Year End Tax Tips You Can Share With Your Employees

Talk of the fiscal cliff is everywhere these days, so many of your employees may be concerned right now about what will happen to their tax rates.  While no one knows what Congress will ultimately decide regarding next year’s income tax rates, there is one cold, hard fact that isn’t getting much press – the Medicare surcharge.  I wrote about this new surcharge tax last month, which increases the Medicare tax rate from 1.45% to 2.35% on amounts of earned income over $200,000 for single filers and over $250,000 for married filers.  Here are 2 tips you can share with your high income employees who may be in danger of this surcharge:

  • Exercise Stock Options – The good news is that the proceeds from exercising stock options won’t be impacted by the possible increase in capital gains tax to 20% in 2013 since the IRS considers this as compensation and taxes it as ordinary income.  The bad news for high income employees is if they have a substantial profit from exercising those stock options and they wait until 2013, it could push their earned income above the threshold of the Medicare surcharge mentioned above.  Employees may benefit from cashing in their stock options now so they will be included in their 2012 compensation.  Since these transactions typically take a few business days to settle, make sure to clarify to your workforce the last possible day they need to exercise their options to get it completed by year end.
  • Complete an In-Plan Roth Conversion – Many employers have introduced the ability for employees to do an In-Plan Roth conversion, allowing the participant to convert all or a portion of their pre-tax and after-tax balances to their Roth 401(k).  Typically, employees are hesitant to make the move because it involves paying taxes on the amount of pre-tax funds that are being converted.  For higher income employees on the fence, communicating the risks of higher taxes and the Medicare surcharge may be what they need to bite the bullet now and pay 2012 taxes on a conversion.  Providing a federal tax table with 2012 tax rate breakpoints can be very helpful as your employees try to decide how much, if any, they should convert.  Be sure to provide the deadline for getting the conversion request in to your plan administrator by the end of the year.

With the last paycheck of the year only a few weeks away, it is critical that employees take action now to benefit from these moves.  Educate your workforce about these strategies by sending out an e-blast or highlighting this topic in your December newsletter.  Make sure to remind employees about your employer0sponsored financial guidance benefit if one is available.  A quick phone call to a financial helpline can get each employee well on the way to being tax savvy.

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