McKonomics

IRS Grants W-2 Relief for Employers

 More Time to Report the Value Of Healthcare Coverage

The Patient Protection and Affordable Care Act does a lot more than mandate healthcare coverage. It also requires that companies report the value of employer-sponsored group health coverage on employee W-2s.

Under the health reform law, reporting was supposed to begin with W-2s for the 2011 tax year. But thanks to a recent ruling from the IRS, employers now have an additional year to comply with this requirement. (IRS Notice 2010-69)

New rules: Beginning with W-2s issued for 2012, employers will have to include the value of the healthcare coverage they sponsor for staff members. The purpose is "to provide employees with greater transparency into overall healthcare costs." The IRS wants to make it clear that this reporting is for information only, and the value of the health insurance does not represent taxable income to recipients.

Businesses: Big Tax Savings

 The Small Business Jobs and Credit Act of 2010, which was signed into law on September 27, contains a number of valuable tax breaks for businesses. The new law's two significant changes come in the form of more generous rules for depreciation write-offs.

1. Bigger Section 179 depreciation deductions are allowed for qualifying new and used assets that are placed in service in tax years beginning in 2010 and 2011. Under the Section 179 deduction election, many small and medium-sized businesses can instantly depreciate most or all of the cost of many assets in the year in which they are first placed in service.

In addition, qualified real property improvements placed in service in tax years beginning in 2010 and 2011 are also eligible for the Section 179 deduction. Real property costs have never been eligible before.

2. First-year bonus depreciation of an extra 50 percent is allowed for qualifying new (not used) assets that are placed in service by December 31, 2010. The bonus depreciation break had expired at the end of 2009, but the new law retroactively reinstates it for qualifying assets that are placed in service during calendar year 2010.

Buckets of Money for Retirement

 You've diversified your investment portfolio. But have you diversified your tax burden? Making sure that the after-tax value of your savings isn't riding on just one tax rate doesn't get a lot of attention. But make no mistake: failure to diversify your tax exposure before you retire could reduce what you have to live on later.

Many people plan for retirement by contributing diligently to 401k and other tax-deferred accounts such as traditional IRA's. That makes sense because they may be receiving matching contributions from their employer and the gains compound without the drag of taxes. However, withdrawals from these accounts will be taxed as ordinary income which can take the biggest tax bite out of your savings. When you consider that your withdrawals must be large enough to cover your expenses plus the taxes on the withdrawals, you may find yourself in a higher tax bracket than you think.

So, how should you cope with this dilemma? Diversify. One sound strategy is to fund three buckets of money-tax-deferred, tax-free, and long-term capital gains. Having three buckets will give you some maneuvering room when it comes to funding your retirement.