Masonry Magazine March 1970 Page. 25
TAXES
By MIRIAM McD. MILLER
REMINDER
The IRS reports that many taxpayers are overlooking the special provision for deducting one half (up to $150) of medical insurance premiums. This deduction can be made without regard to the 3% limitation that generally applies to medical and dental expenses.
If you haven't already filed your 1969 tax return, you will notice when you work on it that there is now a NEW one-page Form 1040. Short Form 1040A (punch-card return) has been eliminated. There are supplementary schedules provided for the use of those taxpayers unable to use a short form because they either itemize their deductions or they have more complicated forms of income.
DEFERRED COMPENSATION
Recently the IRS was asked advice on how certain deferred salary would be taxed. It seems that a corporation established a plan whereby a qualified employee could defer a portion of his salary until after his retirement.
According to the terms of the contract between the employee and the corporation involved, the employee could elect in one year to have either 5% or 10% of his salary that he was to earn in the next year deferred until after retirement. The employee would have to be at least 40 years old and would have to earn a specified amount. For each employee so electing, the corporation established a deferred compensation account and credited to such account the amounts the employee elected to defer. Then, following retirement, the amounts in the employee's account would be distributed to him in installments on January 1 for ten years.
The IRS pointed out that income is constructively received in the taxable year during which it is credited to a taxpayer's account or otherwise made available to him. However, income is not so constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.
In this case, the IRS ruled that the deferred compensation was not constructively received and therefore the employee did not have to include it in his income and pay taxes on it until the later years when it is actually received by him. So too the corporation can deduct the deferred payments to an employee only at the time that it is actually paid to him. (Rev. Rul. 69-650.)
To the same effect the IRS ruled that an incentive bonus that could be designated by an employee to be paid at a future time usually after retirement was not to be included in the employee's income until the year in which it was actually received. (Rev. Rul. 69-649.)
You may recall that there had been a provision in the House bill that was the forerunner of the Tax Reform Act of 1969 that would have taxed deferred compensation payments exceeding $10,000 to retired employees. Those payments exceeding $10,000 would probably have been taxed at rates paid by the taxpayer in pre-retirement years. However, this provision was omitted in the Senate and was therefore not included in the Act.
HEAD OF HOUSEHOLD
Under the Tax Reform Act there will be an increase in the tax rate benefits for heads of households. Therefore, any taxpayer who thinks that he might qualify for this status should investigate its requirements. One thing might be noted: while a head of household may have more than one home, he must reside (for a debatable period of time) in the household for which he seeks the tax benefit.
NO WITHHOLDING
Remember that after April 30, 1970, an employee (e.g. a student working part-time) may free his pay from all withholding by informing his employer that 1) he expects to pay no tax in the current year, and 2) he did not pay any taxes in the preceding year.
LUMP-SUM DISTRIBUTIONS TO EMPLOYEES
The avowed purpose of the Tax Reform Act of 1969 was to make federal income tax liability more equitable among all taxpayers. One phase of the tax structure that was considered to give certain taxpayers a substantial advantage over other taxpayers concerned a lump-sum distribution from an employee pension plan.
Many, if not most, qualified retirement plans provide that an employee, upon retirement, may elect to receive his retirement payments either as periodic annuity or he may take his total retirement benefits in a lump-sum. In the latter case, there certainly would be a tax disadvantage should an employee be subject to pay ordinary income tax upon the receipt of such a large amount of income in one taxable year.
Thus, in 1942, Congress provided a solution by providing for the treatment of the total lump-sum distribution as a long-term capital gain. What this meant was that 50% of the taxable portion (i.e. that part that did not include previously taxed employee contributions) of the distribution was deductible in figuring taxable income. The remaining 50% was taxable as ordinary income. Also, in certain cases, the distributee was able to take advantage of the special alternative capital gains tax that limited his tax to 25% of the entire taxable portion of the distribution.
However, in 1969 Congress marked this area of the tax laws as a tax advantage as it permitted employees to receive large amounts "of what is in reality deferred compensation at a more favorable rate." Thus, the new Act's inclusion of a restriction on the use of capital gains tax for the lump-sum benefits is Congress' attempt to curb the former tax advantage enjoyed by retiring employees.
The 1969 Act provides that employer contributions to the retirement plan made after December 31, 1969, may no longer be considered as long-term capital gains. These amounts must be treated as ordinary income. The same rules apply to forfeitures of employer's contributions by employees which are reallocated (after December 31, 1969) to the accounts of other employees.
On the other hand, that portion of the lump-sum distribution that represents appreciation of the fund, pre-1970 employer contributions and pre-1970 forfeitures, are still taxable at the capital gains rate.
To figure his taxes a retiring employee receiving a lump-sum distribution will have to break it down this way:
-Employer contributions prior to January 1, 1970.
-Employer contributions after January 1, 1970.
(Continued on page 40)