New 2013 Relocation, Payroll and Tax Issues

Presented byQuentin Hormel, CRP

Big Tax Items in 2013

American Taxpayer Relief Act of 2012

• Permanently extended many Bush-era tax cuts.

Health Care Reform Bill

• New Medicare tax rate on higher incomes.

Payback of Homebuyer Tax Credits

2013 Federal Tax Tables

2013:

• American Taxpayer Relief Act of 2012 extended the Bush-era tax cuts permanently, but with the addition of a new top bracket/rate.

• Tax rates remain the same (10% - 35%) except for the return of top rate of 39.6% (the pre-2001 top rate).

• Brackets have been slightly adjusted for inflation.

• NEW: Legally married same-sex couples generally must file as married starting in 2013 (Rev. Ruling 2013-17).

2014+:

• Rates expected to remain the same with brackets adjusted for inflation.

• Talk of revamping the tax code and eliminating certain deductions and credits.

2013 Deductions/Exemptions

& Phaseouts2013:• Phaseout of itemized deductions and exemptions have

returned for higher incomes in 2013. They had been temporarily eliminated for the previous three years.

• Phaseout occur for AGI’s exceeding $250,000 if SNG, $300,000 if MFJ, $275,000 if HH, and $150,000 if MFS.

• Slight increase in the value of standard deductions and exemptions.

• Threshold has increased for those taking medical deductions on the Schedule A. Previously, deductions were available on costs exceeding 7.5% of gross income. Starting in 2013, that increases to 10%.

2014+:• Phaseouts will likely remain.• The value of standard deductions and exemptions

while likely increase based upon the inflation rate.

2013 Mileage Rates

2013:

• Business rate increased from $0.555/mile in 2012 to $0.565/mile in 2013.

• Final move excludable rate increased from $0.23/mile in 2012 to $0.24/mile in 2013.

• Charitable rate remains at $0.14/mile for 2013.

2014:

• To be announced later in 2013.

2013 Federal Withholding

2013:

• Supplemental withholding rate remains at 25% (39.6% for supplemental payments exceeding $1,000,000).

2014:

• Rates unlikely to change.

2013 OASDI Tax

2013:

• OASDI rate has returned to 6.2%. Had temporarily been 4.2% the previous two years.

• OASDI cutoff increased from $110,100 in 2012 to $113,700 in 2013.

2014:

• Rate likely to remain the same with increased OASDI threshold based upon inflation.

2013 Medicare Tax2013:• For many years, the Medicare rate has been 1.45% with

no income threshold.• Starting in 2013, there is an “Additional Medicare Tax” of

0.9% for higher incomes.• For withholding purposes, the additional tax is required for

Medicare wages exceeding $200,000, regardless of marital status.

• When filing the 1040 Federal tax return, Medicare will be recalculated based upon total Medicare wages. The thresholds are $200,000 if SNG or HH, $250,000 if MFJ, and $125,000 if MFS.

• Any additional tax due or overpayments made are reconciled on the tax return.

• Also, a new 3.8% tax levy on unearned income is imposed for taxpayers with MAGI exceeding these thresholds. The tax is due on the lesser of unearned income and MAGI over these thresholds.

2014:• No additional changes expected.

Medicare Examples

Example 1:- Married Filing Jointly- $250,000 in Medicare wages, with no spousal or outside

income- Paid $450 in additional Medicare withholding ($50,000 x

0.9%)- Federal tax return – threshold of $250,000 – will get

$450 back

Example 2:- Single- $150,000 with company A and $150,000 with company

B- Didn’t pay additional Medicare withholding- Federal tax return – threshold of $200,000 – will owe an

additional $900 in tax ($100,000 x 0.9%)

2013 Medicare Tax2013:• For many years, the Medicare rate has been 1.45% with

no income threshold.• Starting in 2013, there is an “Additional Medicare Tax” of

0.9% for higher incomes.• For withholding purposes, the additional tax is required for

Medicare wages exceeding $200,000, regardless of marital status.

• When filing the 1040 Federal tax return, Medicare will be recalculated based upon total Medicare wages. The thresholds are $200,000 if SNG or HH, $250,000 if MFJ, and $125,000 if MFS.

• Any additional tax due or overpayments made are reconciled on the tax return.

• Also, a new 3.8% tax levy on unearned income is imposed for taxpayers with MAGI exceeding these thresholds. The tax is due on the lesser of unearned income and MAGI over these thresholds.

2014:• No additional changes expected.

Homebuyer Tax Credit

• First-time homebuyers (and some repeat homebuyers) were eligible for a tax credit of up to $8,000 for homes purchased between 4/9/08 and 9/30/10.

• New transferees who previously took the credit on a home purchase might need to repay the credit (or portion thereof) due to the relocation.

• If fully tax protecting transferees and paying for any loss of the credit, some may require very large gross-ups.

Homebuyer Tax Credit

If transferee took the 2009 & 2010 credit (as much as $8,000):• As long as the transferee lives in the home for 3+ years, the

credit never needs to be repaid.• If the home is sold within three years of the purchase date, the

credit may need to be repaid.• The repayment amount is the lesser of the gain on the sale and

the amount of the credit taken.

If transferee took the 2008 credit (as much as $7,500):• This credit is similar to a 15-year interest-free loan. The credit is

normally repaid in fifteen equal installments over a 15-year period.

• If the home is sold before repaying the full amount, the balance may need to be repaid in the year it is sold.

• The repayment amount is the lesser of the gain on the sale and the remaining balance.

Homebuyer Tax Credit Payback:

2009 / 2010 CreditExample #1:• Couple bought home on 4/30/10 for $300,000

and received a $8,000 credit.• Get transferred and sell home on 4/1/13 – basis

of home is $300,000 - $8,000 + any capital improvements ($5,000) = $297,000.

• If sell home for $305,000+, then must pay back $8,000 tax credit. If sell for $297,000-, then no payback is required. If sell home on 4/30/13 or later, then no payback required.

• To compensate, give transferee $8,000 + gross-up = roughly $13,000.

Homebuyer Tax Credit Payback:

2008 CreditExample #2:• Couple bought home on 6/1/08 for

$300,000 and received $7,500 credit (paid back over 15 years).

• Sell home on 10/1/13 – may need to pay back the balance ($6,000) on the following year’s tax return if made profit, rather than over the following 12 years.

• How to handle?

Homesale Gains & Losses

• Exclusion on gain of up to $500,000 if MFJ, $250,000 if SNG.

• Must live in home for at least two of the last five years.

• If moved prior to two years, can take a portion of exclusion if moved under certain scenarios.

• Taxable gains may be subject to the 3.8% Medicare tax levy as unearned income.

• Loss on sales are not deductible!

Alternative Minimum Tax (AMT)

• Written in 1969 to stop high-income people from paying little or no tax.

• Never adjusted for inflation until recent years with one- and two-year patches.

• Finally, the American Taxpayer Relief Act of 2012 permanently added annual inflation adjustments for the exemption amounts.

• For 2013, the exemptions are $80,800 if MFJ, $51,900 if SNG or HH, and $40,400 if MFS.

• Very complex calculation.

Other Deductions/Credits

• Transit, Storage and Final Move Expenses – Most costs are either deductible (if not reimbursed) or excludable (if paid by employer).

• Child Tax Credit - $1,000 / dependent under age of 17. Extended indefinitely.

• Sales Tax Deduction – Available since 2004. Was extended for 2012 and 2013.

Other Deductions/Credits

• PMI – Deduction has been available since 2007. Was extended for 2012 and 2013. Deductible on the Schedule A.

• Points/Interest & Taxes – Deductible on the Schedule A.

• Education Deductions and Credits – American Opportunity Tax Credit, Lifetime Learning Credit, and tuition and fee deductions. Credits taken on Form 8863 and deductions on Form 8917.

IRS Concerns

In 2010, IRS announced 6,000+ intense company payroll audits continuing thru late 2013/early 2014. Major focus includes:• Worker misclassification (employee vs.

contractor).• Fringe benefit reporting.• Executive pay.Other areas to watch for:• Not reporting taxable relocation expenses, or

waiting until the end of the year to report them vs. pay period basis. Penalties can be significant.

• Should be careful about reimbursing expense at year-end but not reporting to payroll until the following year.

• Temporary assignments.

State Withholding Rules

• In most cases, withholding is required in work state.

• In most cases, income tax is owed in work state, with non-residents taking a tax credit on their home state’s income tax return.

• Nine states have no income tax on earned income.

• Exceptions are states with reciprocal agreements.

State Withholding Rules

State Reciprocal

Agreements

D.C

.

Illin

ois

Indi

ana

Iowa

Ken

tuck

y

Mar

ylan

d

Mic

higa

n

Min

neso

ta

Mon

tana

New

Jer

sey

Nor

th D

akot

a

Ohi

o

Pen

nsyl

vani

a

Virg

inia

Wes

t Virg

inia

Wis

cons

in

D.C. X XIllinois X X X XIndiana X X X X XIowa X Kentucky X X X X X X XMaryland X X X XMichigan X X X X X XMinnesota X XMontana XNew Jersey XNorth Dakota X XOhio X X X X XPennsylvania X X X X X XVirginia X X X X XWest Virginia X X X X XWisconsin X X X X

State Withholding Rules

• No state income tax on earned income: AK, FL, NV, NH, SD, TN, TX, WA, and WY

• Don’t allow itemized deductions such as points or interest & taxes: CT, IL, IN, LA*, MA, MI, NJ, OH, PA, RI, UT*, WV, and WI* (* - portion deductible/excludable)

• Allow deduction on Federal tax: AL, IA, LA, MO*, MT*, OR* (* - has limits)

• Allow deduction/exclusion for final move meals: NJ and PA

• Distance test of 35 miles: PA

Mobile Workforce State Income Tax

Simplification Act• Introduced on March 13, 2013 as H.R. 1129.• Previously bills introduced in House in 2007

(H.R. 3359), 2009 (H.R. 2110) and 2011 (H.R. 1864).

• Would limit state taxation to the residence state and to the work state if performing duties for more than 30 days during calendar year.

• Each state has its own rules. Some state require withholding on non-residents starting with day one while some others require withholding after reaching a certain threshold.

• Standardizes the threshold for number of days across all states at 30 days.

Temporary Assignments

• Assignment expected to last no more than one year is treated like a business trip.

• If expected to last longer than a year, then treated as relocation.

• Many business trip expenses are non-taxable:- Trip at start and end of assignment- Transportation, lodging, meals- Some miscellaneous expenses- Certain return trips- Option of per diem allowances in lieu of receipted expenses (www.gsa.gov for domestic tables and aoprals.state.gov for int’l locations; starting in 2012, IRS Pub. 1542 no longer publishes rates)- Employee’s Visa, passport, language training- Family expenses are taxable!

Per Diem Allowance – www.gsa.gov

Tax Forms & Publications

• Form W-2 – Wage & Tax Statement• “RTR” – Formerly Form 4782• Form 3903 – Moving Expenses• Publication 521 – Moving Expenses• Form 8959 – Additional Medicare Tax• Form 5405 – Repayment of First-Time Homebuyer

Credit• Form 6251 – AMT Tax• Schedule D – Capital Gains & Losses• Schedule A – Itemized Deductions• Publication 15 / Circular E – Employer’s Tax Guide to

Fringe Benefits• IRS Publication 463 – Travel, Entertainment, Gift and

Car Expenses• IRS Publication 535 – Business Expenses• IRS’s Taxable Fringe Benefit Guide• IRS Publication 970 – Tax Benefits for Education

Thank You!

Quentin Hormel, CRP

Qhormel@orionmobility.com203-563-2119

www.orionmobility.com