A quick look at the President-elect’s tax plan for businesses
The election of Donald Trump as President of the United States could result in major tax law changes in 2017.
News & Tech Tips
CLIENT ALERT: Overtime Rule Changes Go Into Effect December 1, 2016
Employers have just a few weeks left to prepare for the changes that The United States Department of Labor (DOL) issued in May.
The DOL issued the final update to its proposed “Overtime Rule” which was a revision to the Fair Labor Standards Act.
The salary threshold for white collar exemptions will be increased to $47,476 from the current threshold of $23,660, effective December 1, 2016, affecting 4.2 million U.S. workers.
Key Overtime Rule Changes:
- Full-time salaried workers earning less than $47,476 annually will be eligible for overtime pay (previous threshold was $23,660).
- The Highly Compensated Employee (HCE) annual compensation threshold will be increased to $134,004 from $100,000 for full-time salaried workers.
- Bonuses, commissions and incentive pay for non-HCE employees may be counted toward 10% of the threshold if paid at least quarterly.
- The overtime salary threshold will be updated every three years based on wage growth, to be posted by DOL 150 days before effective date.
- Duties test for white collar salaried workers will remain unchanged.
The DOL is proposing the following ways for businesses to comply with these changes:
- Pay salaried employees earning less than $47,476 annually time-and-a-half for overtime work.
- Raise workers’ salaries above the new $47,476 annual threshold.
- Limit hours worked for salaried employees earning less than the threshold to 40 hours per week.
According to the DOL, this exemption threshold has not been updated since 2004 and was due to be revised as “President Obama directed the Secretary of Labor to update the FLSA’s overtime pay protections and to simplify the overtime rules for employers and workers alike.”
For more details on this update rule, check out the DOL’s Overview and Summary and Small Business Guide.
We hope this information has been helpful to you. If you have questions about how the proposed overtime rule affects your business, please contact your Whalen & Company representative.
There’s still time to set up a retirement plan for 2016
Saving for retirement can be tough if you’re putting most of your money and time into operating a small business
It’s critical to be aware of the tax rules surrounding these plans
Nonqualified deferred compensation (NQDC) plans pay executives at some time in the future for services to be currently performed
Beware…of income-based tax limits
Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.
Income thresholds
If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.
Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phase-out reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).
The limits in action
These AGI-based limits can be very costly to high-income taxpayers. Consider this example:
Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.
The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).
These two AGI-based provisions combined could increase the couple’s tax by $17,805!
Year-end tips
If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.
For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.
© 2016 Thomson Reuters