1. Relocation Tax Updates & Trends Presented by Peter Fonseca, CRP

2. Federal Tax Issues, Including Common Deductions and Credits IRS Concerns & Audits State Withholding Issues Relocations & Temporary Assignments Gross-Up Policy Recommendations Common Gross-up Audit Mistakes

3. In 2013, the American Taxpayer Relief Act extended the Bush-era tax cuts permanently, but with the addition of a new top bracket/rate. Tax rates remain the same (10% - 39.6%). Brackets have been slightly adjusted for inflation.

4. Slight increase in the value of standard deductions and exemptions: $6,300 if SNG or MFS $12,600 if MFJ $9,250 if HH $4,000 per exemption For higher incomes in 2015, phase-out occurs for AGI’s exceeding: $258,250 if SNG $309,900 if MFJ $284,050 if HH $154,950 if MFS Recommendations: Consider phaseouts in gross-up calculations. Also, use itemized deduction estimates (for homeowners) and standard deductions (for renters).

5. Most companies calculate year-end gross-up based upon estimated taxable income, after reducing AGI by exemptions and either standard deductions or estimated itemized deductions. Standard/itemized deductions lower taxable incomes and possibly tax/gross-up rates. Most homeowners are itemizers and most renters are non-itemizers. If used standard deductions for all, then likely will over gross-up many homeowners.

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

7. Business rate increased from $0.56/mile in 2014 to $0.575/mile in 2015. Final move excludable rate decreased from $0.235/mile in 2014 to $0.23/mile in 2015. Charitable rate remains at $0.14/mile for 2015.

8. 2015 supplemental withholding rate remains at 25% ( 39.6% for YTD supplemental payments exceeding $1,000,000). Recommendation: If you use supplemental rates during the year, then calculate year-end gross-up based upon marginal rates. Pass the difference to payroll as a ‘delta report’.

9. OASDI (Social Security) rate remains at 6.2%. OASDI cutoff increased from $117,000 in 2014 to $118,500 in 2015.

10. For many years, the Medicare rate has been 1.45% with no income threshold. Starting in 2013, there was an “Additional Medicare Tax” of 0.9% for higher incomes. This remains in effect for 2015 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 is recalculated based upon total Medicare wages on Form 8959. 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.

11. 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 credit 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%)

12. A new 3.8% Medicare tax on certain investment income is imposed for taxpayers with MAGI exceeding these thresholds ($200,000 if SNG or HH, $250,000 if MFJ, and $125,000 if MFS). The tax is due on the lesser of net investment income versus MAGI over these thresholds. Must complete Form 8960.

13. $300,000 of MAGI $70,000 of net investment income Married Filing Jointly The lesser of unearned income ($70,000) and MAGI over threshold ($300,000-$250,000) is subject to 3.8% tax. $50,000 x 3.8% = $1,900 NIIT

14. 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. 2009/2010 credit: If own home for 3+ years, then no payback required. 2008 credit: Similar to no-interest loan, paid back in equal installments over 15 years. If sell prior to paying back, might need to pay back the balance on that year’s tax return and complete Form 5405.

15. Couple bought home on 6/1/08 for $300,000 and received $7,500 credit (paid back over fifteen years). Sell home on 10/1/14 – may need to pay back the balance ($5,500) on that year’s tax return, rather than over the following eleven years. How to handle?

16. Companies should not reimburse employees if they are required to payback the credit. Had the employee not moved they still would have been required to repay the credit over the 15 year term. By selling the home earlier they are only required to accelerate the payments.

17. 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% Net Investment Income Tax as net investment income. Loss on sales are not deductible!

18. Originally designed in 1969 to stop the top 155 American high-income earners from paying little or no tax. It now impacts tens of millions. 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 2015, the exemptions are $83,400 if MFJ, $53,600 if SNG or HH, and $41,700 if MFS. Very complex calculation. Use Form 6251.

19. Do not attempt to factor in the AMT into your Gross-up calculations. The calculation of AMT will vary between taxpayers based on salary & specific deductions they may be taking. Allow your transferees to complete their tax returns. After they have completed their return you can have a gross-up audit performed to verify if the AMT tax negatively impacted them.

20. Moving Expenses: Transit, Storage and Final Move Expenses PMI – Deduction has been available since 2007. Currently unavailable in 2015. but likely to be extended. Points/Interest & Taxes – Deductible on the Schedule A. Sales Tax Deduction – Available since 2004. Currently unavailable in 2015, but likely to be extended. Recommendation: Consider the sales tax deduction in gross-up calculations.

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

22. $1,000 tax credit has been available since 2003. Must be dependent and under age 17 at end of tax year. Phases out for gross income exceeding $110,000 if MFJ, $75,000 if SNG or HH, and $55,000 if MFS. Lose $50 for every portion of $1,000 over limit. Example: $140,000 gross income, MFJ, 2 dependents under 17. Will lose $1,500 of credit; can only claim $500 credit.

23. Recommendation: Do not gross-up at year-end! Why? Based upon total income including outside & spousal income. Would likely over gross-up or under gross-up many by $1,000 or more. How to handle? Let transferees complete tax returns first. If they feel they deserve additional gross-up, let them come to you then.

24. What are your options if an employee feels they lost any of these credits due to their relocation. Have a Gross-up audit performed on the employee’s tax returns to determine the true loss. In cases the relocation may have only caused a portion of the credit loss or no loss at all. An audit can determine the true impact.

25. 1.Part year and non-resident state returns prepared incorrectly. 2.Preparer is unfamiliar with the company’s gross-up policy. Some taxable expenses might not be grossed up. 3.Spousal and outside income might not be part of the company’s gross-up policy. 4.New residence points are incorrectly deducted on the “without move” side. 5.Form 3903 prepared incorrectly.

26. 6.State and local gross-ups are incorrectly deducted on the “without move” side. 7.AMT Tax and its complexity during audits. 8.Many other areas (ie credit and deduction phaseouts) not typically grossed up at year-end. The company may/may not decide to include as part of audit. 9.Failure to recapture any excess FICA tax withheld.

27. 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.

29. 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/credit) Allow deduction on Federal tax: AL, IA, LA, MO*, MT*, OR* (* - has limits) Allow deduction/exclusion for final move meals: PA and NJ Distance test of 35 miles: PA

30. 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). − OR high-low per diem rates (see IRS Notice 2014-57). − Employee’s Visa, passport, language training − Family expenses are taxable!

32. IRS budget has been cut significantly over the past few years. Proposed modest increases for 2015. - Individual taxpayer audits down to 0.8% in 2014. - Corps with $10M assets down to 4.2%. IRS concerns: - Identity theft tax refund fraud. - Affordable Care Act – Penalties for not having insurance. Focus of audits: - The rich and their entities. - Partnership returns. - Employment taxes.

33. Employment taxes: - Employee vs. independent contractor. - Form 1099 compliance. - S corporation reasonable compensation issues. - Cash businesses. Other items to be careful of: - 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.

34. Peter Fonseca, CRP pfonseca@orionmobility.com 203-563-2152 www.orionmobility.com