Fringe Benefits Tax and Capital Gains Tax - Assignment Example

Fringe Benefits Tax and Capital Gains Tax Name of University Submitted by Names: Tutor: Date Fringe Benefits Tax and Capital Gains Tax Part One: Fringe Benefits Tax  Fringe benefits are the benefits that an employee will receive in addition to wages and salary. The War Labor Board coined the term during the World War II to refer various indirect benefits that the industry could devise in order to attract and retain employees as direct increase in wages had been prohibited. The four main kinds of fringe benefits include those offered on motor vehicles and loans with low interests other than those that are provided by life insurance companies. Others are subsidized or free services and goods that are offered by the company. Some employers normally institute company contributions to death, accident or sick funds. The fringe benefits are often deductible to employees’ salary and may even be taxable (Vermont Department of Labor 2012). Companies have improvised their own ways to compensate their high profile and other highly valued employees the fringe benefits (IRS 2013; USA Federal State Company Tax.com 2014). What Is Fringe Benefits Tax Fringe Benefits Tax can simply be defined as the Tax that is levied on the fringe benefits. It is important to note that it is normally calculated independently from that of income tax. In this regard, it is calculated on various values of fringe benefits that are taxable. According to the Internal Revenue Services, any benefit that is provided to top employees but not enjoyed by other employees may be taxed to them (Dyson and Lloyd 2013). Some of Fringe Benefits in the United States In the US, employees Fringe benefits have included those that cover relocation assistance, dental and vision plans, dependent and health care plans, retirement benefits plans, adoption and child care assistances, transportation benefits, legal assistance plans and long term insurance plans . It may also include a wide range of both formal and informal discounts offered to employees. Some American corporations have been offering cafeteria plans to increase the morale of their employees. In most cases, however both the employer and his employees have funded the cafeteria plans. Others are provision of executive dining room, low interest loans, company credit card offer, dependent or spouse life insurance, employer-paid parking, vacations, wealth or financial management and the employee’s use of listed properties. Some employers may institute bonuses or awards, payment of club dues or membership fees, among others (IRS 2013; USA Federal State Company Tax.com 2014; Internal Revenue Service 2014). Tax Treatments of Fringe Benefits In US, the Internal Revenue Code (IRC) treats fringe benefits as taxable, partially taxable, nontaxable or tax deferred ( Dyson and Lloyd 2013; IRS 2013). Taxable Fringe Benefits These benefits are includible in the employee’s gross income and have not been excludible in many of the IRC section. The amounts being includible as wages will generally be subject to income Tax, withholding Medicare and social security. For instance, in this section are bonuses, which are normally taxable as wages, as no section of the law on tax has excluded them from any taxation. Fringe benefits, which have not met statutory requirements for being excluded, are fully taxable. Generally, they will be reported as wages and no tax reporting will be required to show that they meet accounting standards. However there is an exemption on this: if an employee is fully covered by a qualifying system of retirement, which enables him not to be subjected to Medicare tax or social security, the taxes would not apply to the Fringe benefits he would receive in that regard (Dyson and Lloyd 2013; IRS 2013). Common examples in this category Taxable fringe benefits are excessive mileage reimbursement, clothing suitable for street wear, moving expenses for more than 50 miles, excessive education reimbursement, wards and prizes, and excessive reimbursement without adequate treatment in the account. Moreover, working condition fringes that allows employees to go beyond normal convenient use that can be deemed personally will be subjected to taxation (Graham 2014). Nontaxable (Excludable) These fringe benefits have been excluded from wages by IRC specific sections. In this category, are the qualified health plans (IRS 2013). More common Examples for Fringe benefits excluded from taxation Benefits that are received through accident insurance or employer health plans, qualified tuition reduction, health insurance that the employer pays, lodging or meals that are provided for employment convenience, cafeteria plans, qualified employee discount, De minimis benefits, qualified transportation expenses and discount, care programs for dependents, educational assistance program and services that do not require additional costs (Vermont Department of Labor 2012). Others are assistances for adoption, on premise athletic facilities, reimbursements of qualified moving expenses, qualified planning services and qualified military closure or realignments fringe (IRS 2013; Turner 2013). Partially taxable fringe benefits are those that have been partly excluded by the IRC section. Some benefits may be excluded up to a certain limit for instance the public transportation subsidy (IRS 2013). Tax-deferred benefits are those that will be taxed later but not at the date when they are received. For instance, when an employer contributes to the pension plan of his employee, it may not be taxed at this instance but may become taxable at the time it is distributed to the employee (IRS 2013; Kokemuller 2014). Taxation Treatment When reporting taxable fringe benefits, they have to be subject to withholding period so that they are made available at certain period. The employer may choose to have a fixed period of time that may be, for instance, quarterly, annually or semi annually. However, he may choose not to withhold tax as long as he notifies the employee (Podgursky 2003). For non taxable income, the employer will be required to do adequate accounting by verifying the time, date, amount, place and the process of an expense. Receipts will have to be available unless they are made under per diem. The employees will have to hold the required documents such as receipts, bills for evidence (Podgursky 2003). Valuation of Taxable Fringe Benefits On Valuation, generally, fringe benefits are normally included in wages at the prevailing fair market value (FMV). The Fair market value is considered to be the amount a willing seller will accept from unrelated willing buyer, without being forced and both ought to espouse reasonable knowledge about the facts of their business. Although in some cases, costs and the FMV may differ, it has been common that they match. It is also important to note that the amount of taxable fringe benefits are reduced by any amount the employer pays. For instance, if the employee is supposed to be taxed on $3.00 per day and the employer pays only $1.00 per day, the amount of fringe benefits that will be subjected to taxation will be$2.00 per day. It is however; also, I important to note that some special valuation may be apply to certain fringe benefits (USA Federal State Company Tax.com 2014). Part Two: Capital Gains Tax Capital gain is defined as the profit the seller gains after disposition of his capital asset that may include bond, stock or real estate. In this case, the amount realized upon such disposition exceeds that of purchase price. Sometimes the term “investment income” may be used to refer to capital gains. Therefore, capital gain tax will refer to the type of tax levied on gains derived from the disposition of capital assets by corporations and individuals. It is therefore important to mention that capital gain taxes are levied only when assets are realized. In this regard, as it is implied, if one purchased his investment, the cost will be the price he paid for it. If one inherited his properties, the cost price will be based on the day the original owner died. However, if one has received the investment as a gift, the cost price will be based on the original price of the asset so long as the asset was not worth more than the amount it was given to the current owner (IRS 2011; Manzi and Michael 2012). In the United States, corporations and individuals will be liable to taxation on their capital gain subject to annual net capital gains. It is important to note that the net capital gain implies the difference between total capital losses and capital gains. Therefore, if capital losses are higher than capital gains, the net capital gain may be used to reduce the net income up to a certain limit. On the same note, one can carry over the net capital loss to treat it as if it had been incurred the following year (Guide to Capital gains Tax 2013). What is a Capital Asset? Capital assets include mutual funds, stocks, real estate, bonds, coins, precious metals, fine arts and other valuable collectibles (OECD 2006). Tax Treatment on Capital Gains It is important to note that in US, capital gains are taxed in different ways depending on the kind of capital asset and how long the asset has been held. From various sources, it is eminent that the IRS favors assets in long-term investment category as compared to those in the short-term category. Consequently, the longterm investments will have higher rates of taxation than those in the short-term category. Although the period the asset lasts influences very much on taxation, the specific tax rate will be determined by the type of the asset (Manzi and Michael 2012). Therefore, in this regard, special tax rate will be applicable to a certain type of assets. For the Longevity of the Period Long term versus short term A gain on capital asset will be taxed depending on whether the investment is short term or long term. Therefore, the holding period, which is how long one has held an investment, will be determined. This will be derived from the day one bought the item and to that, he sold it. The short-term period of holding is normally less than a year. For the year 2013, the short term income taxes will be taxed at the same rates as ordinary income tax rate. This implies that the tax levels will range from 10% to 39.6%. On the other hand, the long-term period of holding is considered to be a one year period or more than that. Its rates are normally less than those of ordinary tax rates are. The capital gains tax rates on long-term assets normally range from zero to 20%, depending on the marginal bracket of the investor. For lower income individuals, tax rate may approach zero. However, some special kinds of net capital gains may be taxed as from 25% to 28%. For instance, among the exceptions in the long term assets are the long-term collectibles, which are currently being taxed at 28% regardless of the tax bracket. Therefore, most tax planning on capital gains have been deferring the sale of an investment that proves to be profitable so that to qualify for the long term discounted rate, which is lower (Bell 2014; Manzi and Michael 2012). Since new tax laws are being enacted, taxation on capital gains is likely to increase from the rate of 15% to that of 20% for individuals who are still singles, earning income over $400,000 and for couples earning over $ 450,000. In this regard, it is important to note that individuals making in the range of $36,250 to $ 400,000 will have their capital gains continuing to be taxed at a 15% rate. However, those earners on the two lower income groups will pay capital gain profit at 0%. For those earning over $200,000 in the case of singles and $250,000 in the case of couples will see their capital gain receiving additional 3.8%. Other classifications have put some assets in the super-long term category. Those assets in the Super-long term are held for more than five years after their purchase. However, this category is only applicable for the assets purchased after 1st January of 2001 (Roos 2014; Simontacchi 2007). For Kind of Assets Small company stocks The Small Business Jobs Act (2010) under Section 2011, has exempted by 100%, taxation on capital gains for the small business investment in the angel and venture capital, if such a business has only been held for a period of 5 years. However, it is important to realize that the exemption may apply only to shares of stocks. They will in this case, exclude warrants and convertible debts. There have been various propositions to the presidents with hopes that they continue being reduced so that small businesses in lower-income communities may thrive (Adam Smith Institute 2013; Perez 2014). Inherited properties For inherited property, tax on the supposed capital gains is normally forgiven at death. Therefore, if someone inherits properties to sell it later, he will only be liable on the net capital gain on the day the property was sold and that when he actually inherited it. According to the established taxation custom, in most cases, capital gain from when the stock was inherited and when it has been sold has been taxed at 0% (Manzi and Michael 2012). Carried interests in paying managers It has been established that when paying managers, in either hedge funds or private equity, the taxation principle will retain the same character as if it was his source of income. However, if such a source generates income for the investors, the pay will be taxed at the capital gains rate (Simontacchi 2007). How Individuals can Lessen Taxes on Capital Gains Most people have decided to evade the capital gain tax by firstly, investing in their own primary area of residence. Others are also running to keep their income bracket down as much as they can so that they may reduce the amount that will be taxed from their capital gains (Edwards 2012). Moreover, capital gain reduction can be lowered by shifting to pre-retirement accounts. The other tactic is selling one’s portfolios when there are a lot of losses so that they may offset the likely gains (Roos 2014). By giving it as a gift to a child, he may sell it and be taxed at a very lower bracket due to the child’s age (Roos 2014). It is also considered that instead of selling the item at appreciated price, so that to advance cash to relatives, one can just give it as a gift to them. Opening a 529 College Savings account will also lessen the amount one can be taxed on capital gains (Roos 2014). Saving plans opened for kids will make the savings grow without any expenses. Last but important will be moving to a tax friendlier state is also proving much advantageous (Perez 2014; Simontacchi 2007). List of References Adam Smith Institute, 2013, The Effect of Capital Gains Tax Rises on Revenues. Bell, K 2014, No Capital Gains Due For Some Investors , Bank rate, Dyson, M G and Lloyd, MM 2013, Update on the Taxation of Fringe Benefits: American Benefits Council, Miller & Chevalier Chartered. Edwards, C 2012, Advantages of Low Capital Gains Tax Rates, Tax & Budget Bulletin, Cato Institute. Graham, J. (2014).Taxable Fringe Benefits, 2% Shareholder. Krost, Baumgarten, Kniss & Guerrero, viewed 22 January 2014 Guide to Capital gains Tax, 2013, Revenues, Irish Tax and Customs. Internal Revenue Service, 2014, Employer's Tax Guide to Fringe Benefits, Department of the Treasury. IRS, 2013, FSLG Fringe Benefit Guide, viewed 22 January 2014 IRS, 2011, Ten Important Facts about Capital Gains and Losses, viewed 22 January 2014 Manzi, N. and Michael, J 2012, Capital Gains Taxation: Federal and State, House Research. OECD, 2006, Taxation Policy Studies: Taxation of Capital Gains of Individuals, OECD Publishing. Perez, W 2014, Capital Gains Tax, About: Tax Planning US, viewed 22 January 2014 Podgursky, M 2003, Fringe Benefits: There Is More to Compensation than a Teacher’s Salary, Check the Facts. Roos, D 2014, How Capital Gains Tax Works, How Stuff works, viewed 22 January 2014 Simontacchi, S 2007, Taxation of Capital Gains under the OECD Model Convention, Kluwer Law International. Turner, R 2013, Fringe Benefits, a Variety of Forms of Compensation That Are Not Taxed, Colgate University. USA Federal State Company Tax.com, 2014, viewed 22 January 2014 Vermont Department of Labor, 2012, 2011 Fringe Benefit Study: Vermont Department of Labor 2011 Fringe Benefit Study, Economic and Labor Market Information. Read More