Transcript Slide 1

2012 and 2013 Taxes on the Move
Speakers:
David S. Oltman – Chief Compliance Officer, Ineo/Relocation Taxes, LLC
[email protected]
Tom Tolen – Global Tax Director, Ineo Relocation Technologies, LLC
[email protected]
Location: Go To Webinar
Date: Wednesday – February 27th, 2013
Time: 9am – 10am MST
Date: 2/27/13
Today’s Speakers
David Oltman
Chief Compliance Officer
David S. Oltman is one of the relocation industry's foremost tax resources. David has brought his expertise
and the strength of Relocation Taxes, LLC to the Ineo family of services. David now leads Ineo's Tax
division, Relocation Taxes, and serves as the company’s Chief Compliance Officer.
Prior to joining Ineo, David co-founded Relocation Taxes, LLC and The Hessel Group U.S. and U.K. in 1987.
David began his relocation career as the Manager of Benefits Administration and Relocation at Ciba
Geigy/Novartis Corporation.
He is a member of The International Foundation of Employee Benefits Plans and The Employee Relocation
Council, and co-founder of the Relocation Council of New York City. David is an ERC Meritorious Service
Award
Tom Tolen
Global Tax Director
Tom has an extensive tax background with more than 25 years providing direction on relocation tax and
payroll issues.
Prior to joining Ineo, Tom worked as a Revenue Agent at the IRS. He also had public accounting experience
with Ernst and Young where he was responsible for tax return preparation and tax consulting for large
wealth individuals and closely held businesses. These experiences, along with his Tax manager experience
with McGladrey & Pullen & Relocation Management System provide him with an excellent foundation for
his role at Ineo.
Prior to joining Ineo Tom held the position as Tax Director for the nation’s largest mobility services
organization.
2012 Year-end Corporate Tax & Payroll Issues
Tax Credits lost on tax returns – Education Credits and American
Opportunity Credits – IRS Form 8863 (Phase-out range “Single”
$80,000 - $90,000 and “Married Filing Joint” $160,000 to $180,000),
Child Tax Credits ($110,000, $130,000, $150,000…). See RTA p. 11.
Repayment of Home Buyer Tax Credit – IRS Form 5405 if moved again
within 3 years. All these issues can effect the transferred employee by
several hundred dollars, to several thousand dollars, to well over
$10,000+. See RTA p. 44.
Recommendation: Only after doing a complete gross-up audit in 2013 of the
employee’s 2012 tax return. Cost usually between $275 to $425 per audit.*
The importance of proper tax preparation can not be over stated. For
example a FL to OH move – and not allocating state wages properly.
*Business Expense. Not taxable.
2012 Year-end Corporate Tax & Payroll Issues
1) AMT Tax (Alternative Minimum Tax) effects – could effect 10 times more taxpayers, “Target”
result is the corporate transferee. (higher gross-ups). See RTA p.10 & page 44
2) All Tax Brackets where indexed for inflation (significant lower gross-ups in 2012 could be
higher in 2013) See RTA p.11. Brand new – lower phase-outs of itemized deductions (went
from 3% to 2% to 1% to 0% in 2010 and 2011 - and lower phase-out for personal exemption
amounts 1/3 reduction and a new minimum of $2,333 ($3,700 x. 66.67%) per personal
exception. 0% in 2010 and 2011. Average savings of $375/move.
Potential 2013 higher tax rates – gross-up impact. 60% total tax rate = a 150% gross-up.
3) How states are catching employees who do not report their wages. Tax Amnesty. Hotel &
credit card gas receipts. IRS Employment Tax Audits Begin in 2010 and will run through 2013.
A significant number of audits have been started.
4) New State Sales Tax Deduction – Applies mainly to transferees in nine (9) no income tax
states. AK, FL, NV, NH, SD, TN, TX, WA & WY (lower gross-ups) See RTA p.12 Average
savings of $600 per move.
5) Reduced Home Sale Exclusion & New Home Buyer Tax Credit ($8,000/$6,500). Very
complex. See RTA – p.44 IRS Form 5405 – plus new “Repayment Letter” being sent by IRS
based on address changes. If house turned into rental – credit must be repaid.
2013 Hot!!! Federal & State Tax Issues
Temporary Assignments – 1 year rule – business vs. taxable. See RTA pages 8 & 9 also
Revenue Ruling 93-86. New Trend to “reconcile” state taxes – “Keep Employee Whole
For State Income Tax ”. New Proposed Tax Bill – H.R. 1864 & S. 3485 – “30 Day Rule”
(was H.R. 3359 & 2110 - 60 day rule). “Mobile Workforce State Income Tax Fairness
and Simplification Act”. The methodology used is to calculate what the employee “would
have paid” in Federal and State/Local taxes (in the “live state”) – then compare that
amount to what the employee “actually paid” in Federal and State/Local taxes (in the
temp. “work state”). The difference between those two amounts is the amount due the
employee. Issues to consider:
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Any State income tax dollars that were “advanced” or “loaned”
The taxability of “advances” or “loans”
Multi-state tax credits taken or not taken on state tax returns
Non-Resident and Part-Year Resident state tax returns
Administration of the program – “loans”, “advances” and “repayments”
* Proposed Effective Date 1/1/2014 – See RTA p. 13
2012 Year-end Tax & Payroll Issues
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Global Assignments – Stealth Expatriates – tracking issues. See RTA pages 14 thru 19.
E-Solutions – New trends – Lots of software on the market – average cost $50 - $75
per move. From Gross-ups to Int’l Hypo Taxes, to Lump Sum software.
US Government (WITA/RITA) - Sen. Grassley - GRAB. See RTA pages 38 & 39
Capital Losses on home sales are NOT deductible. See RTA page 2
The Mortgage Forgiveness Debt Relief Act. “Short Sales” no longer taxable, Negative
Equities and Loss on Sales.
IRS Revenue Ruling 2005-74 (updates 72-339) – Corporate home sale procedures
clarified. Third Party home sales NOT taxable.
First Time Homebuyers Credit: $8,000/$6,500 (MFJ $225,000; SNG $125,00) start of
phase out range. Three year pay back period. See IRS Form 5405 Very complex.
Three (3) year payback provision. IRS has just started sending out repayment request
letters, to employees who have “changed their address” or “moved” or have “rented
their house”.
Commuters – Expenses & Salary taxable in both “live” and “work” states.
Making Work Pay Credit: – Between $400 to $800 credit Phase out range (Single
$75,000 - $95,000 and then MFJ $150,000 - $190,000) Replaced in 2012 by lower
FICA - was 6.20% currently 4.20%.
Average Gross-up Percent's – Could go from 60% to over150% based on proposed
2014 and 2015 tax changes.
IRS 2012 Year-end Tax Forms & and New Medicare Rates
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RTR - "Relocation Tax Report" - replaces old "IRS Form 4782“. See RTA p. 25
3903 - "Moving Expenses" - taxpayer required. See RTA p. 29
Sch. D - "Capital Gains and Losses" - replaces old "IRS Form 2119“
New Form 8938 – Similar to TD F 90-21.1 – Report Foreign Bank Accounts
and Interests, >$10k, or $50K or $100k
New 2012 Federal, State, Local and F.I.C.A. (Social Security – 4.20%)
$110,100 & Medicare 1.45% unlimited) tax brackets. The 2012
FICA/Medicare brackets – have changed. The longtime OASDI rate for the
employee of 6.20% was changed to 4.20% in 2011 and 2012. The
employer rate remains 6.20%. This represents a potential several hundred
dollar per move gross-up savings.
New 2013 FICA Limit $113,700 and 6.20% rate.
New 2013 Medicare Rate increases to 2.35% if over (Single $200k, MFJ
$250k) and a new 3.8% tax on unearned income. Complex calculation.
States that follow the pre-1994 "rules" allowing the final move meal
deduction / exclusion.
NJ* / PA**
* Allows only a 100% exclusion of Final Move Meals on NJ-1040
** Allows a 100% deduction of Final Move Meals on PA-40R-UE-1
Penalties for Failure to Withhold Taxes on a Timely Basis
Most all relocation expense reimbursements or
supplemental wage payments are subject to withholding
at the time of payment. Most companies use the
Supplemental rate of 25% and apply a gross-up
percentage. Accountable Plan rules apply, using the
30/60/120 rule. Taxable moving expenses (lump sums)
are treated as if they were paid under a "nonaccountable" plan. An average penalty of $8,000 per
move could cost a company that relocates 200
employees per year, 1.6 million dollars for each year of
non-compliance.
Tax Saving Strategies (Withhold/Gross-up)
(1) When ever possible, always look for a business purpose for an expense. For
example, Moves less than 1 year (temporary assignments), a Pre-employment
physical, House Hunting Trips as business trips (breakout spouse expenses). Use a
TP Home Sale Company or Qualified In-House Program. Tax Gross-up Savings
over $9,000 per move.
(2) Have trained accounting/relocation tax expense professionals tax code and audit
all expenses entered from the transferee's expense report. Average cost savings is
several thousand dollars per move. Average cost to audit $50 per file.
(3) Do not include either Van Line or Final Move expenses in a "Lump-Sum"
allowance. Why? Because not taxable when receipts are provided. Employees can
still deduct their moving expenses even if they receive a lump sum that is taxable and
grossed-up. Lumps Sum Software $50 to $75 per move.
(4) Re-capture any FICA overpayments – Year-end “true-up” – only adjust for
“negatives” differences. Tax Gross-up Savings over $1,000+ per move.
(5) Explain/Educate employees with regard to how their gross-up was calculated.
Priceless!!!!!
Hot !!! 2013 Relocation Trends
• Year-end “true-up” or “difference” or “delta” calculation. Negatives only
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“adjustments”. Big savings in gross-ups Average gross-up is over $10,000.
(Average savings over $2,000 per move).
Only gross-up at supplemental rate [ 25% ], let transferees come back and
request more. Gross-up Audit after the fact. (Average savings over
$1,000 per move).
Companies now paying for Domestic Tax Return preparation included as a
relocation benefit. Saves company’s significant time and money – both
hard and soft dollars. $900+/Companies now paying for “pre-move” tax consulting - $350
Lump Sums – Very popular, software is available. $50 - $75
Expense Management Audits – Relocation Accounting Audits. (Average
costs $395 per audit or several thousand dollars to audit a “batch” of
records).
Reconcile State Taxes for employees who go on a temporary assignment
or Commuter assignments. Gross-up wages for extra state taxes when
needed. Gross-up Audits – for AMT, Home Buyer Credit and Other Lost
Credits. Cost $425 per move .
10 Things Every Employee Should Know Before Considering a Move
1) Income will be inflated due to moving expenses paid by your company. Make sure that
federal and state withholdings are sufficient to cover the increase. Also, the year after
the move, most transferees are more likely to be under withheld. If in doubt, contact
your tax advisor. See RTA p.7 Also, If your company paid your Van Line bill, you can
NOT deduct it on IRS Form 3903. If you rent out your house, you will have to repay
the Home Buyer Tax Credit – Usually $8,000.
2) Make sure that a state W-4 form has been prepared and given to your payroll
department so that withholding is being taken out in the proper state. YOU ARE
REQUIRED TO HAVE WITHHOLDING TAKEN IN THE STATE THAT YOU WORK IN,
EVEN IF YOU ARE A RESIDENT OF ANOTHER STATE! This should become
effective the first paycheck received in the new place of employment. See RTA p.7, 12 & 13
3) In addition to the state, your new city may also require tax to be withheld. Review your
first pay stub to make sure that this is being done (if applicable). See RTA page 12
4) Keep in mind that excess FICA withheld from two or more employers is refundable, Line
69 IRS tax form 1040. Affects both working spouses.
5) You have up to two years to satisfy the time test, to establish permanent residency, in
order to deduct moving expenses.
10 Things Every Employee Should Know Before Considering a Move
6) Special costs, that are unique to you, are also deductible as moving
expenses such as pets, horses, aquariums and tips paid to “movers &
packers. No limit on the number of cars that can be moved and deducted.
Rental Losses can be carried forward. See RTA p.4
7) The cost of moving students, from their college to the new location, is
deductible.
8) In the year that you move, remember that any non-amortized points on a
refinanced loan can be deducted if you sell your house. See RTA p.8
9) Premature distributions from pension plans are not only taxable as income
but incur a 10% penalty unless rolled over within 60 days. There is often a
misconception how the rules for first time homebuyers work. Also in the
year of a move, income is inflated and this is probably not a good time to
take an early distribution.
10) The year after the move, significant potential for under withholding
penalties exist. It could be hard to meet any of the safe harbor rules:
Owe<$1,000, or pay at least 100% of last year’s liability, if AGI is >$150k, then
pay 110% of last years liability. See RTA p.7
Gross-up Audits – With/Without Move Analysis
Common mistakes CPAs make with transferees' tax returns with regard to
“Keeping The Transferee Whole"
(1) The tax return is prepared incorrectly!!!. Excludables (W-2 Box 12 –
Items preceded by the letter “P”) are not properly reported and carried
forward to the 1040 Federal tax return. IRS Form 3903 “Moving
Expenses” is not completed properly, or not at all. Points / Loan
Origination fees are not deducted properly on IRS Schedule A. Part
year and non-resident State Tax Returns are not completed properly, or
not at all.
(2) Accountant is not familiar with the company's relocation tax gross-up
policy. For example, what expenses are Grossed-up and which
expenses are not subject to tax assistance.
(3) Other income (spouse income) is used to establish tax brackets both
"with" and "without" the move.
(4) Points and Mortgage Interest are deducted both "with" and "without"
move
Gross-up Audits – With/Without Move Analysis
(5) State and Local Gross-up tax dollars are deducted "with" and "without"
the move.
(6) Recapture Excess FICA taxes Withheld.
(7) Rental Losses can be carried forward.
(8) Improper Deductions are taken on tax returns.
Comment: If the transferee "partially loses the benefit of their Standard
Deduction", or the new “General Sales Tax Deduction”; in other words, is
forced to itemize; the transferee has been adversely affected.
For example, the maximum "Standard Deduction Loss" exposure:
Standard Deduction Married Filing Jointly
$12,200 (MFJ)
.25%
$ 3,050 "Extra Tax Owed Because of Move“
Additionally, transferee’s who exercise stock options, have rental
properties, AMT and generally more complex tax issues should consider
having “professional” tax preparation and review” by trained relocation tax
experts.
Money Saving Gross-up Policy Decision Opportunities
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2013 GROSS-UP DECISIONS
• Use Tax Tables
YES/NO
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Additional Cost Per Move*
Several Thousand
Dollars
• State Taxes
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Moved To/From / Both? $1,000
• Include Fed. in State
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$350
• Local Taxes
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$150
• F.I.C.A. Taxes
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SS / Med / Both SS
$250
• F.I.C.A. Circular Logic
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$400
$1,000 / Medicare
Money Saving Gross-up Policy Decision Opportunities
– 2013 GROSS-UP DECISIONS
YES/NO
Additional Cost Per Move*
– Deduction/Exempt. Phase-out
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$275 (No 2012 phase-out)
– Assume Itemized Deductions
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$600 (New GST)
– Gross-up "Unqualified" Moves
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$5,800
– Misc. Expense Allowance
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$4,000
– COLA / MIDA
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$6,000
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$150
– Loss on Sale
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$10,000 to $50,000+
– AMT, WPC, First Time HB Credits
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$1,000 - $20,000+
– Annualize New Hire Salaries
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Several Thousand Dollars
was in 2012
– $0.565/$0.24 cents per mile ($.555
&
$.23)
Money Saving Gross-up Policy Decision Opportunities
2013 GROSS-UP DECISIONS
YES/NO
Additional Cost Per Move*
• Look at Non-itemizers (Renters)
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$500+
• Economic Stimulus Package
• Third Party Home Sale Company
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$0 to $3,000+
$9,000
• Other
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58% to 60% of
Benefits Paid - Commuters
• The dollar amounts presented are estimates only. The actual dollar amount will
vary based on the total cost of the move, what state is used for tax purposes,
and of course the company's relocation tax gross-up policy.
* Savings documented well over $2,000 per move.
Copyright Ineo/Relocation Taxes, LLC 2013
Summary of Changes for 2013
• Federal Income Tax
– Rate increase
– Phase outs
• Itemized deductions
• Exemptions
– Tax on investment income
– Alternative Minimum Tax (AMT)
– Debt forgiveness
• FICA
– Social Security
• End of tax holiday
• Increased maximum wages
– Medicare tax
• New rate
• New limit
• State Income Taxes
Tax Rate Increase
• Rates remain the same for most individuals
– 2012
• Rates range from 10% - 35%
• 35% was top rate on income over $388,350 ($194,175 MFS)
– 2013
• New 39.6% rate added for higher income taxpayers
• Applies to taxable income over :
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$400,000 for single persons
$450,000 for married couples filing a joint tax return
$225,000 for married couples filing a separate return
$425,000 for head of households
Tax Rate Increase
• Effect on relocation tax costs
– Will depend on profile of relocation population
– Federal income tax assistance
• Will be about the same for mid level transfers
• Will increase on executive level
– For every $10,000 in taxable relocation federal income tax will
increase by $1,171 in 2013
» Prior to change would pay 35% or $5,385
» After the change will pay 39.6% or $6,556
» A 22% increase in the tax cost
Phase outs
• Itemized deductions
– Reduce allowable deductions by 3% of amount of AGI over threshold
• Personal exemptions
– Reduce exemptions by 2% for each $2,500 increment or portion of an
increment AGI is over the threshold
– Threshold
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Single
Married filing joint
Married filing separate
Head of household
$250,000
$300,000
$150,000
$275,000
Phase outs
• Example:
– Single employee with wages of $200,000 is reimbursed
$10,500 of taxable relocation expenses
– Without move AGI = $200,000
• would be allowed full deduction
– With move AGI = $210,500
• Itemized deductions with move are reduced by $315 (3% of
$10,500) due to additional relocation income
• $3,900 exemption deduction with move is reduced by 10% or $390
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AGI
$210,500
Threshold
$200,000
Excess
$ 10,500
$2,500 Increments
5
Lose 2% per increment
10%
Alternative Minimum Tax (AMT)
• AMT is
– A flat tax to insure everyone pays a minimum amount of tax
– Deductible items for AMT differ from regular tax
• Example State taxes
– Itemized deduction for regular tax
– Not deductible for AMT
• Pay greater of AMT or regular tax
• Exemption for AMT is increased
– 2012 Married $78,750 Single $50,600
– 2013 Married $80,800 Single $51,900
Tax on Investment Income
• Patient Protection Act adds 3.8 % tax on investment
income
– Investment income
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Interest
Dividends
Rents
Royalties
Gain on disposition of assets not used in a trade or business
– Applies to individuals with AGI over $200,000
Investment income
• Effect on relocation
– Relocation may cause transferee with income under the
AGI limit to go over the limit.
• Example:
– Employee has $180,000 in company earnings plus $10,000
of dividends and interest
– Company pays $50,000 of taxable relocation
– AGI with relocation is over $200,000
– Employee now owes an additional $380 (3.8% of $10,000)
because of the additional relocation income
Debt Forgiveness
• Extended provision on exclusion from gross income for
discharge of qualified principal indebtedness
• Applies to homeowners who receive
– Principal forgiveness
– Go through short sale
– Foreclosure
– Other debt modifications which reduce the amount
indebtedness
Social Security
• Tax Holiday - OASDI (Social Security) rate reduced to
4.2% for FICA wages earned in 2011 and 2012
• Tax Holiday expired 12/31/12
• FICA rate for OASDI increases to 6.2% for wages
earned after 12/31/12
Tax Holiday
• Effect on relocation
– Will increase the tax assistance on employees that would
not reach the FICA maximum with normal company
earnings
• Example employee with YTD FICA wages of $75,000
and $10,000 of taxable relocation would pay:
– $420 for 2012
– $620 for 2013
Additional Medicare Tax
• New 0.9% rate for Medicare
• Prior rules on Medicare
– All FICA earnings taxed at 1.45%
– No wage limit
• New Rules
– FICA wages up to $200,000 ($250,000 for married couples that file a
joint tax return) are taxed at 1.45%
– FICA wages over $200,000 ($250,000 for married couples that file a
joint tax return) are 2.35% (1.45% plus 0.9%)
– Only applies to employee does not apply to employer portion
Additional Medicare Tax
• Required to withhold additional FICA when wages exceed
$200,000
• Problem for relocation
– Married employees are not subject to the 0.9% tax
until joint wages exceed $250,000
• No liability incurred for FICA wages between
$200,000 and $250,000
• Employee will have additional liability if
– Wages don’t exceed $200,000 but joint wages
exceed $250,000
– Employers may want to have tax review after
return is filed
State Income Taxes
• Federal changes may also impact state income taxes
• Example: Colorado
– Federal taxable income as adjusted times 4.63%
– Increasing federal taxable income increases Colorado
income tax
Continuing Education Credit
• One hour of continuing education credit is
available for attending today’s seminar
• Apply for CRP, CPE, or CUE credit on line at the
Ineo website http://www.ineotech.com/contact/
Questions and Answers