If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.
The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.
The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.
Running the numbers
If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.
Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).
If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.
We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.
If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”
Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.
What’s an “improvement”?
In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.
Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.
Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.
Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.
2 safe harbors
Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:
1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.
2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.
There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.© 2017
Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.
What are the deduction rates?
The rates vary depending on the purpose and the year:
Business: 54 cents (2016), 53.5 cents (2017)
Medical: 19 cents (2016), 17 cents (2017)
Moving: 19 cents (2016), 17 cents (2017)
Charitable: 14 cents (2016 and 2017)
The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.
In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.
What other limits apply?
The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.
For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)
And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.
There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.
So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.
And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.
Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.
Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.
When filing is required
Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:
When filing isn’t required
No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.
If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.
Meeting the deadline
The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.
Have questions about gift tax and the filing requirements? Contact us to learn more.
Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.
Current tax treatment
ISOs must comply with many rules but receive tax-favored treatment:
So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.
Future exercises and stock sales
If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.
Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.
The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.
Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain.
If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward. © 2017
The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.
Sec. 199 deduction 101
The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.
The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
How income is calculated
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:
• Tangible personal property (for example, machinery and office equipment),
• Computer software, and
• Master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return. © 2017
Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.
Limits on the deduction
First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.
Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.
However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
Changing the tax treatment
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.
If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.
Deduction for state and local sales tax benefits some, but not all, taxpayers
The break allowing taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes was made “permanent” a little over a year ago. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat.
Your 2016 tax return: How do you determine whether you can save more by deducting sales tax on your 2016 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.
Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).
2017 and beyond: If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. When the PATH Act made the break “permanent” in late 2015, that just meant that there’s no scheduled expiration date for it. Congress could pass legislation to eliminate the break (or reduce its benefit) at any time.
Recent Republican proposals have included elimination of many itemized deductions, and the new President has proposed putting a cap on itemized deductions. Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.
Questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return? Or about the impact of possible tax law changes on your 2017 tax planning? Contact us — we can help you maximize your 2016 savings and effectively plan for 2017. © 2017
Do you start thinking about filing your tax return when it gets close to the April deadline? You might even want to file for an extension so you don’t have to send your return in until October. But filing early can help protect you from tax identity theft, a growing scam in which thieves file bogus returns using victims’ Social Security numbers. Tax ID theft can cause big headaches and delay legitimate refunds. But if you file first, it will be the return filed by a potential thief that will be rejected, not yours. The IRS begins accepting 2016 returns on Jan. 23.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)
If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
Few changes to retirement plan contribution limits for 2017
Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.
Type of limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Contributions to defined contribution plans
Contributions to SIMPLEs
Contributions to IRAs
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Catch-up contributions to SIMPLEs
Catch-up contributions to IRAs
Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.
However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.
With health care costs continuing to climb, tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three accounts? Here’s an overview:
HSA. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
HRA. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Questions? We’d be happy to answer them — or discuss other ways to save taxes in relation to your health care expenses.
This year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.
Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.
On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.
Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.
There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.
The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.
This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.
Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, discuss with us whether a conversion is right for you.
It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.
The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.
50 is the magic number
Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.
Under the law, an ALE:
A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.
A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.
If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.
However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.
We can help
Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.
Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?
The power of tax credits
Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.
Rules to be aware of
A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.
Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.
Are you eligible?
These are only some of the rules that apply to the child and dependent care credit. So please contact us to determine whether you’re eligible.
As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.
If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.
By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:
1. Tax-free gain rollovers. Iys of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.
The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).
Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.
Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, such as your risk tolerance, time horizon and overall investment goals.
It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.
For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.
If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.
What happens if qualified status is lost?
Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.
In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.
Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).
The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.
Now that the April 18 income tax filing deadline has passed, it may be tempting to set aside any thought of taxes until year end is approaching. But don’t succumb. For maximum tax savings, now is the time to start tax planning for 2016.
A tremendous number of variables affect your overall tax liability for the year. Starting to look at these variables early in the year can give you more opportunities to reduce your 2016 tax bill.
For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.
In other words, tax planning shouldn’t be just a year-end activity.
In recent years, planning early has been a challenge because there were a lot of expired tax breaks where it was uncertain whether they’d be extended for the year. But the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks through 2016, or, in some cases, later. It also made many breaks permanent.
For example, the PATH Act made permanent the deduction for state and local sales taxes in lieu of state and local income taxes and tax-free IRA distributions to charities for account holders age 70½ or older. So you don’t have to wait and see whether these breaks will be available for the year like you did in 2014 and 2015.
To get started on your 2016 tax planning, contact us. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.
The short answer is: none. You need to hold on to all of your 2015 tax records for now. But this is a great time to take a look at your records for previous tax years and determine what you can purge.
The 3-year rule
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss most records related to tax returns for 2012 and earlier years.
What to keep longer
You’ll need to hang on to certain records beyond the statute of limitations:
Just a starting point
This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.
Yes, the federal income tax filing deadline is slightly later than usual this year — April 18 — but it’s now nearly upon us. So, if you haven’t filed your return yet, you may be thinking about an extension.
Filing for an extension allows you to delay filing your return until the applicable extension deadline:
While filing for an extension can provide relief from April 18 deadline stress, it’s important to consider the perils:
A tax-smart move?
Filing for an extension can still be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. Please contact us if you need help or have questions about avoiding interest and penalties.
Starting a new business is an exciting time. But before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.
Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away.
How expenses are handled on your tax return
When planning a new enterprise, remember these key points:
An important decision
Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.
If you suffer damage to your home or personal property, you may be able to deduct these “casualty” losses on your federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.
Here are some things you should know about deducting casualty losses:
When to deduct. Generally, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.
Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)
$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.
10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.
Have questions about deducting casualty losses? Contact us!
If your 2015 tax liability is higher than you’d hoped and you’re ready to transfer some assets to your loved ones, now may be the time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your incometax liability — and perhaps your family’s tax liability overall:
1. Gift appreciated or dividend-producing assets to loved ones eligible for the 0% rate. The 0% rate applies to both long-term gain and qualified dividends that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.
2. Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0% rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8% net investment income tax on dividends from the assets or if you sold the assets.
3. Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.
If you’re considering making gifts to someone who’ll be under age 24 on , make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too. To learn more about tax-smart gifting, contact us.
Tax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible. Have you maxed out your 2015 limits?
While it’s too late to add to your 2015 401(k) contributions, there’s still time to make 2015 IRA contributions. The deadline is . The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2015).
A traditional IRA contribution also might provide some savings on your 2015 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2015 tax return.
Evaluate your options
If you don’t qualify for a deductible traditional IRA contribution, see if you qualify to make a Roth IRA contribution. If you exceed the applicable income-based limits, a nondeductible traditional IRA contribution may even make sense. Neither of these options will reduce your 2015 tax liability, but they still provide valuable opportunities for tax-deferred or tax-free growth.
We can help you determine which type of contributions you’re eligible for and what makes sense for you.
Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two valuable credits are especially for small businesses that offer certain employee benefits. Can you claim one — or both — of them on your 2015 return?
Retirement plan credit
Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified startup costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.
Small-business health care credit
The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2015, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.
To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be taken for only two years, and they must be consecutive. (Credits taken before 2014 don’t count, however.)
Take all the credits you’re entitled to
If you’re not sure whether you’re eligible for these credits, we can help. We can also advise you on what other tax credits you might be eligible for when you file your 2015 return.
When it comes to deducting charitable gifts, all donations are not created equal. As you file your 2015 return and plan your charitable giving for 2016, it’s important to keep in mind the available deduction:
Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.
Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held more than one year.
Tangible personal property. Your deduction depends on the situation:
Vehicle. Unless it’s being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.
Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.
Finally, be aware that your annual charitable donation deductions may be reduced if they exceed certain income-based limits. If you receive some benefit from the charity, your deduction must be reduced by the benefit’s value. Various substantiation requirements also apply. If you have questions about how much you can deduct, let us know.
If there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 return. To max out your education-related breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.
Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.
Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.
How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact us.
Today it’s becoming more common to work from home. But just because you have a home office space doesn’t mean you can deduct expenses associated with it.
If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.
Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.
A valuable break
If you are eligible, the home office deduction can be a valuable tax break. You may be able to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
Or you can take the simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.
For employees, home office expenses are a miscellaneous itemized deduction. This means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI).
If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income.
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact us for more information.
Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017.
The break had expired December 31, 2014, for most assets. So the PATH Act may give you a tax-saving opportunity for 2015 you wouldn’t otherwise have had. Many businesses will benefit from claiming this break on their 2015 returns. But you might save more tax in the long run if you forgo it.
What assets are eligible
For 2015, new tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified leasehold-improvement property.
Acquiring the property in 2015 isn’t enough, however. You must also have placed the property in service in 2015.
Should you or shouldn’t you?
If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.
But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2015, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re in a higher bracket.
We can help
If you’re unsure whether you should take bonus depreciation on your 2015 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.
If you’re like many Americans, you may not start thinking about filing your tax return until the deadline (this year, ) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.
How filing early helps
In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.
Another key date
Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is — the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.
An added bonus
Let us know if you have questions about tax identity theft or would like help filing your 2015 return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.
By purchasing stock in certain small businesses, you can not only diversify your portfolio but also enjoy preferential tax treatment. And under a provision of the tax extenders act signed into law this past December (the PATH Act), such stock is now even more attractive from a tax perspective.
100% exclusion from gain
The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010. (Smaller exclusions are available for QSB stock acquired earlier.)
The act also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.
What stock qualifies?
A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business.
Many factors to consider
Of course tax consequences are only one of the many factors that should be considered before making an investment. Also, keep in mind that the tax benefits discussed here are subject to additional requirements and limits. Consult us for more details.
For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.
So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.
Questions about this or other PATH Act breaks that might help you save taxes on your 2015 tax return? Contact us — we can help you identify which tax breaks will provide you the maximum benefit.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks, in some cases making them permanent. Extended breaks include many tax credits — which are particularly valuable because they reduce taxes dollar-for-dollar (compared to deductions, for example, which reduce only the amount of income that’s taxed).
Here are two extended credits that can save businesses taxes on their 2015 returns:
1. The research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has been made permanent. It rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial.
2. The Work Opportunity credit. This credit has been extended through 2019. It’s available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.
Want to know if you might qualify for either of these credits? Or what other breaks extended by the PATH Act could save taxes on your 2015 return? Contact us!
Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, the limits remain unchanged for 2016:
Type of limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Contributions to defined contribution plans
Contributions to SIMPLEs
Contributions to IRAs
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
Catch-up contributions to SIMPLEs
Catch-up contributions to IRAs
Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2016. And if you turn age 50 in 2016, you can begin to take advantage of catch-up contributions.
However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2016, check with us.
Many valuable tax breaks expired December 31, 2014. For them to be available for 2015, Congress had to pass legislation extending them — which it now has done, with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by the President on December 18. The PATH Act not only revives expired breaks for 2015 but also makes many breaks permanent, generally extends the rest through either 2016 or 2019, and enhances some breaks.
Here is a sampling of extended breaks that may benefit you or your business:
Please contact us for more information on these and other breaks under the PATH Act. Keep in mind that, for you to take maximum advantage of certain extended breaks on your 2015 tax return, quick action may be required.
The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2015 tax liability — you just must act by December 31:
Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.
If you’re unsure whether these steps are right for you, consult us before taking action.
After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).
If you don’t comply — which usually requires taking the RMD by — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.
So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.
Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.
Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.
For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.
Recently, the IRS released the 2016 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.45 million (up from $5.43 million in 2015). But even with the rising exemptions, annual exclusion gifts offer a valuable tax-saving opportunity.
The 2015 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2016.)
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.
But you need to use your 2015 exclusion by . The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your grandson this year, you can’t add $28,000 to your 2016 exclusions to make a $56,000 tax-free gift to him next year.
Questions about making annual exclusion gifts or other ways to transfer assets to the next generation while saving taxes? Contact us!
From the Thanksgiving kick-off of the holiday season through , many businesses find themselves short-staffed as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace to be nearly a ghost town as employees scramble to use their time off rather than lose it.
A paid time off (PTO) contribution arrangement may be the solution. It allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting the excess PTO amounts to employer contributions.
A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.
To offer a PTO contribution arrangement, you simply need to amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms, and additional rules apply.
To learn more about PTO contribution arrangements, including their tax implications, please contact us.
While tax consequences should never drive investment decisions, it’s critical that they be considered — especially by higher-income taxpayers, who may be facing the 39.6% short-term capital gains rate, the 20% long-term capital gains rate and the 3.8% net investment income tax (NIIT).
Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:
Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.
These are only a few of the year-end strategies that may help you reduce taxes on your investments. For more ideas, contact us.
Most of us have retirement savings to help us afford the lifestyle we want when we retire. Some savings are in Individual Retirement Accounts usually managed by the financial institutions of our choice.
What a lot of us don’t know are the contribution and withdrawal rules governing IRA accounts, and the penalties for non-compliance.
For 2015, the maximum you may be able to con tribute to a traditional or Roth IRA is:
This is the maximum you may contribute to any or all IRAs combined.
If you are age 701⁄2 or older, you may not contribute to a traditional IRA at all. You may contribute to a Roth IRA for as long as you want as long as you continue to receive compensation.
The penalty you pay for contributing more than is allowed is an excise tax of 6% on amounts over the contribution limit.
Other IRA rules may limit or eliminate your ability to contribute to an IRA, including income, filing status and the amount of your taxable compensation. Tax deductions may be limited based on whether you or your spouse has an employer retirement plan if your income is above certain levels.
You must make withdrawals from a traditional IRA by April 1of the year following your 70 1⁄2 birthday; failure to do so requires that you pay a 50% excise tax on the amount you are required to take. You can request a waiver of the tax if you did not take your required withdrawal.
You’re taking the right steps to help secure your retirement future with an IRA, following the rules helps you maximize your retirement savings.
Information received from Summer 2015 SSA/IRS Reporter
If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. (Some states do offer tax incentives for contributing.) However, for Colorado residents, you are eligible for a Colorado deduction to the Colorado 529 plan.
Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
529 plans offer other benefits as well:
Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).
The biggest downside may be that your investment options — and when you can change them — are limited. Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.
Your 401(k) plan may allow you to borrow from the plan. However, you should consider a few things before taking a plan loan.
If you don’t repay the full amount of the loan, including interest, according to the loan’s terms, the unpaid loan amount is a distribution to you from the plan. Your plan may even require you to repay the remaining amount of the loan in full if you stop working for the employer that is sponsoring the plan. Otherwise, the unpaid amount is considered a plan distribution to you.
Generally, you have to include any previously untaxed amount of the distribution in your gross income for the year in which the distribution occurs. You may also have to pay an additional 10 percent tax on the amount of the taxable distribution, unless you:
are age 59 1/2 or older, or
qualify for another exception to this additional 10 percent tax.
Any unpaid plan loan amount also means you will have less money saved for your retirement. Your 401(k) plan is designed so you can save money while working for your retirement. So, carefully consider all other alternatives before borrowing from your future.
Information received from Fall 2015 SSA/IRA Reporter
The first step to smart timing is to project your business’s income and expenses for 2015 and 2016. With this information in hand, you can determine the best year-end timing strategy for your business.
If you expect to be in the same or lower tax bracket in 2016, consider:
Deferring income to 2016. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
Accelerating deductible expenses into 2015. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before , so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.
If you expect to be in a higher tax bracket in 2016, accelerating income and deferring deductible expenses may save you more tax over the two-year period (though it will increase your 2015 tax liability).
For help projecting your income and expenses or for more ideas on how you can effectively time them, please contact us.
Now may be a great time to refinance, because mortgage rates are still low but expected to increase. Before deciding to refinance, however, here are a couple of tax consequences to consider:
1. Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness, and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt, and deductible interest is subject to a $100,000 debt limit.
2. Prepaying interest. “Points” paid when refinancing generally are amortized and deducted ratably over the life of the loan, rather than being immediately deductible. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. But if you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.
Is your head spinning? Don’t worry; we can help you understand exactly what the tax consequences of refinancing will be for you. Contact us today!
The additional Medicare tax and net investment income tax (NIIT) apply when certain income exceeds the applicable threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers.
The following types of executive compensation could be subject to the 0.9% additional Medicare tax if your earned income exceeds the applicable threshold:
And the following types of gains from exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold:
Concerned about how your exec comp will be taxed? Please contact us. We can help you assess the potential tax impact and implement strategies to reduce it.
Starting in 2016, applicable large employers (ALEs) under the Affordable Care Act (ACA) will have to file Forms 1094-C and 1095-C to provide information to the IRS and plan participants regarding their health care benefits for the previous year. Both the forms and their instructions are now available for ALEs to study and begin preparations for required filings. In addition, organizations that expect to file Forms 1094 and 1095 electronically can peruse two final IRS publications setting out specifications for using the new ACA Information Returns system.
Keep in mind that ALEs are employers with 50 or more full-time employees or the equivalent. And even ALEs exempt from the ACA’s shared-responsibility (or “play or pay”) provision for 2015 (that is, ALEs with 50 to 99 full-timers or the equivalent who meet certain eligibility requirements) are still subject to the information reporting requirements in relation to their 2015 health care benefits.
If your company is considered an ALE, please contact us for assistance in navigating the ACA’s complex requirements for avoiding penalties and properly reporting benefits. If you’re not an ALE, we can still help you understand how the ACA affects your small business and determine whether you qualify for a tax credit for providing coverage.
Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but generally only to the extent that they exceed 10% of your adjusted gross income.
Taxpayers age 65 and older can enjoy a 7.5% floor through 2016. The floor for alternative minimum tax purposes, however, is 10% for all taxpayers.
By “bunching” nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.
If it’s looking like you’re close to exceeding the floor in 2015, consider accelerating controllable expenses into this year. But if you’re far from exceeding it, to the extent possible (without harming your or your family’s health), you might want to put off medical expenses until next year, in case you have enough expenses in 2016 to exceed the floor.
For more information on how to bunch deductions or exactly what expenses are deductible, please contact us.
Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.
If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.
For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.
For more ideas on how to maximize your vehicle-related deductions, contact us.
Contributing to a traditional employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, offers many benefits:
For 2015, you can contribute up to $18,000. If your current contribution rate will leave you short of the limit, consider increasing your contribution rate through the end of the year. Because of tax-deferred compounding, boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.
If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2015). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.
Have questions about how much to contribute? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.
Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies. The net number represents your taxable estate.
You can transfer up to your available exemption amount at death free of federal estate taxes. So if your taxable estate is equal to or less than the estate tax exemption (for 2015, $5.43 million) reduced by any gift tax exemption you used during your life, no federal estate tax will be due when you die. But if your taxable estate exceeds this amount, it will be subject to estate tax. Many states, however, now impose estate tax at a lower threshold than the federal government does, so you’ll also need to consider the rules in your state.
If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.
Be prepared to see the wage limit increase for Colorado Unemployment Premiums in 2016.
Each year, employers must pay annual unemployment premiums for employee wages. Once the wage limit is reached, no additional unemployment taxes are paid for this employee for the current year. These premiums are paid quarterly to the state.
The State of Colorado uses the premiums paid by employers to provide unemployment insurance benefits to unemployed individuals.
According to the State of Colorado, the wage limit will increase to $12,200 in 2016
Previous year limits:
$11,800 for 2015
$11,700 for 2014
$11,300 for 2013
If you have any questions regarding these changes, please contact us.
With Congress returning from its August recess, this is the question on tax-savvy Americans’ minds. Many valuable tax breaks aren’t permanent, so Congress has to pass legislation extending them to keep them in effect. Unfortunately, Congress often waits until the last minute to do so.
For example, Congress didn’t pass 2014 extenders until December 2014, making the legislation retroactive to January 1, 2014 — but not extending the breaks to 2015. So we’re again in a waiting game to see what will happen with extenders legislation. Some believe Congress will act soon, while others think we’ll again be waiting until December.
Here are several expired breaks that may benefit you or your business if extended:
Please check back with us for the latest information. Keep in mind that quick action after extenders legislation is passed may be required in order to take maximum advantage of the extended breaks.
The tax treatment of investment income varies, and not just based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at the favorable long-term capital gains tax rate (generally 15% or 20%) rather than at the applicable ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay qualified dividends may be more attractive tax-wise than other income investments, such as CDs and taxable bonds.
But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:
Also, the tax treatment of bond income varies. For example:
While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.
If you’re a collector, donating from your collection instead of your bank account or investment portfolio can be tax-smart. When you donate appreciated property rather than selling it, you avoid the capital gains tax you would have incurred on a sale. And long-term gains on collectibles are subject to a higher maximum rate (28%) than long-term gains on most long-term property (15% or 20%, depending on your tax bracket) — so you can save even more taxes.
But choose the charity wisely. For you to receive a deduction equal to fair market value rather than your basis in the collectible, the item must be consistent with the charity’s purpose, such as an antique to a historical society.
Properly substantiating the donation is also critical, and this may include an appraisal. If you donate works of art with a collective value of $5,000 or more, you’ll need a qualified appraisal, and if the collective value is $20,000 or more, a copy of the appraisal must be attached to your tax return. If an individual item is valued at $20,000 or more, you may also be required to provide a photograph of that item.
If you’re considering a donation of artwork or other collectibles, contact us for help ensuring you can maximize your tax deduction.
Teenagers’ retirement may seem too far off to warrant saving now, but IRAs can be perfect for teens precisely because they’ll likely have many years to let their accounts grow tax-deferred or tax-free.
The 2015 contribution limit is the lesser of $5,500 or 100% of earned income. A teen’s traditional IRA contributions typically are deductible, but distributions will be taxed. Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free.
Choosing a Roth IRA is typically a no-brainer if a teen doesn’t earn income that exceeds the standard deduction ($6,300 for 2015 for single taxpayers), because he or she will likely gain no benefit from deducting a traditional IRA contribution. Even above that amount, the teen probably is taxed at a low rate, so the Roth will typically still be the better answer.
How powerful can an IRA for a teen be? Here’s an example: Both Madison and Noah contribute $5,500 per year to their IRAs through age 66 and earn a 6% rate of return. But Madison starts contributing when she gets her first job at age 16, while Noah waits until age 23, after he’s graduated from college and started his career. Madison’s additional $38,500 of early contributions results in a nest egg at full retirement age of 67 that’s nearly $600,000 larger than Noah’s — $1,698,158 vs. $1,098,669!
Contact us for more ideas on helping teens benefit from tax-advantaged saving.
Earlier this summer Congress passed the Trade Preference Extension Act of 2015 related to trade negotiations, TPA, etc. To pay for part of the Act’s provisions, Congress increased the penalties for not filing information returns (Form 1099 series filings). If you are the owner of a small business or firm, you are required to file Form 1099 if you pay certain vendors or rents during the year. This change will increase the penalties, doubling them in most cases, for any business that does not file these forms, missed filing one or more 1099s or filed an incorrect Form 1099. Here’s a sample of the changes:
Previously the penalty for not filing each 1099 was $100. Now that penalty is $250 for each form not filed. Note that there is a separate penalty for not filing the form with the IRS and not sending the form to the vendor for a total of $500 for each Form 1099 not prepared.
If the IRS considers the non-reporting intentional, the penalty has been increased from $250 to $500 each form not sent to the IRS or the payee.
We suggest you start gathering the information for Form 1099 reporting now. You can use Form W-9, Request for Taxpayer Identification Number and Certification, to obtain the tax ID number from your vendors.
Who should you send a Form 1099-MISC? Generally you will send a Form 1099-MISC if all of the following apply:
Paid to a nonemployee
Paid for services
Paid to an individual, partnership or estate. Also payments to attorneys that are incorporated should be sent Form 1099-MISC.
Payment is $600 or more for the year including payment for incidental parts or materials used by the payee in rendering the service. (examples are paint supplied by painter, materials supplied by plumber, etc.)
Payment was not done with a credit card, debit card, PayPal or gift card. These are all reported by the bank or processor on Form 1099-K. If you report them on Form 1099-MISC, they will be double reported.
Other 1099 reporting rules may apply. Consult the Form 1099-MISC instructions for more details.
On July 31, President Obama signed into a law a bill that included changes to due dates for certain returns. These changes will be effective for tax year beginning after December 31, 2015, so it will affect most taxpayers beginning with the 2017 filing season.
The biggest change is that Partnership returns will be due March 15th instead of April 15th. The theory is this will reduce the number of K-1s received just prior to the April 15th individual return due date and lowering the amount of individual returns going on extension. We do not believe that this will be the case. Likely it will mean more partnership returns going on extension and will not have a measurable impact on the number of individual returns being extended. If a partnership is extended, the extension is valid for six months, meaning extended partnership returns will still be due on September 15th.
There are no changes to the due dates for individual or S Corp returns. Individuals are still due April 15th and S Corps are due March 15th.
Trust and calendar year Estate income tax returns are still due on April 15th. However, if an extension is filed, the extended due date will now be September 30th. Currently, extended Trust and Estate returns are due on September 15th.
The due date for calendar returns C Corp returns will now be April 15th. Currently, they are due on March 15th. Fiscal year C Corp returns will be due 3 ½ months after their year-end, unless they have a June 30 year-end. In this case the due date will remain September 15th.
The old FBAR reporting, now called FinCen Report 114 currently have a June 30th due date. Under the new law, they will be due April 15th. However, they will be eligible for a six-month extension until October 15th. We assume that the report will automatically extend with the extension of the individual tax return and a separate extension will not be required.
Exempt organizations (Form 990) will remain due May 15th if they have a calendar year-end. In the past they had to file an initial 3 month extension request, and a second 3 month extension request. Under the new law, they will be granted a six month extension when they request and the due date will be November 15th.
Employee Benefit Plans (Form 5500) will remain due July 31st. Currently, with an extension, the due date is October 15th. Under the new law, they will be granted an additional month extension and the due date will be November 15th.
Mortgage interest rates are still at historically low levels, but they’re expected to go up by year end. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:
0% capital gains rate. If the child is in the 10% or 15% tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you’d owe if you sold the assets yourself. As long as the assets are worth $14,000 or less (when combined with any other 2015 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion.
Low federal interest rates. Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are very low by historical standards. But these rates are also expected to increase by year end.
If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact us.
If you use your car in your business and you use it only for that purpose, you may deduct its entire cost of operation. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.
Standard mileage rate method: The rate for 2015 is 57.5 cents per mile. If you are self-employed and maintain an eligible office in your home, you can deduct the mileage to and from your client’s or customer’s place of business, as well as between jobs. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes. To use the standard mileage rate, you must not have claimed a depreciation deduction for the car using any method other than straight-line, nor have claimed a Section 179 deduction on the car.
Actual expense method: Actual expenses include the cost of gas, oil, insurance, repairs, maintenance, tires, washing, and licenses. Depreciation or lease payments are eligible too. You can also deduct the cost of business-related parking fees, tolls and state and local taxes not paid with the acquisition or disposition of the vehicle.
Taxpayers who wish to use the standard mileage rate in lieu of actual expenses for computing deductible vehicle expenses must elect to do so in the first year. Switching to the standard mileage rate in a later year is not an option.
If you have additional questions regarding the deductible business expenses, please contact us. We’re happy to help you.
By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings may be even greater than it once would have been. (S corporation dividends paid to shareholder-employees generally won’t be subject to the 3.8% net investment income tax.)
But paying little or no salary to S corporation shareholder-employees is risky. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low. To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, company financial data and other evidence.
Do you have questions about compensating S corporation shareholder-employees? Contact us — we can help you determine the mix of salary and dividends that can keep tax liability as low as possible while standing up to IRS scrutiny.
Have you heard about the Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) Act? If you answered no than you are not alone.
It is a fairly new piece of legislation that is still in the process of being finalized. Under this newly revised Section 529A of the Internal Revenue Code, states may establish and maintain a new type of tax-favored savings program through which contributions may be made to the account of an eligible disabled individual to meet qualified disability expenses. Each state is responsible for establishing and operating the ABLE program, and with any luck, accounts will be able to be established before the end of 2015. On June 3, 2015, Colorado became the 17th state to enact ABLE.
Please follow this link to view a complete summary of the ABLE Act, and a very helpful question and answer section: http://www.ndss.org/Advocacy/Legislative-Agenda/Creating-an-Economic-Future-for-Individuals-with-Down-Syndrome/Achieving-a-Better-of-Life-Experience-ABLE-Act/
With nonqualified stock options (NQSOs), if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for. This is the same as for the perhaps better-known incentive stock options (ISOs).
The tax treatment of NQSOs, however, differs from that of ISOs: NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately. Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability.
When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax.
Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them.
If you usually receive a large federal income tax refund, you’re essentially making an interest-free loan to the IRS. Rather than wait until you file your 2015 tax return in 2016, why not begin enjoying your “refund” now by reducing your withholdings or estimated tax payments for the remainder of 2015?
It’s particularly important to review your withholdings, and adjust them if necessary, when you experience a major life event, such as marriage, divorce, birth or adoption of a child, or a layoff suffered by you or your spouse.
If you’d like help determining what your withholding or estimated tax payments should be for the second half of the year, please contact us.
On June 26, the U.S. Supreme Court ruled that same-sex couples have a constitutional right to marry, making same-sex marriage legal in all 50 states. For federal tax purposes, same-sex married couples were already considered married, under the Court’s 2013 decision in United States v. Windsor and subsequent IRS guidance — even if their state of residence didn’t recognize their marriage.
From a tax planning perspective, the latest ruling means that, in states where same-sex marriage hadn’t been recognized, same-sex married couples no longer will need to deal with the complications of being treated as married for federal tax purposes but not married for state tax purposes. So their tax and estate planning will be simplified and they can take advantage of state-level tax benefits for married couples. But in some cases, these couples will also be subject to some tax burdens, such as the “marriage penalty.”
Same-sex married couples should review their tax planning strategies and estate plans to determine what new opportunities may be available to them and whether there are any new burdens they should plan for. Employers will need to keep a close eye on how these developments will affect their tax obligations in relation to employees who have same-sex spouses. Please contact us if you have questions.
If your child is looking to purchase their first home, you may be able to use your IRA to help them with the down payment. The rules allow a taxpayer to withdraw $10,000 penalty free to purchase a home for the taxpayer or the taxpayer's lineal descendants. The withdrawal is still subject to income tax, but is not subject to the 10% early withdrawal penalty if you are under 59 1/2.
In order to qualify for penalty exemption, the following items must be met:
This strategy is primarily directed to those taxpayers that wish to help their child purchase a home, but do not have the liquidity otherwise. If you have the liquidity, it may make more sense to gift your child the money for a down payment as opposed to taking a taxable distribution from your IRA.
Please contact us should you have any questions regarding the proper way to structure the aforementioned transaction.
Ignoring your tax bill from the IRS? Don't. Here are some important tips that will help you avoid extra charges and pay your tax debt.
For a more in depth full list of tips please visit http://www.irs.gov/uac/Six-Tips-to-Help-You-Pay-Your-Tax-Bill-this-Summer or contact us for more information.
Information retrieved from IRS.gov
Planning on getting married this summer? Remember that tax planning is just as important as planning for the perfect day. Here are some tips from the IRS that will make tax time easier next year.
Change of name. If you change your name, make sure you report it to the SSA.
Change tax withholding. You should consider giving your employer a new Form W-4, Employee's Withholding Allowance Certificate.
Change in filing Status. If you are married as of December 31st, that is your marital status for the entire year for tax purposes.
For more in depth information on this topic please visit http://www.irs.gov/uac/Include-a-Few-Tax-Items-in-Your-Summer-Wedding-Checklist or contact us for additional information.
Information retrieved from IRS.gov
With the U.S. Supreme Court’s June 25 decision upholding the Affordable Care Act (ACA) yet again, employers subject to the act’s information reporting provision can no longer afford to put off planning in the hope that the requirements might go away.
Beginning in 2016, “large” employers as defined by the act (generally employers with 50 or more full-time employees or the equivalent) must file Forms 1094 and 1095 to provide information to the IRS and plan participants about health coverage provided in the previous year (2015).
Fortunately, recent IRS guidance helps clarify the reporting requirements. And a new IRS Q&A document addresses more specific issues that may arise while completing the forms.
Keep in mind that, while some “midsize” employers (generally employers with 50 to 99 full-time employees or the equivalent) can qualify for an exemption from the play-or-pay provision in 2015 if they meet certain requirements, these employers still will be subject to the information reporting requirements.
If your organization is among those required to file Forms 1094 and 1095 and you need help complying with the requirements, please contact us.
A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.
Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.
If you don’t pay attention to the details, the tax consequences of a sale may be different from what you expect. For example, if you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.
And when it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.
Finally, consider the transaction costs, such as broker fees. While of course such costs aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.
If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.
If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes.
And the employee might be subject to double taxation if both states attempt to tax his or her income — the recent Supreme Court ruling in Comptroller of the State of Maryland v. Wynne addressed a similar issue, although in that case the taxpayers weren’t telecommuters but owners of an S corporation that earned income in other states.
The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement. If you’re considering hiring employees to telecommute from outside your state, we can help you assess the potential tax impact.© 2015
If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. You can deduct the vehicle’s fair market value (FMV) if the charity:
But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.
You also must obtain proper substantiation from the charity, including a written acknowledgment that:
For more information on these and other rules that apply to vehicle donation deductions, please contact us.© 2015
As the school year draws to a close, it’s a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if you have young children.
One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.
Here are some other key ESA benefits:
The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.
Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!© 2015
and losses from investment real estate or rental property are passive by
definition — unless you’re a real estate professional. Why is this important?
Passive income may be subject to the 3.8% net investment income tax (NIIT), and
passive losses are deductible only against passive income, with the excess
being carried forward.
To qualify as a real estate professional, you must annually perform:
Each year stands on its own, and there are other nuances. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn’t keep adequate records of time spent.
If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.© 2015
Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for.
ISOs must comply with many rules but receive tax-favored treatment:
There also might be alternative minimum tax consequences in certain situations. If you’ve received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.
Whether you filed your 2014 income tax return by the April 15 deadline or filed for an extension, you may think that it’s a good time to take a break from thinking about taxes. But doing so could be costly. Now is actually the time you should begin your 2015 tax planning — if you haven’t already.
A tremendous number of variables affect your overall tax liability for the year, and starting to look at these variables early in the year can give you more opportunities to reduce your 2015 tax bill. For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.
In other words, tax planning shouldn’t be just a year end activity. To get started on your 2015 tax planning, contact us. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.© 2015
additional 0.9% Medicare tax applies to FICA wages and self-employment income
exceeding $200,000 per year ($250,000 for married filing jointly and $125,000
for married filing separately). Unfortunately, the withholding rules have been
tripping up some taxpayers, causing them to face an unexpected tax bill — plus
interest and penalties — when they file their returns.
Employers must withhold the additional tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So if your wages don’t exceed $200,000, your employer won’t withhold the tax — even if you’re liable for it. This might occur because you and your spouse’s combined wages exceed the $250,000 threshold for joint filers or because you have wages from a second job or have self-employment income.
If you expect to be in the same situation in 2015, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments. If you have questions about the additional 0.9% Medicare tax, please contact us.© 2015
When a company’s deductible expenses exceed its income, generally a net operating loss (NOL) occurs (though of course the specific rules are more complex). If when filing your 2014 income tax return you’ve found that your business had an NOL, there is an upside: tax benefits.
When a business incurs a qualifying NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.
However, there is an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.
In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL.
Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefit of an NOL.© 2015
The IRS considers a paper return that’s due April 15 to be timely filed if it’s postmarked by midnight on April 15. But dropping your return in a mailbox on the 15th may not be sufficient.
For example, let’s say you mail your return with a payment on April 15, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.
To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:
Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. For example, DHL is no longer an authorized delivery service.
If you’re concerned about meeting the April 15 deadline, another option is to file for an extension. We can help you determine if that makes sense for you.© 2015
The deadline for 2014 IRA contributions is April 15, 2015. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2014).
If you haven’t already maxed out your 2014 limit, consider making one of these types of contributions by April 15:
1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2014 tax return. Account growth is tax-deferred; distributions are subject to income tax.
2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits may reduce or eliminate your ability to contribute, however.
3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.
Want to know which option best fits your situation? Contact us.
Generally, you’ll need to file a gift tax return for 2014 if, during the tax year, you made gifts:
If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.
There may be other instances where you’ll need to file a gift tax return — or where you won’t need to file one even though a gift exceeds your annual exclusion. Contact us for details.
your business has made repairs to tangible property, such as buildings,
machinery, equipment and vehicles, you may be eligible for a deduction on your
2014 income tax return. But you must make sure they were truly “repairs,” and
not actually “improvements.”
Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:
Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. (A qualified small business is generally one with gross receipts of $10 million or less.)
Contact us to ensure that you’re taking all of the repair and maintenance deductions you’re entitled to.
interest — interest on debt used to buy assets held for investment, such as
margin debt used to buy securities — generally is deductible for both regular
tax and alternative minimum tax purposes. But special rules apply that can make
the deduction less beneficial than you might think.
Your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward, and you can deduct it in a later year if you have excess net investment income.
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.
If you’re wondering whether you can claim the investment interest expense deduction on your 2014 return, please contact us. We can run the numbers to calculate your potential deduction — or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.
Appreciating investments that don’t generate current income aren’t taxed until sold, deferring tax and perhaps allowing you to time the sale to your tax advantage. Review your year-to-date gains and losses now to see if selling any additional investments by Dec. 31 can reduce your 2014 tax liability.
For example, if you’ve cashed in some big gains during the year, look for unrealized losses in your portfolio and consider selling them to offset your gains. Or if you have net losses, consider selling some appreciated investments, because the losses can absorb the gain. If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married filing separately) of the net losses against ordinary income, though you can carry forward excess losses indefinitely.
If you bought the same investment at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.
For more ideas on how to reduce taxes on your investments, contact us. We can provide strategies that are right for your situation. But don’t wait — most strategies must be implemented by Dec. 31 to reduce your 2014 tax liability.
If you’re looking to reduce your 2014 tax bill, you may want to consider purchasing a business vehicle before year end. Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to expense, rather than depreciate over a period of years, some or all of the vehicle’s cost.
The normal Sec. 179 expensing limit generally applies to vehicles weighing more than 14,000 pounds. The limit for 2014 is $25,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $200,000. These amounts have dropped significantly from their 2013 levels. But Congress may still revive higher Sec. 179 amounts for 2014.
Even when the normal Sec. 179 expensing limit is higher, a $25,000 limit applies to SUVs weighing more than 6,000 pounds but no more than 14,000 pounds. Vehicles weighing 6,000 pounds or less are subject to the passenger automobile limits. For 2014, the depreciation limit is $3,160.
Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to learn what tax benefits you might enjoy if you make the purchase by Dec. 31.
Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial.
One deductible expense you may be able to control is your property tax payment. You can prepay (by Dec. 31) property taxes that relate to this year but that are due next year, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to next year and deduct the payment on this year’s return.
Don’t forget that the income-based itemized deduction reduction returned last year. Its impact should be taken into account when considering timing strategies.
Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2014? Contact us. We can help you determine what steps to take before year end to reduce your 2014 tax bill.
The long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. If you have loved ones in the 0% bracket, you may be able to take advantage of it by transferring appreciated assets to them. The recipients can then sell the assets at no federal tax cost.
Before acting, make sure the recipients you’re considering won’t be subject to the “kiddie tax.” This tax applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
For children subject to the kiddie tax, any unearned income beyond $2,000 (for 2014) is taxed at their parents’ marginal rate rather than their own, likely lower, rate. So transferring appreciated assets to them will provide only minimal tax benefits.
It’s also important to consider any gift and generation-skipping transfer (GST) tax consequences. For more information on transfer taxes, the kiddie tax or capital gains planning, please contact us. We can help you find the strategies that will best achieve your goals.
If you’re self-employed, you may be able to set up a retirement plan that allows you to make much larger contributions than you could make as an employee. For example, the maximum 2014 employee contribution to a 401(k) plan is $17,500 - $23,000 if you’re age 50 or older. Look at how the limits for these two options available to the self-employed compare:
1. Profit-sharing plan. The 2014 contribution limit is $52,000 - $57,000 if you’re age 50 or older and the plan includes a 401(k) arrangement.
2. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum future annual benefit toward which 2014 contributions can be made is generally $210,000. Depending on your age, you may be able to contribute more than you could to a profit-sharing plan.
You don’t even have to make your 2014 contributions this year. As long as you set up one of these plans by Dec. 31, 2014, you can make deductible 2014 contributions to it until the 2015 due date of your 2014 tax return. Additional rules and limits apply, so contact us to learn which plan would work better for you.
For assets with a useful life of more than one year, businesses generally must depreciate the cost over a period of years. Special breaks are available in some circumstances, but uncertainty currently surrounds them:
Section 179 expensing. This allows you to deduct, rather than depreciate, the cost of purchasing eligible assets. Currently the expensing limit for 2014 is $25,000, and the break begins to phase out when total asset acquisitions for the year exceed $200,000. These amounts have dropped significantly from their 2013 levels. And the break allowing up to $250,000 of Sec. 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.
50% bonus depreciation. This additional first-year depreciation allowance expired Dec. 31, 2013, with a few exceptions.
Accelerated depreciation. This break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.
Many expect Congress to revive some, if not all, of the expired enhancements and breaks after the midterm election in November. So keep an eye on the news. In the meantime, contact us for ideas on how you can maximize your 2014 depreciation deductions.
If you’re a “large” employer, time is running out to prepare for the Affordable Care Act’s (ACA’s) shared responsibility provision, commonly referred to as “play-or-pay.” It’s scheduled to go into effect in 2015.
Under transitional relief the IRS issued earlier this year, for 2015, large employers generally include those with at least 100 full-time employees or the equivalent, as defined by the ACA. However, the threshold is scheduled to drop to 50 beginning in 2016, and that threshold will apply beginning in 2015 for the ACA’s information-reporting provision.
The play-or-pay provision imposes a penalty on large employers if just one full-time employee receives a premium tax credit. The credit is available to employees who enroll in a qualified health plan through a government-run Health Insurance Marketplace and meet certain income requirements — but only if:
· They don’t have access to “minimum essential coverage” from their employer, or
· The employer coverage offered is “unaffordable” or doesn’t provide “minimum value.”
The IRS has issued detailed guidance on what these terms mean and how employers can determine whether they’re a large employer and, if so, whether they’re offering sufficient coverage to avoid the risk of penalties.
If your business could be subject to the play-or-pay provision and you haven’t yet started preparing, do so now. For more information on play-or-pay — or on the information reporting requirements — please contact us.
Are you, your spouse or a dependent heading off to college? If so, here’s a quick tip from the IRS: some of the costs you pay for higher education can save you money at tax time. Here are several important facts you should know about education tax credits:
For more information, visit the Tax Benefits for Education Information Center on IRS.gov. Also, check Publication 970, Tax Benefits for Education. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Many people still ask if they sell their home, do they need to buy another one of equal or greater value. Fortunately, that is the old law and it no longer applies. The general rule under the new law states that a married couple can exclude up to $500,000 ($250,000 for a single person) of gain on the sale of a residence that was used as the main home for two of the last five years.
You might not need to report the sale on your tax return if the gain is not taxable. The best part of the law says that the tax on the excluded gain is not just deferred until a later date, the tax is completely forgiven. Also the new 3.8% net investment income tax does not apply to the excluded gain.
Another area of confusion is that the gain on the sale of your home is the cash you get at closing. If the home was never depreciated, the gain is calculated by taking the selling price of your home, less the selling expenses, less the cost of your home including improvements. This may or may not be the cash you receive. The amount of debt on the property is generally not a factor in determining your gain but it does impact the cash you receive after the loan is paid off.
As usual, there are some exceptions to the general rule. If you used any portion of your home for business, you may owe taxes. This would include using a portion of your home as an office in home or renting the property.
If you have a gain and you haven’t lived in the house for two years, you might still be able to exclude some or all of the gain if unusual circumstances forced you to sell the home. For instance, an unexpected job transfer requiring you to relocate might allow you to utilize a portion of the $500,000 ($250,000) exclusion.
The rules can be tricky and the discussion above is just the basics. If you have an unusual situation with the sale of your home, you should discuss this with your CPA.
A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.
But an installment sale can backfire on the seller. For example:
If you have a traditional IRA, you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don't require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.
Many people make donations to charities whose work they support, but if you are planning to take a tax deduction for your gift, you must have the proper paperwork. Assembling the right documentation can also be tricky because the requirements vary based on whether the donation is cash and on the value of your gift. If you donate less than $250 in cash, for example, a canceled check, credit card statement or similar record may be sufficient, but if you give more, you will need a written acknowledgment from the charity. An additional tax form--and possibly an appraisal--may be needed for non-cash donations, depending on their value. Of course, the organization itself must also qualify as a charity under IRS rules.
Would you like to benefit charity while reducing the size of your taxable estate yet maintain an income stream for yourself? Would you also like to divest yourself of highly appreciated assets and diversify your portfolio with minimal tax consequences? Then consider a CRT. Here’s how it works:
· When you fund the CRT, you receive a partial income tax deduction and the property is removed from your estate.
· For a given term, the CRT pays an amount to you annually.
· At the term’s end, the CRT’s remaining assets pass to charity.
If you fund the CRT with appreciated assets, it can sell them without paying tax on the gain and then invest the proceeds in a variety of stocks and bonds. You’ll owe capital gains tax when you receive CRT payments, but much of the liability will be deferred. Plus, only a portion of each payment will be attributable to capital gains. This also may help you reduce or avoid exposure to the 3.8% net investment income tax and the 20% top long-term capital gains rate.For more ideas on tax-smart gifts to charity, minimizing estate taxes, maintaining an income stream or diversifying your portfolio tax efficiently, contact us.
On May 30, 2014, the governor of Colorado signed House Bill 14-1119 enacting an income tax credit for the donation of food to a hunger-relief charitable organization. The credit would apply to Colorado farmers, ranchers, and fruit / vegetable growers.
You may find a little less in your tax refund this year if you are subject to the new 3.8% net investment income tax that went into effect at the beginning of 2013. It applies to married couples filing jointly with modified adjusted gross income (MAGI) over $250,000 and single people with MAGI above $200,000 (trusts and estates are also affected). It kicks in if you have net investment income, which includes interest, dividends, capital gains and rental and royalty income, among other items.
Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they're commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these two tax pitfalls:
CHICAGO (Reuters) - Paper Social Security benefits statements, which used to be mailed out every year and then fell victim to budget cuts, are going to make a partial comeback.
Starting this September, the Social Security Administration (SSA) will resume mailings at five-year intervals to workers who have not signed up to view their statements online, an agency spokesman told Reuters. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55, and 60, he said, adding the agency would continue to promote use of the online statements.
The SSA stopped mailing most paper statements in 2011 in response to budget pressures, and saved the SSA $70 million annually - about 50 cents per mailed statement. But the decision has been a sore point with some critics, who argue the statement provides a valuable annual reminder to workers of what they can expect to get back from payroll taxes in the future.
The annual statement includes an estimate of monthly benefits at various claiming ages, and for disability claims. It explains how benefits are calculated, and displays the worker's history of income subject to Social Security tax.
The SSA budget is funded mainly by the same payroll tax revenue used for paying benefits but Congress, which approves the agency's budget, has approved less than the agency's request in 14 of the past 16 years. In fiscal 2012, for example, SSA operated with $11.4 billion, just 88 percent of the amount requested.
The cuts have led to sharp reductions in SSA customer service. Nationwide, staff is down 62,000 from a peak of 70,000 in the 1900s.
So far, only 10 million American wage earners - just 6 percent of all workers - have signed up at the site. (www.1.usa.gov/1d3xvuZ). Critics note that many of the workers who will be most reliant on Social Security in retirement are least likely to have Internet access, including low-income and non-English speaking minorities.
The partial restoration of mailed statements was made possible by an improved budget outlook. The SSA's fiscal 2014 budget was boosted to $11.7 billion and President Barack Obama's fiscal 2015 budget request is $12 billion.
"It's a step in the right direction," said Nancy Altman, co-director of Strengthen Social Security, an advocacy group. "But the mailings shouldn't be limited to workers who haven't signed up (for) online accounts. Just because people have signed up, it does not mean that they revisit it to check their earnings statements."
Information retrieved from Reuters.com
It is very easy to have a household employee without even realizing you have become an employer. Maybe you hire a nanny during the summer months to watch your kids in your home while you are at work or maybe one of your elderly parents needs a caregiver during the day. These are typical situations where you could fall under the household employee rules. These rules do not cover the plumber or electrician you hire to make repairs to your home since these people are generally independent contractors.
If you pay someone more than $1,900 for the year or more than $1,000 per quarter for working in your home, the household employee rules may apply. Once the household employer rules apply, you become an employer and the wages paid become subject to all the same payroll taxes and payroll reporting applicable to any business.
The federal payroll taxes and most federal payroll tax reporting can be done on your personal income tax return. You may need to increase your withholding or pay estimated taxes during the year to avoid penalties. The federal payroll tax reporting is done on Schedule H included in your Form 1040 personal income tax return and the payroll taxes you owe are added to the balance due with your return. However, you still need to issue Form W-2 to your employee and file that form with the Social Security Administration. You also need to collect certain information from the employee for withholding and residency requirements and file several reports when they are first hired. Don’t forget to check with your homeowners insurance agent to see if the employee is covered.
The State of Colorado has not adopted any simplified reporting for household employees like the IRS. Therefore, you will need to file quarterly reports and pay Colorado withheld taxes and unemployment taxes throughout the year.
The key to avoiding problems is recognizing you have hired an employee and treating them as an employee from the start. Call your CPA to discuss this issue if you think it might apply to you. Don’t wait until next April 15 to find out if you have a problem. For assistance with your household employees, contact our office and find out how we can help you today.
With the gift and estate tax exemptions currently at $5.34 million, you might think that estate valuations are less important. But even if you believe that your estate’s value is under the exemption amount, it’s still important to know the value of your assets.
First, your estate might be worth more than you think. For example, if you own an insurance policy on your life, the death benefit will be included in your estate, which may be enough to trigger estate tax liability.
Second, obtaining a qualified appraisal can limit the IRS’s ability to revalue your assets. If you make gifts that exceed the $14,000 annual gift tax exclusion, you’ll need to file a gift tax return, even if the gift is within your lifetime exemption. Generally, the IRS has three years to audit gift tax returns and challenge reported values for gifted assets. But that period doesn’t begin until the gift has been “adequately disclosed.”
For assets that are difficult to value — such as closely held business interests or real estate — the best way to satisfy the adequate-disclosure requirements and avoid an IRS challenge is to include a qualified professional appraisal with your return.Please contact us for more information on properly valuing your assets. We can help you comply with IRS requirements and keep taxes to a minimum.
stock is stock that’s granted subject to a substantial risk of forfeiture.
Income recognition is normally deferred until the stock is no longer subject to
that risk or you sell it. You then pay taxes on the stock’s fair market value
at your ordinary-income rate.
But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.
There are some potential disadvantages, however:
· You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax.
· Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value.If you’ve recently been awarded restricted stock or expect to be awarded such stock this year, work with us to determine whether the Sec. 83(b) election is appropriate for you.
Are you aware of the recent tax developments that have occurred in the past few months? Below are some of the important tax changes that could affect you.
No matter where your organization is located, you cannot escape weather-related events.
Did you miss the tax filing deadline on April 15? If so, don't worry. Here are some tips to help you.
Did you know that bonus 50% first-year depreciation will no longer be available to your business in 2014 and beyond? And that the Section 179 expensing limit, which allows you to deduct qualified costs immediately instead of expensing them over time, will tumble to $25,000 from $500,000, where it's been for the last four years? These are just a few of the changes that businesses should prepare for this year. While many tax rules are permanent, others are written to expire at some point in the future. Some are extended and given new deadlines, but a significant number of popular "extenders" terminated at the end of 2013, including both business credits and deductions. There are discussions in Congress about extending these and other credits and deductions, but it is unlikely that any legislation will be enacted prior to the November elections.
How do you treat an insurance payment you received for a property loss? An answer often heard in the accounting community is - it depends.
The passing of Memorial Day marks the beginning of summer in the minds of many Americans. Although the kids might still be in school for another week or two, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax break?
Day camp is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2014, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Be aware, however, that overnight camp costs don’t qualify for the credit.
Additional rules apply, so please contact us to determine whether you’re eligible.
This week, May 12-16, is National Small Business Week, celebrating America's wonderful entrepreneurs and small business owners. If you are the owner of a small business, it is critical to be able to keep your finances in order to grow as a business. Don't forget about the many tax-saving opportunities that exist for you as the owner of a small business:
- Home Office Deduction: Beginning this year, the IRS has created a simpler option for calculating the deduction you can receive if your business is centralized from your home. Instead of keeping up with specific home office expenses, you can now use a standard rate per foot. This rate is $5 per square foot, for up to 300 square feet.
- Auto Expenses: The 2014 standard mileage rates for a car or truck are 56 cents per business mile that you have driven. You can also keep track of your actual driving expenses, which may take more time, but could possibly save you more money.
- Books and Legal Fees: Because they are considered a cost of doing business, legal and tax assistance on your business books are fully deductible. Also, fees paid to lawyers and tax professionals can generally be deducted from the year that they are applicable to.
- Business Travel Expenses: Even if a trip is for both pleasure and business, you can still deduct the business part of your expenses. Expenses deducted can include meals and lodging, travel, business calls, and other necessary expenses related to your business travel.
Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you're not careful, you could lose the tax benefits of business travel.
This year, trusts are subject to the 39.6% ordinary-income rate and the 20% capital gains rate to the extent their taxable income exceeds $12,150. And the 3.8% net investment income tax applies to undistributed net investment income to the extent that a trust's adjusted gross income exceeds $12,150.
Your 2013 tax return is filed, and you may now be wondering which records you can toss -- the short answer is none. You need to hold on to all of your 2013 tax records for now. But this is a great time to look at your records for previous tax years and determine what you can purge.
Now that tax season has ended, it may be clear to you how organized you were for this year's returns. If you felt slightly unorganized, or even if you were on top of things, there are many benefits to having a solid financial plan. According to a study done by Financial Finesse, an employee financial education provider, employees are becoming more proactive about their financial planning and are making sure to focus on and improve security in their long-term financials.If you have yet to get a grip on your financial plan, or are interested in improving it for the future, here are some tips for establishing a useful financial plan:
As we say goodbye to Windows XP and Office 2003, we continue to search for that next workhorse. As of April 2014, both Windows XP and Office 2013 will be discontinued. As we look to that new operating system (OS) our natural selection would be Windows 7, however mainstream support for Windows 7 ends January 2015. Does this make for a long term strategy?
Too often natural disasters strike and serve as reminders that it’s important for both individuals and businesses to protect themselves against the potential financial consequences of such events. A few smart steps we recommend include making electronic backups of important records, including your insurance policies, tax returns, bank and credit card account information, and vital records. It is critical that you store this backup in a separate location that will be easy to access if your area suffers damage. You should also take the time to take pictures or videos of your home or business and store them separately in case you need to make an insurance claim.
If you run a business, you must consider how you will get up and running again after a disaster. It’s a good idea to develop contingency plans that will enable employees to work from home or elsewhere if your location is damaged or inaccessible. Both businesses and families should consider using phone trees or other methods to maintain contact in an emergency. Review your contact and contingency plans every year to be sure they are up to date.
Want further advice on protecting your family’s or business’s financial well-being in case of a disaster? We can help. Contact us today with all your financial questions.
Did you know that while many tax rules are permanent, others are written to expire at some point in the future? These expiring items are often granted a temporary extension, but a significant number of popular “extenders” terminated at the end of 2013, including both credits and deductions. A number of credits for qualified energy home improvements and appliance purchases will no longer be available, along with the credit against health insurance premiums previously granted to certain taxpayers. Teachers will no longer be able to take the $250 deduction for out of pocket classroom supply purchases, and the deduction for qualified tuition and related expenses is set to disappear.
How will the end of these and other credits or deductions affect you? And what other tax law changes could have an impact on your finances? Contact our office to find out the answers. We can offer the advice and planning recommendations you need to minimize your tax bite and enhance your overall financial situation.
With the well-publicized security breach at major retailer Target recently, identity theft is likely on your mind. And stolen credit isn’t your only risk.
In an increasingly common scam, identity thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file their returns, they’re notified that they’re attempting to file duplicate returns. It can take months to straighten things out, causing all sorts of headaches and delaying legitimate refunds.
You can reduce your likelihood of becoming a victim by filing your return as soon as possible after you receive your W-2 and 1099s. If you file first, it will be the thief who’s filing the duplicate return, not you.
Also, if you did shop at Target during the security breach, be sure to check your bank and credit card accounts frequently, and consider signing up for the free year of credit monitoring the retailer is offering potential victims.
If you’d like to file your tax return early this year, please contact us. We’d be happy to help. Also let us know if you have questions about protecting yourself from tax return fraud and identity theft.
Did you know that bonus 50% first-year depreciation will no longer be available to your business in 2014 and beyond? And that the Section 179 expensing limit, which allows you to deduct qualified costs immediately instead of expensing them over time, will tumble to $25,000 from $500,000, where it’s been for the last four years? These are just a few of the changes that businesses should prepare for this year. While many tax rules are permanent, others are written to expire at some point in the future. Some are extended and given new deadlines, but a significant number of popular “extenders” terminated at the end of 2013, including both business credits and deductions.
How will the end of these and other credits or deductions affect you? And what other tax law changes could have an impact on your company finances? Contact our office to find out the answers. We can offer the advice and planning recommendations you need to minimize your tax bill and enhance your business’s financial situation.
the Affordable Care Act (ACA), beginning in 2013, taxpayers with FICA wages
over $200,000 per year ($250,000 for joint filers and $125,000 for married
filing separately) had to pay an additional 0.9% Medicare tax on the excess
Now that we’re in the new year, it’s time for an estate plan checkup. Why? First, various exclusion, exemption and deduction amounts are adjusted for inflation and can change from year to year, so it’s a good idea to see if they warrant any updates to your estate plan:
inflation adjustments aren’t the only reason for an estate plan checkup. You
should also review your plan whenever there are significant changes in your
family, such as births, deaths, marriages or divorces. And your estate plan
also merits a look if your financial situation has changed significantly.
If you want to find out if your estate plan needs updating — or if you don’t have an estate plan and would like to put one in place — please contact us. We can help you ensure you have a plan that will achieve your goals.
The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
1) Delayed start date for 2014 tax filing season. In October 2013, the IRS said that the start date of the 2014 tax filing season would be delayed past the original Jan. 21, 2014 start date because of the government shutdown. However, at that time, it did not provide a specific delayed start date. It has now done so. Late in 2013, the IRS announced that the start date for the 2014 tax season would be Jan. 31, 2014. But it stressed that the Apr. 15, 2014 due date is not extended. Those unable to meet the deadline can apply for an automatic six-month extension, the IRS noted.
2) Guidance on the new 3.8% surtax on net investment income. The IRS has issued final and proposed regulations on the new 3.8% surtax on net investment income (NII) that first went into effect in 2013. The surtax is 3.8% of the lesser of: (1) NII, or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). The final regulations are voluminous and clarify many aspects of this new tax. They explain, among other items, how NII is calculated, the individuals and entities subject to or excepted from the tax, and the deductions taken into account in figuring the tax. The proposed regulations (upon which taxpayers may rely) provide guidance on the computation of NII with respect to a number of specialized provisions and situations including various payments to partners and former partners.
3) Guidance on the new additional Medicare tax. The IRS has issued final regulations on the new additional 0.9% Medicare (hospital insurance, or HI) tax that first applies for tax years beginning after 2012. This tax applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). Likewise, the Medicare tax on self-employment income for any tax year beginning after Dec. 31, 2012 is increased by an additional 0.9% on self-employment income which exceeds the same thresholds as apply for employees. The regulations cover many aspects of this new tax including the employer's withholding requirement, reporting the tax on new Form 8959, and payment of the tax by self-employed individuals who also have employment income, among other items.
4) "Use-it-or-lose-it" rule relaxed for health FSAs. Last fall, the IRS modified the "use-or-lose" rule for health flexible spending arrangements (health FSAs) in order to allow, at the plan sponsor's option, participating employees to carry over up to $500 of unused amounts remaining at year-end. Previously, any amounts that weren't used by year-end would be forfeited. The IRS emphasized that the plan sponsor can specify a lower amount as the permissible maximum carryover amount, or it can decide to not allow any carryover at all.
5) IRA's ownership of taxpayer's business resulted in disastrous tax consequences. Harsh tax consequences resulted where an individual taxpayer had his IRA own the shares of his business, a limited liability company (LLC). Agreeing with the IRS, the Tax Court held that the LLC's payment of compensation to the taxpayer for his services to the LLC was a prohibited transaction under the rules governing IRAs. As a result, the IRA was retroactively disqualified and its assets were deemed distributed to the taxpayer and taxed to him as ordinary income. One purpose of the prohibited transaction rules is to prevent taxpayers from using their IRA to engage in transactions for their own account that could place plan assets and income at risk of loss before retirement. The taxpayer argued that he did not engage in a prohibited transaction when he caused the LLC to pay him compensation because the amounts it paid to him did not consist of plan income or assets of his IRA but merely the income or assets of a company in which his IRA had invested. However, the Court disagreed, finding that in causing the LLC to pay him compensation, the taxpayer engaged in the transfer of plan income or assets for his own benefit, in violation of the rules.
6) Standard mileage rates down. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) has decreased by 0.5¢ to 56¢ per mile for business travel after 2013. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense also has decreased by 0.5¢ to 23.5¢ per mile for 2014.
7) Bankruptcy protection for inherited IRAs. The Supreme Court has agreed to decide whether bankruptcy protection applies to inherited IRAs. There is a conflict among some lower courts as to whether a debtor's inherited IRA may qualify for an exemption under the bankruptcy laws. Some courts have held that the exemption for retirement funds does not apply to inherited accounts because they are not held for retirement. Other courts disagree, finding that the exemption applies because the funds were originally for retirement of the person from whom they were inherited. Those concerned that the Supreme Court may hold against the exemption may want to explore using trust arrangements for IRA funds to achieve asset protection.
8) Increased fees for installment agreements and offers in compromise. The IRS has issued final regulations increasing fees for an installment agreement (an agreement with the IRS to pay taxes in installments) and an offer in compromise (an offer to the IRS to settle one's tax debt for less than what the IRS says is owed). Specifically, effective Jan. 1, 2014, the fee for entering into an agreement to pay taxes in installments has increased from $105 to $120, and the fee for processing an offer in compromise has increased from $150 to $186. However, low-income taxpayers and taxpayers making offers based solely on doubt as to liability will continue to pay no fee.
The additional Medicare tax imposes an additional 0.9% tax on FICA wages, Railroad Retirement Act compensation, and self-employment income above certain threshold amounts: $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for single taxpayers. The threshold must be exceeded before the tax is imposed and there is no corresponding amount owed by the employer. The tax is effective for wages received for any tax year starting after December 31, 2012. All wages subject to Medicare tax (1.45% for the employee) are subject to the additional Medicare tax.
The employer must withhold additional Medicare tax from wages it pays to an individual in excess of $200,000 in a calendar year regardless of the individual's filing status or wages paid by another employer. Individuals cannot request additional income tax withholding specifically for the additional Medicare tax, but can use a Form W-4 to request additional income tax withholding. If estimated taxes are paid there is no way to specifically apply payments to additional Medicare tax.
Individuals will owe additional Medicare tax on wages, compensation, and/or self-employment income, plus spouse's income if married filing jointly, on any income that exceeds the threshold for the individual's filing status (MFJ=$250,000.) Noncash fringe benefits are also subject to the additional Medicare tax. An individual's liability for additional Medicare tax will be calculated on their individual Form 1040.
Are you reporting all new hires correctly?
The Colorado Department of Labor and Employment has announced new employment eligibility verification requirements for Colorado employers effective October 1, 2012.
The employment verification law in Colorado is in addition to the federal Form I-9 requirements. There are two main requirements associated with this new Colorado law, both of which must occur within 20 days of hire: (1) an affirmation requirement (see the document - "Colorado Affirmation Form Instructions"), and (2) a requirement to make and retain copies of the employee identity and employment authorization documentation that was presented for completion of the Form I-9.
The Affirmation of Legal Work Status, copies of the employee's identity and employment authorization documentation, and the federal Form I-9 should all be kept in the employee's employment file for the term of their employment. There is no need to file any of these documents to the State of Colorado, or the IRS.
Federal law also requires Colorado employers to submit data to the State Directory of New Hires. This reporting must also take place within 20 of hire or by the first regularly scheduled payroll following the date of hire. Information about the employee, such as: name, address, social security number, and date of hire must be reported. Information about the employer should also be included, such as: employer name, payroll address, and federal identification number. Colorado employers can either fax the information to 303-297-2595 or mail it to: Colorado State Directory of New Hires, PO Box 2920, Denver, CO 80201-2920.
When operating and maintaining your car while traveling on business, you should keep records of all the expenses you have. You can use a log, diary, notebook, or any other written record to keep track of your expenses. Your records must show details of the following elements:
o the cost of the car and any improvements
o the date you started using it for business
o the beginning mileage and ending mileage associated with each trip
o the total mileage on the vehicle for the year
o the date of the use of the car
· Place or Description
o your business destination
· Business Purpose
o business purpose for the expense
It is necessary to keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support your deduction for 3 years from the date you file the income tax return on which the deduction is claimed. You must keep records of the business use of your car for each year of the recovery period. The recovery period is generally 6 years under MACRS. Please consult your tax advisor to determine your particular recovery period.
Are you engaged in a trade or business? Do you operate for gain or profit? If so, then you could be required to file an information return with the Internal Revenue Service. The Form 1099-MISC reporting rules apply to any business (whether a sole proprietorship, partnership, or corporation) that makes a reportable payment in the course of its trade or business.
So what is a reportable payment? Generally, payments of $600 or more made in the course of a trade or business to service providers who are not employees must be reported. Form 1099-MISC is used to report these payments. An independent contractor (service providers who are not employees) includes:
· repairmen, etc.
Anyone who provides your trade or business a service. Payments required to be reported include (but is not limited to) rents, fees, commissions, prizes, awards, or other forms of compensation for services.
There are some payments that do not have to be reported on Form 1099-MISC. For example: payments made to a corporation (there are exceptions), payments for merchandise, wages to employees, business travel allowances paid to employees, etc. For a complete list of exceptions see the 2013 Instructions for Form 1099-MISC by clicking here.
If you are required to file an information return (Form 1099-MISC) with the IRS then you need to request a correct taxpayer identification number (TIN) from your service providers. Form W-9 Request for Taxpayer Identification Number and Certification can be used for this purpose. For a copy of Form W-9, click here.
Favorable depreciation and expensing rules for qualified leasehold improvements
Whether you are a landlord or a tenant, some of the leasehold improvements that you make qualify for favorable depreciation and property expensing rules that don't apply to most other building improvements. Specifically, improvements that are "qualified leasehold improvement property" (described below) and placed in service before Jan. 1, 2014 (Jan 1, 2015 for certain projects) are generally eligible for 50% bonus depreciation.
Also, "qualified leasehold improvement property," if placed in service before Jan. 1, 2014, can be depreciated over a 15-year period, meaning that the 50% of the cost of the property that isn't deducted as bonus depreciation is deducted in the placed-in-service-year and over the next 14 years.
Further note that in lieu of claiming some or all of the depreciation allowed for "qualified leasehold improvement property," you might be able to elect to expense (i.e., deduct in the placed-in-service year) up to $250,000 of the cost of "qualified leasehold improvement property" placed in service in tax years that begin before 2014. Eligibility for the expensing election depends on the size and nature of your other investments in business property.
These special rules are a dramatic departure from the general rule that deductions for the cost of nonresidential buildings, or improvements to the buildings, are allowed over a 39-year period.
Many, but not all, improvements made under a lease meet the requirements for being "qualified leasehold improvement property." These requirements include, but aren't limited to:
Please contact us to help you determine whether any improvements that you have in mind meet the requirements for qualified leasehold improvements.
You don't have to be a manufacturer to take the "manufacturers' deduction"
The manufacturers' deduction, also called the "Section 199" or "domestic production activities deduction," is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
April 15 has passed, now what?
With the 2012 tax filing season behind us, it's time to start thinking seriously about 2013 tax planning especially if you're a higher-income taxpayer, because you might be subject to one or more significant tax increases this year:
Contact us to learn whether you're likely to be hit with these tax hikes and what strategies you can implement to minimize the impact.
Time is running out for tax-free treatment of home mortgage debt forgiveness
Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Debt forgiveness isn't the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.
Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude from their taxable income up to $2 million in COD income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). But the exclusion is available only for debts forgiven (via foreclosure or restructuring) through 2012.
QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn't available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).
If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home. Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it's generally better to defer tax when possible.
So if you're considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion while it's available.
Why you may want to incur medical expenses before year end
Eligible expenses can include health insurance premiums, medical and dental services and prescription drugs. Expenses that are reimbursed (or reimbursable) by insurance or paid through a tax-advantaged health care account (such as a Flexible Spending Account or a Health Savings Account) aren't eligible.
To potentially be able to deduct more health care costs, consider "bunching" nonurgent medical procedures and other controllable expenses into alternating years. For example, if your year-to-date medical expenses already exceed 7.5% of your projected 2012 AGI and you're anticipating elective surgery or major dental work in early 2013, you could instead schedule it for this year. Or you could stock up on prescription meds (to the extent allowed) and buy new contact lenses or glasses before year end.
Bunching expenses into 2012 may be especially beneficial because of the scheduled floor increase. But keep in mind that, for alternative minimum tax purposes, the 10% floor already applies. Also, if tax rates go up in 2013 as scheduled, your deductions might be more powerful then. Finally, be aware that the floor increase could be repealed by Congress.
The 2012 gift tax annual exclusion: Use it or lose it
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That?s because the future appreciation can avoid gift and estate taxes.
But you need to use your 2012 exclusion by Dec. 31 or you?ll lose it. The exclusion doesn?t carry from one year to the next. For example, if you don?t make an annual exclusion gift to your grandson this year, you can?t add $13,000 to your 2013 exclusion to make a $27,000 tax-free gift to him next year.
We can help you determine how to make the most of your 2012 gift tax annual exclusion.
Consider the tax implications if you?re awarded restricted stock
Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes based on the stock?s fair market value (FMV) when the restriction lapses and at your ordinary-income rate.
But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly before income would otherwise be recognized. Why? Because the election allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.
There are some disadvantages of a Sec. 83(b) election:
1. You must prepay tax in the current year. But if a company is in the earlier stages of development, this may be a small liability.
2. Any taxes you pay because of the election can?t be refunded if you eventually forfeit the stock or its value decreases. But you?d have a capital loss when you forfeited or sold the stock.
If you?re awarded restricted stock before the end of 2012 and it?s looking like your tax rate will go up in the future, the benefits of a Sec. 83(b) election may be more likely to outweigh the potential disadvantages.
Need to hire? Consider veterans
To be eligible for the credit, you must take certain actions before and shortly after you hire a qualified veteran. We can help you determine what you need to do.
With election results in, what?s next for tax law changes?
President Obama has been reelected, the Senate will remain in the hands of the Democrats (but without a filibuster-proof supermajority) and the House will continue to be controlled by the Republicans. In other words, the political makeup of Washington will be about the same in 2013 as it is now. As a result, it?s still very uncertain what will happen with tax law changes.
When it comes to tax law, Congress and the president have much to address, including tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.
It?s still unclear what Congress will try to accomplish in the lame duck session ? and what they?ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)
The lack of change in the political makeup of Washington could make it very difficult to pass tax legislation, considering how far apart the parties are on what should be done. Yet now that both parties know the outcome of the Nov. 6 elections, they may be more willing to compromise.
Whatever happens, it could have an impact on your yearend tax planning. So keep an eye on Congress before implementing year end strategies.
2 reasons to sell highly appreciated assets before year end
If you own highly appreciated assets you?ve held long term, it may make sense to recognize gains now rather than risk paying tax at a higher rate next year:
1. The 15% long-term capital gains rate is scheduled to return to 20%.
2. Higher-income taxpayers will be subject to a new 3.8% Medicare tax on some or all of their net investment income.
As Congress and the President negotiate on how to address the fiscal cliff, it?s still unclear whether the 15% rate will be extended ? especially for higher-income taxpayers.
Because a final deal in Washington may not be reached until the very end of the year ? or even after Jan. 1 ? you can?t necessarily afford to take a wait-and-see attitude. And the new 3.8% Medicare tax will go into effect regardless of what happens with the fiscal cliff. If you have questions about the potential tax impact on your investments, please contact us.
2012 return filing on hold for many taxpayers
While the many revived breaks under the American Taxpayer Relief Act of 2012 (ATRA) are good news for taxpayers, they would have been better news had they been signed into law earlier.
Because many breaks were retroactively extended back to Jan. 1, 2012, numerous IRS forms have to be updated accordingly. But the IRS couldn?t get started until after the changes were signed into law Jan. 2, 2013. And this means many taxpayers will have to wait to file their 2012 returns.
Both individual and business taxpayers are affected. Forms that need to be updated include those for:
You might save more by deducting state and local sales taxes
For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But this break had expired Dec. 31, 2011.
Now the American Taxpayer Relief Act of 2012 has extended it for 2012 and 2013. So see if you can save more by deducting sales tax on your 2012 return. And if you?re contemplating a major purchase, you may want to make it in 2013 to ensure the sales tax deduction is available
Lower FSA contribution limit may make HSAs more attractive
Previously, employers could set whatever limit they wanted on employee contributions to Flexible Spending Accounts (FSAs) for health care. But starting this year, the maximum limit is $2,500.
If you?re concerned about a lower limit and aren?t contributing to a Health Savings Account (HSA), look into whether you?re eligible ? you must be covered by a qualified high-deductible health plan. As with FSA withdrawals, HSA withdrawals for qualified medical expenses are tax-free. But the HSA contribution limits are higher: $3,250 for self-only coverage and $6,450 for family coverage, plus an additional $1,000 for taxpayers age 55 or older.
HSAs also may be more beneficial because they can bear interest or be invested and can grow tax-deferred similar to an IRA. Additionally, you can carry over a balance from year to year. If you have an HSA, however, your FSA is limited to funding certain ?permitted? expenses.
An HSA also can provide a way to do some post-Dec. 31 tax planning: You have until the April filing deadline to make your contribution. Please contact us to learn whether you could benefit from an HSA.
Can recently enhanced Sec. 179 expensing reduce your 2012 taxes?
Section 179 expensing allows businesses a 100% deduction for the cost of qualifying asset purchases. Its 2012 benefits were recently enhanced by the American Taxpayer Relief Act of 2012 (ATRA).
Sec. 179 expensing is subject to an annual limit, which is phased out if purchases exceed a designated threshold. So if total purchases are large enough, a business might not be eligible for any Sec. 179 expensing.
Before ATRA, the expensing limit for 2012 was $139,000, with a $560,000 phaseout threshold. The act increases these amounts to $500,000 and $2 million, respectively (the same amounts that applied in 2010 and 2011).
These increases mean not only that many smaller businesses can enjoy a larger tax benefit, but also that some larger businesses that previously wouldn?t have been eligible because their asset purchases were too high may now qualify.
The limits had been scheduled to drop to $25,000 and $200,000, respectively, in 2013, but ATRA also extends the higher amounts through 2013.Many rules apply, so please contact us to learn if you qualify on your 2012 return ? or discuss whether you should plan purchases this year to benefit from the break on your 2013 return.
Newly revived ?charitable IRA rollovers?: Time is running out for 2012 tax savings
The American Taxpayer Relief Act of 2012 (ATRA) revives for 2012 and 2013 the opportunity to make tax-free IRA distributions (up to $100,000 per year) for charitable purposes. If you?re age 70½ or older, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. This ?charitable IRA rollover? can be used to satisfy required minimum distributions.
To help taxpayers take advantage of the 2012 revival, ATRA allows a charitable rollover made in January 2013 to be treated for tax purposes as if it had been made Dec. 31, 2012. And if you took an IRA distribution in December 2012 and contribute it to charity in January 2013, the ?direct contribution? requirement is waived; you can contribute the distribution to a qualified charity in January 2013 and treat it as a 2012 direct contribution, provided the other requirements are met.
IRS makes deducting home office expenses easier
On Jan. 15, the IRS announced a new simplified home office deduction, which is available beginning with 2013 income tax returns (not the 2012 returns generally due April 15, 2013).
Normally, if your home office qualifies, you can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses. Further, you can take a deduction for the depreciation allocable to the portion of your home used for the office. You can also deduct direct expenses, such as a business-only phone line and office supplies. However, the deduction generally requires completion of a 43-line form (Form 8829), often along with complex calculations.
The new simplified deduction is $5 per square foot for up to 300 square feet of home office space. So the maximum annual deduction is $1,500. If you choose this option, you can?t deduct depreciation for this portion of your home. But you can take itemized deductions for otherwise allowable mortgage interest and property taxes without allocating them between personal and business use.
Please contact us to determine whether you?re eligible for the home office deduction.
Making the most of 2012 education credits
The American Opportunity credit (up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education) and the Lifetime Learning credit (up to $2,000 per tax return for postsecondary education expenses beyond the first four years) reduce taxes dollar-for-dollar. Both a credit and a tax-free Section 529 plan or Coverdell Education Savings Account distribution can be taken as long as expenses paid with the distribution aren?t used to claim the credit.
But income-based phaseouts apply to these credits. If you don?t qualify because your income is too high, your child might. However, you must forgo your dependency exemption ($3,800 for 2012) for the child ? and the child can?t take the exemption.If your family incurred postsecondary education expenses in 2012, please contact us to determine how you can make the most of these credits.
Work Opportunity credit for certain 2013 new hires can save you tax
If you're considering expanding your staff, hiring from certain disadvantaged groups before the end of 2013 can save you tax. The American Taxpayer Relief Act of 2012 extended the Work Opportunity credit for hires from most eligible groups through 2013.
Examples of eligible groups include food stamp recipients, ex-felons and nondisabled veterans who've been unemployed for four weeks or more, but less than six months. For these groups, the credit generally equals 40% of the first $6,000 of wages paid to qualifying employees, for a maximum credit of $2,400. A larger credit of up to $4,800 is generally available for hiring disabled veterans.
If you're hiring veterans who've been unemployed for six months or more in the preceding year, the maximum credits are even greater:
Please contact us for more information on how to qualify for the credit.
Be prepared for the health care act's "play or pay" provision
The Patient Protection and Affordable Care Act of 2010's shared responsibility provision, commonly referred to as "play or pay," is scheduled to take effect Jan. 1, 2014. It doesn't require employers to provide health care coverage, but it in some cases imposes penalties on larger employers that don't offer coverage or that provide coverage that is "unaffordable" or that doesn't provide "minimum value."
Why 2013 may be the year to make that car or boat purchase you've been thinking about
For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. The American Taxpayer Relief Act of 2012 has extended this break - but only through 2013.
The break can be valuable to those residing in states with no or low income tax rates. But wherever you live, it can be a powerful tax saver if you purchase a major item, such as a car or boat.
With tax reform being discussed and the federal deficit continuing to be a major issue, it's hard to predict whether the deduction will be extended again. If you're contemplating a major purchase, you may want to make it in 2013 to ensure the sales tax deduction is available.