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Presentation and slides from 2013 Global Relocation Conference by Quentin Hormel.
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WITHHOLDING / GROSS-UP / COST CONTAINMENT
OPPORTUNITIES
Presented by Quentin Hormel, CRP
WITHHOLDING / GROSS-UP / COST CONTAINMENT
OPPORTUNITIES
1.Transferee Communication
2.Common Gross-up Analysis Mistakes
3.Gross-up Decisions
TRANSFEREE COMMUNICATION
1. Watch withholdings – adjust W-4 if necessary.2. Complete new work state W-4 and give to payroll as
soon as working in new state.3. Local income tax?4. Greater chance for underwithholding penalties the
year after the move. Safe harbor rules:• owe less than $1,000.• pay 90% of tax liability during year.• pay 100% of previous year’s tax liability in
withholdings and estimated payments during year (if previous year’s AGI exceeds $150,000 / $75,000 if MFS, then 110%).
• previous year’s tax liability is $0 and tax year was twelve months.
SAFE HARBOR RULE EXAMPLE
Year Before Move: SNG, $100,000 AGI, $15,000 tax liability
Year of Move: $105,000 + $40,000 taxable relo = $145,000 AGI, ($24,000 - $4,000 y/e adj. = $20,000 w/h), $25,000 tax liability (owe $5,000 at tax time):
1. $5,000 > $1,000 (fail)
2. $20,000 / $25,000 = 80% (fail)
3. $20,000 > $15,000 (pass)
Year After Move: $110,000 AGI, $14,000 w/h, $16,000 tax liability (owe $2,000 at tax time):
1. $2,000 > $1,000 (fail)
2. $14,000 / $16,000 = 87.5% (fail)
3. $14,000 < $25,000 (fail)
TRANSFEREE COMMUNICATION
5. Warn transferees if running a year-end delta with negative adjustments.
6. Tell transferees to save receipts for transit costs and final move expenses that aren’t reimbursed. Might be able to take deduction on the 3903, even if given lump sum to cover such costs.
7. Transferees can take deduction for transit costs and final move expenses that aren’t reimbursed regardless if they are non-itemizers.
8. Form 3903 required if W-2 Box 12-P has dollar amount.
9. Transferees should not take double deduction for transit costs and final move expenses appearing on the W-2 Box 12-P.
3903 EXAMPLE
$10,000 van line – reimbursed directly to vendor$1,000 FM airfare – reimbursed to employee (W-2 box 12-P)$100 tip to movers – not reimbursed
TRANSFEREE COMMUNICATION
10.Alert transferees to year-end cutoff date for submitting expenses.
11.Deductible final move expenses are available for those that live in both the old home and new home, including those in college and excluding tenants and employees.
12.The balance of non-amortized points on a refinanced loan can be taken as deduction.
13.Warn of late-year deductibles – extra dollars saved this year might go back to IRS next year.
LATE-YEAR DEDUCTIBLE EXAMPLE
• 11/30/13 Expense cutoff• 12/15/13 Close on home, $6,000 points• Won’t show on W-2 this year but
company reimburses employee• This year’s tax return: $6,000 deduction
- $2,000 tax savings• Next year’s tax return: $6,000 included
in taxable earnings on W-2, no Federal withholding to cover the taxes, no deduction available – will pay $2,000 more in taxes
COMMON MISTAKES WHEN ANALYZING
GROSS-UPS
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.
INCORRECT 3903 EXAMPLE
If the number in Box 12-P is not carried to line 4 of the 3903:
COMMON MISTAKES WHEN ANALYZING
GROSS-UPS
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.
RECAPTURING EXCESS FICA EXAMPLE
If the individual worked only for one company:$160,000 earnings, FICA w/h = $113,700 x 6.2% = $7,049.40If the individual worked for two companies during the year:1/1-6/30: $80,000 earnings, FICA w/h = $80k x 6.2% = $4,9607/1-12/31: $80,000 earnings, FICA w/h = $80k x 6.2% = $4,960Excess is deducted on line 69 of 1040:FICA paid ($4,960 + $4,960) – Max ($7,049.40) = $2,870.60
GROSS-UP OPTIONS
1. Use flat tax rate vs. using tax tables.2. Gross up for to-state vs. from state
vs. both states.3. Gross up for Soc. Sec. tax.4. Gross up for Medicare tax. 5. Gross up for Local tax.6. Gross up for any loss of the child tax
credit. (Recommendation: do not gross up at year-end)
CHILD TAX CREDIT EXAMPLE #1
Transferee has $100,000 salary, 2 children under 17, taxable relo of $40,000:• Without move, estimate $2,000 credit• With move, only getting $500 credit• If grossing up, then $1,500 + $800 gross-up =
$2,300
If spousal/outside income was $50,000:• Without move, $150,000 AGI = no credit
If policy set to gross up, then company provided $2,300 more in gross-up than what was deserved.
CHILD TAX CREDIT EXAMPLE #2
Transferee has $70,000 salary, 2 children under 17, taxable relo of $40,000:• Without move, estimate $2,000 credit• With move, estimate $2,000 credit• $0 of additional gross-up
If spousal/outside income was $50,000:• Without move, $120,000 AGI = $1,500 credit• With move, $160,000 AGI = $0 credit
If policy set to gross up, then company provided $1,500 + too little in gross-up.
GROSS-UP OPTIONS
7. Include FICA gross-up in the Federal gross-up calculation. (circular logic)
8. Gross up for any loss of itemized deductions/exemptions.
9. Annualized salaries vs. YTD earnings for Federal wages. (Recommendation: use YTD earnings for college new hires and use annualized salaries for experienced new hires)
COLLEGE NEW HIRE EXAMPLE
New hire, single, no previous earnings during year, annual salary of $60,000, hired on 11/1:
• Using annualized salary ($60,000), Federal gross-up will be calculated at 25%.
• Using YTD earnings, Federal gross-up will be based on $10,000 of AGI with gross-up calculated at 10%.
In reality, $10,000 is closer to actual AGI and 10% rate would give the better calculation.
EXPERIENCED NEW HIRE EXAMPLE
New hire, single, $50,000 in previous earnings during year (1/1-10/31), annual salary of $60,000 with new company, hired on 11/1:
• Using annualized salary ($60,000), Federal gross-up will be calculated at 25%.
• Using YTD earnings, Federal gross-up will be based on $10,000 of AGI with gross-up calculated at 10%.
In reality, $60,000 is closer to actual AGI and 25% rate would give the better calculation.
GROSS-UP OPTIONS
10. Use sales tax deduction tables. 11. Gross up for unqualified moves.12. Use itemized deduction tables vs.
flat percentage.13. Look at homeowners vs. renters.
(itemizers vs. non-itemizers) (Recommendation: break out homeowners from renters)
HOMEOWNER VS. RENTER EXAMPLE
If using standard deduction for all:
Transferee has $100,000 salary, single:
• Deduction would be $6,100 (+$3,900 exemption) – taxable income is $90,000 – tax bracket is 28%.
• If actually a homeowner (itemizer), the average deduction is about $20,000 (+$3,900 exemption) – taxable income is $76,100 – tax bracket is 25%.
Will likely over gross up many, especially homeowners (itemizers).
HOMEOWNER VS. RENTER EXAMPLE
If using itemized deduction estimate for all:
Transferee has $100,000 salary, single:
• The average deduction is about $20,000 (+$3,900 exemption) – taxable income is $76,100 – tax bracket is 25%.
• If actually a renter (non-itemizer), the standard deduction is $6,100 (+$3,900 exemption) – taxable income is $90,000 – tax bracket is 28%.
Will likely under gross up many, especially renters (non-itemizers).
GROSS-UP OPTIONS
14. Gross up for MEA.15. Gross up for loss on sales.16. Gross up for COLA or MIDA.17. Gross up for home sale bonus.18. Follow a third party home sale
program. (Recommendation: yes! – big savings on gross-ups)
19. Gross up for any taxable expense. (The average gross-up is 58-60% of expense amount)
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