27 Feb CPA Client Bulletin Select February 2018
Solving the Annuity Puzzle
Deducting Employee Business Expenses
Insuring Key People at Small Companies
Factoid: Annuity Sales
Annuity sales in the first half of 2017 topped $100 billion.
Did You Know ?
The average total cost at private, nonprofit four-year institutions reached $46,950 in the 2017–2018 school year, up from $45,370 a year ago. Those are the published charges for tuition, fees, room, and board. For in-state students living on campus at public universities, comparable average costs this year are $20,770.
Source: The College Board
Article: Solving the Annuity Puzzle
Americans hold billions of dollars in annuities, yet they are widely misunderstood. Used properly, an annuity can serve valuable purposes in personal financial planning. On the other hand, some types of annuities are widely criticized, even scorned, by some financial advisers.
What might be considered the purest type of annuity is a contract with an issuer, often an insurance company, for a stream of cash flow. Such contracts have been called immediate annuities, although they now may be labeled income annuities or payout annuities because those labels may be more appealing to consumers.
Example 1: Marie Jenkins pays $100,000 to an insurer for an income annuity. Every month thereafter the company sends Marie a check. annuities guarantee certain withdrawal amounts. Annuity withdrawals may be fully taxable, and a 10% penalty also may apply before age 59½.
Critics charge that some annuities, especially deferred annuities, can be complex, illiquid, and burdened with high fees. Read the fine print of any annuity before making a commitment.
Taxation of Annuity Payouts
- Periodic annuity payments are amounts paid at regular intervals—weekly, monthly, or yearly—for a period of time greater than one year.
- Between the simplified and general methods of computing income tax on such payments, you must use the general method if your annuity is paid under a nonqualified plan, rather than under a qualified plan such as a 401(k) or an IRA.
- With the general method, you determine the tax-free part of each annuity payment based on the ratio of the cost of the contract to the total expected return.
- The expected return is the total amount you and other eligible recipients can expect to receive under the contract, as per life expectancy tables from the IRS.
- Our office can help you make the required calculation.
Article: Deducting Employee Business Expenses
If you work for a business, you might incur certain expenses that are related to your job. In some cases, those expenses can be substantial. As of this writing, in late 2017, Congress is considering legislation that would eliminate miscellaneous itemized deductions, but it appears that they will be available on 2017 returns. That said, you may be able to deduct such expenses incurred last year when you file your 2017 federal income tax return.
The process of claiming this deduction for employee business expenses might not be simple. You must go through several steps, and you’ll need relevant records to substantiate the deduction if you’re challenged by the IRS.
The broad look
In general terms, here is an explanation of how to arrive at an employee business expense deduction. First, you need to see how much you have spent on items that are ordinary and necessary for your role at work. These must be outlays that were not reimbursed in some manner. Therefore, the amounts you hope to deduct must be your actual out-of-pocket costs.
Once you calculate this number, it is incorporated as a miscellaneous itemized deduction on Schedule A of your tax return. If you take the standard deduction instead of itemizing on Schedule A, you can’t deduct your employee business expenses.
Other costs also go into the category of miscellaneous deductions. They might include tax preparation and investment fees. Once you have a total of miscellaneous items, that amount is deductible on Schedule A to the extent it exceeds 2% of adjusted gross income (AGI).
Example: Al and Bonnie Carson are both employees at different companies. Al has no unreimbursed employee expenses, but Bonnie had $2,500 of such costs in 2017. Together, the Carsons’ miscellaneous items total $4,100 for last year.
On their 2017 joint tax return, the Carsons report AGI of $110,500. In this example, 2% of AGI is $2,210. Subtracting $2,210 from $4,100 leaves $1,890, the amount of miscellaneous deductions they can claim on Schedule A.