Employee Compensation: Exclusions, Fringe Benefits, and Deferred Compensation - Prof. Lind, Study notes of Tax Legislation and Financial Law

Download Employee Compensation: Exclusions, Fringe Benefits, and Deferred Compensation - Prof. Lind and more Study notes Tax Legislation and Financial Law in PDF only on Docsity! Chapter 4 – Employee CompensationApproach:  Exclusions  Payments made on behalf of employees  Fringe Benefits  Employee Reimbursements  Transportation, Travel, Moving  Stock Options and Deferred compensation  Deferred Compensation Exclusions for Employees Payments made on Behalf of an Employee  Employer-sponsored accident & health plans  Meals & lodging  Misc. qualified fringes General Fringe Benefits  Working Condition fringes  De minimus fringes Meals and Lodging Examples  Ann is a registered nurse working in a community hospital. She is not required to take her lunch on the hospital premises, but she can eat in the cafeteria at no charge. The hospital adopted this policy to encourage employees to stay on the premises and be available in case of emergencies. During the year, Ann ate most of her meals on the premises. The total value of those meals was $750. Does Ann recognize gross income related to the employer-provided meals?  Ira is the manager of a hotel. His employer will allow him to live in one of the rooms rent-free or receive a $600 per month cash allowance for rent. Ira elected to live in the hotel. Does Ira recognize gross income for the value of the lodging? No Yes Other Qualified Fringe Benefits  Child and dependent care services  Excludable to a maximum of $5,000 a year.  Athletic facilities  Value of the use of athletic facilities on the employer’s premises is excluded from gross income.  Educational assistance  Employer-paid tuition, fees, books and supplies for undergraduate study is excludable to a max. of $5,250 a year. Working Condition Fringes & De Minimis Fringes Working Condition Fringes  Exclusion for cost of property or services provided by employer IF employee could have deducted the items if he/she had paid for them (employee business expenses)  Examples:  Subscriptions, dues, uniforms, use of company car for business De Minimis Fringes  Items for which benefit is so small that it is impractical to account for them  Examples:  Personal use of copy machine, employee picnic, occasional taxi fare for employee working late, personal local phone calls, qualified parking ($245 per month) Stock Options  Stock options can be classified into one of two types for tax purposes:  Incentive stock options (ISOs) are not deductible to the corporation and do not generate taxable income to the shareholder/employee.  Non-qualified stock options generate a tax deduction to the corporation calculated using the intrinsic value method and taxable income to the shareholder/employee in an equal amount. ISOs  Neither the grant of the option nor the exercise of the option generate taxable income to the employee or a tax deduction to the employer.  When the employee subsequently sells the stock, a long- term capital gain is recognized to the extent the sales price exceeds the exercise price. ISOs  In order to receive preferential treatment the following requirements (among others) must be met:  The option must be exercisable only within 10 years of the date of grant.  The exercise price must equal or exceed the market value of the stock at the date of grant.  The option holder must be an employee of the corporation from the date of grant until 3 months before the date of exercise.  The option must be nontransferable other than at death and must be exercisable during the employee’s lifetime only by the employee.  The employee must not dispose of the stock within two years after the date of grant and one year after exercise. Stock Options: Example 2  Assume the same facts in Example 1 except the options are NQOs, and that there is no readily ascertainable FMV for the options at the date of grant. What are the tax consequences to Wren and Rocky? In 2011 Rocky has compensation income of $10,000 and Wren has a $10,000 deduction. In 2012 Rocky has LTCG of $10,000. 401(k) Plans  Employee defers compensation by contributing pre-tax earnings to the plan.  Equivalent to a deduction for AGI  Employer can deduct deferred compensation currently.  Earnings on investment accrue tax free.  Limitations:  Maximum deduction by employer for matching contribution is 25% of compensation  Maximum pre-tax income that can be deferred by employee is $17,500, plus additional $5,500 if age 50 or older.  What are IRAs?  IRAs are a means of saving for retirement years. Technically they are a trust set up for a t/ps retirement.  Several kinds:  Conventional (traditional)  Contributions may or may not be deductible  Earnings build tax-free until withdrawal  Withdrawals are taxable (in part or in full)  Roth  Contributions are NOT deductible  Earnings build up tax-free  Withdrawals do NOT constitute gross income Individual Retirement Accounts (IRAs) IRA Examples 1. Tina, single, has no retirement plan other than a traditional IRA. Tina’s AGI is $85,000. Tina can deduct ______ 2. Tom, single, also participates in a qualified retirement plan at work and has AGI of $64,000. Tom can deduct _______ 3. Terry, single, also participates in a qualified retirement plan at work and has AGI of $67,800. Terry can deduct ______ $5,500 $2,750 $660  What is so great about Roth IRAs?  Chance to get tax-free distributions when you retire.  What does it cost?  Give up tax deduction now.  What are the requirements?  Eligibility: ability to contribute is phased out for Tps w/ high AGI---  Single: B/t $112k and $127k AGI ($15k range)  MFJ: B/t $178k and $188k ($10k range)  Money must have been put into the Roth IRA for least 5 years and the taxpayer must be 591/2 before money can be withdrawn tax free. Roth IRAs Bev and Trey are married and file a joint return. Their AGI is $182,000. How much can they contribute to a Roth IRA? ($4,000/10,000) x $5,500 = $2,200 reduction. They can each contribute $3,300.