Your compensation may take several forms, including salary, fringe benefits and bonuses. If you work for a corporation, you might also receive stock-based compensation, such as stock options. These come in two varieties: nonqualified (NQSOs) and incentive (ISOs). With both NQSOs and ISOs, if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for. The tax consequences of these types of compensation can be complex. So smart tax planning is critical. Let’s take a closer look at the tax treatment of NQSOs, and how it differs from that of the perhaps better known ISOs. Compensation income NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately. ISOs, on the other hand, generally don’t create compensation income taxed at ordinary rates unless you sell the stock from the exercise without holding it for more than a year, in a “disqualified disposition.” If the stock from an ISO exercise is held more than one year, then generally your lower long-term capital gains tax rate applies when you sell the stock. Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability. ISO exercises can trigger AMT unless the stock is sold in a disqualified disposition (though it’s possible the AMT could be repealed under tax reform legislation). More tax consequences to consider When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Otherwise you might face underpayment penalties. Also keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax (NIIT). These two taxes might be repealed or reduced as part of Affordable Care Act repeal and replace legislation or tax reform legislation, possibly retroactive to January 1 of this year. But that’s still uncertain. Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them. © 2017
Adequate insurance coverage is, in many cases, a legal requirement for a business. Even if it’s not for your company, proper coverage remains a risk management imperative. But that doesn’t mean you have to take high insurance costs sitting down. There are a wide variety of ways you can decrease insurance costs. Just two examples are staying on top of facilities maintenance and improving the safety of those who work there. Facilities maintenance For starters, have an electrician check your facility. Can the building’s electrical system handle the load at peak times? Are there circuits at risk of being overloaded? Also look at installing a sprinkler system (or upgrading your existing system if needed). Some insurance carriers provide premium discounts for installing fire prevention equipment such as sprinklers. And check your fire extinguishers. Are they well maintained and the right type? The type of extinguisher you need for an electrical fire isn’t the one you need for a kitchen grease fire. Many municipalities offer free or low-cost fire safety inspection services. Your local fire department may be able to recommend steps that not only reduce hazards, but also reduce insurance premiums. And don’t forget to consider how much maintenance you’re actually obligated to perform. Renting or leasing real estate, rather than owning it directly, is often less costly because the property owner may be responsible for much of the upkeep. Ownership has its advantages, of course, but it also brings potential liability with it that has to be insured against. Worker safety Employee injuries can drive up insurance and workers’ compensation expenses. Inspect your floors and other high-traffic areas for slippery spots, lack of nonslip surfacing, ice buildup or other hazards. Also eliminate clutter, poor carpet installation, loose steps and handrails, and anything else that could potentially generate a slip and fall claim. Additionally, consider asking the Occupational Safety and Health Administration (OSHA) for a courtesy inspection. Doing so may help you avoid potential penalties as well as prevent injuries and other incidents that would raise your premiums. Opportunities for savings Yes, buying the right array of insurance policies is a cost of doing business. But you may have more control over these expenses than you think. We can help you assess your insurance costs and identify opportunities for savings. © 2017
Whether you didn’t save as much for retirement as you would have wished earlier in your career or you’d simply like to make the most of tax-advantaged savings opportunities, if you’ll be age 50 or older on December 31, consider making “catch-up” contributions to your employer-sponsored retirement plan by that date. These are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. 401(k)s and SIMPLEs Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year. But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Self-employed plans If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution. You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution. Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2016 tax liability. And keep in mind that catch-up contributions are available for IRAs, too, but the deadline for 2016 contributions is later: April 18, 2017. If you have questions about catch-up contributions or other retirement saving strategies, please contact us at email@example.com.
There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:
1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.
2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.
3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.
If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.
Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.
There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.
One way your business can find and keep valuable employees is to offer an attractive compensation package. Fringe benefits are an important incentive — especially those that are tax-free. Here’s a rundown of some common perks and their tax implications. Medical coverage. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excl[...] uded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions. Employers must meet a number of requirements when providing coverage. For instance, benefits must be provided through a group health plan (fully insured or self-insured). Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income. Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance
In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax. The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income. Additional 0.9% Medicare tax Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus. Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income. If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments. Deductions for the self-employed For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.) As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks. For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us. © 2016
Shipmates, Battle-Buddies and fellow Airwarriors: Greetings in the New Year! As our firm is getting ready for the new tax year, Congress and the President of the United States delivered a last-minute gift to Veterans from previous wars. I wanted to take this time to share with you an important tax update. Important, because it rights a wrong to those, who have served our nation.
“On December 16, President Obama signed into law H.R. 5015, the “Combat-Injured Veterans Tax Fairness Act of 2016,” to help combat-injured veterans recover income taxes that were improperly collected by the Department of Defense (DOD) on certain disability severance payments. The Act directs the DOD to identify certain severance payments to veterans with combat-related injuries paid after Jan. 17, '91, from which DOD withheld amounts for tax purposes, and the individuals to whom such severance payments were made. The DOD must provide these veterans with notice of the amount of improperly withheld severance payments and instructions for filing amended tax returns to recover these amounts. In addition, the Act extends the 3-year Code Sec. 6511 period for filing a refund claim with IRS to the date that is one year after DOD provides the veteran with the information required under the Act. The bill was passed by the Senate on December 10 by unanimous consent, and the House had previously passed the measure on December 5 by a vote of 392-0.” (Source: RIA Tax Watch, 2016)
If you served in the military at any time since 1991, you might get a notice dealing with a possible refund. However, in order to get the refund, you will need to file an amended return to recover the refunded amount.
Normally, taxes have a three-year statute of limitations. The Act, however, has extended that statute for receiving the refund to one year after DOD informs you. Now, a year might seem like a lot of time, but it can close quickly, especially if you are trying to amend a return all the way back in the early or mid-1990s, which are returns you might not have in your possession.
Contact us at once! (You should do this when filing a return beyond the 3-year period, but especially in this case). We can get access to your PY returns and prepare the return to maximize your benefit under this new law.
Greetings all! This is an article I wrote for AJET. It is geared toward people living in Japan, but the information is pretty universal. If you have any questions, please email us at firstname.lastname@example.org.
Navigating the Tax Waters During your Special Experience in Japan
By Kevin Matthews, CPA, PHR, MBA, MAcc
What an exciting time!!! That was the feeling I had, when I stepped off of the plane after arriving at Narita Airport. I had just flown Business Class (they did it Business Class back then) and then had a relaxing ride from Narita to Tokyo. We were greeted at the door by a man all dressed up with a top had and he opened the door for us. WOW!
Over the next few days, we would learn about what it took to survive and thrive as ambassadors of our nations to the country of Japan. In one of the seminars, it hit me… Taxes. I wasn’t worried as I had been filing my own taxes, but some of the people said it would be different in Japan. How hard could it be? Well, I found out really quick; it was hard.
Perhaps, it wasn’t so hard, but so different. I used to file my taxes using a 1040-EZ, but now I was told that I could no longer do that, because I was living in a foreign country. What were these differences? How is a US citizen or green card holder taxed, when living in Japan? Finally, how does the US prevent “double taxation?” These topics will be discussed as we explore how the JET can keep compliant with the tax laws of our home country.
WARNING: This article is not intended to make you a tax expert. If you need assistance, please seek out the advice of a CPA, Enrolled Agent (people who have passed a test with the IRS and have received a special status to represent people before the IRS) or a tax attorney. The information in this article is for general informational use only and should only be used after consideration of your specific situation.
First question, how is it different? We will discuss this more into the second and third sections, but your taxes are going to get a little more complicated. First, you will have to complete additional forms and really consider your situation as you begin to ask how you will complete your tax filings. Because of the additional forms, filing your taxes on your 1040-EZ or 1040-A will no longer work.
Second of all, you are going to have to separate your income into pools of foreign income (i.e. income in Japan) and domestic income (income from back in the US). This is because only foreign income can be excluded or qualify for the foreign tax credit. Finally, as we will discuss in the third section, your taxes are more likely to get extended, because you are going to want to meet one of the residency tests, which will exclude your income.
The second question, how are US Citizens and Permanent Resident (or Green Card holders) taxed? While the first answer, which may come to mind is the “by the IRS,” this answer does not get to the point relating to your special situation. If you ask your French, UK or Irish colleagues about their tax requirements, they will likely tell you they filed a form with their home governments to say they are going to live abroad. This form stops their requirements to be taxed in their home country, while they live in the foreign country.
The US (and some other counties) does not work in this manner; instead, the United States taxes your worldwide income. This means that a dollar you make in Japan is taxed in the US, just as much as a dollar made back in your hometown.
One might say, “Worldwide Income? But that’s not fair!” In this case, Congress agrees and they offer some relief measures, which brings me to the third section: how does the US prevent double taxation. Taxed once in Japan and then once again in the US would not be a fair regiment, so Congress passed two sections to the tax law.
The first section they passed was section 911. Section 911, which is better known as the Foreign Earned Income Exclusion (FEIE), was passed back in 1951. Back then there was no limit to the income. But over time, a limit was imposed and it has changed and in 1986, it was reduced to $70,000 of income. It was increased to $80,000 in 2002 in years after 2005, it was adjusted for inflation. Congress added a housing exclusion along the way to where we are today. For 2016 the FEIE is $101,300, which does not include the housing allowance amount. Since most JETs (at least when I was in) make less than this, I will not discuss the housing exclusion, which could raise this higher, but for our purposes, we will use the $101,300 number.
So how does someone qualify for the exclusion? There are two tests: The Bona Fide Residence Test and the Physical Presence Test. The Bona Fide Residence test requires that you live in a foreign country for an entire tax year (for all of us, that is January 1 – December 31) as a tax resident of that country. If you live in Japan and are subject to their tax scheme, then you will likely qualify for this test.
There is only one major thing: In order for you to qualify, you will have to wait to file your taxes until you have lived in Japan for an entire calendar year. For most taxpayers, this means you will not be able to file your 2016 tax returns until January of 2018! Yikes! If you go this route, you will have to extend your tax returns, not only by the standard 6 months, but you will have to file a Form 2350 to ask the IRS for an extension to the beginning of 2018.
The easier test and the one that I used when I was a JET, is the Physical Presence Test (PPT). The reason why it is more popular is because people qualify faster for the test. The way the test works is in order to qualify as a tax resident, you have to live outside of the US for 330 days out of 365 days. Now, this sounds easy, but the 365 confuses many people, because they think the 365 days have to be in the same calendar year, but it doesn’t!!!
Instead, your 365 days starts when you arrive in Japan (or any foreign country where you want to use this rule) From your arrival date, count 365 days later and as long as you have 330 days in Japan, you will qualify for this test and you can exclude your foreign income you earned in Japan (Japanese salaries). If you arrived in Japan in August 2016, you will likely be able to file your taxes in August of 2017, thus you can file them sooner and you will only have to request an extension through October 15 of 2017, which is an automatic extension and can easily be filed using a Form 4868. The major trip up on the PPT is how many vacation days you spend in the US. You only have 35 days you can be there, so be wise about your use of them and track carefully.
The second section they passed was section 901 or better known as the Foreign Tax Credit. If you pay taxes in Japan (I am not a Japanese tax expert, but when I was in Japan, they excluded us from filing taxes for the first two years in Japan), you can tax a tax credit on the taxes you pay in Japan.
My experience has shown Japanese income taxes to be higher than US taxes, so it could potentially be very valuable in removing your taxes on your foreign income in the US, but facts and circumstances are different for everyone. Before deciding on this course of action, it is recommended you seek council of a CPA, Enrolled Agent or a tax attorney.
Finally, there are many rules for people living abroad. A couple of those rules is as follows:
I know that the information in this article is a lot, and the last thing I want to do is to worry you about your taxes. First of all, have fun in Japan. Being a JET in Chiba City was one of the most rewarding experiences in my life and I would not be where I am today without those experiences. I loved being in Japan and look forward to the day I can return there for a visit to the place, where I experienced so much happiness.
Enjoy the moment. Enjoy the WOW! 20 years later looking back, as I am now, you will focus on the good times, provided that you take care of the tax returns as they require. If you have any questions, please feel free to contact either myself or IRS office at the US embassy. When I lived in Japan, they were very helpful in showing me what to do.
Remember, we can do taxes, while you live overseas and have contacts with tax accountants in foreign countries. We can meet your international tax needs!
Since today is Veteran’s Day, I wanted to start my blog talking about something, which is important to me. (Full disclosure: I served in the US Navy for over 8 years and I am proud to continue to serve Servicememebers through my company.) I wanted to write about some of the issues, which might come up, if a servicemember dies or is hurt in the line of duty. There are only two things in life certain – Death and Taxes. Today, I will discuss both.
The large picture is over the past few years, we have been drawing down from our conflicts overseas in some areas, and increasing our roles in others. It is also well known, our nation faces challenges overseas, which may call us to action again.
On the smaller scale (the individual), the IRS allows amendments of tax returns up to 3 years after the filing date, the due date (normally April 15, but could be later) or 2 years after the tax is paid, whichever is later, and in some cases, even further in the past. If you know someone who has had a family member pass away or was injured in a combat zone within the past three years, this article might apply to them; however, in addition there are other aspects of the law, which might help them in their time of need and they need to contact their attorney, CPA or EA about their options. If they are incapable of doing so, as their caregiver, you can call on their behalf, for an initial consultation.
Society, through the actions of the federal government, attempts to show its gratitude to members of the armed forces, who die in the line of duty in an active combat zone, through forgiveness of taxes owed on the income received by that servicemember. The following are directly from the law as it is written today:
What the above means in English is that under certain conditions, a servicemember, who dies in a combat zone (or any terroristic activity) shall not owe taxes! As I read both the sections of the law and the regulation dealing with this section, the amount of tax forgiveness starts the year in which you arrive in the foreign country, but it is only attributable to the amount paid to the servicemember, and not any additional income (rental properties, partnership income, investment income, etc.)to INCLUDE spousal income.
It is this last line, which needs focus. The income a spouse receives from his or her employment, while the servicemember is stationed in the combat zone, is NOT excludable from income taxes under these rules, nor is the income received in the year of death of the servicemember. In fact, the regulations deal with how the amount of the exclusion is to be calculated; this can get convoluted. It is recommended that you consult with CPA, if you think that you may qualify for relief under this condition. If you don’t have a CPA, please feel free to reach out to Beta Solutions CPA here.
Hospitalization of Servicemembers in a Combat Zone
Many people might know about the exclusion of income while serving in a combat zone, but I remember when I was in the US Navy: Live by the Gouge, Die by the Gouge; therefore, I am going to put some black and white on this. §112 of the tax code deals with combat pay exclusions. It is known, if you serve in a combat zone, you will qualify for a combat exclusion, if you meet the conditions under these rules. This is great if you are healthy, but what if you get sick after eating some really bad food and you are sent to Europe for further observation for two months? Did you bust your exclusion?
The tax regulations dealing with hospitalizations states, “if an individual is hospitalized for wound, disease, or injury while serving in a combat zone, the wound disease or injury will be presumed to have been incurred while serving in a combat zone, unless the contrary clearly appears.” So, “no” you did not bust your exclusion and the pay, while in the hospital is excluded.
Right Before Retirement
Remember the line in the movies, where the guy gets shot, he says “And only six days before retirement!” right before dying. Servicemembers can sympathize with that, because we all have dealt with Murphy’s Law. Turning to a more serious note though, imagine you are on patrol one week before the end of combat operations in Afghanistan and you are injured. The IRS regulations will continue to provide relief under the rules. If you have further questions about this, please feel free to email me at email@example.com, or here.
Agent Orange-like Cases
What happens if a servicemember comes back from the combat zone and experiences symptoms of a disease and is hospitalized (while on active duty). If the disease is determined to be contracted in a combat zone (where the incubation period is showed to put the exposure in the combat zone) and hospitalization occurs, the pay is excludable under the law, but only pay, which is servicemember’s pay and excludable under the law. However, the exclusion is only if the hospitalization for the disease occurs within 2 years of termination of the combat zone status.
The best case for the above exclusion, which I can think of, would be exposure to Agent Orange, where the onset of the disease was years after exposure. It would be likely symptoms would appear after returning home. An interesting point on this is the Vietnam War was specially excluded under the law and the two-year limit, as listed above, does not apply (the onset of Agent Orange is so long, it may not show up for decades). But as there are likely no active duty people who served in Vietnam in the military at this time, this use of this code for Vietnam serving active duty servicemembers might be limited.
If your situation is unique due to military service, please feel free to contact Beta Solutions CPA to meet your tax compliance and planning needs. We have the military experience to understand your situation and the tax know-how to work through your situation. Please feel free to contact us here.
Disclosure: This blog was posted on MOAA’s blog June 23rd, 2014. For the purposes of today’s blog (November 11, 2016), I have modified it as it was originally posted. I did write the original blog. The blog is currently posted here. Please feel free to read the original blog as some information was removed in order to truncate this blog.
Folks, here at Beta Solutions CPA things are coming together. I just put up the website and still working to get things ready for the new tax season, which is only 10 weeks away. It will fly and we have to be ready. Stand by for more information.