5 Things to Know About Tax Reform Effect on Employers

January 9, 2018by mycalchoice
Highlights/Key Takeaways

  • The Medical Expense deduction is being expanded, temporarily, for 2017 and 2018.
  • Employee awards – like gift cards, tickets, meals, and lodging – are now taxable.
  • Employers can no longer contribute to commuter benefits and take a tax deduction.
  • Unreimbursed moving expenses are no longer deductible for employees.
  • New rules apply to 401(k) loans when an employee leaves a job.

Just before Christmas, President Donald Trump signed the Tax Cuts and Jobs Act, which dramatically reduces the corporate tax rate (from 35 to 21 percent) and cuts the top individual tax rate to 37 percent. The legislation also doubles the standard deduction for individuals, while eliminating many personal exemptions and most itemized deductions. A single person’s standard deduction increases to $12,000 (from $6,300), and the standard deduction for married and joint filers increases to $24,000 (from $12,700). It’s forecast that more than 90 percent of taxpayers will take the standard deduction when filing taxes for 2018 (in 2019).

The tax legislation also repeals the individual mandate of the Affordable Care Act (ACA); however, the mandate does not go away until 2019. (At this time, individuals who are not exempt from the individual mandate are still required to have coverage in 2018, or face a penalty when filing their income taxes in 2019.) The employer mandate, which requires employers with 50 or more full-time or full-time equivalent employees to offer health coverage, has not been repealed… at least not yet; however, that could change during 2018 or 2019.

For employers, the new withholding rates should be ready by the end of January, so employee paychecks (under the new tax rates) are likely to change in March, or possibly sooner. Also changing in 2018 is the ability for employers to take a partial tax credit for employees’ short-term leave. The Family and Medical Leave Act guarantees employees at larger companies up to 12 weeks of leave annually, although there’s no requirement workers be compensated; the new tax law provides a partial credit to employers for wages paid during an employee’s leave.

  1. Medical expenses: Temporarily, for 2017 and 2018, the new tax rules expand the deduction for medical expenses. It allows individuals to deduct qualified medical expenses exceeding 7.5 percent of income. Under prior rules, the cutoff was 10 percent of income for those born after 1952. Nearly nine million people used the medical expense deduction in 2015.

  3. Employee awards: Another change in the new tax law is an updated definition of what employers can offer as tax-free achievement awards. Cash or a cash equivalent (like gift cards, meals, tickets, and lodging) are taxable. Tangible property, like a t-shirt or coffee mug, is not taxable.

  5. Commuter benefits: Employees can continue to use pre-tax dollars to pay for transit or parking expenses related to their commute. (Qualified expenses are allowed under Section 132 of the Internal Revenue Code.) Up to $260 monthly can be set aside by employees; however, employers are no longer permitted a tax deduction for contributions toward these expenses.

  7. Relocation expenses: Unreimbursed moving expenses are no longer deductible for employees on their income taxes. If a business pays a worker’s moving expenses for a new job or relocation of an existing job, under prior tax law, the amount was not taxable to the employee. Now, through 2025, any such payments are considered income – and are taxable to the employee. The exception to this new rule is active-duty military. It remains to be seen whether employers will choose to offset the tax for employees by increasing their gross pay.

  9. 401(k) loan repayment change: As a general rule, when an employee leaves a job, whether voluntary or otherwise, he or she has to repay any funds owed on a 401(k) loan. If it’s not repaid, the amount is deducted from the account when the balance is rolled over or paid out (which subjects it, potentially, to an early withdrawal fee, too). Now, under the new tax law, employees have until their tax-filing-due-date (usually April 15) in the year following their exit to roll over their account without it being treated as a distribution.

More health care options for your employees

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Shopping for group health insurance?

This guide compiles a list of common questions you may have before you start offering health insurance coverage.