Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
Please note that this blog is based on laws effective on June 22, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
When businesses hear about the research tax credit, they typically imagine that it’s for scientists in white lab coats. But that is not the case! The credit is actually much broader and more valuable than you might think.
The tax credit of up to 20% of qualified expenditures encourages businesses to develop, design or improve products, processes, techniques, formulas or software and similar activities. In the past, this credit—called the Credit for Increasing Research Activities—had to be reauthorized by Congress annually, but as part of the 2015 PATH Act, this credit was made permanent.
Calculated on the basis of increases in research activities and expenditures, the purpose of the research tax credit is to reward businesses that pursue innovation by continually increasing investment in research activities. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline compared with prior years.
There are two methods used to compute the credit: the regular method that provides for a 20% research credit or the simplified method which is easier to document but results in a reduced credit of 14% of eligible expenses.
• Regular Method – Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the business entity in 1984–1988, or a later period for companies that started subsequent to that period of time. This method may be the best choice for companies that can document a low base amount.
• Simplified Method – Under the alternative simplified method, the credit equals 14% of qualified research expenses over 50% of the average annual qualified research expenses in the three preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year’s qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, taxpayers with a high base amount from that period or smaller business entities.
The term “qualified research” means research undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:
However, certain purposes that are not qualified include style, taste, cosmetic or seasonal design factors. The definition is relatively broad and encompasses such activities as:
The research tax credit is considered part of a taxpayer’s general business credit. A general business credit may typically be carried back one year by filing a refund claim for that earlier year, and if not used in that prior year, it is carried forward for a maximum of 20 years. This credit will not normally offset the alternative minimum tax. However, eligible small businesses with $50 million or less in gross receipts may claim the credit against their alternative minimum tax liability.
The business expense that created the credit must be reduced by the amount of the credit.
In the case of a qualified small business (one with gross receipts of less than $5 million) the business may elect to claim a portion of its research credit, not to exceed $250,000, against the employer’s share of the employees’ FICA withholding requirement (the 6.2% payroll tax). To be eligible for the payroll tax credit, the business may not have had gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election.
If you would like to further discuss the research tax credit and how it might benefit your business, please contact Cray Kaiser today.
Please note that this blog is based on laws effective on April 27, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Self-employed individuals, unlike employees, don’t have an employer withholding federal (and state, where applicable), Social Security or Medicare (FICA) taxes tax from their wages during the year.
They are not paid a wage; instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business that will allow them to determine their taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, a self-employed person pays 100% of these taxes, termed the self-employment tax (SE tax), on his or her self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all of the self-employment activities are combined to determine the amount of the SE tax. However, two spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax.
Since a self-employed taxpayer doesn’t have taxes withheld on their self-employment income, they need to pay estimated taxes quarterly based upon their taxable profits. These estimated taxes are paid with IRS Form 1040-ES . In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance. The payments are due April 15th, June 15th, September 15th, and January 15th. If the due date falls on a weekend day or legal holiday, the due date will be the next business day. (And if you didn’t notice, the second “quarter” is two months, and the third one is four months – one of the many quirks in our tax system!)
A self-employed taxpayer who has more than $400 in net profit from their self-employment must pay self-employment tax, which is made up of Social Security tax of 12.4% on the first $137,700 (2020) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is a 0.9% Medicare tax to the extent the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. Finally, half of the self-employment tax can be deducted from gross income.
If a self-employed taxpayer pre-pays less than 90% of his or her current year’s tax liability, including Social Security and Medicare taxes for the year, then the taxpayer can be subject to a penalty that assesses interest on underpayments by the quarter, unless the taxpayer meets the safe harbor provisions
Estimated-Tax Safe Harbors rather than having to determine their quarterly profits and estimate their income tax and SE tax liabilities, some self-employed individuals instead opt to use a quarterly safe-harbor-payments method allowed by the IRS, which avoids the underpayment penalty if used correctly. There are two safe harbors available:
The underpayment penalty does not apply if the final amount due on an individual’s tax return is less than $1,000.
One thing to consider when deciding whether or not to use the safe harbor method is that because the safe harbor estimates are not based on the current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year’s income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current-year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes, instead of the taxpayer receiving a refund payment.
Also remember that tax pre-payments are not just based on the self-employment income and must factor in all other taxable income, including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources.
Generally, a self-employed individual keeps track of his or her own income but may also receive one or more 1099-MISC forms issued by a payor. If that income has already been accounted for in the business’s income records, it should not be included again. Beginning in 2021 for earnings received in 2020, Form 1099-NEC will be used in place of the 1099-MISC to report nonemployee compensation.
Self-employed individuals that take credit card payments for sales of their business products or services use third parties to settle the transaction and return payment to the self-employed individual. To combat fraud, the IRS requires all third-party network transactions to be reported on Form 1099-K if the amount is $20,000 or more and the number of transactions is 200 or more. Again, the sales should have already been included as income and should not be included a second time.
Besides self-employed individuals having to pay SE tax on their trade or business income, the SE tax also applies to other situations such as members of the clergy, partnership distributions, foreign self-employment income, agricultural co-op payments to retired farmers, director fees, and certain executors/administrators (fiduciaries). If you fall into any of these categories, please contact Cray Kaiser for more information.
Income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the self-employment tax. In addition, the following are some sources of income as well as individuals not subject to self-employment tax: a shareholder’s portion of an S corporation’s taxable income, fees for the services of a notary public, non-resident aliens, the fiduciary of an estate on an isolated basis, rents paid in crop shares, real estate rental income, statutory employees, a self-employed taxpayer’s child employee under the age of 18.
If you are self-employed and have any questions about your tax planning situation and opportunities, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Please note that this blog is based on laws effective on April 7, 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
A hobby exists for pure enjoyment – there’s (typically) no goal to make money or make a living from a hobby. They are passion projects or fun activities that people choose to spend their time on because it makes them happy. But that doesn’t mean that hobbyists don’t make money from their hobby – sometimes they do! In that case, what are tax issues related to hobbies? Tax law generally does not allow deductions for personal expenses except those allowed as itemized deductions on the 1040 Schedule A, and this also applies to hobby expenses.
Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. By disguising hobbies as a trade or business, and if the hobby expenses exceed the hobby income, they think they can report the difference between hobby income and expenses as a deductible business loss. But not so fast! To curtail hobbies being treated as businesses, the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies. The not-for-profit rules are often referred to as the hobby loss rules.
The distinction between a hobby and a trade or business sometimes becomes blurred, and the determination depends upon a series of factors, with no single factor being decisive. All of these factors have to be considered when making the determination:
Because making a determination using these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during a period of five consecutive years. However, if the activity involves breeding, training, showing or racing horses, then the period is two out of seven consecutive years.
Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.
However, hobbies (not-for-profit activities) have special, unfavorable rules for reporting the income and expenses, which have been exacerbated by the 2017 passage of the Tax Cuts and Jobs Act (tax reform). These rules are:
Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether or not that income is subject to self-employment tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.
If you have any questions related to how not-for-profit rules may apply to your activity, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in April 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Do you know what your tax nexus is and how it impacts your business? In this audio blog, CK Principal Karen Snodgrass gives an overview of nexus, how the Wayfair ruling has affected businesses, and what business owners should be doing to comply with nexus.
This is a complex topic that requires a lot of careful attention to ensure compliance. You should work with your tax advisor to make sure you’re taking the necessary steps to follow the law. In the meantime, click below to listen to a quick introduction to nexus:
If you have questions about your tax situation, please don’t hesitate to contact Cray Kaiser today.
Congratulations on making it to half a century! Your fifties can be a time of change. Maybe not having to work anymore sounds like a dream, but you might be concerned you don’t have enough saved for your upcoming retirement. Those concerns definitely aren’t unfounded as 40 million households in America have no retirement savings at all. Additionally, the Federal Reserve found that as of 2016, the median account balance of most retirement assets was only $60,000 with an average of $228,900. Given that healthcare and housing costs alone can easily deplete that amount during retirement, this is a growing concern nationwide.
This is why your fifties are a crucial period to continue to build up your retirement savings. This is especially true if you didn’t get to save as much when you were younger due to lower earnings, recessions, caring for children, or other roadblocks. While you may be facing new difficulties, you still must prioritize retirement savings. The good news is that there are many tax-advantaged savings strategies you can leverage once you reach age 50 or 55 to start catching up to where your retirement contributions should be. Here are some smart money moves you can make when you turn 50:
Most standard retirement plans have a catch-up contribution that kicks in once you turn 50. These catch-up caps are separate of the indexed annual cap on your retirement contributions:
For example, if you have a 401(k) at work, the cap for 2020 is $19,500 so your total annual contribution can be as high as $26,000 if you are 50 or older. If you have an employer match, you should take advantage of this cap and additional catch-up contribution to maximize your savings as employer matches are the closest you can get to free money.
Medical expenses are a cold hard reality at any age, but especially once retirement approaches. HSAs are tax-advantaged savings plans where the funds grow tax-free, and distributions are also tax-free provided that you had medical bills.
You must be enrolled in a high-deductible health plan, and Medicare enrollees aren’t allowed, so you need to take advantage of this strategy while you are still enrolled in a health plan. For self-only coverage, the minimum deductible is $1,400 and maximum is $6,900 for 2020 ($2,800 and $13,800 respectively for family coverage).
Your contribution limit can vary based on the type of health coverage you have, your age, when you became eligible, and when you’re no longer eligible. Assuming your coverage is consistent, you can contribute up to $3,550 to an HSA if you have self-only coverage ($7,100 for family).
HSAs often function as supplementary retirement assets because you don’t pay any tax on distributions made after you turn 65, or you become permanently and totally disabled. They are frequently overlooked, but you should contribute to an HSA so long as you have a qualified health plan.
The need for care is going to be a reality for millions of Americans who may not have much family to help them out in retirement age or don’t want to burden their loved ones. Keep in mind that 70% of Americans over 65 end up needing long-term care. If you don’t already have long-term care insurance, you need to start comparing rates now. Some policies are even bundled with life insurance, or act as a hybrid of the two insurances, if you want to ensure that your loved ones will be cared for if anything happens to you sooner.
If you are self-employed, you can deduct your long-term care insurance premiums. Some states also offer tax benefits regardless of employment, such as New York, Idaho, and Indiana. For federal tax purposes, you can deduct long-term care insurance premiums as a medical expense exceeding 10% of your adjusted gross income, although the 2018 tax reform has vastly reduced the number of taxpayers who itemize.
Entering your fifties can feel like a pivotal transition. No matter how much saving and preparing you were able to do earlier in your life, there is still plenty of time (and you have many options) for “catching up” or continuing to improve your financial position for the long-term. If you are looking for a trusted advisor to help you navigate financials, please don’t hesitate to contact Cray Kaiser.
Please note that this blog is based on tax laws effective in March 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
In this audio blog, CK Principal Karen Snodgrass walks us through the complexities of Illinois taxes. If you live and/or own a business in Illinois, you know that taxes have continued to rise. To put it simply, it’s a tough time to be a resident. That’s why many individuals and companies are looking for ways to move out of state and reduce their tax burden.
But is it as simple as moving out of Illinois? Unfortunately, it’s not. There are many steps required to establish domicile in a new state, and even then, Illinois will look for ways to keep taxing you. So, if you’re one of many residents considering a move out of Illinois, listen to the audio blog below to learn more about what that entails:
If you have questions about your tax situation, please don’t hesitate to contact Cray Kaiser today.
You likely already know that the tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This limit is meant to keep individuals from using gifts to avoid the estate tax that is imposed upon inherited assets. It can be a significant issue for family-owned businesses when the business owner dies, and the business has to be sold to pay the resulting inheritance (estate) taxes. This is, in large part, why high-net-worth individuals invest in estate planning.
Current tax law provides both an annual gift-tax exemption and a lifetime unified exemption for the gift and estate taxes. Because the lifetime exemption is unified, gifts that exceed the annual gift-tax exemption reduce the amount that the giver can later exclude for estate-tax purposes.
This inflation-adjusted exemption is $15,000 for 2020. Thus, an individual can give $15,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift-tax exclusion of up to $155,000 in 2020.
For example, Jack has four adult children. In 2020, he can give each child $15,000 ($60,000 total) without reducing his lifetime unified exemption or having to file a gift tax return. Jack’s spouse can also give $15,000 to each child without reducing either spouse’s lifetime unified exemption. If each child is married, then Jack and his wife can each also give $15,000 to each of the children’s spouses (raising the total to $60,000 given to each couple) without reducing their lifetime unified tax exemptions. The gift recipients are not required to report the gifts as taxable income and do not even have to declare that they received the gifts on their income tax returns.
If any individual gift exceeds the annual gift-tax exemption, the giver must file a Form 709 Gift Tax Return. However, the giver pays no tax until the total amount of gifts in excess of the annual exemption exceeds the amount of the lifetime unified exemption. The government uses Form 709 to keep track of how much of the lifetime unified exemption that an individual has used prior to that person’s death. If the individual exceeds the lifetime unified exemption, then the excess is taxed at the current rate of 40%.
The gift and estate taxes have been the subject of considerable political bickering over the past few years, particularly the asset value at which estate tax should apply. In 2020, the lifetime unified exemption is $11.58 million per person. By comparison, in 2017 (prior to the recent tax reform), the lifetime unified exemption was $5.49 million.
This history is important because the exemptions can change significantly at Congress’s whim. For this reason, individuals have been hesitant to make large gifts as there was concern that the gifts could be “clawed back” into their estate if the estate tax limits were reduced in the future. However, the IRS recently came out with guidance to alleviate these concerns and provide a significant planning opportunity for donors. According to the IRS, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”
For example, a wealthy donor may be hesitant to gift $10 million, although that amount gifted would be under their lifetime exemption and thus not taxable. The concern is that a new administration would only allow for a $5 million estate tax; meaning half of the gift would remain in his estate. Under new IRS guidance, no matter when the person dies the full amount would remain exempt, even if the exclusion is reduced in the future.
With the additional clarification of the lifetime gift exclusion availability for future estates, wealthy donors should strongly consider ensuring that their gifting strategy maximizes future tax benefits.
All donors, wealthy or not, should be cognizant of other gift tax exclusions such as certain gifts of medical expenses and tuition. When planned for correctly, these gifts are nonreportable and do not count against an annual or lifetime exclusion.
Cray Kaiser is here to help you understand the complexities of gift tax and estate tax. Please contact us at 630-953-4900 if you’d like to discuss your personal gifting strategy.
The CK team gets many calls about crowdfunding and the taxability around the money raised. We recently shared a blog about the basics of crowdfunding, specifically for nonprofits, but wanted to elaborate a little more about the tax implications and tax consequences of crowdfunding.
Many crowdfunding platforms such as GoFundMe, Kickstarter and Indiegogo have fees ranging from 5% to 9%. Each platform specifies its own charges, limitations, and withdrawal processes. And in addition to those fees, funds raised may be taxable, depending on the purpose of the campaign. Here’s how each type of crowdfunding goal is taxed:
When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.
On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual. In that case, the contributor is required to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.
A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; thus, if the amount is over $15,000, the fundraiser is required to file a gift tax return and reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.
Gifts to specific individuals, regardless of the need, are not considered a charitable contribution under tax law (i.e. raising funds to help pay for someone’s funeral expenses). Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.
Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:
Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.
When raising money for business projects, two issues must be contended with: 1) the taxability of the money raised and 2) the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.
Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (i.e. credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. It all depends on if the third party follows the de minimis rule.
If you have questions about crowdfunding-related tax issues, please contact Cray Kaiser today.
Beginning January 1, 2020, Illinois has a new Minimum Wage Credit. Below is key information on the credit and you can click here to read full details.
Employers with 50 or less full-time equivalent employees and that have employees that had been earning less than the required minimum wage but are now being paid the required minimum wage.
The Minimum Wage Credit will be allowed against the Illinois withholding tax liability of employers.
The maximum credit is 25% and will decrease each year in the future. As Cray Kaiser knows more about the credit in the future, we’ll keep you informed.
It’s important to make sure your HR is tracking employees’ pay to determine each person’s eligibility. Alternatively, if you are using an outside payroll provider, inquire as to whether they will track this for you.
For more information on the Minimum Wage Credit, please click here. If you have any questions about this credit, please don’t hesitate to contact Cray Kaiser today.
Please note that this blog is based on tax laws effective in January 2020 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Which employer-offered benefits are you taking advantage of? Do you know all of the benefits available to you? Not only do many employer-offered benefits provide impactful resources to you and your family, but some save you significant money and taxes. Below is a list of benefits that your employer may offer and the tax benefits of each. If you’re unsure of what is available to you, we recommend asking your employer for more information.
For a company that has 50 or more employees, the Affordable Care Act (Obamacare) requires the business to offer at least 95% of its full-time employees and their dependents (but not spouse) with affordable minimum essential health care coverage or be subject to a penalty. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the costs of health insurance coverage have risen dramatically over the last few years.
The tax-free benefit of what the employer covers is valuable. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage.
Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions of up to $19,500 for 2020. And if the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,500, bringing the total to $26,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.
Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee, and the employer can deduct the cost. For 2020, the limit on tax-free employer reimbursements is $270 per month each for qualified parking, transit passes, and commuter transportation.
This is a special account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. The FSA account can be used to pay for health plan deductibles, co-payments, and even some over-the-counter-medications with pre-tax dollars. The annual limit on contributions is inflation adjusted and is $2,750 for 2020. However, if you don’t use the money in your FSA, you’ll lose it.
The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it.
An employee doesn’t have to include in his or her income amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational assistance that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.
An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the expenses are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee actually has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,300 for 2020 per child, for both non-special needs and special needs adoptions. The exclusion is phased out when the employee’s modified adjusted gross income is between $214,520 and $254,520 for 2020. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion, but any excludable employer-paid expenses can’t be used for the credit.
Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers, but no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.
Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2020, can be up to $7,100 for families and $3,550 for a single individual. When distributions are made for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.
If you have any questions about how employer-offered benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact Cray Kaiser.
