Employee Expenses and Deferred Compensation

1
Chapter 9

• Employee Expenses and Deferred Compensation

2
Deferred Compensation

• Qualified pension and profit-sharing plans
• Qualification requirements for a qualified plan
• Tax treatment to employees and employers
• Non qualified plans
• Employee stock options
• Plans for Self-employed individuals

3
Individual Retirement Accounts (IRAs)

• Traditional IRA
• Fully deductible IRA contributions (lesser of
  4,000 or earned income) are available only to
  two groups of taxpayers
• Taxpayers who are not active participants in a
  qualified employer retirement plan
• Taxpayers who are active, but their AGI is
  50,000 or less (single) or 75,000 or less
  (married filing jointly) for 2006

4
Traditional IRA

• Partial deductions are available to active
  participants with AGI less than 60,000 (single)
  or 85,000 (married/filing jointly) deduction is
  phased out ratably over the 10,000 AGI range,
  respectively
• A working spouse may deduct up to 4,000 for
  themselves and 4,000 for the non-working spouse
  

5
Roth IRA

• Referred to as Back Loaded IRA
• Nondeductible
• Maximum contribution is 4,000
• If qualify for both Traditional and Roth maximum
  contribution for both is 4,000
• Subject to AGI phase-out limitations
• 95,000 110,000 for Single
• 150,000 160,000 for MFJ

6
Roth IRA

• Special ordering rules for withdrawals
• Rollover funds from an existing deductible IRA
  into Roth IRA
• Not subject to 10 penalty
• If the rollover was made before January 1, 1999,
  amounts included in gross income would be spread
  over 4 years

7
Roth IRA

• Roth IRAs must be established by the due date of
  the tax return
• Contributions are never deductible
• Contributions are subject to special modified AGI
  Limitations
• Contributions can be made after the owner has
  reached age 701/2
• No distributions are required at any age
• Withdrawals from Roth are not taxable if
  withdrawals are qualified withdrawals.

8
Education IRACoverdell Education savings Account

• Nondeductible contribution
• Maximum contribution 2,000 year until the age
  of 18
• Elementary, Secondary and higher education
  expenses
• Distributions are excluded from gross income if
  they do not exceed qualified education expenses

9
Simplified Employee Pensions

• Immediate deductions for employer
• Annual deduction for each participant is limited
  to the lesser of 25 of the participant
  compensation (up to ceiling of 220,000)
• Treated as being made on last day of year if made
  by the due date of return
• Employer contributions must be nondiscriminatory
• Distributions from SEP are subject to taxation
  based on IRA rules
• A self-employed person may establish a SEP rather
  than a H.R. 10 Plan

10
Simple Retirement Plans

• Savings incentive match plan for employees
• For employers with lt 100 employees who received
  at least 5,000 in compensation
• Elective contributions up to 10,000 per year and
  requires employer to make matching contributions

11
Tax Planning Considerations

• Traditional vs. Roth IRA
• Rollover from Traditional to Roth
• Considerations include marginal tax rate, age of
  taxpayer and payment of taxes from rollover from
  post-tax funds

12
Compliance And Procedural Considerations

• Reports for qualified retirement plans are
  required to be filed with the IRS and, sometimes,
  with the Dept. of Labor.