A job loss is bad but the tax implications could make it worse
Unemployment has been holding steady recently at 3.7%. But there are still some people losing their jobs — particularly in certain industries including technology and media. If you’re laid off or terminated from employment, taxes are likely the last thing on your mind. However, there are tax implications due to your altered employment circumstances.
Depending on your situation, the tax aspects can be complex and require you to make decisions that may affect your tax bill for this year and for years to come. Be aware of these three areas.
1.Unemployment and payments from your former employer
Many people are surprised to find out that federal unemployment compensation is taxable. (Some states exempt unemployment comp from state tax.) In addition, payments from a former employer for any accumulated vacation or sick time are taxable. Although severance pay is also taxable and subject to federal income tax withholding, some elements of a severance package may get special treatment. For example:
- If you sell stock acquired by way of an incentive stock option (ISO), part or all of your gain may be taxed at lower long-term capital gain rates rather than at ordinary income tax rates, depending on whether you meet a special dual holding period.
- If you received — or will receive — what’s commonly referred to as a “golden parachute payment,” you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under very complex rules, along with the excess parachute payment also being subject to ordinary income tax.
- The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.
2.Health insurance costs
Under the COBRA rules, employers that offer group health coverage generally must provide continuation coverage to most terminated employees and their families. While the cost of COBRA coverage is usually expensive, the amount of any premium you pay for insurance that covers medical care is an eligible medical expense for tax purposes. That means it’s deductible if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income.
If your former employer pays some of your medical coverage for a period of time after termination, you won’t be taxed on the value of the benefit.
3.Retirement plan balance
Employees whose employment is terminated may need tax planning help to determine the best option for amounts they’ve accumulated in retirement plans sponsored by former employers, such as a 401(k) plan. In many cases, a direct, tax-free rollover to an IRA is the best move. You may also choose to leave the account in your previous employer’s 401(k) plan (although the employer may elect to distribute the funds to you). Or, if you get a new job, you may want to transfer the money in the account with your former employer to your new employer’s 401(k) plan.
If you’re under age 59½, and make withdrawals from your former company’s plan or IRA to supplement missing income, you may owe an additional 10% penalty tax unless you qualify for an exception.
If a distribution from the retirement plan includes employer securities in a lump sum, the distribution is taxed under the lump-sum rules, except that “net unrealized appreciation” in the value of the stock isn’t taxed until the securities are sold or otherwise disposed of in a later transaction.
Further, any loans you’ve taken out from your former employer’s retirement plan, such as a 401(k)-plan loan, may be required to be repaid immediately, or within a specified period. If they aren’t, they may be treated as if the loan is in default. If the balance of the loan isn’t repaid within the required period, it will typically be treated as a taxable deemed distribution.
If you need assistance, contact us. We can help you navigate the best path forward during this transition period.
© 2024
Empower your sellers with sales enablement
The driving revenue force of just about every kind of business is sales. But all too often, once a sales team is up and running, it’s left to its own devices to maintain its strengths, develop new skills and upgrade its technology. This can produce mixed results — some sales departments are remarkably self-sufficient while others could really use more organizational support.
To remove the guesswork, many of today’s businesses are investing in sales enablement. This is an enterprise-wide, collaborative and continuous approach to empowering the sales department to do its best work.
Pillars of the concept
Wait a minute, you might say, isn’t sales enablement just another name for sales training? No, not entirely.
Training is certainly a part of the equation. A sales enablement program will involve ongoing training on the latest sales techniques, changes in the marketplace, the company’s latest products or services, and so forth. But this training doesn’t occur haphazardly — it’s regularly scheduled and typically segmented into easily digestible learning modules, generally a more effective approach than overloading sales reps with info on a sales retreat or in sporadic seminars.
There are several other pillars of sales enablement as well. One is content. Under their programs, many companies build a library of materials that features items such as:
- Books and articles on best practices,
- Customer testimonials,
- Product “spec sheets,” slide decks and demos, and
- Reports and spreadsheets with the latest competitive intelligence.
Another key feature of a sales enablement program is coaching. This may involve engaging outside consultants to provide coaching services to sales reps or developing internal mentoring or partnering.
Technology is also central to sales enablement. Most programs involve regular discussions with the leadership team and IT department about what tools could best serve the sales team. Notably, there are multiple software platforms on the market focused on sales enablement that can help businesses set up and manage their programs. Some customer relationship management software offers help in this area, too.
Benefits in the offing
There’s a reason sales enablement has caught on with many different types of companies. There are significant benefits in the offing.
First, a well-designed program can get new hires up to speed much more quickly than a more casual, ad hoc approach to “rookie” training. And for fully onboarded and seasoned employees, sales enablement can save time and effort by providing easy access to the relevant and up-to-date data, content and tools that support their activities. Ultimately, it can boost productivity for the whole team and, thereby, revenue for the business.
Also, the ongoing training and coaching features of sales enablement help sales reps keep their skills sharp and their knowledge growing. The aforementioned learning modules, webinars, podcasts, quizzes and other learning formats may give them an edge over competitors with less educational support.
There’s the engagement factor, too. A sales enablement program communicates to new hires, as well as established reps, that the organization fully supports them. As word gets around, you may attract stronger job candidates and enjoy better employee retention rates.
A major initiative
As the saying goes, nothing worth doing is easy. To implement and run a successful sales enablement program, you’ll need to invest considerable time and resources. And before any of that, you’ll need to set clear, measurable objectives — as well as a reasonable budget. For help with the financial side of planning a major initiative like this, contact us.
© 2024
Maximize the QBI deduction before it’s gone
The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver.
Deduction basics
The QBI deduction is written off at the owner level. It can be up to 20% of:
- QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus
- QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation.
How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums.
Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals.
Limitations
At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.
If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business.
Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).
Unfavorable rules for certain businesses
For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB.
Other factors
Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately.
There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result.
Use it or potentially lose it
The QBI deduction is scheduled to disappear after 2025. Congress could extend it, but don’t count on it. So, maximizing the deduction for 2024 and 2025 is a worthy goal. We can help.
© 2024