Tax Planning for Investments Gets More Complicated

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For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year-end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary income tax rate.

Old rules

For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

New rules

The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:

Singles:

  • 0%: $0 – $38,600
  • 15%: $38,601 – $425,800
  • 20%: $425,801 and up

Heads of households:

  • 0%: $0 – $51,700
  • 15%: $51,701 – $452,400
  • 20%: $452,401 and up

Married couples filing jointly:

  • 0%: $0 – $77,200
  • 15%: $77,201 – $479,000
  • 20%: $479,001 and up

For 2018, the top ordinary income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

More thresholds, more complexity

With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us.

© 2018

Supervisors Promoted From Within Call for Special Care

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When a supervisory position opens up, your immediate reaction as an employer may be to post a job opening to the general public. But don’t underestimate the value, efficiency and cost savings of an internal hire from your non-manager ranks.

Although promoting from within isn’t always feasible, when it is, you’ll likely be boosting that employee’s loyalty, eliminating (or greatly shortening) the onboarding process, and saving dollars on hiring costs. But, if you take this step, be prepared. These new supervisors typically need special care to avoid rocky transitions.

Cover the basics

Don’t make the mistake of promoting an employee to supervisor and then immediately moving on to other priorities. Most newly minted supervisors, no matter how strongly they performed in previous positions, will need some training and mentoring to grow into their new roles.

What specifically might they need? First, reflect upon your own experience for some ideas. If you had a smooth transition to a supervisory role, what made that possible? If it was a bumpy road, what would have made it smoother? Basic subjects that should be part of a supervisor boot camp include:

• Employee goal-setting

• Performance assessment

• Performance management

• Conflict resolution
Also, leadership training will be needed to supplement the nuts-and-bolts topics.

Assign a mentor

In devising a training program, you can’t anticipate every stumbling block a new supervisor will face. So, it’s important to give that person a mentor who, ideally, has made the same transition.

Putting some structure around the mentoring program at first — such as a scheduled weekly check-in session — can give rise to important discussions that might not otherwise take place. These check-ins don’t need to go on forever; three to six months may be all it takes.

Prepare for the worst

Unless the new supervisor will be moving to another department, prepare him or her for the challenges associated with becoming the boss of former co-workers. Just to name a few:

• Resentment from employees who believe they should have gotten the promotion instead of the person you chose,• Efforts by former co-workers to exploit friendship with their new boss by asking for or expecting special treatment, and• Difficulties the new supervisor may have in delivering honest but critical performance appraisals to former co-workers.
It will be tempting for new supervisors to downplay their authority over former co-workers. But they need to understand going in that there’s no getting around the fundamental change in the relationship. That change will probably require a cutback in purely social interaction with their former co-workers.

Give it a shot

The good news is that, if you have chosen wisely, a new supervisor will be able to surmount these hurdles. And the potential benefits can be striking. Our firm can provide more information and other budget-smart hiring ideas.

© 2018

Behavioral Job Interviews Offer a Glimpse of What Could Be

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Once an employer identifies a prospect for an open position and sets up an interview, another great challenge arises: How do you effectively use the interview to determine whether this person is right for your organization?

One way is behavioral interviewing — a technique in which you frame your questions to candidates to elicit real-world stories from previous work experience. The answers your interviewees give can offer a glimpse of what could be.

Examples to consider

It’s important to structure your questions so that the candidate can’t reply with only a “yes” or “no” answer. In some cases, your “questions” might not literally be questions.

For example, if you’re looking for a customer service rep, you could say, “Tell me about a time you’ve had to handle a dissatisfied customer.” Look for detailed responses that appear honest and heartfelt.

Or let’s say the open position is for a manager or executive. You might ask something along the lines of, “Talk about a situation in which you were asked to do something or tackle a strategic objective that tested your personal values. How did you react? What was the ultimate result?” Listen for how the candidate describes his or her value system and what steps he or she took to resolve the situation.

Best practices

When coming up with behavioral interview questions, begin with the job description. (If it hasn’t been updated in a while, you may want to do that first.) Be sure the queries you come up with are relevant to the duties and skills listed in the description, as well as the challenges the candidate will face if hired and the culture of your organization. To keep the interview from going too long, devise, say, three to five questions that will offer the most insight.

Instruct your managers to use identical language and present the questions in the same order to interviewees. Consistency is key when trying to weigh applicants’ responses against one another.

More revealing

Behavioral interviews may take a little more preparation than a more ad hoc, impromptu approach. But many employers believe these types of questions reveal much more about how an employee will perform when on the job. Our firm can provide more information and ideas.

© 2018

Six Ways to Run a Better Meeting

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There are few more self-destructive acts for an employer than to waste its employees’ time. You not only squander productivity but also hurt morale. Among the most common culprits of wasted time are bad meetings. A sloppily managed one can leave employees grumbling and frustrated for hours, even days, afterward. Here are six ways to run a better meeting:

1. Start on time. Beginning promptly shows you respect people’s time and encourages punctuality as an aspect of your organizational culture. Train and encourage meeting leaders to adhere to firm start times. Managers should address chronic latecomers verbally first (but after the meeting), and in writing later if necessary.

2. Lead with something positive. Poorly run meetings can quickly devolve into unproductive gripe sessions. Set the tone for a more constructive discussion of your agenda items by leading off with some good news highlighting an organizational or individual accomplishment.

3. Clear the air. After a positive start, if there’s an “elephant in the room,” confront it. Examples include a sudden staff change, bad sales report or unflattering story in the media. Say whatever needs to be said to acknowledge it and, if appropriate, discuss it. Then move on to a more constructive topic.

4. Deploy multiple voices. Depending on the agenda and meeting length, it’s usually a good idea to ask more than one team member to address a topic and lead a discussion. This will give the meeting more of a dynamic feel — lessening the likelihood that attendees will tune out a single voice. It also eases the burden on one person to run the whole show.

5. Follow a “no rehash” rule. Every topic should be thoroughly discussed. But backtracking to previous agenda items can turn meetings into a chaotic, confusing and laborious mess. Establish and enforce a clearly stated policy that, once the meeting has moved forward, previous discussions cannot be restarted.

6. Conclude optimistically with actionable tasks. Just as you started positively, also try to end the meeting on an upbeat, motivational note. Not every agenda item will require follow-up action, but many will. Identify those that do call for action and assign clear tasks to the appropriate attendees. Otherwise, dismiss everyone with a renewed sense of urgency to work on the items discussed. Contact us for more ideas on how to better accomplish your strategic objectives.

© 2018

Family Limited Partnerships & Succession Planning

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One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.
A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.

How it works

To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children.

You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.

Tax benefits

As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.

Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.

The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2018 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.

To transfer interests in excess of the annual exclusion, you can apply your lifetime gift tax exemption. And 2018 may be a particularly good year to do so, because the Tax Cuts and Jobs Act raised it to a record-high $11.18 million. The exemption is scheduled to be indexed for inflation through 2025 and then drop back down to an inflation-adjusted $5 million in 2026. While Congress could extend the higher exemption, using as much of it as possible now may be tax-smart.

There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.

FLP risks

Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.

The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-reduction strategy.

Right for you?

An FLP can be an effective succession and estate planning tool, but it isn’t risk free. Please contact us for help determining whether an FLP is right for you.

© 2018

401(k) Hardship Withdrawals

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Many employers sponsor 401(k) plans to help employees save for retirement, but sometimes those employees need access to plan funds well before they retire. In such cases, if the plan allows it, participants can make a hardship withdrawal.

If your organization sponsors a 401(k) with this option, you should know that there are important changes on the way next year.

What will be different

Right now, 401(k) hardship withdrawals are limited to only funds an employee has contributed, and the employee must first take out a plan loan from the account. The employee also cannot participate in the plan for six months after a hardship withdrawal.

However, important changes take effect in 2019 under the Bipartisan Budget Act of 2018 (BBA). First, employees’ withdrawal limits will include not only their own contributed amounts, but also accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

In addition, the BBA eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This means employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And, for you, the plan sponsor, it means no longer having to re-enroll employees in the 401(k) after the six-month hiatus.

What remains the same

Some things haven’t changed. Hardship withdrawals are still subject to a 10% tax penalty, along with regular income tax. This combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have to, so as to wind up with the same net amount.

The BBA also didn’t change the reasons for which hardship withdrawals can be made. According to the IRS, such a withdrawal “must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” This can include the need of an employee’s spouse or dependent, as well as that of a nonspouse, nondependent beneficiary.

The agency has said that the meaning of “immediate and heavy” depends on the facts of the situation and assumes the employee doesn’t have any other way to meet the need.

Examples offered by the IRS include:

  • Qualified medical expenses
  • Tuition and related educational fees and expenses
  • Burial or funeral expenses

The agency has also cited costs related to a principal residence as usually qualifying. These include expenses related to the purchase of a principal residence, its repair after significant damage, and costs necessary to prevent eviction or foreclosure.

Further guidance

If your organization sponsors a 401(k) plan that permits hardship withdrawals, be sure to read up on all the details related to the BBA’s changes. Our firm can provide more information and further guidance.

© 2018