Posted on Jul 9, 2019

If you pay for services from independent contractors, your legal obligations to those individuals are far more limited than those involving statutory employees. But the growing importance of so-called “gig” workers in today’s labor force is changing the legal landscape for some businesses.

Evolving Marketplace

The term “gig workers” refers to people who an employer would contract with directly, through agencies, or using a professional employer organization. The growth of the gig economy is fueled by variable demand for manpower and new enabling technology for some categories of work. But employment attorneys warn that aggressive plaintiffs’ lawyers are chipping away barriers to employer liability for gig workers in the areas of accidents and injuries.

Meanwhile, the Occupational Health and Safety Administration (OSHA) is also paying more attention to contract workers. On its website, OSHA has outlined employer duties to protect temporary workers. It states, “OSHA has concerns that some employers may use temporary workers as a way to avoid meeting all of their compliance obligations.” Employers “should consider the hazards it is in a position to prevent and correct.”

OSHA’s website also asserts that “Host employers must treat temporary workers like any other workers in terms of training and safety and health protections.”

Warning Shot

OSHA’s policy statement is focused on employers’ use of temp agencies in “joint employment” arrangements, rather than the standard gig worker/independent contractor relationship. But it appears that a warning shot has been shot across employers’ collective bow.

A study recently published by the Journal of Occupational and Environmental Medicine notes “increased rates of fatal and non-fatal injuries” among “traditional contingent workers,” and explores potential causes. Differences in training was a potential culprit.

As a result, one employment law firm warns that “safety, training, culture, practices, supervision and enforcement must be adapted to meet the new economy.” Even without the threat of litigation, only the rare employer would be indifferent to potential hazards facing anybody performing work for them. Besides, accidents caused by independent contractors at your worksite can also hurt regular employees and your customers.

Naturally, hazards faced by gig workers vary according to the nature of the work they perform. “On-demand jobs are among the most dangerous in the country,” asserts the worker legal advocacy group National Employment Law Project. This organization wants states to mandate workers compensation coverage for all “on-demand workers.” It lists the three most common job categories — transportation, delivery and home services — as “among the most hazardous in the country.”

Vulnerability to Injury

Outside of the transportation, delivery and home services sectors, attention generally focuses on gig workers who spend a lot of time on your company’s premises, where they might be vulnerable to accidents or injuries. Worksite injuries don’t always involve hazardous equipment or materials.

Experts calling attention to the safety issue point to the demographics of gig workers, particularly the fact that they tend to be young. “Younger age is a well-known independent risk factor for occupational injury,” according to a recent study by the Journal of Occupational and Environmental Medicine.

In addition to their relative youth, gig workers often work for a relatively short time periods for one company or in one industry sector. That inexperience also can put them at greater risk for accidents.

Protecting Workers

Meanwhile, OSHA has recently focused on worksite risks for younger workers. It’s identified the following steps to employers should take to protect full-time and temporary workers under age 30:

  • Ensure that young workers receive training to recognize hazards and are competent in safe work practices.
  • Implement a mentoring or buddy system.
  • Encourage young workers to ask questions about tasks or procedures that are unclear.
  • Explain to young workers what they need to do if they’re hurt on the job.

In addition, OSHA has informed employers of their duties to try to protect workers from workplace violence. The agency highlighted a case in which a social services contractor was held responsible for ignoring safety concerns expressed by a worker who traveled outside the workplace to visit clients and, while conducting a visit, was killed by a client.

The worker was an employee of the contractor. However, the case highlights employers’ obligations to provide for the safety of individuals who provide services in a gig-like environment.

Toeing a Fine Line

In attending to the safety needs of independent contractors, employers should avoid tipping the scales toward establishing an employer-employee relationship with individuals who it classifies as independent contractors.

The law in this evolving area of employment law involves subjective assessments, and the nature of gig work arrangements varies widely. So, the advice of an employment attorney could prove invaluable as you weigh your workplace safety maintenance obligations.

Posted on Jul 8, 2019

Does your business need to add one or more vehicles? If so, the purchases may qualify for tax breaks under current tax law. Here are the details.

First-Year Depreciation Breaks

The Tax Cuts and Jobs Act (TCJA) allows unlimited 100% first-year bonus depreciation for qualifying new and used assets (including eligible vehicles) that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, for a used asset to be eligible for 100% first-year bonus depreciation, it must be new to the taxpayer (you or your business entity).

Spotlight on Leased Vehicles

Business use of a leased vehicle may be   tax deductible. If a leased vehicle is used 100% for business purposes, the full cost of the lease is deductible as an ordinary business expense. However, lessees of more expensive vehicles must include a certain amount in income for each year of the lease to partially offset the lease deduction.

The income inclusion amount varies based on the leased vehicle’s initial fair market value and the year of the lease. The IRS recently published a table to help taxpayers determine the inflation-adjusted lease inclusion amounts for vehicles with lease terms starting in 2019.

For example, suppose your business leases a light truck with a fair market value of $66,500 on January 1, 2019, for three years. It’s used for business purposes only. According to the IRS table, your income inclusion amounts for each year of the lease would be as follows:

  • $72 in 2019,
  • $160 in 2020, and
  • $236 in 2021.

The lease inclusion table is designed to help balance out the tax benefits of leasing a luxury car compared to purchasing it and taking the expanded first-year depreciation tax breaks.

Contact your tax advisor to discuss the pros and cons of leasing vs. buying a business vehicle. Taxes are just one consideration in this critical decision.
The TCJA also permanently increased the Section 179 expensing limit for qualifying asset purchases from $500,000 in 2017 to $1 million for tax years beginning in 2018 and beyond. However, this break is phased out for qualifying purchases over $2.5 million in 2018 (up from $2 million in 2017).

For tax years after 2018, these amounts will be adjusted annually for inflation. The inflation-adjusted figures for 2019 are $1.02 million and $2.55 million, respectively.

Sec. 179 expensing for qualifying asset purchases is phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount. So, no Sec. 179 deduction is available if your total investment in qualifying property is above $3.57 million for 2019.

Heavy Vehicles

Heavy SUVs, pickups and vans are treated for  tax purposes as transportation equipment. So, they qualify for 100% first-year bonus depreciation and Sec. 179 expensing if used over 50% for business. This can provide a huge tax break for buying new and used heavy vehicles.

However, if a heavy vehicle is used 50% or less for business purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.

To illustrate the potential savings from these first-year tax breaks, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2019. You can deduct the entire $65,000 in 2019 thanks to the 100% first-year bonus depreciation privilege. If you use the vehicle only 60% for business, your first-year deduction would be $39,000 (60% x $65,000).

To qualify as a “heavy” vehicle, an SUV, pickup or van must have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify the GVWR of a vehicle by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia and lots of full-size pickups.

Garden-Variety Passenger Vehicles

The tax breaks for passenger automobiles (defined to include light SUVs, pickups, and vans) are less generous than for heavy vehicles. The inflation-adjusted depreciation limits for passenger vehicles that were acquired before September 28, 2017, and placed in service during 2019 are:

  •  $10,100 for the first year ($14,900 with bonus depreciation),
  • $16,100 for the second year,
  •  $9,700 for the third year, and
  •  $5,760 for each succeeding year.

The depreciation limits for passenger autos acquired after September 27, 2017, and placed in service during 2019 are:

  •  $10,100 for the first year ($18,100 with bonus depreciation),
  • $16,100 for the second year,
  •  $9,700 for the third year, and
  •  $5,760 for each succeeding year.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately.

Important: For a vehicle to be eligible for these tax breaks, it must be used more than 50% for business purposes, and the taxpayer can’t elect out of the deductions for the class of property that includes passenger automobiles (five-year property).

Limited-Time Offer

The Sec. 179 limits were permanently expanded by the TCJA. But the first-year bonus depreciation program will gradually start phasing out 20% per year, beginning with tax years starting in 2023. And the bonus depreciation program will expire after 2026, unless Congress extends it. If you have questions about depreciation deductions on vehicles, contact your tax advisor.

Posted on Jun 18, 2019

Estate planning isn’t just for the rich and famous. Many people mistakenly think that they don’t need an estate plan anymore because of the latest tax law changes. While it’s true that the Tax Cuts and Jobs Act (TCJA) provides generous estate tax relief, even for well-to-do families, the need for estate planning has not been eliminated. There are still numerous reasons to develop a comprehensive estate plan and regularly update it.

How the Estate Tax Has Evolved

Several recent tax law changes, including certain provisions of the TCJA, may help you shelter all or a large portion of your estate from estate and gift tax.

At the turn of the century, the unified estate and gift tax exemption was a mere $675,000. It was increased to $1 million in 2002, while the top estate tax rate was 55%. Then legislation gradually increased the estate tax exemption to $5 million for 2011, indexed annually for inflation, and lowered the top estate tax rate to 35%. (There was a one-year moratorium on federal estate tax for people who died in 2010.)

Along the way, the unified estate and gift tax exemptions were severed and then reunified, as they remain under current law. Therefore, any amounts used to cover lifetime gifts erode the remaining estate tax shelter.

Notably, subsequent legislation also created and then preserved a “portability” provision. This allows the estate of a surviving spouse to use the unused portion of the deceased spouse’s exemption. So, it effectively “doubled” the $5 million exemption for married couples to $10 million.

Starting in 2018, the TCJA officially doubled the estate exemption per individual from $5 million to $10 million, with annual indexing for inflation. For 2019, the exemption is $11.4 million for an individual or $22.8 million for a married couple. However, these provisions are scheduled to expire after 2025. For 2026 and thereafter, the law will revert to pre-2018 levels, unless Congress takes further action.

Why Estate Planning Still Matters

Given the dramatic increase in the unified estate and gift tax exemption over the last 20 years, there’s a common misconception that federal estate planning is a concern of only the wealthiest individuals. But here are four valid reasons for people with estates below the unified exemption threshold to devise a plan — or revise an existing plan to take advantage of current tax law.

1. Family changes.

Most mature adults have created a will. Some also have set up trusts to maximize each spouse’s exemption and protect assets from creditors and spendthrift family members.

However, circumstances change over time. Is your old list of beneficiaries still complete and accurate? You may need to update your will and estate plan to reflect births and (unfortunately) deaths and divorces in the family.

Who’s listed as the executor of your estate? The executor is the quarterback of your estate planning team. Maybe your children were minors when you originally drafted your plan, and now your grown children may be better suited to serve as executors than your aging parents.

Carefully select your executor and successor (to serve as a backup executor in case the appointed executor predeceases you or is otherwise unable to fulfill the duties). To prevent problems after you die, consider meeting with the successor to iron out any potential problems and discuss the challenges that must be met. Even if your first choice is still on board, you may periodically want to “check in” and review matters.

Your estate plan also may need an overhaul if you’ve divorced, especially if you’ve remarried and your new spouse has children of his or her own. Along the same lines, one or more of your children may have divorced, requiring adjustments to your estate plan. The need to update your plan could even extend to pets that need care if you should unexpectedly pass away.

2. Changes to assets and liabilities.

It’s a good idea to review your estate plan any time there’s a significant change in the value of your estate, including the value of any business interests, real estate or securities you own. A major increase or decrease in the value of one asset could cause you to rethink how your holdings will be allocated among your beneficiaries. Similarly, the sale or purchase of an asset may require adjustments to your plan.

3. Change in residence.

State law generally controls estate matters. Therefore, the state where you legally reside can make a big difference. The differences may range from the number of witnesses required to attest to a will to the minimum amount a spouse must inherit from an estate. Furthermore, the legal state of residence may affect other estate planning documents besides your will, such as a power of attorney, living will or advance medical directive.

If you’re moving to another state, or you’ve already moved, meet with a local estate planning advisor to review your current plan and determine whether changes are needed. This is especially important when you have a substantial estate for tax purposes. Sometimes, an old home state may assert that a person didn’t change his or her legal residence and continue to pursue state death tax obligations.

4. Estate tax changes.

If you haven’t updated your estate plan since the TCJA passed, it’s worth checking in with your estate planning advisor to ensure your plan reflects current tax law. The wealthiest individuals may still set up complex estate planning strategies to shield their estates from federal estate tax. But simple trusts may still be used to protect assets from creditors and guard against spendthrift family members.

Also, beware that the estate tax provisions of the TCJA are in effect only through 2025 — and there are no guarantees the current estate tax levels will remain in effect until then. Congress could change the law again before 2026 — or make it permanent.

Moreover, the federal tax law changes don’t provide protection on the state level. So, it’s important for your estate plan to take any applicable state death taxes into account.

Time to Update

Too often, well-intentioned taxpayers create an estate plan, including a will, and then stick it in a drawer or safe deposit box where it gathers dust. This can potentially leave a legacy of estate tax complications and frustrations for your family members when they can least afford it, financially and emotionally. To ensure your final wishes are kept and your assets are preserved, work with an estate planning professional to devise a flexible, comprehensive plan and then review it on a regular basis.

Posted on Jun 14, 2019

By 2026, nearly one in four workers will be 55 and older. That’s compared to about one in five today, according to the U.S. Bureau of Labor Statistics.

So, the proportion of younger workers in the overall labor pool will shrink. Does that mean your business will have to settle for workers that are less capable in some ways?

Research suggests that this isn’t the case. As workers age, their levels of agility and skills is unlikely to diminish, according to the Gerontological Society of America (GSA). In fact, the GSA estimates that 85% of the U.S. population in the 65 to 69 age bracket has no health-related impediments to work. That proportion only drops to 81% for the 70 to74 age bracket. And the majority (56%) of Americans aged 85 and over have no such limitations — although that percentage might be smaller for heavy manual labor.

“Longevity Economics”

The GSA recently published a report entitled, “Longevity Economics: Leveraging the Advantages of an Aging Society.” It offers some insight about the working world through the eyes of older employees. The report states, “While previous generations may have viewed their 50s and early 60s as their most productive and financially rewarding years, older Americans view their 70s or 80s as ages for making some of their greatest contributions.”

The report highlights a series of “myths” (with some underlying elements of truth) concerning older workers, while also offering tips on making the most out of this growing workforce sector. Here are some examples:

Myth: Older workers expect to earn more.

Reality: Many older workers have already paid for their homes and other major life expenses, such as children’s education. So, they’re often content to take jobs with less responsibility and, accordingly, lower pay.

Myth: The cost of health benefits for older workers is higher  than for younger ones.

Reality: While older workers may individually incur more health claims, they typically don’t use family coverage. And they also may qualify for Medicare coverage. So, they may be less expensive to cover than younger employees.

Myth: Older workers are harder to motivate because they aren’t as financially ambitious or as interested in getting a promotion as younger workers are.

Reality: Compared to their younger counterparts, older workers might be less motivated by financial rewards. But they might find nonfinancial benefits, such as flexible work hours or extra vacation time, more rewarding — and employers can satisfy these needs at little or no cost.

Different Motivations

According to GSA research, “Older workers are more motivated to exceed expectations than younger workers” and are more deeply engaged in their work than their younger colleagues. In addition, the report highlights older workers for their “willingness to contribute to company success through discretionary activities such as working longer hours, being dedicated to the company, and putting more energy into their jobs correlated with lower staff turnover and better company performance.”

So, what inspires older employees to become engaged? A survey of job seekers over age 50 performed by RetirementJobs.com shows that older workers aren’t indifferent to what they are paid in salary and benefits. But they are particularly interested in flexibility, security and stability, independence, autonomy and pure challenge. Even the term “retirement jobs” suggests that, while some people call themselves retired, they may view working as more of a retirement activity than a job.

Just as employers have had to learn how to maximize the productivity of new generations of workers, with policies such as “casual Fridays,” they must do the same for older workers. “Employers just need to recognize the differences in motivators at various points across the years of employment,” the report states. “HR innovations can be very effective in supporting longer working lives.”

The Long View

One “innovation” is simply taking a long-term view of your company’s workforce needs. Don’t try to precisely forecast specific jobs from year to year. Instead, focus on your long-term goals over the next five or ten years. It’s nearly impossible to predict specific job skills that will be required in the future. Also, think in terms of how you’ll fill and retain workers in broad “job families” and where older workers will fit into the big picture.

The GSA report suggests these tactical approaches to consider:

Invest in older workers today to maintain their productivity through training, workplace adaptations and internal transfers.
Recognize the shift of careers from upward to horizontal, such as into an advisory capacity, or downward as people want to contribute in less demanding positions.
Create performance-based compensation structures that are independent of age.
The GSA concludes, “By leveraging an aging population in the ‘longevity era,’ economic growth can be enhanced now and continued into the future.” Contact your HR and payroll advisors to help your business capitalize on today’s older (and possibly wiser) workforce.

 

Posted on May 7, 2019
If your small business is unincorporated, you may be fed up with paying the federal self-employment (SE) tax. This tax is how the federal government collects Social Security and Medicare taxes from self-employed individuals. However, you may be able to lower your exposure to these taxes if you structure your business as a subchapter S corporation for federal tax purposes. Here are the details on how this tax-saving strategy can work.

Employment Tax on Salary Income

First, let’s review how federal employment taxes are collected for regular W-2 employees. If a taxpayer earns salaries and wages as an employee, Social Security tax will be incurred at a 12.4% rate on the first $132,900 you earn in 2019. The taxpayer’s employer will withhold half (6.2%) from his or her paychecks. The other half will be paid by the employer directly to the U.S. Treasury. No Social Security tax is incurred on any salary above the $132,900 ceiling for 2019.

Medicare tax on salary income is incurred at a 2.9% rate before rising to 3.8% at higher salary levels. (See “What is the Additional Medicare Tax?” below.) Part of the Medicare tax is withheld from the employee’s salary, and part is paid by the employer. There’s no income ceiling on the Medicare tax or the 0.9% Additional Medicare Tax.

Employment Tax on SE Income

How does the situation differ if you’re self-employed? For 2019, you’ll pay the maximum 15.3% SE tax rate on your first $132,900 of net SE income. That includes 12.4% for the Social Security tax component and 2.9% for the Medicare tax component.

No Social Security tax is incurred on SE income above the Social Security tax ceiling of $132,900 for 2019. But the Medicare tax component continues at a 2.9% rate before rising to 3.8% at higher levels of SE income. There’s no income ceiling on the Medicare tax component or the 0.9% Additional Medicare Tax.

For example, suppose your unincorporated small business generates SE income of $216,567 for you in 2019. To calculate your SE tax bill, the net SE income figure is multiplied by 0.9235 to equalize the overall tax impact of federal employment taxes on SE income and salary income.

Your business generates $200,000 of SE income after applying the 0.9235 factor. So, you’ll owe $16,480 of Social Security tax ($132,900 × 0.124), plus $5,800 of Medicare tax ($200,000 × 0.029). That’s a grand total of $22,280 in SE tax for 2019.

To make matters worse, your SE tax bill is likely to increase every year due to inflation adjustments to the Social Security tax ceiling (the “wage base”) and the growth of your business.

Tax on Salary Income for S Corp Shareholder-Employees

Salaries paid to employees of S corporations — including an employee who’s also a shareholder — are subject to federal employment taxes just like salaries paid to a regular W-2 employee. That is, the employee owes 6.2% Social Security tax on the first $132,900 for 2019 and 1.45% Medicare tax on all salary income. These amounts are withheld from the employee’s paychecks. The employer pays in matching amounts of Social Security tax and Medicare tax directly to the U.S. Treasury.

At higher salary levels, an employee (including an S corporation shareholder-employee) must pay the 0.9% Additional Medicare Tax out of his or her pocket. So, the combined federal employment tax employer rate for the Social Security tax is 12.4%, and the combined rate for the Medicare tax is 2.9%, rising to 3.8% at higher salary levels. These rates are effectively the same as the SE tax rates.

So, the bad news is that salary income for S corporation shareholder-employees is subject to federal employment tax. The good news is that S corporation taxable income passed through to a shareholder-employee and S corporation cash distributions paid to a shareholder-employee generally are not subject to federal employment taxes.

As a result, S corporations may potentially be in a more favorable position than sole proprietorships, single-member limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes, partnerships and multimember LLCs that are treated as partnerships for tax purposes.

Tax Reduction Strategy

How can you lower the burden of federal employment taxes if you’re interested in this strategy? First, structure your business as an S corporation. Then pay modest salaries to yourself and any other shareholder-employees. Finally, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.

For example, let’s suppose you own an S corporation that generates net income of $200,000 before paying your $60,000 salary for 2019. Only the $60,000 salary is subject to federal employment taxes of $9,180 ($60,000 x 0.153). That’s significantly less than the $22,280 federal employment tax bill in the previous example.

Caveats

Operating as an S corporation and paying yourself a modest salary will work if you can prove that your salary is “reasonable” based on market levels for similar jobs. Otherwise you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. That said, the risk of the IRS successfully doing that is minimal if you can demonstrate that an unrelated third party would agree to perform the same work for that same amount. Your tax advisor can help with that.

There are also some unfavorable side-effects of paying modest salaries to S corporations shareholder-employees. First, modest salaries could limit contributions to certain tax-favored retirement accounts. If the corporation maintains a SEP or garden-variety profit-sharing plan, the maximum annual deductible contribution is limited to 25% of the shareholder-employee’s salary. So, the lower the salary, the lower the maximum contribution to your account. But, if the S corporation offers a 401(k) plan, generous contributions can still be made to your account while paying modest annual salaries.

In addition, paying modest salaries could reduce Social Security benefits that shareholder-employees receive at retirement. And S corporation status can trigger some tax complexities.

For example, a separate business tax return must be filed for an S corporation, and transactions between S corporations and shareholders (including transfers of business assets to the new corporation) must be evaluated for potential tax consequences. Corporations also may be subject to various formalities under state law, such as conducting board of directors’ meetings and keeping minutes. Before choosing to operate as an S corporation, you’ll have to consider whether the additional paperwork is worth the federal employment tax savings.

Need Help?

Contact your tax advisor if you think converting an existing unincorporated business into an S corporation could help reduce your federal employment taxes. He or she can help with the mechanics of making the initial conversion under applicable state law and then handle the post-conversion tax issues. Although the March 15 deadline for electing S status has already passed for 2019, it can still be made for 2020 and beyond.

What is the Additional Medicare Tax?

For tax years beginning after December 31, 2012, the 0.9% Additional Medicare Tax potentially applies to wages, compensation and self-employment (SE) income. You must pay the Additional Medicare Tax if your wages, compensation or SE income (together with that of your spouse if filing a joint return) exceed the following threshold amounts:

Filing Status Threshold Amount
Single or head of household $200,000
Married filing jointly $250,000
Married filing separate $125,000

Your employer must withhold Additional Medicare Tax from wages if it pays you more than $200,000 in a calendar year, without regard to your filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status and wages, compensation and SE income from all sources.

Posted on May 6, 2019

Every year, thousands of elderly Americans fall victim to elder abuse and financial exploitation scams, sometimes at the hand of their spouses or adult children. In fact, suspicious Activity Reports (SARs) related to elder financial exploitation have quadrupled the last four years, according to the Consumer Financial Protection Bureau (CFPB).

Acknowledging the scope of this problem, in 2018, Congress passed the Senior Safe Act. It defines elder financial exploitation as “the fraudulent or otherwise illegal, unauthorized, or improper actions by a caregiver, fiduciary, or other individual in which the resources of an older person are used by another for personal profit or gain.”

The Senior Safe Act gives financial advisors and institutions some protection against lawsuits if they sound the alarm on suspicious activity in their elder clients’ accounts. Previously, many financial advisors and institutions didn’t report suspicious activity, because they were afraid of being sued by implicated individuals.

While the law provides added measures of protection, friends and family members are often the first line of defense against elder abuse and financial exploitation. Here’s how you can help your loved ones.

Learn the Categories of Abuse

The first step in preventing fraud against elders is to familiarize yourself with the different types of financial abuse. The CFPB has compiled this list of common ploys:

  • Exploitation by someone who can act on the victim’s behalf when armed with a power of attorney (POA) or in a fiduciary relationship,
  • Theft of money or property,
  • Investment fraud and scams, such as deceptive “free-lunch seminars” selling unnecessary or fraudulent financial services or products,
  • Lottery and sweepstakes scams,
  • Scams by telemarketers, mail offers or door-to-door salespersons,
  • Computer and Internet scams, including identity theft, and
  • Contractor fraud and home improvement scams.

Discuss this list with older friends and family members. And reassure them that if they’ve been exploited, there’s no shame in admitting it. Older people are often embarrassed about being victimized — especially when the abuser is a family member or trusted caregiver — so, they may be reluctant to bring it to the attention of another person who can help.

Get the Scoop

The more you know about your loved ones’ finances and intentions, the better. Having remote access to their bank and investment accounts allows you to monitor transactions for unusual patterns that warrant investigation. It’s also helpful to meet their advisors, including tax accountants, bankers and lawyers.

Be aware that financial and health care POA instruments can provide opportunities for dishonest caretakers to commit fraud. If you’re not the one with that legal authority, it’s important to stay connected to that person. And suggest options that offer safeguards for the elderly person. For example, a “springing” POA goes into effect only under circumstances described in the document, such as mental incompetence.

The CFPB cautions against appointing a hired caregiver or other paid helper as a POA agent. If there’s no other choice, consider requiring the POA agent to regularly report to you (or another trusted individual) about any major financial transactions taken on your loved one’s behalf.

Some POA instruments allow the agent to make routine purchases, using an account that’s funded with only enough money to cover monthly expenses. Or you might require two signatures for checks over a certain dollar threshold.

The CFPB and FDIC have created the “Money Smart for Older Adults Resource Guide” to help educate seniors about this issue. This free publication emphasizes that not all financial abuse of elderly people crosses the line to theft.

For example, a free-lunch seminar might not explicitly require participants to purchase products or services. Instead, it might entail listening to an aggressive, unrealistic sales pitch or imply that the participant owes the salesperson something in exchange for receiving a free lunch.

The resource guide also offers the following helpful tips:

  • Take your time when making investment choices. The phrase “act now before it’s too late” should raise a red flag.
  • Always request a written explanation of any investment opportunity; then get an educated second opinion.
  • Make checks payable to a company or financial institution, never to an individual.
  • Document all conversations with financial advisors and consider bringing another person to help recall the details and ask relevant questions.

When a problem occurs, it’s important to act quickly. Time is critical to resolve matters and, if possible, achieve financial restitution.

For More Information

You can’t always protect elderly loved ones from financial abuse and exploitation. But you can help minimize opportunities for them to become victims. Your financial and legal advisors can answer any questions you may have about this issue and provide ideas to fortify your loved one’s defenses.

Posted on May 1, 2019

Congratulations to the graduating class of 2019! As soon as a new graduate switches his or her tassel to the other side of the cap, it’s time to plan for the future — and there’s more to do than finding a good-paying job.Smart financial planning in the first few years after graduation can make a big difference in the years ahead. Here are five tips to help new grads prosper.

Watch Out for ID Theft

The conventional wisdom is that most identity theft scams are targeted at vulnerable senior citizens. But that’s not actually true. In fact, Millennials may be at an even greater risk. According to data recently released by the Federal Trade Commission (FTC), 43% of people in their 20s reported a loss due to fraud, while only 15% of those in their 70s did so.To avoid ID theft, the FTC advises you to be suspicious and use common sense before providing information or funds to unknown parties. Visit the FTC’s website for more prevention tips or to report a scam.

1. Make (and Follow) a Budget

You don’t have to be an economics major to know that you shouldn’t spend more than what you earn. However, if you really want to get ahead, do an inventory of your income and expenses. Differentiate needs from wants. For example, eating is a necessity, but eating out at restaurants should only be an occasional splurge.  When drawing up your budget, figure out how much you need to live on. Give yourself an “allowance” for discretionary items and set a monthly savings goal. Beware: You don’t want to overextend yourself and then live paycheck to paycheck. This can cause stress if you unexpectedly lose your job, become disabled or incur a major medical bill or car repair.Allocate a predetermined amount from each paycheck to go directly to a separate savings account. By keeping your savings separate, you won’t be tempted to spend that amount on discretionary items, like a new jacket, concert tickets or a trip to Europe.As a rule of thumb, you should have a “rainy day fund” of three to six months of net take-home pay. If an emergency happens, you’ll be grateful for your savings.

2. Build Your Credit

Following a budget doesn’t mean you have to live an austere lifestyle. It should include a little “mad money” for fun and for discretionary spending, such as vacations, dining out, pets, clothing and personal pampering. Credit cards can be a convenient way to pay for these items and track the expenditures. Plus, credit cards often accrue rewards points that can be redeemed in the future.Most college students already have a credit card in their names. If you don’t have a card yet, sign up for one immediately and pay the charges on time every month. Doing so puts you on the road to establishing a solid credit score, which will come in handy when you apply for a car loan or mortgage.Never let your credit card balances spiral out of control. If you continue to pay off your balance every month, you’ll avoid high interest charges on outstanding amounts.You can also establish credit by:

  • Renting an apartment or home (instead of living with your parents),
  • Paying monthly bills (such as utilities, phone and cable Internet), and
  • Buying or leasing a vehicle.

Another financially savvy way to save money and build credit is to take advantage of interest-free financing offers on large purchases. These are often available for furniture, electronics and major appliances. But there’s a catch: Pay off the balance in full before the deal expires or you’ll likely incur high interest charges going back to the date of purchase.

3. Save for Retirement

How soon should new grads start saving for retirement? The sooner, the better. So, when you start your full-time job, take advantage of any employer retirement program as soon as you’re eligible. If you’re lucky, your employer might also contribute funds to your retirement up to a predetermined matching limit.Most employers allow workers to participate in a qualified retirement plan, such as a SEP or 401(k) plan. These programs allow you to contribute pretax dollars to the account and allow them to grow, tax free, until you withdraw funds during retirement. You also may supplement your company’s plan with IRAs and other tax-favored retirement accounts and investments.

4. Find a Place to Live

Deciding where to live is tied to many variables, including your job, family and personal preferences. But finances are the top consideration.Depending on where you live and how much you earn, you probably can’t move into your dream home right away. This is especially true if you work in a high-cost area. For instance, the cost of a studio apartment in a major city could be the same or even more than that of a 3-bedroom, single-family home out in the country.Be realistic about how much you can afford. As a rule of thumb, you generally can spend up to a third of your monthly net pay on housing. If your starting income is modest, you may have to pay a higher percentage of your take-home pay.When you have enough money for a down payment, consider buying a condominium, townhouse or single-family home. Interest rates are currently near historic lows. Plus, home ownership still offers tax benefits, especially if you expect to itemize deductions on your tax return after a purchase.Warning: The Tax Cuts and Jobs Act (TCJA) limits itemized deductions for mortgage interest and property taxes for homeowners for 2018 through 2025. The state and local tax (SALT) limit is most likely to affect taxpayers in states with high tax rates and/or those who have significant taxable income.  Other options, such as sharing an apartment with a roommate, may allow you to save more money until you can afford a place of your own. Alternatively, if you can, you might live with your parents for a while and accumulate even more savings until you’re ready to move out.

5. Get Your Wheels

Depending on where you live and work, a vehicle may be a necessity or a discretionary purchase if you can get from place to place by walking, bicycling or using public transportation. Often, recent grads can’t afford their dream cars right away. So, some may lease; others choose an economical vehicle that they can finance at a reasonable interest rate. To facilitate a car loan application, follow these steps:

  • Check your credit to ensure that you’re entitled to a favorable rate.
  • Obtain quotes for loans. Get at least three rates at banks, credit unions and car dealerships.
  • Find a willing co-signer, such as a parent or grandparent, if your credit rating is subpar or you haven’t established any credit yet.

If you end up financing through a dealership, mainly because it’s convenient, you may decide to pay off the original loan rate later with a loan at a lower rate. If you choose this path, make sure the original loan doesn’t include any prepayment penalties.When budgeting for a new or used vehicle, remember that expenditures extend beyond the original purchase price. That is, you’ll have to pay for auto insurance, gas, maintenance and repairs. These costs can quickly add up — and may eat away at your savings.

Need Help?

From credit scores and retirement to housing and transportation, there are a lot of major decisions to make soon after graduation. Fortunately, your financial advisors can mentor you as you enter the workforce and later as you progress in your career and personal life.

Posted on Apr 9, 2019

Hiring young people can be beneficial for all parties. But before you make any job offers, be fully aware of how youth employment is regulated under the Fair Labor Standards Act (FLSA). When employers fail to comply with these obligations, they can be prosecuted by the Department of Labor (DOL). And if the prosecution is successful, the DOL will likely publicize the results as a sobering reminder to all employers of the FLSA requirements.

Recent Examples

For instance, a fast food franchisee in the Midwest was recently charged with multiple labor law violations. They permitted several dozen employees under the age of 16 to work shifts longer than three hours on school days. The underage workers were allowed to operate certain dangerous equipment. And, the company failed to maintain proper employee work records. The result? The employer was fined nearly $50,000.

In another case, the local government of a small town was penalized for employing minors to perform hazardous jobs, which included riding in the back of trucks and operating chainsaws. The case reminds employers of “the importance of preventing employees under the age of 18 from participating in prohibited work,” the DOL’s Wage and Hour Division stated.

Under-Age Categories

There are two age brackets for youth workers: 

  •  14- and 15-year-olds, and
  •  16- and 17-year-olds.

Different rules apply to each bracket. Minors who work for a family business (assuming the work is considered nonhazardous) are exempt from these rules. Otherwise, children generally must be at least 14 to work, according to the FLSA.

The maximum hours of work for 14- and 15-year-old employees in various non-manufacturing, non-mining, nonhazardous jobs are as follows:

  • 40 hours per week when school isn’t in session,
  • 8 hours per day when school isn’t in session,
  • 3 hours per day when school is in session, and
  • 18 hours per week when school is in session.

Also, after Labor Day and before June 1, 14- and 15-year-olds aren’t permitted to work before 7:00 a.m. or after 7:00 p.m. During the summer months, they can work until 9:00 p.m. Exceptions are made for certain work study and career exploration programs.

Workers ages 16 to17 don’t have restricted work hours. However, like 14- and 15-year-olds, they aren’t permitted to work in hazardous jobs, such as:

  • Manufacturing,
  • Construction,
  • Assisting with or operating power-driven machinery,
  • Lifeguarding in a lake, river, ocean beach or other natural environment.

Other examples of hazardous jobs are: work involving the use of ladders and scaffolding, cooking, baking, loading goods off or onto trucks, building maintenance, and warehouse work (unless clerical).

The DOL’s website provides a full list of jobs that 14- and 15-year-old workers are permitted to do. It’s important to reference this list before hiring a teenager in that age bracket, because it isn’t permissible to hire these workers for any job that doesn’t appear on the approved job list.

Exploration

If young employees are participating in a special work experience program, they might not be subject to all the usual FLSA restrictions, including the number of hours they can work during a school week.

An example is the “work experience and career exploration” program for 14- and 15-year-olds. State education departments can apply to the DOL’s Wage and Hour Administrator to set up such programs. Their purpose is to “provide a carefully planned work experience and career exploration program for students who can benefit from a career-oriented experience.”

Employers also have more flexibility with 14- and15-year-olds who are in a DOL-approved work study program, which is geared to academically oriented students. Individual schools can apply to the DOL for approval of those programs.

6 Practical Tips

Here are six practical tips offered by seasoned employers of workers who are under age 18, compiled by the DOL’s “Youth Rules” website resource center.

1. Color coding. Different colored vests are issued to employees under the age of 18 by one chain of convenience stores. That way, supervisors know, for example, who isn’t allowed to operate or clean the electric meat slicer.

2. Tracking. An employer in the quick service industry, with over 8,000 young workers, developed a computerized tracking system to ensure that workers under 16 years of age aren’t scheduled for too many hours during school weeks.

3. Policy cards. One supermarket issues teens a laminated, pocket-sized “Minor Policy Card” on the first day of work. The card explains the store’s policy and requirements for complying with the youth employment rules.

4. Training. Many employers have taken the simple, but critical, step of training all their supervisors in the requirements of the FLSA. Refresher training at periodic intervals is equally important.

5. Warning stickers. Some employers place special warning stickers on equipment that young workers may not legally operate or clean.

6. Self-check for compliance. Some companies conduct their own compliance checks of their businesses to ensure they adhere to all federal, state and local youth employment rules.

Last Words

If you’re prepared, there could be a wealth of mutual benefit in hiring young teens for certain jobs. Employers benefit from their youthful exuberance and vigor. And, while a young worker’s focus might be earning some spending money, everyone needs to make a successful entry into the working world. As with any labor policy, check your state and possibly even local government’s laws and regulations pertaining to hiring minors before taking the plunge.

 

Posted on Apr 9, 2019

For many small business owners, their ownership interest is one of their biggest personal assets. What will happen to your ownership interest if you get divorced? In many cases, your marital estate will include all (or part) of your business interest.

Sometimes, divorcing spouses continue to participate in the business’s operations after the divorce settles, and then both spouses retain an ownership interest in the business. But, more commonly, former spouses are unable to effectively co-manage the business. So, one spouse retains a controlling interest and the other spouse 1) retains a passive stake in the business, 2) is bought out, or 3) is allocated other marital assets in a property settlement agreement.

How a marital estate is divvied up can have significant tax consequences. Here’s what you  need to know to get the best tax results.

State Law Is Key

How you must split up assets in divorce depends largely on where you live.

Community Property States

Community property states include:

  • California,
  • Texas,
  • Washington,
  • Wisconsin,
  • Arizona,
  • Nevada,
  • New Mexico,
  • Louisiana, and
  • Idaho.

In these states, the general rule is that each spouse owns half of community property assets (those accumulated during the marriage) and owes half of the liabilities incurred during the marriage.

In contrast, assets that were owned by one spouse before the marriage, or that were received by one spouse as a gift or  bequest during the marriage, are generally considered to belong solely to that person. Therefore, those assets aren’t included in the marital estate and split up 50/50.

Equitable Distribution States

All the other states are so-called “equitable distribution” states. Here, the general rule is that you and your spouse must split up your assets according to “whatever is fair” in the eyes of the divorce court. This often works out to be a 50/50 split.

If you don’t want to be at the mercy of the court, you and your spouse can negotiate a settlement outside of court, and the court will generally go along with your agreement. This can be a smart option, because spouses may be emotionally tied to certain assets (such as Grandma’s jewelry or a vacation home that’s been in the family for decades). And business-owner spouses may want to retain 100% of their business in exchange for other nonbusiness assets (such as a personal residence or retirement funds).
Tax-Free Transfer Rule

In general, you can divide most assets, including cash and ownership interests in a business, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under the tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

To illustrate how this works, suppose that, under the terms of your divorce agreement, you give your primary residence to your ex-spouse in exchange for keeping all the stock in your small business. This asset swap would be tax-free. And the existing basis and holding  periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to post-divorce transfers as long as they’re made incident to divorce. Transfers incident to divorce are those that occur within:

  • A year after the date the marriage ends, or
  • Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

In recent years, the IRS has extended the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gain assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets also can be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Tax Implications of Tax-Free Transfers

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — where the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold, unless an exception applies.

For example, if you qualify for the principal residence gain exclusion break, you can exclude up to $250,000 of gain from your federal taxable income, or up to $500,000 of gain if you file a joint return with a future spouse.

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex continues to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex ultimately sells the shares, he or she (not you) will owe any resulting capital gains taxes.

Important: The person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. Always take taxes into account when negotiating your divorce agreement.

Splitting Up Qualified Retirement Plan Accounts

Many business owners set up qualified retirement plans, such as a profit-sharing, 401(k) or defined benefit pension plan. A percentage of the account balance or plan benefits may need to be transferred to your ex-spouse as part of the divorce property settlement.

To execute a transfer without owing taxes on amounts that go to your ex, you must use a qualified domestic relations order (QDRO). In effect, the QDRO causes your ex-spouse to become a co-beneficiary of your retirement account. The tax advantage comes from the fact that the QDRO also makes your ex responsible for the income taxes on retirement account money that he or she receives in the form of account withdrawals, a pension or an annuity. In other words, the QDRO causes the tax bill to follow the money.

The QDRO also allows your ex to withdraw his or her share of the retirement account balance and roll the money over tax-free into his or her own IRA (to the extent such withdrawals are permitted by your plan’s terms). The rollover strategy allows your ex to take over management of the money while continuing to postpone taxes until funds are withdrawn from the rollover IRA. When your ex withdraws funds from the rollover IRA, he or she (not you) will owe the related income taxes.

Warning: Without a QDRO, money that’s transferred from your qualified retirement plan account to your ex-spouse is treated as a taxable distribution to you. So, your ex gets a tax-free windfall at your expense. To add insult to injury, you may also owe the 10% early withdrawal penalty tax on money that goes to your ex before you’ve reached age 59½.

Splitting Up IRAs

You don’t need a QDRO to obtain an equitable tax outcome when you turn over IRA funds to your ex under your divorce agreement. This includes money held in SEP accounts, SIMPLE IRAs, traditional IRAs and Roth IRAs. QDROs are only relevant in the context of qualified retirement plans.

However, with IRAs, you still must be careful to avoid getting taxed on money that goes to your ex. The key to a tax-free transfer is to specifically order the transfer in your divorce or separation instrument. For this purpose, the tax code narrowly defines a divorce or separation instrument as a “decree of divorce or separate maintenance or a written instrument incident to such a decree.”

A transfer that meets this requirement can be arranged as a tax-free rollover of the applicable amount from your IRA into an IRA set up in your ex-spouse’s name. Your ex can then manage the money in the rollover IRA as he or she sees fit and can continue to defer taxes until withdrawals are taken. Any future income taxes are paid by your ex (not you).

Important: When it comes to IRA transfers, don’t jump the gun. If you voluntarily give your ex-spouse some IRA funds before it’s required under a divorce or separation instrument, it will be treated as a taxable distribution to you. If a taxable distribution occurs before you’re 59½, you also may be hit with the 10% early withdrawal penalty.

New Treatment for Alimony Payments

Allocating marital assets is just one part of settling your divorce. Deciding on maintenance payments is another critical component.

The Tax Cuts and Jobs Act (TCJA) permanently disallows deductions for alimony payments required by divorce agreements signed after December 31, 2018. Such payments are federal income-tax-free to the recipient. Under prior law, payers could deduct alimony, and recipients had to include alimony in their taxable income.

This recipient-favorable change should be taken into account when negotiating divorce agreements — and when drafting prenuptial agreements in the future.

Minimizing Taxes

Like any major life event, divorce can have major tax implications, especially if you own a private business interest. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

Posted on Apr 4, 2019

The IRS announced that it is providing expanded penalty relief to certain individuals whose  2018 federal income tax withholding and estimated payments fell short of their total tax liability for the year. (Notice 2019-25)

The IRS is now lowering to 80% the threshold required to qualify for this relief. Under the relief originally announced January 16, 2019, the threshold was 85%. The usual percentage threshold is 90% to avoid a penalty.

This means that the IRS is now waiving the estimated tax penalty for taxpayers who paid at least 80% of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments — or a combination.

Why Did Some People Not Have Enough Withheld?

The U.S. tax system is pay-as-you-go. By law, it requires taxpayers to pay most of their tax obligation during the year, rather than at the end of the year. This can be done by either having tax withheld from paychecks or pension payments, or by making quarterly estimated tax payments.

The expanded relief will help many taxpayers who owe tax when they file, including taxpayers who didn’t adjust their withholding and estimated tax payments to reflect an array of changes under the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017.

“We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year,” said IRS Commissioner Chuck Rettig. “The expanded penalty waiver will help many taxpayers who didn’t have enough tax withheld. We continue to urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

The revised waiver computation will be integrated into commercially-available tax software and reflected in the forthcoming revision of the instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

What If You Already Filed?

Taxpayers who have already filed for tax year 2018 but qualify for this expanded relief may claim a refund by filing Form 843, Claim for Refund and Request for Abatement and include the statement “80% Waiver of estimated tax penalty” on Line 7.  This form cannot be filed electronically.

If you have questions about withholding or the recently announced penalty relief, contact your Cornwell Jackson tax advisor.