The Arizona Department of Revenue has issued an employer information sheet regarding the increase in Arizona personal income tax withholding rates. The changes in withholding rates affect mandatory withholding for employees, voluntary withholding for Arizona residents working outside the state, and voluntary withholding for pension and annuity recipients.

An employer or a pension or annuity payor must notify employees and pension and annuity recipients of the new withholding percentage options and make available Arizona Forms A-4, Employee Withholding Allowance Certificate, and A-4V, Voluntary Withholding Request for Arizona Resident Employed Outside Arizona. A new employee must complete Form A-4 within the first five days of employment to elect a withholding percentage. If the new employee does not complete the form, the employer must withhold the tax from the employee's compensation at the applicable minimum percentage (10% or 18.2%) or $5 per month, whichever is greater.

Arizona Withholding Percentage Option Changes, July, 2003.

WASHINGTON - Employers across the country adjusted how much money to withhold from paychecks in accordance with new schedules formulated to match lower-income brackets.

The $330 billion tax package (search) was signed into law in May. Aside from seeing a little extra in their paychecks due to income tax reductions, millions of Americans will also receive a $400 check for each child, to arrive later this month -- and investors will see Washington take a smaller bite out of capital gains and dividend income.

While the income tax cut was made retroactive to the beginning of 2003, employees will not receive a refund check, but will apply for the normal income tax return for the higher rate charged in the first half of the year.

"This year's tax cut unfortunately will come in bits and pieces, and [employees] won't see the full magnitude of it for some time," said Scott Hodge, executive director of the Tax Foundation (search). The new law extends the 10 percent income tax rate from $6,000 to $7,000 of taxable income or from $12,000 to $14,000 for married couples. The other brackets are now at 15, 25, 28, 33 and 35 percent.

When broken down, the cuts play out differently for families depending on income and number of dependents. For instance, a married couple with two children and an annual income of $40,000 will see $1,133 per year. That same couple will see $2,021 per year if they make $75,000; $3,158 per year if they earn $200,000.

However, that same couple with no children will get back $333 per year for a $40,000 income; $1,604 per year for a $75,000 salary; and $3,280 per year for a $200,000 salary. The dollar amount is lower in the first two income categories where the couple doesn't qualify for the $400-per-child tax credit.

Single individuals with no children who generally sign up for fewer exemptions will receive $126 per year for a $40,000 income; $826 per year for a $75,000 salary; and $2,766 per year for a $200,000 salary.

The income tax cuts are the first break taxpayers will see.

"This is the first stage, in which we will see the small changes that will impact your paycheck," said Hodge. The next stage -- the child tax credit (search) given for each child under age 17 living at home -- will start arriving in 25 million homes in the last week of July. All the checks should be delivered by mid-August.

The wealthy will receive the biggest dollar return for the income tax cut. But as a percentage of income tax liability, low- and middle-income taxpayers fare better. The tax cut returns 96 percent of the taxes a family of four earning $40,000 would have paid this year. It gives back 28 percent of the taxes the same family earning $75,000 would have paid. It gives back 9 percent to families earning $200,000.

"The top 1 percent of taxpayers earns about 20 percent of the income in America, but pays 40 percent of all the income taxes. And so when they get a 10 percent tax cut, it's a pretty large dollar amount, but after all, they paid an awful lot to begin with," Hodge said.

Employees can find out how the Bush tax cut affects them personally by calculating its value at www.paycheckcity.com. The site sells tax-calculating software and also provides calculators for personal accounting.

Fox News' Major Garrett contributed to this report.
Fox News Channel/Politics, July 02, 2003

When Texas Rangers shortstop Alex Rodriguez stepped onto the field at the All-Star Game last July in Milwaukee, there was a huge cheer from the crowd.

There may have been cheering at the Wisconsin Department of Revenue as well: By appearing in the event, Rodriguez obligated himself to pay more than $8,000 in Wisconsin income taxes.

Rodriguez and hundreds of other athletes and entertainers are finding that some of their biggest fans are state tax collectors. A growing number of states -- and some cities as well -- are aggressively pursuing high-income non-residents who earn income from within the states' borders.

This ultimate commuter tax -- often dubbed the "jock tax" -- is creating a major headache for its targets and has spawned a cottage industry of accountants and bookkeepers who advise high-profile figures on how to minimize their state taxes, prepare returns and make payments for taxes they cannot escape.

Players sometimes move to a different state, which accountants say can help when it comes to items like signing bonuses, but they have little choice about where they play their games.

"It's a nightmare," said Ronald Rubin, a certified public accountant in Bethesda who does tax returns for several professional athletes. "You have some players filing 12 or 14 state income tax returns."

The players "moan about it, but it's really a pain for the accountants," said former Washington Capitals goalie Bernie Wolfe, who now runs Bernard R. Wolfe & Associates Inc., a financial planning firm in Chevy Chase. "They have this tax return that's about the size of an atlas -- a hundred pages for a tax return. They bill the player and the player gets upset because of the costs."

Stars like Rodriguez, who make millions of dollars a year, get little sympathy, and accountants and state officials say they generally pay what they owe.

"You see at the end of the year your paycheck comes in and you have 15 different states that take out money," said Washington Capitals left wing Steve Konowalchuk, who earns around $1.5 million a year. "It's kind of weird."

Agents and others, though, say many marginal players, who may have careers lasting only a few years and paychecks far smaller than A-Rod's, can see a significant portion of their earnings drained away by the jock tax. The tax also applies to coaches, trainers, equipment managers and others who travel with the team, though many of them make fairly modest salaries.

States have long asserted the right to tax income earned within their borders, but the soaring incomes of athletes have given the jock tax special significance. The fiscal woes facing many state and even municipal governments have made them more aggressive in their collection efforts.

"Maybe 10 years ago no one should have done this, but since others have done it, we felt we owed it to our citizens to be collecting this tax," said Cincinnati city councilman David Pepper, who in December helped pass a law applying a 2.1 percent earnings tax to out-of-state professional athletes, which is expected to bring in about $750,000 to the city. "If we don't do whatever anyone else does, we're the ones with the 'kick me' sign on us."

Some experts say the tax is unfair because it singles out certain groups.

"It's not fair [that] just because this particular occupation is so easy [to track] and no one feels bad for" the rich players that they have to pay these taxes, said David K. Hoffman, an economist with the Tax Foundation in Washington.

Hoffman argues that the players are paid by their teams in their home states and are not in fact earning their money at away games. In addition, he said, "the cities and states are the ones that benefit. When a famous athlete goes to a city that doesn't have the most popular team, he fills the seats. But his paycheck doesn't change."

Hoffman, who calculated the taxes incurred by Rodriguez for playing in the All-Star Game, figures that Wisconsin pulled in more than $133,000 from all the players in amounts ranging from A-Rod's $8,864 to $58 each from National Leaguers Eric Gagne and Jimmy Rollins.

States argue that their taxes are equally applicable to everybody, but some concede that practical considerations do play a role. Maryland, for example, doesn't try to tax airline pilots, though their situation might seem analogous to athletes', because "it's not considered enough of a significant activity that they are involved in when they stop briefly" in the state, said a spokesman in the comptroller's office. Also, it would be a "bureaucratic nightmare . . . trying to assess what percentage of their salary should be taxed. It's just not doable."

But where the tax can be collected easily and in large amounts, states are interested.

California, which is looking at a $35 billion budget deficit and has 15 teams among the four major professional leagues, has an employee assigned almost exclusively to keeping track of the comings and goings of professional athletes: Duane Hoffman, associate tax auditor with the California Franchise Tax Board and the man in charge of the non-resident athlete audit program.

Hoffman said the state is an equal-opportunity taxer.

"We don't just pick on athletes," he said. "The law is designed for everyone who is doing business in California."

Hoffman pores over sports publications and online sites analyzing which teams are coming from where, which players are playing, when they arrive and when they leave.

"I am the only one in the office who gets to legitimately look at the sports [Web] sites," he said.

"This is a guy who knows the injury and waiver wire better than many managers," said Stephen Kidder, a Boston tax lawyer who represents the players' unions in Major League Baseball, the NHL and the NFL. "[Hoffman] knows exactly who is here and who is on the plane and on the roster."

"There is one state I won't mess with," said Kimberly Morton, who handles the tax returns of professional athletes for CSMG Inc., a major sports agency. "If you get on the bus and step foot in the state, California will find out."

The tax also is of interest to residents of the Washington area. Although the District of Columbia is barred by Congress from taxing D.C.-source income of non-residents, Mayor Anthony Williams has talked of seeking permission to tax the payroll of a baseball team, were one to move here, to help pay for a new stadium.

Most states that tax visiting athletes, coaches and others traveling with the team base the levy on what is known as "duty days," which are defined as the number of days an athlete is actually earning his salary.

In Major League Baseball, the athlete is considered to be paid from the beginning of spring training to the end of the regular season -- roughly 220 days. If the player earns a salary of $1 million, that number is divided by the 220 duty days and the player is considered to earn $4,545 per duty day. If he visits San Francisco for a four-game stand, California will tax him on the income earned while he was in the state, which comes to $4,545 per day over four days, or $18,180. At the state's approximately 9 percent marginal rate, the athlete might pay $1,636 in California state income tax for the four-day stand in San Francisco. Basketball may have as many as 270 duty days, and professional football about 180, depending on whether a player's team reaches the playoffs.

From there, the jock tax gets complicated very quickly.

Experts at Tanton and Company of New York City, a nationally known firm that specializes in tax returns for professional athletes, said each state defines "duty days" differently. Some include the preseason schedule, while others include only regular season games.

Most states consider an NFL game to constitute two duty days because teams arrive on Saturday for Sunday games and leave Sunday. NBA and NHL games are usually two days because the teams arrive the night before a game and go on to the next city immediately after the game.

Some states, of course, don't have an income tax at all. Players who live and play for teams in these states, including Texas, Florida, and Washington state, aren't taxed when they are at home -- only when they play games in states that do have a tax.

The District is perhaps the strangest situation of all. Barred from taxing non-residents, it can't even tax the home-team players, let alone the visitors, unless a player lives in the city, which few do.

Thus, when the Redskins left Robert F. Kennedy Memorial Stadium in the District for FedEx Field in Maryland, they subjected visiting players to state income taxes (Maryland's) they had not had to pay before. This was especially painful for players from no-tax states.

It made no difference to the Redskins themselves, however, since Maryland and Virginia, where the Redskins are based, have, like many states that abut one another, a reciprocity agreement. This means that when a Virginia resident works in Maryland, Maryland collects Virginia taxes and remits them to Virginia -- and Virginia does likewise when a Maryland resident works in Virginia.

And there is the principle that a taxpayer shouldn't be taxed on the same income in two different states. As a result, states give credit to their players for taxes paid on away games.

For example, when a Washington Redskins player who lives in Virginia pays Arizona taxes because the Redskins played the Cardinals in Arizona, the state of Virginia recognizes that he earned the money in Arizona and doesn't charge him tax on those earnings.

"I don't think it's a big deal money-wise because there are [tax] offsets in Maryland," said Konowalchuk. "It's probably a bigger hassle for the accountants."

Super Bowls, playoff games and all-star games present another opportunity for state tax collectors.

David Hoffman of the Tax Foundation calculates that the combined earnings of the 60 players at last summer's baseball all-star game totaled $3.3 million, on which they paid a total of $133,000 in tax to Wisconsin for that single appearance.

"I just drool when the playoff games are here," said California's Duane Hoffman, adding that the jock tax brings in around $80 million in revenue to California from out-of-state residents. That's less than one-tenth of one percent of the state's $96 billion 2003-04 budget. And the net tax effect is far less, because while California is raking in taxes on out-of-state players visiting the Golden State, it is also handing over money to California players in the form of credits against taxes those players must pay in other states.

Though California and other states benefit from taxing players from states such as Texas and Florida, which have no income tax and thus don't hit visiting players, many are just breaking even and impose the tax only to keep from losing revenue to others that are doing it. "It would be much simpler if states simply taxed their own teams and don't look to visiting athletes for revenue sources," said sports agent Leigh Steinberg. "The amount of revenue derived from this tax is de minimis compared to the overall tax base for any municipality or state. It isn't as if the marginal revenue was going to keep schools open or stop libraries from closing."

"It's just a shift of taxes between the states," said Jan Plewes, head of financial services at Octagon Marketing and Athlete Representation.

Duane Hoffman said the income tax for non-residents has always been on the books, but it wasn't worth enforcing until athletes' salaries took off in the late 1970s and early 1980s.

"It wasn't cost beneficial when the guys were making less than $100,000," he said. "It doesn't make sense to go after a guy for $150. Another reason California is into this is the multiplicity of teams." In many cases, teams withhold money from players' wages and pay taxes to the municipality or state in which the game is played. Those payments by the team can be made monthly or quarterly.

Some states, such as California and New York, monitor the process closely. Many states require the athlete to file a state tax return, with the result that many professional athletes have tax returns that stretch for hundreds of pages and cost several thousand dollars in accounting fees.

One way athletes can reduce their tax bill is to get as much money as possible up front in a signing bonus, and to receive that bonus as a resident of a tax-free state. If contracts are worded carefully, signing bonuses are not considered wages and an athlete can then avoid paying any state income tax, including the jock tax, on that money, agents say. The savings can reach hundreds of thousands of dollars for big-time players.

Sports agent Ron Del Duca saved client Tom Barndt, an NFL defensive tackle at the time, nearly $200,000 by advising Barndt to establish residency in Nevada before he signed a contract that included a $3.3 million bonus to play for the Cincinnati Bengals in February 2000.

"I basically told him, 'If you like Vegas and want to save some money down the line, establish residency,' " said Del Duca, of Virginia Beach. "But you physically have to show the tax people it's a legitimate relocation. You can't do it the day before you sign the contract."

Even without the signing bonus, players who live and work in a tax-free state can save millions in annual taxes.

Case in point: because Rodriguez resides in no-income tax states (Florida and, now, Texas) and plays half of his games in no-tax Texas, he avoids paying a state income tax on at least half of his income. At $25 million a season, half of his salary comes to more than $12 million. If he avoids paying, say, a 3 percent state income tax on that amount, Rodriguez is saving $360,000 free and clear. That's $3.6 million over 10 years.

"Tax planning is an important part of financial strategy for any professional athlete," said Octagon sports agent Gregg Clifton, who represents such big-name baseball players as pitchers Tom Glavine, David Wells and Baltimore Orioles outfielder B.J. Surhoff. "While we don't encourage athletes to move just for tax reasons, there's a clear benefit to relocating to tax-free states."

"It's definitely a consideration for free agents because 1 or 2 percent [in taxes] on a big contract starts to add up," said Capitals center Jeff Halpern, 26, who lives in Maryland and earns about $1 million per season. "A guy who plays in California is not making as much money as he would [if he lived and played] in Florida because of the taxes."

New York Yankees pitcher Wells, a native Californian, relocated to Florida in the early 1980s to be close to spring training and have easier access to offseason workouts. With his 16-year career earnings estimated to be in excess of $40 million, Wells has probably saved several million in state income tax, not to mention the interest that those savings would have earned over the years.

Steinberg, who has a long history of representing Dallas Cowboys stars such as Troy Aikman and Daryl Johnston, remembers some Cowboys bemoaning the Redskins' move in 1997 from the District to FedEx Field.

"The players always wondered whether this was one more nefarious Redskins plot to unsettle them on the eve of a big game," he said.

Washington Post
February 24, 2003
By Thomas Heath and Albert B. Crenshaw

The House passed the Health Savings and Affordability Act of 2003, H. R. 2596, and then attached it to H. R. 1, the Medicare Prescription Drug and Modernization Act of 2003. A conference committee is working out differences between the House-passed and the Senate-passed version, the Prescription Drug and Medicare Improvement Bill of 2003, S. 1.

The bill would create health savings accounts (HSAs) and health savings security accounts (HSSAs) which would provide tax-favored treatment for current medical expenses as well as the ability to save on a tax-favored basis for future medical expenses. In general, HSAs and HSSAs would be tax-exempt trusts or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder and his or her spouse and dependents (subject to rules similar to those applicable to individual retirement arrangements).

Tax treatment. Employer contributions to a health account (including salary reduction contributions made through a cafeteria plan) would be excludable from gross income and wages for employment tax purposes to the extent the contribution would be deductible if made by the employee (e.g., in the case of an HSSA, subject to the adjusted gross income limits).

Unused FSA amounts. Up to $500 of unused health benefits in an employee's health FSA could be carried forward to the employee's health account for the next plan year of the health FSA or transferred to an HSA or HSSA maintained for the benefit of the employee. Amounts transferred to an HSA or HSSA would be treated as employer contributions for purposes of the HSA and HSSA rules. If an individual is not eligible to contribute to an HSA or HSSA for the taxable year, the individual could transfer up to $500 of unused health benefits in the employee's health FSA to a tax-qualified retirement plan, a tax-sheltered annuity (Code Sec. 403(b)), an individual retirement arrangement (IRA), or an eligible deferred compensation plan of a state or local government (Code Sec. 457). The provision would apply to taxable years beginning after December 31, 2003.

Reporting requirements. The provision would provide an exception from the generally applicable information reporting provisions for payments for medical care made under either: (1) a flexible spending arrangement or (2) a health reimbursement arrangement that is treated as employer-provided coverage and would be applicable to payments made after December 31, 2002.

CCH, July 16, 2003

The IRS has finalized previously proposed regulations on catch-up contributions. Code Sec. 414(v) allows an individual age 50 or over to make additional elective deferrals, up to a specified dollar limit, under a plan that otherwise permits elective deferrals if certain requirements are satisfied. The final regulations are effective on July 8, 2003, and apply to contributions in tax years beginning on or after January 1, 2004. Taxpayers can rely on the final regulations and the earlier proposed regulation for tax years beginning prior to January 1, 2004. The final rules affect Code Sec. 401(k) plans, Code Sec. 408(p) SIMPLE IRA plans, Code Sec. 408(k) simplified employee pensions, Code Sec. 403(b) tax-sheltered annuity contracts and Code Sec. 457 eligible governmental plans. (Treasury Department News Release, TDNR JS-528; T.D. 9072.)

CCH, July 17, 2003.

If you've recently reduced your company's retirement benefits, you're not alone: The percentage of small businesses that say they are likely to offer a retirement plan in the next two years continues to drop after years of steady growth in small company plan participation.

According to the sixth annual Small Employer Retirement Confidence Survey (SERS), the percentage of companies not offering a retirement plan (nonsponsors) that say they are very likely to begin offering one has declined-from 17 percent in 1998 to 7 percent in 2003.
While another 22 percent say they are somewhat likely to start a plan, 43 percent say they are not at all likely to start a plan in the next two years-up from 32 percent in 1998.

Retention is a factor in deciding to offer plans. The study indicates that small employers that are very likely to offer a plan in the next two years are much more likely than other nonsponsors to say a retirement plan offers their business a competitive advantage in recruitment and retention and in motivating employees.

The bottom line is the key. Additionally, nonsponsors continue to say that company's profitability plays a key role in whether they offer a retirement plan. Specifically, 27 percent of nonsponsors say they do not offer a plan because of low or uncertain revenue, and 34 percent say that an increase in business profits would motivate them to offer a retirement plan.

Most large employers offer plans, most small employers don't. According to the most recent data, 58.1 percent of full-time employees in medium- and large-sized firms participate in an employment-based retirement plan, compared with 28.8 percent of full-time employees at small firms (99 or fewer workers). This "pension gap" in participation among small businesses has been an area of policy focus for years.

The 2003 SERS is released by the Employee Benefit Research Institute (EBRI), American Savings Education Council (ASEC), and Mathew Greenwald & Associates (Greenwald), studying 300 small employers without retirement plans.

CCH, July 9, 2003