benefits until the specified date. If he or she leaves earlier, they get nothing. Also, the SERP may impose certain conditions that must be met to receive the future payout (e.g., working for a set period of years). Similarly, because the payments are not guaranteed, the employee may be left holding the bag if the company goes under and other creditors can claim the funds.

Finally, examine all the tax ramifications. If the employee is in a higher tax bracket in retirement, the tax bite could be substantial. (Plus, rates may rise in the future.) And, from the employer’s perspective, the deduction is not available until the benefits are received.

Bottom line: Both employees and employers should review the details with a professional expert and make an informed decision regarding a SERP.

 

IRS Posts the Dirty Dozen Tax Scams

New breakdown into four categories

 

The IRS recently released online its annual list of the “Dirty Dozen” tax scams to watch out for in 2021. But this year, the publication came with a new twist: Instead of enumerating a definitive dozen scams as it has done in the past, the IRS separated the scams into four categories, as follows:

 

·         Pandemic-related scams like Economic Impact Payment (EIP) theft;

 

·         Personal information cons including phishing, phone "vishing" and ransomware;

 

·         Ruses focusing on unsuspecting victims like fake charities and senior/immigrant fraud; and

 

·         Schemes that persuade taxpayers into unscrupulous actions such as Offer In Compromise (OIC) mills and syndicated conservation easements.

 

The agency compiled the list into these categories based on who perpetuates the schemes and whom they impact. We will briefly review the four groups.

Group 1: The pandemic-related scams include threats from identity thieves who try to steal EIPs, also known as stimulus payments. Most eligible people will get their payments automatically from the IRS. There is no need to involve a “middleman” to collect the money you are owed.

 

Group 2: The IRS advised taxpayers to look out for unexpected schemes in the form of emails, texts, social media messages and phone calls. These phishing scams target taxpayers and tax professionals and can seem legitimate at first glance.

For example, emails or phone calls purporting to be from the IRS may request financial information or request that the recipient click on a link or open an attachment. Some scams utilize social media and seek to use events like the COVID-19 pandemic to trick people. Recipients of such unsolicited emails or phone calls can report the actions to the Treasury Inspector General for Tax Administration (TIGTA).

Group 3: The IRS shared five scams relating to requests for donations to fake charities, tax scams targeting immigrants and senior citizens, OIC mills, unscrupulous tax return preparers and unemployment insurance fraud.

Group 4: The IRS concluded its series by warning taxpayers to watch out for certain transactions and arrangements marketed by promoters. This included syndication conservation easements, abusive micro-captive arrangements, potentially abusive use of the U.S.-Malta tax treaty, improper claims of business credits and improper monetized installment sales.

 

Both taxpayers and tax professionals alike must remain vigilant in protecting against tax-related scams and schemes. If you doubt the legitimacy of a contact purportedly coming from the IRS, confirm the person’s identity. Caution: We have heard plenty of horror stories about emails that look to be coming from a legitimate source but the sender’s name is off by a single letter or number. Similarly, voice messages may sound legit, but are bogus attempts to pry away your money or steal sensitive identity information from you.

Final words: Taxpayers are encouraged to review the Dirty Dozen list in a special section on www.irs.gov. Remember that these scams do not occur only during tax filing season—they go on throughout the entire year.

 

How to Reduce Work Stress

 

Some stress on the job is normal, but you cannot let it run, or ruin, your life. How can you avoid dire consequences? Follow these basic guidelines:

 

·         Improve on physical, as well as mental, aspects. Eat healthier, exercise and live healthier.

 

·         Turn around negative attitudes that can drag you down and add to workplace strife.

 

·         Seek guidance from others. Talking things out usually helps.

 

When you feel overcome by stress, take a deep breath, focus on the positive and get back to work. Keep your spirits up!

 

 

Facts and Figures

Timely points of particular interest

 

Leave Donation Programs—Some employers have allowed employees to forfeit paid vacation or sick days in exchange for donations made to charitable organizations to help COVID-19 victims. The contributions are deductible by the employer and there are no tax consequences for the employees. Initially, the IRS gave its approval to these leave donation programs for 2020 and now has extended the tax breaks through 2021.

 

Waiting for Refunds—Are you still expecting to receive a tax refund from the 2020 return you filed on time? You are not alone. As of last month, the IRS reported that it still has to process about 35 million returns, including both initial and amended returns. The IRS attributes the backlog to the pandemic and a slew of new tax law changes. You can check your status on the IRS’ “Where’s My Refund?” tool.