New 2012 & 2013 Global Mobility Tax & Payroll Issues

Transcription

1 New 2012 & 2013 Global Mobility Tax & Payroll Issues Speaker: David S. Oltman Title: Chief Compliance Officer Ineo/Co-Founder Relocation Taxes, LLC Location: Pittsburgh, PA Date: 9/14/12

2 New 2012 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 2012 of the employee s 2011 tax return. Cost usually between $250 to $395 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.

3 New 2012 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 and lower phase-out for personal exemption amounts 1/3 reduction and a new minimum of $2,333 ($3,700 x %) per personal exception. 0% in 2010 and 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 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.

4 2012 Hot!!! Federal & State Tax Issues Temporary Assignments 1 year rule business vs. taxable. See RTA pages 8 & 9 also Revenue Ruling New Trend to reconcile state taxes Keep Employee Whole For State Income Tax. New Proposed Tax Bill H.R / S Day Rule (was H.R & 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: a) Any State income tax dollars that were advanced or loaned b) The taxability of advances or loans c) Multi-state tax credits taken or not taken on state tax returns d) Non-Resident and Part-Year Resident state tax returns e) Administration of the program loans, advances and repayments * Proposed Effective Date 1/1/2014 See RTA p. 13

5 2012 Tax & Payroll Issues 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) - 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 (updates ) 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 2013 and 2014 tax changes.

6 IRS 2012 & 2013 Tax Forms & and New Medicare Rates RTR - "Relocation Tax Report" - replaces old "IRS Form See RTA p "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 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 The employer rate remains 6.20%. This represents a potential several hundred dollar per move gross-up savings. New 2013 proposed FICA Limit $113,700. 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

7 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.

8 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!!!!!

9 Hot!!! 2012 Relocation Trends Year-end true-up or difference or delta calculation. Negatives only 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. $875+/- 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 $395 per move.

10 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 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 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.

11 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

12 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

13 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 $11,900 (MFJ).25% $ 2,975 "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.

14 Money Saving Gross-up Policy Decision Opportunities 2012 GROSS-UP DECISIONS YES/NO Additional Cost Per Move* Use Tax Tables Several Thousand Dollars State Taxes Moved To/From / Both? $1,000 Include Fed. in State $350 Local Taxes $150 F.I.C.A. Taxes SS / Med / Both SS $1,000 / Medicare $250 F.I.C.A. Circular Logic $400

15 Money Saving Gross-up Policy Decision Opportunities 2012 GROSS-UP DECISIONS YES/NO Additional Cost Per Move* Deduction/Exempt. Phase-out $275 (No 2012 phase-out) Assume Itemized Deductions $600 (New GST) Gross-up "Unqualified" Moves $5,800 Misc. Expense Allowance $4,000 COLA / MIDA $6,000 $0.555/$0.23 cents per mile $150 Loss on Sale $10,000 to $50,000+ AMT, WPC, First Time HB Credits $1,000 - $20,000+ Annualize New Hire Salaries Several Thousand Dollars

16 Money Saving Gross-up Policy Decision Opportunities 2012 GROSS-UP DECISIONS YES/NO Additional Cost Per Move* Deduction/Exempt. Phase-out $275 (No 2012 phase-out) Assume Itemized Deductions $600 (New GST) Gross-up "Unqualified" Moves $5,800 Misc. Expense Allowance $4,000 COLA / MIDA $6,000 $0.555/$0.23 cents per mile $150 Loss on Sale $10,000 to $50,000+ AMT, WPC, First Time HB Credits $1,000 - $20,000+ Annualize New Hire Salaries Several Thousand Dollars

17 Money Saving Gross-up Policy Decision Opportunities 2012 GROSS-UP DECISIONS YES/NO Additional Cost Per Move* Look at Non-itemizers (Renters) $500+ Economic Stimulus Package $0 to $3,000+ Third Party Home Sale Company $9,000 Other 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 2012