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Author: Beth Rizkal

Dealing with Child Support Withholding Orders

Posted on by Beth Rizkal

A whopping 75% of all child support is collected through employer-based income withholding orders (IWOs), according to the federal Office of Child Support Enforcement (OCSE). In the most recent year for which figures are available, that amounted to $32 billion. The latest information from the Census Bureau indicates that nearly half of the country’s 13.4 million custodial single parents have some type of child support arrangement in place, with the average monthly payment at around $480.

One reason those numbers are so large, besides a high divorce rate, is that systems have been established that help state agencies find people who might otherwise not live up to their child support obligations. Those systems involve you, through a requirement that you provide basic information about new hires within 20 days of their start date (and possibly sooner, depending on your state).

Required Data

Mandated reporting of new hire data has been on the books since the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. The data elements you need to report to the state agency that handles these matters are: the employee’s name, address, Social Security number and date of hire, along with your company’s name, address and federal ID number. Basically, this is the same data you collect on a Form W-4, so you may be able to just submit that form. 

Requirements vary by state. Some will also allow you to file electronically while others want paper filing. Failure to comply with your reporting obligation can result in civil penalties and even criminal penalties in extreme cases.

If you have employees in multiple states, you can either send reports to each state where employees work or send all the forms to one state. The latter, however, obligates you to file electronically and to notify the OCSE which state you’re sending the information to.

This employee database, which is pooled nationally, helps state agencies track down parents who have failed to live up to their child support obligations. When that happens and one is on your payroll, you’ll receive a four-page IWO form that may be accompanied by a seven-page set of instructions. It could come from a state agency, a court, an attorney or possibly even just an individual.

Note: A “new” hire includes people you have rehired after they’ve been off your payroll, if they haven’t been working for you for at least the last 60 consecutive days. Also, even if a new employee quits before the 20-day reporting deadline has elapsed, as long as the person earned wages from you, you still need to file the report.

Next Steps

What needs to happen next is for you to:

  • Document the date you received the IWO (in case any issues arise about how quickly you fulfill its requirements).
  • Verify that you currently employ the named individual or have in the past. Although this may seem like an obvious step, it’s important that you fill in the relevant sections and return the form even if the individual no longer works for you.
  • Make sure that the form is “regular on its face,” legal jargon that essentially means it contains all required information. (The instructions provide details.)

If the form was sent by anyone besides a court or state agency, the IWO is considered a “notice” and not an order. If it isn’t accompanied by a bona fide order, you should return it to the source. Also, if the IWO came from another state, or if the appropriate box is checked on the form, you’ll need to give a copy to the employee.

Finally, if everything is acceptable, you’ll simply need to comply with the terms of the order. A general requirement is that you’ll need to start withholding child support funds by the first pay period that begins 14 working days after the IWO was mailed to you. Then you have seven business days to relay the withheld amount to the state agency that disburses the funds to the recipient. (Some states might require faster turnaround.)

You are within your rights to also deduct from the employee’s paycheck an administrative fee to recoup your added cost, though limits apply to those charges.

What happens if an employee changes his or her withholding allowances to reduce the amount of the child support payment? It’s not up to you to try to counteract that. The IRS may withhold unfulfilled required child support payment amounts from the employee’s tax refund.

Final Thoughts

Handling issues involving delinquent child support can be simple … or complex. Doing so might elicit emotional outbursts from the targeted employee, but it must be done. If necessary, talk the matter over with your payroll advisor to ensure you’re meeting your reporting and withholding obligations.

The Minimum Wage Is Going Up in Many Places in January

Posted on by Beth Rizkal

On January 1, 2019, many states and localities are increasing their minimum wage amounts. In some areas, the amounts paid to tipped employees is also increasing and garnishment limits may also be changing.

This chart briefly details the changes that will kick in on New Year’s Day. For more information about your situation, consult with your payroll advisor.

State Change on January 1, 2019
Alaska    The minimum wage will increase from $9.84 to $9.89 per hour. Tipped employees must be paid this same rate.
Arizona    The minimum wage will increase from $10.50 to $11 per hour. The cash minimum wage for tipped employees will increase from $7.50 per hour to $8 per hour. In Flagstaff, the minimum wage will increase in from $11 to $12 per hour.
Arkansas    The minimum wage will increase from $8.50 to $9.25 per hour. For tipped employees, the cash minimum wage will remain at $2.63 per hour.
California    The minimum wage will rise from $11 to $12 per hour for employers with more than 25 employees. It will increase from $10.50 to $11 per hour for employers with fewer than 26 employees. Tipped employees must also be paid this rate. The minimum wage will also increase in Belmont, Cupertino, El Cerrito, Los Altos, Mountain View, Palo Alto, Redwood City, Richmond, San Diego, San Jose, San Mateo, Santa Clara and Sunnyvale.Garnishment limits may also change. In CA, the maximum amount subject to garnishment can’t exceed the lesser of 25% of weekly disposable income, or 50% of the amount by which the individual’s disposable earnings for the week exceed 40 times the greater of either the state or local minimum wage rate in effect where the debtor works when the earnings are payable.
Colorado    The minimum wage will increase from $10.20 to $11.10 per hour. The cash minimum wage for tipped employees will increase from $7.18 per hour to $8.08 per hour. The garnishment limit is also changing.
Delaware    The minimum wage will rise from $8.25 to $8.75 per hour. For tipped employees, the cash minimum wage rate will remain at $2.23 per hour.
Florida    The minimum wage will increase from $8.25 to $8.46 per hour. The cash minimum wage for tipped employees will increase from $5.23 per hour to $5.44 per hour.
Maine    The minimum wage will increase from $10 to $11 per hour. The cash minimum wage for tipped employees will increase from $5 per hour to $5.50 per hour. The garnishment limit is also changing.
Massachusetts    The minimum wage will rise from $11 to $12 per hour. The cash minimum wage rate for tipped employees will increase from $3.75 per hour to $4.35 per hour.
Minnesota    The minimum wage will increase from $9.65 to $9.86 per hour for large employers (those with annual gross sales of $500,000 or more, exclusive of retail excise taxes). The minimum wage for small employers will increase from $7.87 per hour to $8.04 per hour. Tipped employees must also be paid these rates.
Missouri    The minimum wage will increase from $7.85 to $8.60 per hour. For tipped employees, the cash minimum wage will increase from $3.925 per hour to $4.30 per hour.
Montana    The minimum wage will increase from $8.30 to $8.50 per hour. Tipped employees must also be paid this rate.
New Jersey    The minimum wage will increase from $8.60 to $8.85 per hour. The cash minimum wage for tipped employees will remain at $2.13 per hour.
New Mexico The state minimum wage will remain at $7.50 per hour, but the minimum wage rate will increase in Albuquerque, Bernalillo County and Las Cruces.
New York    On December 31, 2018, the minimum wage will rise from: 1) $13 to $15 per hour for NY city employers with 11 or more employees; 2) $12 to $13.50 per hour for NY city employers with 10 or fewer employees; 3) $11 to $12 per hour for Nassau, Suffolk and Westchester county employers, and 4) $10.40 to $11.10 per hour for employers in areas not noted above. The cash minimum wage for tipped employees varies by industry. The garnishment limits will also change on January 1.
Ohio    The minimum wage will increase from $8.30 to $8.55 per hour. The cash minimum wage rate for tipped employees will increase from $4.15 per hour to $4.30 per hour.
Rhode Island    The minimum wage will increase from $10.10 to $10.50 per hour. However, the minimum cash wage for tipped employees will remain at $3.89 per hour.
South Dakota    The minimum wage will increase from $8.85 to $9.10 per hour. The cash minimum wage for tipped employees will increase from $4.425 per hour to $4.55 per hour. The garnishment limit will also change.
Vermont    The minimum wage will increase from $10.50 per hour to $10.78 per hour. The cash minimum wage for tipped employees will increase from $5.25 to $5.39 per hour.
Washington    The minimum wage will increase from $11.50 to $12 per hour. Tipped employees must also be paid this rate. The minimum wage will also increase in Seattle, SeaTac and Tacoma.

Looking Ahead in 2019

On July 1, 2019, the minimum wage will go up in the District of Columbia from $13.25 to $14 per hour.

In Oregon, the minimum wage will increase in July of next year to various amounts, depending on where an employer is located. For employers located within the Portland metro urban growth boundary, the minimum wage will go from $12 per hour to $12.50. In smaller cities, it will go from $10.75 to $11.25 per hour. And in non-urban counties, the minimum wage will rise from $10.50 to $11 per hour. All of the changes in Oregon are effective on July 1, 2019.

In addition, both houses of the Michigan legislature have approved legislation that would increase the state’s minimum wage rate from $9.25 per hour to $10 per hour, effective March 1, 2019, with annual increases until it reaches $12 per hour, effective January 1, 2022. The legislation had the effect of keeping an approved ballot measure off the November 6 election ballot that would have allowed voters to decide whether to increase the minimum wage rate. However, several published reports say that the Republican-controlled legislature passed the bill not only to keep voters from determining the issue, but with the intention of later killing the measure. They are reportedly working to scale back the minimum wage legislation and paid sick legislation before they leave office in December.

4 Year-End Strategies to Lower Your Personal Tax Bill

Posted on by Beth Rizkal

The countdown to year end has begun. Have you positioned yourself to minimize your 2018 tax bill? The Tax Cuts and Jobs Act (TCJA) made sweeping changes to the federal tax laws that will affect virtually all individual taxpayers — and most of those changes went into effect for this tax year. Here are four tried-and-true tax planning strategies, tweaked to account for the TCJA.

1. Game the Standard Deduction

As the following table shows, the TCJA almost doubled the standard deduction amounts from 2017 to 2018.

Standard Deduction Allowances: 2017 vs. 2018

Filing Status 2017 2018
Single or married filing separately $6,350 $12,000
Married joint filers $12,700 $24,000
Head of household $9,350 $18,000

If your total itemizable deductions for 2018 will be close to your standard deduction amount, consider making enough additional expenditures for itemized deduction items before year end to exceed the standard deduction. Those moves will help lower this year’s tax bill. (Next year, you may decide to claim the standard deduction, which will be increased to account for inflation.)

Itemizable deductions that you can potentially “bunch” in alternating tax years are:

Charitable contributions. Consider making bigger donations this year so that this year’s itemizable deductions will exceed the standard deduction. Then, next year, if your itemized deductions are less than the standard deduction, you can claim it.

Medical expenses. Elective medical procedures — such as dental work and vision care — can be performed before year end to boost your itemized deductions. For 2018, you can deduct medical expenses to the extent that they exceed 7.5% of your adjusted gross income (AGI) if you itemize. In 2019, the AGI threshold for itemizing medical expenses is scheduled to increase to 10%.

Home mortgage interest. Making your January 2019 mortgage payment this year will give you 13 months of interest expense to deduct in 2018. Although the TCJA put new limits on itemized deductions for home mortgage interest, you’re probably unaffected (because of the grandfather rules that apply to pre-existing mortgages). But double-check with your tax advisor to be sure.

SALT expenses. You also can prepay state and local income and property tax (SALT) expenses that are due early next year. Paying those bills before year end can lower your 2018 federal income tax bill, because your itemized deductions will be that much higher. However, the TCJA decreased the maximum amount you can deduct for state and local taxes to $10,000 (or $5,000 for married people who file separately). Unfortunately, many taxpayers will be affected by this limitation, so for them it’s probably not as effective as prepaying other itemizable expenses.

Important note: The SALT prepayment strategy can be a bad idea if you’ll owe alternative minimum tax (AMT) this year. That’s because SALT write-offs are completely disallowed under the AMT rules. Ask your tax advisor if you’re likely to be in the AMT zone for 2018.

It’s also important to note that some itemizable deductions — such as deductions for unreimbursed business expenses and other miscellaneous expenses — were suspended for 2018 through 2025 under the TCJA.

2. Manage Investment Gains and Losses  

If you hold investments in taxable brokerage firm accounts, consider selling appreciated securities that have been held for over 12 months. In 2018, the maximum federal income tax rate on long-term capital gains is 20%. But many people will incur a federal tax rate of only 15%.

2018 Federal Tax Rates on Long-Term Capital Gains and Qualified Dividends
Tax Rates Single Married Joint Filers Head of Household
0% $0 – $38,600 $0 – $77,200 $0 – $51,700
15% $38,601 – $425,800 $77,201 – $479,000 $51,701 – $452,400
20% $425,801 and up $479,001 and up $452,401 and up

For 2018 through 2025, the federal tax rates on long-term capital gains are no longer tied to the federal income tax brackets. After 2018, these brackets will be indexed for inflation. The 3.8% net investment income tax (NIIT) can also apply to long-term capital gains at higher income levels.

To the extent you have capital losses from earlier this year or capital loss carryovers from pre-2018 years, selling investments that have appreciated in value this year won’t result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a smart tax move, because net short-term gains would otherwise be taxed at higher ordinary-income rates of up to 37% (plus the 3.8% NIIT if applicable).

If you have investments that would generate a tax loss if they were sold, you might consider unloading them before year end to shelter any capital gains from sales earlier this year, including high-taxed short-term gains.

If selling your losing investments would cause your capital losses to exceed capital gains, the result would be a net capital loss for the year. Your 2018 net capital loss can be used to shelter up to $3,000 of 2018 ordinary income ($1,500 for married people who file separately). This income may be in the form of salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from this year is then carried forward indefinitely until you have gains to offset against it.

Net capital loss carryforwards can give you investing flexibility in the future, because you won’t have to hold appreciated securities for over a year to get a preferential tax rate. The top two federal rates on net short-term capital gains recognized in 2019 and beyond are 35% and 37% (plus the 3.8% NIIT if applicable). So, it could be particularly beneficial to have a capital loss carryover to shelter high-taxed short-term gains recognized in future years.

3. Set up Loved Ones for a 0% Tax Rate on Investment Income

Under the TCJA, the federal income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts is still 0% if the gains and dividends fall within the 0% bracket. (See the chart above.)

While your income may be too high to benefit from the 0% rate, you may have children, grandchildren and other loved ones in the 0% bracket. If the object of your generosity is in the 0% bracket, consider gifting that person some appreciated stock or mutual fund shares that can be sold without incurring tax on the resulting long-term capital gains. Gains will be long term if your ownership period plus the gift recipient’s ownership period (before the recipient sells) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. If the dividends fall within the gift recipient’s 0% rate bracket, they will be federal-income-tax-free.

Important notes: If you give securities to someone who is under age 24, the so-called “kiddie tax” rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates.

Many states don’t have a 0% tax bracket for capital gains and qualified dividends. Be aware that state taxes could apply.

4. Make Tax-Wise Gifts to Loved Ones and Charities

Generous people who are looking to share their wealth often ask: Is it better to give investments directly to family members and charities — or to sell them and give away the proceeds? From a tax perspective, the answer depends on whether you’ll incur a gain or loss on the sale of an investment.

In general, it’s better to sell shares that would incur a loss and then give away the proceeds. Conversely, appreciated shares should be donated directly to recipients that would incur no tax (or be taxed at a lower rate).

For example, Sam owns stock that’s decreased substantially in value since he bought it in 2016. He wants to make a year-end gift to his niece Barb. Sam’s tax advisor recommends that he sell the investment and book the resulting tax-saving capital loss (to offset capital gains in 2018 and beyond). Then Sam can give the proceeds from the sale directly to Barb.

On the flipside, Samantha owns stock that’s increased substantially in value over the last two years. She wants to make a year-end gift to her nephew Bob. In this scenario, Aunt Samantha’s tax advisor recommends giving the shares directly to Bob, because he’s in the 0% federal income tax bracket for long-term capital gains and qualified dividends. (Even if the stock had been owned for less than a year before it was sold, Bob is in a much lower ordinary-income tax bracket than his wealthy aunt.)

The same general principles also apply to donations to IRS-approved charities. But there’s an extra tax benefit: You also can claim tax-saving charitable donation deductions, if you itemize deductions on your federal income tax return. If you donate shares that you’ve held for more than a year, your itemized deduction equals the current market value of the shares at the time of the gift — and you’ll avoid paying capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS.

Meet with a Tax Pro

These are just a handful of year-end strategies for individual taxpayers. Your tax advisor may offer more suggestions based on your unique tax situation. Act fast, however, because some tax planning moves take time to execute before December 31.

Tax Cheer for Holiday Gifts to Employees

Posted on by Beth Rizkal

With the holidays fast approaching, you might want to reward your employees for all their hard work in 2018. Gift-giving ideas include gift cards, holiday turkeys and achievement awards. Although your intent may be essentially the same in all these situations, the tax outcome for recipients of your goodwill may be quite different. Typically, it depends on the value and type of gift or award. The Tax Cuts and Jobs Act (TCJA) clarifies the tax treatment of certain achievement awards of property. This provision applies to amounts paid or incurred after 2017, including gifts made during this holiday season.

What Are the Rules for Business Gifts to Customers?

  • If your business gives gifts to customers,  clients or other contacts during the holiday season, you may be able to deduct all or part of the cost. But there are strict tax-law limits to your generosity.
  • In general, the deduction for these types of business gifts is limited to $25 per recipient during the tax year. A gift to a company that is intended for a particular person is considered an indirect gift to that person. 
  • If you give a gift to a member of a customer’s family, the gift is generally considered an indirect gift to the customer. However, this rule doesn’t apply if you have a bona fide, independent business relationship with the family member and the gift isn’t intended for the customer’s eventual use.
  • If you and your spouse both give gifts to a customer, the two of you are treated as a single taxpayer. Thus, your combined limit is $25 per recipient. It doesn’t matter if you have separate businesses, are separately employed or whether you each have an independent connection to the customer. Similarly, if a partnership gives a gift to a customer, the partnership and its partners are treated as one taxpayer.
  • Finally, there’s some leeway on the $25 limit. Incidental expenses — such as engraving, packaging, insurance and shipping costs — don’t count towards the cost of a gift.

Tax Rules

As a general rule, amounts effectively paid for  services rendered are taxable, similar to other forms of compensation. Therefore, year-end bonuses, commissions and similar payments made in 2018 are subject to tax in 2018. They’re also deductible by the employer in 2018.

However, if a year-end bonus is delayed until January, it’s taxable to the employee in 2019. And a calendar-year business can’t deduct it until 2019.

The tax rules for achievement awards are slightly more complicated. For these purposes, an “achievement award” is an item of tangible personal property given to employees for length of service or for promoting safety. Examples include watches, electronic devices, golf clubs and jewelry. In the past, there was some uncertainty about other types of property.

Clarity under the TCJA

The TCJA specifically excludes the following items from its definition of “tangible personal property”:

  • Cash and cash equivalents,
  • Gifts cards, gift coupons and gift certificates (other than those where from the employer preselected or preapproved a limited selection),
  • Vacations,
  • Meals,
  • Lodging,
  • Tickets for theater or sporting events, and
  • Stocks, bonds or similar items.

This TCJA provision is similar to proposed regulations that were issued under prior law. It’s also comparable to the position stated by the IRS in Publication 15-B, Employer’s Tax Guide to Fringe Benefits. That publication has no formal authority, however.

There other tax rules pertaining to achievement awards provided through a company plan. To qualify for tax-free treatment to recipients, the following requirements must be met:

  • Any employee can receive a length-of-service award, but safety awards can’t be made to managers, administrators, clerical workers and other professional employees.
  • The award doesn’t qualify if the company granted safety awards to more than 10% of the eligible employees during the same year.
  • The award must be part of a meaningful presentation.
  • The employee must have worked for the company for a minimum of five years to receive a length of service award.

Additionally, if a company uses a “nonqualified plan,” an employee may receive up to $400 in awards without owing any tax. This tax-free amount is quadrupled to $1,600 for awards through a “qualified plan.” Any amount above these limits is taxable to the employee and can’t be deducted by the employer.

Two additional requirements must be met for qualified plans.

  • The award must be paid under a written plan that doesn’t discriminate in favor of highly-compensated employees (HCEs).
  • The average cost of all employee achievement awards granted during the year can’t exceed $400.

De Minimis Gifts

How about small tangible gifts, such as turkeys or hams, given to employees? Such gifts may be excluded from taxable income under a special “de minimis rule.” A de minimis benefit is one that is so small as to make accounting for it unreasonable or impractical. Many small holiday gifts are covered by this exception.

In determining whether the de minimis rule applies, consider the frequency and the value of the gifts. One critical factor is whether the benefit is occasional or unusual. Also, the gift can’t be a form of disguised compensation.

If a benefit is too large to qualify as a de minimis benefit, the entire value is taxable to the employee, not just the excess over a designated de minimis amount. Previously, the IRS has ruled that items with a value exceeding $100 could not be considered a de minimis benefit, even under unusual circumstances.

‘Tis the Season

Make this a happy holiday season from both a gift-giving and tax viewpoint. Stay within the boundaries discussed above to maximize the benefits for employees and employers. If you have questions about the business gift-giving rules, contact your tax advisor.

Estate Tax Planning Tips for Married Couples

Posted on by Beth Rizkal

For married people with large estates, the Tax Cuts and Jobs Act (TCJA) brings welcome relief from federal estate and gift taxes, as well as the generation-skipping transfer (GST) tax. Here’s what you need to know and how to take advantage of the favorable changes.

Estate and Gift Tax Basics

The TCJA sets the unified federal estate and gift tax exemption at $11.4 million per person for 2019 (up from $11.18 million for 2018). For married couples, the exemption is effectively doubled to $22.8 million for 2019 (up from $22.36 million for 2018). The exemption amounts will be adjusted annually for inflation from 2020 through 2025. In 2026, the exemption is set to return to an inflation-adjusted $5 million, unless Congress extends it.

Under the unlimited marital deduction, transfers between spouses are federal-estate-and-gift-tax-free. But the unlimited marital deduction is available only if the surviving spouse is a U.S. citizen.Taxable estates that exceed the exemption amount will have the excess taxed at a flat 40% rate. In addition, cumulative lifetime taxable gifts that exceed the exemption amount will be taxed at a flat 40% rate. Taxable gifts are those that exceed the annual federal gift tax exclusion, which is $15,000 for 2018 and 2019. If you make gifts in excess of what can be sheltered with the annual gift tax exclusion amount, the excess reduces your lifetime unified federal estate and gift tax exemption dollar-for-dollar.

Important: Some states also charge inheritance or death taxes, and the exemptions may be much lower than the federal exemption. Discuss state tax issues with your tax advisor to avoid an unexpected tax liability or other unintended consequences of an asset transfer.

What’s the GST Tax?

The generation-skipping transfer (GST) tax generally applies to transfers made to people two generations or more below you, such as your grandchildren or great-grandchildren. Transfers made both during your lifetime and at death can trigger this tax — and it’s above and beyond any gift or estate tax due.

Under the Tax Cuts and Jobs Act (TCJA), the GST tax continues to follow the estate tax. So, the GST tax exemption also increases under the TCJA. For 2018, both exemptions are $11.4 million per person, or effectively $22.8 million for a married couple. The GST exemption can be a valuable tax-saving tool for taxpayers with large estates whose children also have large estates. With proper planning, they can use the GST exemption to make transfers to grandchildren and avoid any estate or gift tax at their children’s generation.

Exemption Portability

For married couples, any unused unified federal estate and gift tax exemption of the first spouse to die can be left to the surviving spouse, thanks to the so-called “exemption portability” privilege. The executor of the estate of the first spouse to die must make the exemption portability election to pass along the unused exemption to the surviving spouse.

The portability privilege — combined with the increased unified exemption amounts and the unlimited marital deduction — will make federal estate and gift tax bills for married folks a rarity, at least through 2025. That’s because the portability privilege effectively doubles your estate and gift tax exemption to a whopping $22.8 million for 2019 (with inflation adjustments for 2020 through 2025).

Important: Exemption portability isn’t a new privilege under the TCJA. It existed under prior law, and it will continue to exist after the increased estate and gift tax exemptions expire at the end of 2025.  

Estates below $11.4 Million

If your joint estate is worth less than $11.4 million, there won’t be any federal estate tax due even if you and your spouse both die in 2019. That’s because the unified estate and gift tax exemption allows either of you to leave up to $11.4 million to your children and other relatives and loved ones without federal estate tax or any planning moves.

But there are still many reasons for you to create (or review) your estate plan. For example, if you have minor children, you need a will to appoint someone to be their guardian if you die. Or you might want to draft a will to designate specific assets for specific individuals. Likewise, if you’re concerned about leaving money to a spouse or other individual who isn’t financially astute, you might want to set up a trust to manage assets that person will inherit.

Estates between $11.4 Million and $22.8 Million

Couples with joint estates between $11.4 million and $22.8 million are positioned to benefit greatly from exemption portability. If you die in 2019 before your spouse, you can direct the executor of your estate to give any unused exemption to your surviving spouse. If your spouse dies before you, he or she can do the same.

The portability privilege effectively doubles your exemption. That means you and your spouse can transfer up to $22.8 million for 2019 (with inflation adjustments for 2020 through 2025) without incurring estate or gift tax. 

Estates over $22.8 Million

What if your joint estate is worth more than $22.8 million? The generous $11.4 million federal estate tax exemption, the unlimited marital deduction and the exemption portability privilege will work to your advantage. But you may need to take additional steps to postpone (or minimize) federal estate taxes.

For example, Leon and Lucy are a married couple with adult children and a joint estate worth $30 million. They both die in 2019.

Leon dies in February 2019, leaving his entire $15 million estate to Lucy. The transfer is federal-estate-tax-free, thanks to the unlimited marital deduction. Leon also leaves Lucy his unused $11.4 million exemption.

When Lucy dies in November 2019, how much can she leave to her loved ones without incurring federal estate tax? Lucy’s estate tax exemption is $11.4 million; she also has the portable exemption ($11.4 million) that Leon left when he died in February. So, she can leave up to $22.8 million to her beneficiaries without incurring any federal estate tax. Minimizing federal estate taxes on the remaining $7.2 million in Lucy’s estate would require some additional estate planning moves.

Alternatively, Leon could leave $11.4 million to his children (federal-estate-tax-free thanks to his $11.4 million exemption) and $3.6 million to Lucy (federal estate-tax-free thanks to the unlimited marital deduction). That way, when Lucy dies in November 2019, her estate would be worth $18.6 million (her own $15 million plus the $3.6 million from Leon). Then her exemption would shelter $11.4 million from the federal estate tax. Again, minimizing federal estate tax on the remaining $7.2 million in Lucy’s estate would require some additional steps.

Important: The same considerations apply if Lucy is the first to die.

Smart Moves for Big Estates

People with joint estates worth more than $22.8 million should consider planning strategies designed to lower federal estate and gift taxes. Here are a few:

Make annual gifts. Each year, you and your spouse can make annual gifts up to the federal gift tax exclusion amount. The current annual federal gift tax exclusion is $15,000. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption.

For example, suppose you have two adult children and four grandkids. You and your spouse could give them each $15,000 in 2019. That would remove a grand total of $180,000 from your estate ($15,000 × six recipients × two donors) with no adverse federal estate or gift tax consequences. This strategy can be repeated each year, and can dramatically reduce your taxable estate over time.

Pay college tuition or medical expenses. You can pay unlimited amounts of college tuition and medical expenses without reducing your unified federal estate and gift tax exemption. But you must make the payments directly to the college or medical service provider. These amounts can’t be used to pay for college room and board expenses, however.

Give away appreciating assets before you die. In 2019, a married couple, combined, can give away up to $22.8 million worth of appreciating assets (such as stocks and real estate) without triggering federal gift taxes (assuming they’ve never tapped into their unified federal estate and gift tax exemption before). This can be on top of 1) cash gifts to loved ones that take advantage of the annual gift tax exclusion, and 2) cash gifts to directly pay college tuition or medical expenses for loved ones.

To illustrate, say you give stock worth $2 million to your adult son in 2019. That uses up $1.985 million of your $11.4 million lifetime unified federal estate and gift tax exemption ($2 million – $15,000). Your spouse does the same. When it comes to gifts of appreciating assets, using up some of your lifetime exemption can be a smart tax move, because the future appreciation is kept out of your taxable estate.

Set up an irrevocable life insurance trust. Life insurance death benefits are federal-income-tax-free. However, the death benefit from any policy on your own life is included in your estate for federal estate tax purposes if you have so-called “incidents of ownership” in the policy. It makes no difference if all the insurance money goes straight to your adult children or other beneficiaries.

It doesn’t take much to have incidents of ownership. For example, you have incidents of ownership if you have the power to:

  • Change beneficiaries,
  • Borrow against the policy,
  • Cancel the policy, or
  • Select payment options.

This unfavorable life insurance ownership rule can inadvertently cause unwary taxpayers to be exposed to the federal estate tax.

To avoid this pitfall, a married individual can name his or her surviving spouse as the life insurance policy beneficiary. That way, under the unlimited marital deduction, the death benefit can be received by the surviving spouse free of any federal estate tax. However, this maneuver  can cause too much money to pile up in the surviving spouse’s estate and expose it to a major federal estate tax hit when he or she dies.

Alternatively, large estates can set up an irrevocable life insurance trust to buy coverage on the lives of both spouses. The death benefits can then be used to cover part or all of the estate tax bill. This is accomplished by authorizing the trustee of the life insurance trust to purchase assets from the estate or make loans to the estate. The extra liquidity is then used to cover the estate tax bill.

The irrevocable life insurance trust is later liquidated by distributing its assets to the trust beneficiaries (your loved ones). Then, the beneficiaries wind up with the assets purchased from the estate or with liabilities owed to themselves. And the estate tax bill gets paid with money that wasn’t itself subject to federal estate tax.

Bottom Line

The TCJA generally improves the federal estate tax posture of taxpayers for 2018 through 2025. But, to achieve optimal results and cover all your bases, you may need to meet with your tax and legal advisors to create or update your estate plan.      

Small Employers: Should You Jump on the MEP Bandwagon?

Posted on by Beth Rizkal

Today, approximately 38 million private-sector employees in the United States lack access to a retirement savings plan through their employers. However, momentum is building in Washington, D.C., to remedy this situation by helping small employers take advantage of multiple employer defined contribution plans (MEPs).

Could a MEP work for you and your workers? If the federal government expands these retirement savings programs, small employers will need to carefully consider the pros and cons before jumping at the MEP opportunity.

Wheels of Change

In September, President Trump issued an executive order, asking the U.S. Department of Labor (DOL) to investigate ways to help employers expand access to MEPs and other retirement plan options for their workers. The order also aims to improve the effectiveness and reduce the cost of employee benefit plan notices and disclosures.

The DOL followed up by publishing proposed regulations that would expand eligibility for MEP participation. Those regulations are expected to be finalized in early 2019.

A MEP essentially acts as the sponsor of a defined contribution (DC) plan, on behalf of a group of employers under its administrative umbrella. “The employers would not be viewed as sponsoring their own plans under ERISA. Rather, the [MEP] would be treated as a single employee benefit plan for purposes of ERISA,” says the Society for Human Resource Management. The MEP’s sponsor “would generally be responsible, as plan administrator, for complying with ERISA’s reporting, disclosure and fiduciary obligations.”

In principle, the administrative efficiencies of participating in a MEP would lower the costs of providing employees with retirement savings plans. But there are additional factors to take into consideration in evaluating MEPs.

Current rules only provide for “closed” MEPs that are sponsored by an association whose principal purpose is something other than sponsoring the MEP, and whose members must also have a “commonality of interest.”

Under the DOL’s more relaxed proposal, membership in a MEP would open up to companies in the same geographic area or in the same trade, profession or industry. Also, sponsoring the MEP could be the association’s primary purpose, so long as it had at least one secondary “substantial business purpose.”

Several additional requirements for associations that sponsor MEPs were listed in the proposed regulations. Among them, the association must:

  • Have a formal organizational structure with a governing body and bylaws,
  • Be controlled by its employer members,
  • Limit participation in the MEP to employees or former employees of MEP members, and
  • Not be a financial institution, insurance company, broker-dealer, third party administrator or recordkeeper.

The regulations would allow PEOs (professional employer organizations) to sponsor MEPs, if the PEOs meet certain requirements, including to perform “substantial employment functions” on behalf of their employer clients. Also, self-employed individuals and sole proprietors would be eligible to participate in a MEP.

Legislative Improvements

Even though the proposed DOL regs would ease current restrictions on MEPs, enough constraints would remain that could limit their expansion. A major issue that the proposed regulations fail to resolve is the so-called “bad apple” rule. That is, if one employer in a MEP fails to fulfill its administrative requirements, that failure, depending on its severity, could cause the entire MEP to be disqualified under the DOL proposal.

Fortunately, the House of Representatives has already passed a bill (the Family Savings Act) that addresses the bad apple issue. A similar measure (the Retirement Enhancement and Savings Act) is now pending in the Senate. The proposed legislation would clarify that the plans would separate noncompliant employers from other employers — or in essence “quarantine” the bad apples.

The bill also clarifies that employers’ fiduciary liability for the operation of the MEP is limited. But employers can’t avoid fiduciary liability altogether. That’s because they remain responsible for:

  1. Selecting a MEP and its investment lineup, and
  2. Ensuring that the MEP and the association that sponsors it adhere to the quality criteria the employer used when deciding to join the MEP.

The Senate version of the legislation would create a type of MEP known as a “pooled employer plan” (or PEP). PEP participants would interact with the plan electronically to help keep the plan’s administrative costs as low as possible.

Boom or Bust?

It’s unclear whether the new-and-improved MEPs will have a significant cost advantage — or whether that’s even a primary objective of employers that decide to join a MEP. Inexpensive Web-based 401(k) plan sponsorship platforms have emerged in recent years that help to address the cost issue.

Plus, there’s concern that some MEPs will lower costs by transferring fiduciary responsibilities to employers. But many employers may look beyond cost when deciding on a retirement plan. They may also value the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor.

Need more information about your situation? Your benefits advisor can help you select the retirement savings plan options that make the most sense for you and your employees.

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