To Reduce Taxes, Plan First!

This week, Gail reminds us that most company perks are, unfortunately, taxable and underlines the importance of naming the right beneficiary.


Is it possible to set up an employment arrangement to include a housing or auto allowance that would not be subject to income tax?



Dear Brad,

It’s not impossible, but some very specific conditions must exist.

In the good ol’ days many companies would issue cars to certain employees, such as those in sales, who needed to travel as part of their job. But the cost of maintaining a fleet of vehicles has become so expensive that few employers take this route (so to speak) today.

Nonetheless, if you work for the rare firm that provides you with a company-owned vehicle to take home, all non-business mileage would be includable in your income, reported on your annual W-2 form, and subject to income tax. You would have to keep a log and document the miles driven for business versus personal use.

These days the more common arrangement is for an employee to use his personal vehicle for business purposes and submit an expense account to get this reimbursed by his employer.

Regardless whether you get the perk of a company car or are reimbursed for the use of your own vehicle, mileage driven to and from your home to your place of business is always personal. John Roth, a Senior Tax Analyst at CCH, says: “If you’re looking to cover your commuting expenses, it won’t work. That isn’t considered a legitimate expense for a business.”

It helps to look at this from the company’s perspective. Under the law, getting to the office is considered the employee’s responsibility; from that point, transporting an employee to a sales meeting or work site is the employer’s responsibility. Why would your company reimburse you for something it cannot write off as an expense?

[Note!] Because of the recent spike in gasoline prices, the IRS just increased the standard mileage reimbursement rate to 48.5-cents per mile starting Sept.1. (From Jan. 1 through Aug. 31 the rate was 40.5-cents/mile.)

However, this new rate is only good through the end of this year. According to Roth, the IRS has stated that it intends to re-evaluate this rate and will issue a new (and presumably lower) one for 2006.

The issue of whether company housing is taxable as income hinges on whether it is being provided for the convenience of the employer.

For instance, let’s say you’re the maintenance engineer for an apartment building. In exchange for being on call 24/7, you are given a two-bedroom apartment that would normally rent for $1200/month. “Since the employee is required to live at the place of employment, the fair market value of the housing is excludable from gross income. Therefore, there is no tax on it,” says Roth.

Other examples would be seasonal farm workers who are provided with housing during the planting or harvesting season, or oil rig workers who live on the platform for months at a time.

Unless you can meet these requirements, my advice is to negotiate for a bigger salary and cover these costs yourself.

Hope this helps,


Dear Gail,

My former husband just passed away. We remained close friends and he confided in me all the way to the end of his illness. He was very clear that he wanted his assets split evenly between our two children.

The problem is, he listed only our daughter as the beneficiary of his pension and I know that he was thinking she could just split it with her brother. She has to pay all of the taxes on this, so she is giving 50 percent of the after-tax value to her brother. Our daughter lives in Missouri and our son lives in Texas. Is there a way to resolve this so that the two of them lose the least amount of money to taxes?

Thank you,


Dear Carol,

First of all, I’m sorry for the loss of your ex-husband. Even though you were no longer legally married, it’s clear you still cared about each other.

It won’t make you or your children feel any better to know that theirs is not a unique situation. Many people overlook the beneficiary designation on their retirement plans, either because they forget to update it to reflect their wishes, or because they figure their will is going to take care of it.

However, your will or estate plan has no power to alter this document! This concept is so important that in June I devoted this column to reminding people of the importance of updating their beneficiaries on their retirement accounts.

Moreover, as your situation illustrates, most people don’t even consider the tax consequences when they name individuals as their beneficiaries. In the case of your daughter and son, this is especially frustrating because Missouri’s income tax rate is as high as 6 percent, while Texas, where your son lives, has no state income tax!

As Barry Picker, a CPA and Certified Financial Planning professional, points out, your son — a Texas resident — “is, in effect, paying Missouri state income tax” on his portion of his father’s pension!

There is a very slim chance that something can be done to improve things. It all depends upon how long ago your ex-husband died. If it was less than nine months ago, then your daughter can “disclaim” half of the pension benefit she is receiving.

According to Picker, a new I.R.S. Revenue Ruling (2005-36) allows a beneficiary to disclaim — essentially refuse — an inherited asset even after receiving a benefit from it. The disclaimed amount would, by default, be paid to her father’s estate. Presumably his will would direct that his assets are to be equally divided between his children.

Since she is also a beneficiary of her father’s estate, your daughter would also have to disclaim the part of the pension that is paid to the estate in order for her brother to receive the full amount.

This is cumbersome, but it can be done. However, a disclaimer must be executed within nine months of the date of death. You would definitely need an attorney.

If more than nine months have elapsed since your ex-husband died, unfortunately nothing can be done.

Finally, your daughter needs to be careful about how she handles the pension money she is splitting with her brother. Your son does not have to pay income tax on this because, as Picker points out, it is considered a “gift” from his sister. If she gives him more than $11,000 in a single year she is required to file a gift tax return.

There are ways to mitigate this, especially if either or both children are married. By law, a couple can combine their annual gifting limits and transfer a total of $22,000 ($11,000 + $11,000) to a single individual without any gift tax implications.

If your daughter and son were both married, she and her husband could transfer as much as $44,000 a year to your son and his spouse ($22,000 + $22,000).

I’m sorry to be the bearer of bad news. I only hope that others reading your story learn from it.

Best wishes,


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