EES Newsletter

January 2020

 

Key Extenders in the New Tax Law

Congress renews expiring tax breaks

 

In the waning days of 2019, Congress passed the “Taxpayer Certainty and Disaster Tax Relief Act” as part of a spending measure. The new legislation provides an eleventh-hour reprieve for certain tax breaks that were about to expire or had previously expired. Generally, these provisions are extended through the end of 2020.

 

Following is a brief overview of several key extenders included in the new law.  

 

Tuition deductions: An above-the-line deduction for qualified tuition expenses may be claimed in lieu of a higher education credit, such as the American Opportunity Tax Credit (AOTC). However, the deduction is limited to either $4,000 or $2,000, based on your modified adjusted gross income (MAGI) for the year, before it is completely phased out. Depending on your situation, a credit may still be preferable on your 2019 return. Note: The maximum $2,500 AOTC is also phased out at higher MAGI levels.

 

Medical deductions: Under the Tax Cuts and Jobs Act (TCJA), the medical deduction floor of 10% of adjusted gross income (AGI) was lowered to 7.5% of AGI, but only for the 2017 and 2018 tax years. The new law retroactively restores the 7.5%-of-AGI floor for 2019 and continues it for 2020.

 

Mortgage debt forgiveness: Under a special provision, forgiveness of a mortgage debt is excluded from tax, up to a maximum of $2 million. This tax break is only available for debt forgiveness on a mortgage for your principal residence.

 

Mortgage insurance premiums: If you pay mortgage insurance, you can deduct the cost of the premiums, subject to a phase-out beginning at $100,000 of AGI. The phase-out is complete at $110,000 of AGI. Unlike mortgage debt forgiveness, this tax break is available for a principal residence and one other home (e.g., a vacation home).

 

Family and medical leaves: The TCJA authorized a tax credit to employers offering paid family and medical leave to employees. This credit, which initially was created to last only through 2019, ranges from 12.5% of eligible wages to 25%, depending on the amount of wages paid. It takes into account a maximum leave of 12 weeks per tax year.

 

Work Opportunity Tax Credit: Employers may be entitled to the Work Opportunity Tax Credit (WOTC) for hiring workers from “target” disadvantaged groups. Generally, the WOTC equals 40% of the worker’s first-year wages up to $6,000, for a maximum credit of $2,400 per worker. However, it can be as high as $9,600 for a disabled veteran. 

 

Empowerment zones: This provision includes tax incentives for certain businesses operating in designated empowerment zones. The tax breaks include tax-exempt bond financing, a federal tax credit for employers who hire qualified employees, accelerated depreciation deductions and deferral of capital gains tax on the sale of qualified assets sold and replaced.

 

Finally, in addition to the extenders, the new legislation enacted at the end of 2019 provides tax relief in federal disaster areas, eliminates certain taxes required under the Affordable Care Act (ACA) and repeals a tax obstacle for tax-exempt organizations that offer parking privileges to employees, among other provisions. The appropriation package also includes a significant retirement planning law. We will have more details in upcoming issues.

 

 

     

How to Cope With Disruptive Employees

Proactive steps to address problems

 

Even if you thoroughly vet new-hires before you bring them into the fold, it is likely that one or two "bad seeds" will manage to slip through the cracks. Unfortunately, it does not take much for the negativity of a small group to have a substantial impact on the entire workplace. Not to mention the time and effort that must be expended by business managers who are forced to "clean up the mess."

 

Disruptive employees can cause major distractions, slow down productivity and ultimately affect the bottom line. Here are several practical suggestions for handling the situation.

 

• Develop a company-wide policy on workplace behavior before any incidents occur. Spell out which types of disruptive behaviors will not be tolerated. This might include acts such as hostility, bullying, shouting, intimidation, accusations or just an overall negative attitude. Distribute the policy to all employees in writing. Request their signatures to ensure that your employees understand the rules and consequences of their behavior.

 

• Identify those employees who have been disruptive in the past. But do not focus on occasional outbursts or otherwise innocent comments that are made casually at the water cooler or in the lunch room. Remember that almost everyone has a bad day now and then. Problematic employees usually demonstrate a habitual pattern of disruptive behavior that interferes with the job on a regular basis. Be careful to single out only the worst offenders.

 

• Hold one-on-one meetings with these disruptive employees. (Some employees will show surprise when you request a get-together for this purpose.) Try to keep the chat informal, but address the critical issues head-on. Inform the worker that his or her behavior is affecting the workplace. Find out if there are any valid reasons for the disruptions. If a legitimate problem is presented, investigate the matter promptly and, when warranted, take appropriate action. Again, refer to the company manual for guidelines.

 

• Monitor the progress of the employees. If you have talked with an employee about disruptive behavior and have agreed on a solution, you must provide him or her with enough time and opportunity to make good on the adjustments. Keep a close watch on new developments. Note in your files if an employee shows signs of improvement or recurring insubordination.

 

• Institute formal disciplinary proceedings if disruptive behavior continues. Do not allow these actions to slow down productivity or lower company morale. Follow the procedures outlined in your company policy. This may rely on a system that establishes verbal warnings, written warnings and, finally, suspensions or termination.

 

All too often, business managers allow problems to fester without confronting employees. Before you know it, the entire workplace is infected. It is usually better to be proactive than reactive. Although it may raise some sensitive issues in the short term, your business is not as likely to suffer as much over the long run.

 

 

Tax Rewards for Charitable Volunteers

How to deduct out-of-pocket expenses

 

Do you help out your favorite charity by doing more than making donations? Although you cannot deduct the value of your volunteer services, you are entitled to a charitable deduction for your out-of-pocket expenses if you itemize. Of course, the other usual rules for charitable deductions, including the recordkeeping requirements, still apply.

 

What sort of expenses are we talking about? Here is just a partial list that may be claimed by charitable volunteers.

 

Travel expenses: Generally, you can deduct travel expenses incurred away from home while performing services for a charitable organization as long as there is no significant element of personal pleasure, recreation or vacation in the travel. This includes the following:

 

·         Air, rail and bus transportation;

·         Expenses for your vehicle;

·         Taxi fares and other transportation costs; and

·         Meals and lodging. 

 

Because these travel expenses are not business-related, they are not subject to the same limits as business expenses. For instance, you can normally deduct only 50% of the cost of qualified business meals. 

 

If you use your own vehicle for driving on behalf of a charity, you may deduct your expenses based on detailed records or choose to use the IRS-approved flat rate. The current flat rate, which is set statutorily, is 14 cents per mile, the same as it has been for many years.

 

Entertainment: If you host a fundraising event your home, all of your unreimbursed expenses are deductible. As with travel expenses, the usual 50% limit on meal costs does not apply to these charitable events.

 

Telephone expenses: Specific charges for landline calls, cellphone calls and faxes incurred for charitable purposes are deductible. In addition, you may deduct the cost of installing a separate line used strictly for charity-related calls.

 

Conventions: When you attend a convention as a charity’s designated representative, you may deduct unreimbursed travel expenses. This includes reasonable costs of meals and lodging at the convention.

 

Uniforms: The initial cost and maintenance of a uniform that is not “suitable for everyday wear” is deductible if it is used for performing charitable services (e.g., Boy Scout or Girl Scout uniforms for troop leaders).

 

Exchange students: If you house a foreign exchange student, you may deduct up to $50 per month of expenses for each month the child attends high school. The student must reside in your home under a written agreement with a qualified charity and cannot be related to you. 

 

Underprivileged youths: You may deduct reasonable unreimbursed expenses paid to allow underprivileged youths to attend athletic events, movies or dinners if the youths are selected by a charitable organization as a means of reducing juvenile delinquency. But your own expenses are nondeductible.

 

Remember that detailed recordkeeping is critical. Be prepared to prove your expenses in case the IRS ever challenges your deduction.

 

 

Have You Designated Your Beneficiaries?

Seven smart estate planning suggestions  

 

Most of us lead hectic lives, but it is important to take time to designate or update beneficiaries for all your assets as part of an estate plan. Notably, you should be aware that designations for retirement plans and life insurance policies supersede beneficiary dispositions in your will. Keeping that in mind, here are seven practical suggestions.

 

1. Don’t leave the beneficiary lines blank. If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to creditors. A better option is to choose individual beneficiaries and list them on the forms.

 

2. Use trusts for beneficiaries who are minors. In some states, minors face restrictions until they turn age 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Alternatively, you might establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you're gone.

 

3. Understand the key rules. Other than your spouse, beneficiary designations on retirement accounts and insurance contracts will override your will. If you want someone besides your spouse to inherit assets, your spouse must sign a written waiver. Without the waiver, a non-spouse beneficiary designation will be invalid upon your death.

 

4. Inform your beneficiaries. Do not keep your designations a secret. Also, let them know where to find important documents and contact information for your professional advisors. On the other end, make sure your advisors have the vital contact information for your beneficiaries.

 

5. Double-check names and numbers. Make sure they are spelled correctly and that figures are accurate. This is particularly important when listing Social Security numbers and telephone numbers and addresses.

 

6. Use percentages instead of dollar amounts. For example, suppose you have an IRA worth $100,000, and you designate a niece as beneficiary of $75,000 of that amount. If the IRA drops in value to $75,000 or below at your death, your niece is in line to receive the entire amount—any remaining beneficiaries receive zero. Perhaps a better way to meet your objectives is to give your niece 75% of the overall account value.

 

7. Name contingent beneficiaries. If your primary beneficiary has died and you haven’t named a replacement, the assets would go to your contingent (or "secondary") beneficiaries. Without a contingent beneficiary, the assets are transferred to your estate (see above). Avoid potential problems by indicating contingent beneficiaries in appropriate places.

 

Don’t just stuff all the paperwork in a desk or drawer somewhere and forget about it. Review your beneficiary designations periodically to ensure that they remain up-to-date. Finally, make whatever revisions are needed to keep your beneficiary designations current.

 

 

IRS Sets New Retirement Plan Limits

 

The IRS recently announced annual cost-of-living adjustments (COLAs) for certain retirement plans for 2020. See the chart below for the latest changes.

 

	Limit for 2019	Limit for 2020
Maximum annual dollar benefit for a defined benefit plan	$225,000	$230,000
Maximum dollar limit on additions to a defined contribution plan	$56,000	$57,000
Maximum amount of compensation take into account for qualified retirement plans	$280,000	$285,000
Dollar limit for elective deferrals to a 401(k) plan	$19,000 ($25,000 if age 50 or over)	$19,500 ($26,000 if age 50 or over)
Dollar limit for contributions to a SIMPLE plan	$13,000 ($16,000 if age 50 or over)	$13,500 ($16,500 if age 50 or over)

 

Note: The annual limit for contributions to traditional and Roth IRAs remains at $6,000 for 2020 ($7,000 if you are age 50 or over). The phase-out levels for IRA and Roth contributions are adjusted slightly.

 

 

Facts and Figures

Timely points of particular interest

 

Fast Refund—If your company overpaid its estimated taxes in 2019, it does not have to wait until the usual March 15^th due date to file for a refund. The IRS allows a corporation to collect a fast refund—within 45 days of filing the request—if the overpayment is at least 10% of the estimated tax liability and amounts to $500 or more. Consult your tax return preparer for more details.

 

Ready, Set, Go—The start of another year signals that tax return filing season is about to kick off. You can make things go smoother by assembling the necessary information in a logical fashion. This includes all the records needed to maximize the tax benefits on your 2019 return. Ideally, you should schedule a meeting early in the season to get this task off your to-do list.