CPA Blog

It’s critical to be aware of the tax rules surrounding your NQDC plan

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Published: Tuesday, 08 November 2016 11:45

Written by Phillip Strickler, CPA.CITP

Nonqualified deferred compensation (NQDC) plans pay executives at some time in the future for services to be currently performed. They differ from qualified plans, such as 401(k)s, in that:

• NQDC plans can favor certain highly compensated employees,
• Although the executive’s tax liability on the deferred income also may be deferred, the employer can’t deduct the NQDC until the executive recognizes it as income, and
• Any NQDC plan funding isn’t protected from the employer’s creditors.

They also differ in terms of some of the rules that apply to them, and it’s critical to be aware of those rules.

What you need to know

Internal Revenue Code (IRC) Section 409A and related IRS guidance have tightened and clarified the rules for NQDC plans. Some of the most important rules to be aware of affect:

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Mentoring can make your succession plan better

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Published: Tuesday, 08 November 2016 10:28

Written by Phillip Strickler, CPA.CITP

The owners of many companies launch their enterprises with a business plan — a written document outlining the company’s strategic objectives and practical means of accomplishing them. Likewise, many owners leave their businesses via a succession plan, a written document outlining how the company’s ownership will transition.

Often, however, these two documents never cross paths, much less join toward a common goal. If this is the case with your business, and you’ve already identified your likely successor, mentoring can make your succession plan better by uniting it with your business plan.

Establish trust

One of the principles of mentoring is establishing a relationship based on mutual respect and trust. So, as your company evolves, you’ll need to ensure your successor is learning the skills and gaining the knowledge he or she will need to keep your business competitive and, ideally, take it to higher levels of success.

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Tax-smart options for your old retirement plan when you change jobs

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Published: Monday, 31 October 2016 09:11

Written by Phillip Strickler, CPA.CITP

There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:

1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.

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Beware of income-based limits on itemized deductions and personal exemptions

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Published: Monday, 31 October 2016 08:43

Written by Phillip Strickler, CPA.CITP

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 phaseout 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).

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