Local Lodging Expenses and Social Security Statements

New Tax Rule for Local Lodging Expenses

The IRS recently issued long-awaited regulations that permit certain not-away-from-home lodging expenses to be deducted by workers if they are not reimbursed by their employer. Alternatively, if paid for by the employer, the expense can be treated as a tax-free working condition fringe benefit (WCFB) or tax-free accountable-plan reimbursement.

Thanks to prior IRS guidance, the value of an employer-provided WCFB is excluded from the recipient employee's gross income for federal income and employment tax purposes. A WCFB is defined as any property or service provided to an employee to the extent that, if the employee paid for the property or service, it would be deductible by the employee as an unreimbursed employee business expense. Employer-paid lodging for an employee who is out of town on the employer's business counts as a tax-free WCFB.

Prior regulations provide that the cost of an individual's lodging that is not incurred while traveling away from home on business is generally a personal expense and is therefore generally not deductible by the individual. An individual is not considered away from home unless he or she is away from home overnight, or at least long enough to require rest or sleep.

The new regulations stipulate that an individual's local lodging expenses can be deducted by the individual as business expenses if the applicable facts and circumstances dictate that such treatment is appropriate. In turn, expenses that would qualify for deductions if paid for by an employee will qualify as a tax-free WCFB if paid by the employer, or if advanced or reimbursed by the employer under an accountable plan. However, local lodging expenses will not qualify for the aforementioned tax-favored treatment if the lodging is lavish or extravagant, or if it is primarily to provide the individual with a social or personal benefit.

Safe Harbor Rule. Under the new regulations, local lodging expenses are automatically treated as ordinary and necessary business expenses if all of the following conditions are met: (1) the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function; (2) the lodging is for a period that does not exceed five calendar days and does not occur more frequently than once per calendar quarter; (3) in the case of an employee, the employer requires the employee to remain at the activity or function overnight; and (4) the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

Example: Tax-favored treatment allowed for employees.

Distant Corporation puts on periodic employee training sessions at a hotel near its main office. Distant requires all attending employees, including employees from the local area, to remain at the hotel overnight for the bona fide business purpose of maximizing the effectiveness of the training sessions.

If Distant directly pays the lodging costs for attending employees, the costs qualify as tax-free WCFBs for the attending employees, including those who live in the local area, and Distant can deduct the costs as business expenses. If Distant reimburses attending employees for the lodging costs under an accountable plan, the reimbursements are tax-free to the employees, including those who live in the local area, and Distant can deduct the reimbursements as business expenses.

Please contact us if you have questions concerning business travel expenses or any other tax compliance or planning issue.

Social Security Statements

The Social Security Administration (SSA) recently announced that Social Security statements may now be viewed online at www.ssa.gov/mystatement. The statements provide workers with an estimate of benefits under current law and an earnings record with Social Security and Medicare for taxes paid over their working career. A printable version of the Social Security statement is available. To get an online statement, a person must be 18 or older and able to provide information that matches their SSA file. After verification, an account is created with a unique user name and password to access the online statement.

Boomer Alert: Approximately 3 million baby boomers are turning 65 each year. According to the Social Security Administration, social security was the major source of income for most beneficiaries.

James Lowe

www.hicksclark.com

jlowe@hicksclark.com

Filing Status Implications & Retirement Contribution Limitations

Filing Status Implications

For married taxpayers, the implications of filing a joint or separate return extend beyond tax rates and the standard deduction. Like many aspects of income taxation, there is usually more than one approach to finding the optimal solution. We have listed some of the more common implications of filing either a joint or separate return. Although not an exhaustive list, it highlights several issues to consider.

Some of the implications of filing a joint return include (among others):

• The requirement that individuals who file a joint return cannot be claimed as dependents on another return. This can be important when married students are still supported by their parents.
• An individual who files a joint return is not subject to the "kiddie tax" provisions.
• Joint filers are both responsible for the tax on their joint return. Thus, nontax factors should be considered (i.e., questionable business transactions). In addition, divorced taxpayers will each be liable for tax, interest, and penalties due on a joint return filed before the divorce.
• Finally, monthly Medicare premiums can increase substantially for a couple filing jointly versus filing separately, especially for a lower-income spouse.

The implications of filing a separate return include (among others):

• If one spouse itemizes deductions, the other must also, even if total deductions are less than the standard deduction.
• Taxpayers can generally only deduct expenses they actually paid versus those paid by either.
• Credits for child care, adoption, education, and earned income are generally not available.
• If separate filers lived with their spouse during any part of the year, a greater percentage of social security benefits may be taxable because the income threshold for determining the taxable amount is reduced to zero.
• The exclusion of gain on the sale of a principal residence is limited to $250,000 (each) for separate filers versus $500,000 for a joint return.
• The $25,000 passive loss exception for actively managed rental real estate may be totally or partially lost. Also, one spouse's passive income cannot be offset by the other spouse's passive losses.
• The limit on the capital loss deduction on a separate return is $1,500 (each).
• No exclusion is allowed for interest income from Series EE bonds used for higher education expenses.
• The deduction for interest on qualified education loans is not available.
• Taxpayers filing separate federal returns typically must also file separate returns for state income tax purposes.

There you have it: the implications for married taxpayers filing jointly or separately. Please contact us to discuss the most advantageous filing status or any other tax compliance or planning issue.

Retirement Contribution and Other Limitations for 2013

The IRS has announced cost-of-living adjustments affecting the dollar limitations for retirement plans, deductions, and other items. Several of the limitations are higher for 2013 because the increase in the cost-of-living index met the statutory threshold. However, some limitations did not meet that threshold and remain unchanged from 2012.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increased from $17,000 in 2012 to $17,500 in 2013. The catch-up contribution limit for those age 50 and over remains unchanged at $5,500.

The contribution limit for both Roth and traditional IRAs has increased $500 from 2012. You can contribute up to $5,500 ($6,500 if you are age 50 or older by year-end) to your IRA in 2013 if certain conditions are met (i.e., sufficient earned income). For married couples, the combined contribution limits are $11,000 ($5,500 each) and $13,000 ($6,500 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income.

Keep in mind that contributions to traditional IRAs may be tax-deductible, subject to specific limitations that increase for 2013. When you establish and contribute to a Roth IRA, contributions are not deductible, but withdrawals are tax-free when specific requirements are satisfied. In addition, there are no mandatory distribution rules at age 70 1/2 with a Roth IRA, and you can continue to make contri

butions past age 70 1/2 if you meet the earned income requirement.

The 2013 limitation for SIMPLE retirement accounts increased $500 to $12,000. However, the SIMPLE catch-up contribution for those age 50 by year-end is unchanged from 2012 at $2,500.

The 2013 contribution limit for profit-sharing, SEP, and money purchase pension plans is the lesser of (1) 25% of the employee's compensation-limited to $255,000, an increase of $5,000 from 2012 or (2) $51,000, an increase of $1,000 from 2012.

The social security wage base, for computing the social security tax (OASDI), increases to $113,700 in 2013, up from $110,100 for 2012. The additional $3,600 for 2013 represents an increase of 3.3% in the wage base.

Finally, the annual exclusion for gifts increased by $1,000 and is $14,000 in 2013.

James Lowe

www.hicksclark.com

jlowe@hicksclark.com

The Affordable Care Act & 2014 HSA Amounts

The Affordable Care Act
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, the Affordable Care Act), was landmark legislation that dramatically affects how health care is delivered in the United States. Provisions of the legislation affect not only those directly involved in providing health care, but also most individuals and employers.
The health care reform legislation is extremely complex, and many items in the legislation change rules and regulations that were already in place. The IRS, Department of Labor (DOL), Department of Health and Human Services (HHS), and other agencies have the monumental task of interpreting the legislation and providing guidance. Many temporary and proposed regulations, as well as some final regulations, have been issued.
The purpose of this legislation was to provide affordable minimum health care benefits to all individuals. With that in mind, the legislation provides for the establishment of qualified health plans that must provide essential health benefits consisting of minimum essential coverage.
Caution: Some of the rules originally enacted have already been repealed and the effective date of other rules has been modified. It is possible that more changes will occur as these rules are implemented. This information is current as of July 11, 2013.
Employer Responsibility
Beginning in 2015, certain applicable large employers (i.e., generally those who had an average of at least 50 full-time employees in the previous calendar year) that do not offer health insurance coverage to their full-time employees (and their dependents), or employers that offer health insurance coverage that is unaffordable or does not provide a certain minimum value, must pay a penalty if the employer is notified that any full-time employee receives a premium assistance credit to purchase health insurance in the individual market through a state insurance exchange or a cost-sharing-reduction subsidy to help with out-of-pocket expenses. Any penalty paid under this provision is not deductible as a business expense for federal income tax purposes.
To determine if an employer is an applicable large employer, the full-time equivalent value of the hours worked by part-time employees must be calculated and added to the employer's number of full-time employees. This calculation can be challenging. Although part-time employees must be considered when determining applicable large employer status, applicable large employers only need to offer full-time employees (and their dependents) adequate health insurance coverage to avoid paying a penalty. However, the rules for determining full-time status can be complicated for certain variable-hour employees. Employers will be subject to many new notice and reporting requirements.
Individual Mandate for Health Coverage
The health care reform legislation requires most U.S. citizens and legal residents (i.e., applicable individuals) to have minimum essential health insurance coverage every month beginning on or after January 1, 2014. Those who do not have such health insurance will be subject to a penalty for each month they do not have minimum essential coverage. The penalty will be the greater of a flat fee amount (for each individual not covered by health insurance) or a percentage of household income over a threshold amount. For applicable individuals who are at least age 18, the maximum applicable annual dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016 and later years. An inflation adjustment will be applied in calendar years beginning after 2016. For individuals under age 18, the maximum applicable penalty is 50% of these amounts.
Individuals who meet certain financial or hardship criteria are exempt from the mandate. In addition, members of an Indian tribe and individuals who are members of certain religious sects or members of certain health care sharing ministries are exempt from the mandate.
Premium Assistance Credits and Cost-sharing-reduction Subsidies
To assist individuals in meeting the mandate for having minimum essential health insurance coverage, the legislation also provides for premium assistance credits and cost-sharing-reduction subsidies. Beginning in 2014, some individuals will qualify for a premium assistance credit to help them pay the premiums on health insurance purchased in the individual market through the state insurance exchanges that will be operational beginning October 1, 2013. Individuals can elect to have this credit payable in advance directly to the insurer.
The premium assistance credit will be available (on a sliding scale basis) for individuals and families with incomes up to 400% of the federal poverty level ($45,960 for an individual or $94,200 for a family of four, using 2013 poverty level figures) who are not eligible for Medicaid, CHIP, a state or local public health program, employer-sponsored insurance that is both affordable and provides a certain minimum value, or other acceptable coverage.
Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans)
Beginning in 2018 under the current law, a nondeductible 40% excise tax will be levied on so-called Cadillac plans. These plans are employer-sponsored health plans with annual premiums (i.e., excess benefits) exceeding $10,200 for self-only coverage and $27,500 for any other coverage. Slightly higher premium thresholds apply for retired individuals age 55 and older who are not eligible for enrollment in Medicare or entitled to Medicare benefits, and for plans that cover employees engaged in high-risk professions. For coverage under a group health plan, the 40% excise tax will be imposed on insurance companies, but it is expected that employers (and their employees) will ultimately bear this tax in the form of higher premiums passed on by insurers. Employers will be responsible for the tax if coverage is provided by employer contributions to HSAs or Archer MSAs.
Employers will be responsible for calculating the excess benefit amounts and reporting those amounts to the applicable insurer. Employers that currently offer generous health benefits (especially if the benefits are to the owners and related persons) should carefully analyze their plans to see if changes are needed to avoid having plans that will be subject to this tax. Additional guidance will be issued on this excise tax (additional legislation may change some of these provisions).
2014 HSA Amounts
Health savings accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small- to medium-sized companies who do not have access to health insurance.
The tax benefits of HSAs are quite substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions to HSA accounts. Funds in the account may be invested (somewhat like an IRA), so there is opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax free.
An HSA is a tax-exempt trust or custodial account established exclusively for paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. Consequently, an HSA is not insurance; it is an account that must be opened with a bank, brokerage firm, or other provider (i.e., insurance company). It is therefore different from a flexible spending account in that it involves an outside provider serving as a custodian or trustee.
The 2014 inflation-adjusted deduction for individual self-only coverage under a high-deductible plan is limited to $3,300, while the comparable amount for family coverage is $6,550. This is an increase of 1.5% and 1.6%, respectively, from 2013. For 2014, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,250 for self-only coverage and $2,500 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,350 for self-only coverage or $12,700 for family coverage.

James Lowe
www.hicksclark.com
jlowe@hicksclark.com
404-272-2633

The 3.8% Net Investment Income Tax & Business Tax Breaks

The 3.8% Net Investment Income Tax - More Than Meets the Eye
There's a lot for taxpayers to know when it comes to the 3.8% net investment income tax (3.8% NIIT). This new tax is imposed on income from several sources and its impact is far reaching. Analyzing its impact can get complicated fast.
Originating as a component of 2010 health care legislation and first effective in 2013, the 3.8% NIIT is assessed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above specific thresholds. MAGI is adjusted gross income plus any excluded net foreign earned income. The MAGI thresholds are $200,000 for single individuals, $250,000 for joint filers and surviving spouses, and $125,000 for married taxpayers filing separate returns.
Only individuals with some amount of NII, and MAGI above the applicable threshold amount, will be subject to the 3.8% NIIT. For example, if a married couple has $200,000 of wage income and $100,000 of interest and dividend income (i.e., MAGI totaling $300,000), the 3.8% NIIT applies to the $50,000 that is over the $250,000 MAGI threshold.
Trusts and estates can also be hit with the 3.8% NIIT. But for them, the tax applies to the lesser of their undistributed net investment income or AGI in excess of the threshold for the top trust federal income tax bracket. For 2013, that threshold is only $11,950, so many trusts and estates will no doubt be affected this year.
The components of NII generally include gross income from interest, dividends, royalties, and rents; gross income from a trade or business involving passive activities; and net gain from the disposition of property (other than property held in a trade or business in which the owner materially participates). All of these components are reduced by any allocable deductions. This may sound simple, but as always, the devil is in the details.
On a positive note, NII does not include tax-exempt bond interest, veterans' and social security benefits, excluded gain from the sale of a principal residence, life insurance proceeds received by reason of an insured's death, lottery winnings, and the tax-free inside buildup of the cash surrender value of life insurance, among other items.
Fortunately, distributions from retirement plans are generally not included in NII. However, if included in MAGI, qualified plan distributions may push the taxpayer over the threshold that would cause other types of investment income to be subject to the 3.8% NIIT.
Another positive aspect of the 3.8% NIIT is that it does not apply to income from a trade or business conducted by a sole proprietor, partnership, or S corporation; but income, gain, or loss on working capital is not treated as derived from a trade or business and thus is subject to the tax. The term working capital generally refers to capital set aside for use in, or the future needs of, a trade or business.
Unfortunately, the 3.8% NIIT does apply to income derived from a trade or business if it is a passive activity or a trade or business of trading in financial instruments or commodities.
With regard to property dispositions, a gain from the disposition of property that is considered held in the ordinary course of a trade or business is generally exempt from the 3.8% NIIT. Despite the preceding exception, gains from dispositions of property held in a passive business activity or in the business of trading in financial instruments or commodities (whether passive or not) are included in the definition of NII.
For business owners, a gain or loss from the disposition of an interest in a partnership or S corporation may be subject to the 3.8% NIIT. However, a complex calculation involving a deemed sale analysis may be required to make this determination.
Finally, a taxpayer may be subject to both the 3.8% NIIT and the additional 0.9% Medicare tax, but not on the same income. The additional 0.9% Medicare tax applies to wages and self-employment income over certain thresholds, but it does not apply to items included in investment income. So, taxpayers who have both high wages or self-employment income and high investment income may be hit with both taxes.
Taxpayers face numerous challenges in learning about and dealing with the 3.8% NIIT. Please contact us to discuss the 3.8% NIIT or any other tax compliance or planning issue.


Business Tax Breaks
Several favorable business tax provisions have a limited term life that may dictate taking action between now and year-end. They include the following two provisions.
Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment, software, and eligible real property costs. For tax years beginning in 2013, the maximum Section 179 deduction is $500,000, including up to $250,000 for qualifying real property costs. However, you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. For tax years beginning in 2014, the maximum deduction is scheduled to drop back to only $25,000, and most real property costs will be ineligible.
50% First-year Bonus Depreciation. Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that's used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000. The 50% bonus depreciation break will expire at year-end unless Congress extends it.

James Lowe
www.hicksclark.com
jlowe@hicksclark.com
404-272-2633