Is My Fringe Benefit Taxable Income?

Need to know whether or not a fringe benefit is taxable income?
The Revenue Service has a handy guide to fringes, a training manual for agents that has been updated for 2012 to reflect the Service’s current views. It covers the gamut of perks…cars, per diems, education, cell phones, etc… as well as whether payroll taxes are due and how to report taxable fringes.
Go to www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf to view the handbook.

Retirement Reality Check

This is a great quiz regarding what it currently takes to retire. 

http://money.msn.com/retirement-plan/15-things-to-know-before-retirement

Roth IRA Conversions

If you switched an IRA to a Roth in 2010, note this tax-saving opportunity:  You have until Oct. 17, 2011 to undo the switch and recover the tax paid.  If the balance in your Roth has fallen since the conversion…a reasonable possibility in light of the recent decline in the stock market…switching the funds back to an IRA can save you a lot of tax. By returning the money to the IRA, you eliminate the tax on the conversion. If you’ve already filed for 2010, use Form 1040X to recoup the tax. You then must wait 30 days before you are able to reconvert the funds to a Roth.  At that time, reconverting the smaller balance to a Roth will produce a lower tax bill.

If the stock market drop has you thinking about a Roth conversion now… Consider using separate Roth IRAs for different asset classes. That way, if one segment of your Roth investments drops in value while the others increase, you can switch the underperforming account back to an IRA tax and penalty free. This strategy gives you maximum flexibility. If you timely file your 2011 return, you will have until Oct. 15, 2012 to decide whether you are better off unconverting.  Note that the old $100,000 adjusted gross income cap on conversions is no more, and the option to defer the tax bill on the switch over two tax years ended after 2010.

Seniors who are thinking of converting should note a couple of tax traps:  The extra income from the conversion can affect Medicare Part B premiums.  Upper incomers have to pay a monthly surcharge on top of their regular premium.  The surtax starts above $85,000 of AGI for singles and $170,000 for married filers, rising to 220% of the basic premium for single filers with income above $214,000 and married couples with AGI over $428,000. Roth conversion income is included in computing AGI for the surcharge. That can cause Part B premiums to increase by up to $3,000 a year per person. So reporting a lot of Roth conversion income in 2011 may end up dramatically increasing your Medicare Part B premium for 2013.

There’s a similar effect with Social Security benefits. Lower-income seniors
who convert may see more of their benefits taxed because of that additional income.  But seniors won’t have to take required minimum payouts from their Roths.  And any payouts they take will be tax free. That will trim their AGI in future years.

Employer change for the healthcare law

Employers will catch a break on the health care law’s affordability test.  Beginning in 2014, if an employer with 50 or more employees offers health insurance that is deemed not affordable, the firm will owe a tax of as much as $3,000 per year for each low- or middle-income employee who buys coverage through an exchange.  Under the law, coverage is treated as affordable if the required premium contribution from an employee does not exceed 9.5% of his or her total household income.
The affordability test will be easier to satisfy. The IRS will allow firms to base the calculation on employees’ W-2 wages, not on their household income. Business groups argued that employers know the W-2 wages, but don’t have access to household income figures. In many cases, the worker’s wages will be far lower
than total household income. So fewer employers will have to pay the penalty tax.

Its never too early to start retirement savings….

If your child or grandchild is busy toiling at a summer job this year, consider making a payin to a Roth IRA for him or her. You can contribute up to $5,000, but not more than the child’s earnings. But what you put in counts toward the $13,000 annual gift tax exclusion ($26,000 if your spouse concurs).  The payin can help provide a nice nest egg.

A $5,000 contribution to a 16-year-old’s Roth that earns 8% each year will grow to $217,000 at age 65 and $319,000 at age 70. If the child works for a few summers and contributions are made each year, the future balance in the account will be significantly larger.

Roth IRAs have some important tax advantages. Beyond the appeal of tax-free withdrawals after 59½, in the short term, the child can pull out payins free of tax. That can come in handy to help when purchasing a first home.

Current Proposed Tax Overhaul

As Congress struggles to raise the debt limit a tax reform plan is picking up momentum.  It is contained in a major deficit reduction package
put forward by a bipartisan group of six senators.  Tax overhaul would be a big revenue raiser with $1 trillion over 10 years when compared to current law
with its 35% top rate.  But the proposal’s tax hikes raise far less money than if all the Bush tax cuts were allowed to expire as scheduled after next year.
Huge spending cuts would also be included (approximately three times larger than the tax hikes.)
The package is just an outline for now.  Many details are left for later, to be filled in by House and Senate taxwriters, consistent with the revenue goals. While the plan isn’t likely to be passed this year, Obama’s tacit approval of it means you can’t dismiss what they have put on the table.
The current six income tax brackets would be consolidated to just three.  The bottom bracket would be set between 8% and 12%, the middle one between 14%
and 22% and the top bracket would fall between 23% and 29%…down from 35% now.  Basically, the highest end of each bracket is the same as the tax rate structure proposed last year by Obama’s deficit reduction commission. The lower the tax rate that taxwriters set for each bracket, the more tax breaks they will need to eliminate.
The alternative minimum tax would be history…permanently repealed.
The benefits of the earned income credit and child credit would be preserved.
If taxwriters choose to scrap these credits, the proposal requires them at a minimum to provide at least the same level of support for the taxpayers claiming these breaks.

But there’s lots of pain included, especially with $1 trillion in net tax hikes.
Itemized deductions would be slashed. Specifically, the plan’s proponents
say they want to reform the deductions for homeownership and charitable giving.  One way to do this is to limit the value of itemized deductions for upper-incomers, such as converting the deductions to a 12% tax credit, as Obama’s commission did.  And the mortgage interest deduction could be pared by limiting the interest write-off to somewhere around $500,000 of acquisition debt.

Also on the chopping block:  Home-equity loan interest and interest paid on mortgages on second residences.

Deductions for retirement savings would be curbed. To maximize revenue,
not only would the 401(k) payin ceiling have to be lowered, but payins to other plans…IRAs, Keoghs, profit-sharing plans and the like…would have to be cut back as well.
For businesses, the top corporate rate would fall to between 23% and 29%.  However, the tax base would be broadened. That would certainly mean companies would lose the deduction for domestic production, depreciation on assets would be taken over longer periods and the R&D credit would be trimmed or dropped.
The proposal calls for a revenue-neutral restructuring of corporate taxes.
That won’t fly. The 1986 tax reform law levied a big tax hike on businesses.
It’ll be easier to sell reform to the public if individuals and businesses share the pain.