The most effective estate planning strategies often involve the use of irrevocable trusts. But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth? If your marriage is strong, a spousal lifetime access trust (SLAT) can be a viable strategy to obtain the benefits of an irrevocable trust while creating a financial backup plan. A SLAT is an irrevocable trust that authorizes the trustee to make distributions to your spouse if a need arises. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.18 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses. The key benefit of a SLAT is that, by naming your spouse as a lifetime beneficiary, you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse. To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations. Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.
There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. But there may be ways to mitigate this risk. If you’re considering using a SLAT, contact us to learn more about the benefits and risks of this type of trust.
For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%. On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.
Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations: A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level. Although C corporations are still potentially subject to double taxation under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, the break is available only for tax years beginning in 2018 through 2025.
There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your business’s unique situation and your situation as an owner.
Here are three common scenarios and the entity-choice implications:
1. Business generates tax losses. For a business that consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. A pass-through entity will generally make more sense because losses pass through to the owners’ personal tax returns.
2. Business distributes all profits to owners. For a profitable business that pays out all income to the owners, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.
3. Business retains all profits to finance growth. For a business that’s profitable but holds on to its profits to fund future growth strategies, operating as a C corporation generally will be advantageous if the corporation is a qualified small business (QSB). Why? A 100% gain exclusion may be available for QSB stock sale gains. If QSB status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level. These are only some of the issues to consider when making the C corporation vs. pass-through entity choice. We can help you evaluate your options. Contact us at any time at email@example.com.
Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency. While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. That trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency.
But what are the tax consequences of these transactions? Time for a quick Bitcoin 101; Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges. Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.
Questions about the tax impact of virtual currency abound. The IRS has yet to offer much guidance. The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars. When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. They are subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee. When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients. Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective. To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact us at 508-888-2000 or at firstname.lastname@example.org.
The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.
Exemption increases: The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018. This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond. The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate. The impact Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025. Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available. Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater. Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning. For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax. Review your estate plan Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan at 508-888-2000.
IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.
What do ATGs cover? The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:
• The nature of the industry or issue,
• Accounting methods commonly used in an industry,
• Relevant audit examination techniques,
• Common and industry-specific compliance issues,
• Business practices,
• Industry terminology, and
• Sample interview questions.
By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides.
What do ATGs advise? ATGs cover the types of documentation IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks. Other issues that ATGs might instruct examiners to inquire about include internal controls (or lack of controls), the sources of funds used to start the business, a list of suppliers and vendors, the availability of business records, names of individual(s) responsible for maintaining business records, nature of business operations (for example, hours and days open), names and responsibilities of employees, names of individual(s) with control over inventory, and personal expenses paid with business funds.
For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses. Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records. Likewise, for gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.
Avoiding red flags: Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS. To access the complete list of ATGs, visit the IRS website. And for more information on the IRS red flags that may be relevant to your business, contact us email@example.com or at 508-888-2000.
With the April 15th, well technically the 17th, individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.
A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 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.
Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025 and additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning. But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks. The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies. Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities. To get started on your 2018 tax planning, contact us at 508-888-2000 or at firstname.lastname@example.org. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.
You may have breathed a sigh of relief after filing your 2017 income tax return (or requesting an extension). But if your office is strewn with reams of paper consisting of years’ worth of tax returns, receipts, canceled checks and other financial records (or your computer desktop is filled with a multitude of digital tax-related files), you probably want to get rid of what you can. Follow these retention guidelines as you clean up. General rules Retain records that support items shown on your tax return at least until the statute of limitations runs out — generally three years from the due date of the return or the date you filed, whichever is later. That means you can now potentially throw out records for the 2014 tax year if you filed the return for that year by the regular filing deadline. But some records should be kept longer. For example, there’s no statute of limitations if you fail to file a tax return or file a fraudulent one. So you’ll generally want to keep copies of your returns themselves permanently, so you can show that you did file a legitimate return. Also bear in mind that, if you understate your adjusted gross income by more than 25%, the statute of limitations period is six years. Some specifics for businesses Records substantiating costs and deductions associated with business property are necessary to determine the basis and any gain or loss when the property is sold. According to IRS guidelines, you should keep these for as long as you own the property, plus seven years. The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This timeframe generally will cover varying state and federal requirements.) Also keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer. For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period. Regulations for sales tax returns vary by state. Check the rules for the states where you file sales tax returns. Retention periods typically range from three to six years. When in doubt, don’t throw it out It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If you’re unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. But, again, you should keep tax returns themselves permanently, and other rules or guidelines might apply in certain situations. Please contact us with any questions at 508-888-2000 or at email@example.com.
The federal income tax filing deadline is slightly later than usual this year — April 17 — but it’s now nearly upon us. So, if you haven’t filed your individual return yet, you may be thinking about an extension. Or you may just be concerned about meeting the deadline in the eyes of the IRS. Whatever you do, don’t get tripped up by one of these potential pitfalls.
Filing for an extension allows you to delay filing your return until the applicable extension deadline, which for 2017 individual tax returns is October 15, 2018. While filing for an extension can provide relief from April 17 deadline stress and avoid failure-to-file penalties, there are some possible pitfalls:
1. If you expect to owe tax, to avoid potential interest and penalties you still must (with a few exceptions) pay any tax due by April 17.
2. If you expect a refund, remember that you’re simply extending the amount of time your money is in the government’s pockets rather than your own. (If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.)
The IRS considers a paper return that’s due April 17 to be timely filed if it’s postmarked by midnight. Sounds straightforward, but here’s a potential pitfall: Let’s say you mail your return with a payment on April 17, 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 can still be hit with both failure-to-file and failure-to-pay penalties. 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:
DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.
Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.
Despite the potential pitfalls, filing for an extension can 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. We can help you estimate whether you owe tax and how much you should pay by April 17. Please contact us at 508-888-2000 or info@fjhcpa if you need help or have questions about avoiding interest and penalties.
Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even nondeductible contributions can be beneficial.
Don’t lose the opportunity, the 2017 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2017). But any unused limit can’t be carried forward to make larger contributions in future years. This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So to maximize your potential for tax-deferred or tax-free savings, it’s a good idea to use up as much of your annual limit as possible.
There are three types of contributions If you haven’t already maxed out your 2017 IRA contribution limit. Consider making one of these types of contributions by April 17.
With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2017 tax return. If you or your spouse does participate in an employer-sponsored plan, your deduction is subject to a modified adjusted gross income (MAGI) phase out. For married taxpayers filing jointly, the phase out range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan. For a spouse who participates: $99,000–$119,000. For a spouse who doesn’t participate: $186,000–$196,000. For single and head-of-household taxpayers participating in an employer-sponsored plan: $62,000–$72,000. Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
With Roth IRAs, contributions aren’t deductible, but qualified distributions — including growth — are tax-free. Your ability to contribute, however, is subject to a MAGI-based phaseout. For married taxpayers filing jointly: $186,000–$196,000. For single and head-of-household taxpayers: $118,000–$133,000. 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 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.
Maximize your tax-advantaged savings Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us at 508-888-2000 or firstname.lastname@example.org to learn more about making 2017 contributions and making the most of IRAs in 2018 and beyond.
Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us at 508-888-2000 or email@example.com to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
April 2: Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.
April 17: If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans. If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.
April 30: Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)
May 10: Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
June 15: If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.
Normally when appreciated business assets are sold such as real estate, tax is owed on the appreciation. A Section 1031 “like kind” exchange is a way to defer this tax. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.
Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” The tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property. This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.
An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.
There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate. But there’s also some bad news: for 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.
The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us at 508-888-2000 or firstname.lastname@example.org. We can help you ensure you’re in compliance with the rules.
Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate, one of the biggest factors affecting your deduction is what you give.
Cash - You may deduct 100% gifts made by check, credit card or payroll deduction.
Ordinary-income property - For 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 for more than one year.
Tangible personal property - Your deduction depends on the situation: If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis. If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.
Vehicle - Unless the vehicle is 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.
You’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable donation deductions may be reduced if they exceed certain income-based limits. In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.
While December’s Tax Cuts and Jobs Act (TCJA) preserves the charitable deduction, it temporarily makes itemizing less attractive for many taxpayers, reducing the tax benefits of charitable giving for them. Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA nearly doubles the standard deduction - plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax. You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year. Let us know if you have questions about how much you can deduct on your 2017 return or what your charitable giving strategy should be going forward, in light of the TCJA at 508-888-2000.
Individuals can deduct some vehicle-related expenses in certain circumstances. Rather than keeping track of the actual costs, you can use a standard mileage rate to compute your deductions. For 2017, you might be able to deduct miles driven for business, medical, moving and charitable purposes. For 2018, there are significant changes to some of these deductions under the Tax Cuts and Jobs Act (TCJA).
The rates vary depending on the purpose and the year:
Business: 53.5 cents (2017), 54.5 cents (2018)
Medical: 17 cents (2017), 18 cents (2018)
Charitable: 14 cents (2017 and 2018)
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. The charitable rate is lower than the medical and moving rate because it isn’t adjusted for inflation. In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.
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, if you’re an employee, only business mileage not reimbursed by your employer is deductible. It’s a miscellaneous itemized deduction subject to a 2% of adjusted gross income (AGI) floor. For 2017, this means mileage is deductible only to the extent that your total miscellaneous itemized deductions for the year exceed 2% of your AGI. For 2018, it means that you can’t deduct the mileage, because the TCJA suspends miscellaneous itemized deductions subject to the 2% floor for 2018 through 2025. If you’re self-employed, business mileage can be deducted against self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.
Miles driven for health-care-related purposes are deductible as part of the medical expense deduction and an AGI floor applies. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. For 2019, the floor will return to 10%, unless Congress extends the 7.5% floor.
While miles driven related to moving can be deductible on your 2017 return, the move must be work-related and meet other tests. For 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.
There are also substantiation requirements, which include tracking miles driven. In some cases, you might be better off deducting actual expenses rather than using the mileage rates. We can help ensure you deduct all the mileage you’re entitled to on your 2017 tax return but don’t risk back taxes and penalties later for deducting more than allowed. Contact us at 508-888-2000 or email@example.com for assistance and to learn how your mileage deduction for 2018 might be affected by the TCJA.
When it comes to income tax returns, April 15 (actually April 17 this year, because of a weekend and a Washington, D.C., holiday) isn’t the only deadline taxpayers need to think about. The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this has been the S corporation deadline for a long time, it’s only the second year the partnership deadline has been in March rather than in April.
One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.
For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.
If you haven’t filed your calendar-year partnership or S corporation return yet, you may be thinking about an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 17, 2018, for 2017 returns). This is up from five months under prior law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 17, 2018, for 2017 returns. Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.
Filing for an extension can 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. But keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. If, however, filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 17 deadline. Have more questions about the filing deadlines that apply to you or avoiding interest and penalties? Contact us at 508-888-2000 or firstname.lastname@example.org.
If you purchased qualifying property by December 31, 2017, you may be able to take advantage of Section 179 expensing on your 2017 tax return. Keep this tax break in mind in your property purchase planning, because the Tax Cuts and Jobs Act (TCJA), signed into law this past December, significantly enhances it beginning in 2018.
Sec. 179 expensing allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations. For tax years that began in 2017, the maximum Sec. 179 deduction is $510,000. The maximum deduction is phased out dollar for dollar to the extent of the cost of eligible property placed in service during the tax year. The phase-out threshold is $2.03 million. Qualified real property improvement costs are also eligible for Sec. 179 expensing. This real estate break applies to: certain improvements to interiors of leased nonresidential buildings, certain restaurant buildings or improvements to such buildings, and certain improvements to the interiors of retail buildings. Deductions claimed for qualified real property costs count against the overall maximum for Sec. 179 expensing.
The TCJA permanently enhances Sec. 179 expensing. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million, and the phase-out threshold is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for the acquisition is signed. The new law also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for Sec. 179 expensing is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems. Save now and save later, many rules apply, so please contact us at 508-888-2000 or email@example.com to learn if you qualify for this break on your 2017 return. We’d also be happy to discuss your future purchasing plans so you can reap the maximum benefits from enhanced Sec. 179 expensing and other tax law changes under the TCJA.
Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: The Tuition and Fees Deduction. But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.
While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. First you need to see which breaks you’re eligible for and then you need to determine which one will provide the greatest benefit. Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.
Two credits are available for higher education expenses. The American Opportunity credit up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education. Also the Lifetime Learning credit up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years. But income-based phase-out’s 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, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.
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. Be aware that the tuition and fees deduction was extended only through December 31, 2017. It won’t be available on your 2018 return unless Congress extends it again or makes it permanent. Many additional rules and limits apply to the credits and deduction, however to learn which breaks your family might be eligible for on your 2017 tax returns and which will provide the greatest tax savings please contact us at 508-888-2000 or firstname.lastname@example.org.
With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold.
What expenses are eligible?
Medical expenses may be deductible if they’re “qualified”. Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include; payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs. Mileage driven for health-care-related purposes is also deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits.
Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account can’t be deducted. Likewise, health insurance premiums aren’t deductible if they’re taken out of your paycheck pretax. The AGI threshold before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI).
AGI includes all of your taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest. As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. But under the TCJA, the 7.5%-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018. However, this lower threshold is temporary. Beginning January 1, 2019, the 10% threshold will apply to all taxpayers, including those over age 65, unless Congress takes additional action. Consider “bunching” expenses into 2018 Because the threshold is scheduled to increase to 10% in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they’re within your control. However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who’ve typically itemized may no longer benefit from itemizing. Contact us at 508-888-2000 if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We can also help you determine whether bunching medical expenses into 2018 will likely save you tax. View our Facebook page https://www.facebook.com/pg/FJHCPA/posts/?ref=page_internal for more individual related tax posts.
One of the simplest ways of reducing your taxable estate is by gifting assets to loved ones. However, what may not be as simple is determining whether you need to file a gift tax return (Form 709). With the April 17 filing deadline approaching, now is the time to find out an answer.
A federal gift tax return (Form 709) is required if you:
Made gifts of present interests — such as an outright gift of cash, marketable securities, real estate or payment of expenses other than qualifying educational or medical expenses (see below) — if the total of all gifts to any one person exceeded the $14,000 annual exclusion amount (for 2017). Made split gifts with your spouse. Made gifts of present interests to a noncitizen spouse who otherwise would qualify for the marital deduction, if the total exceeded the $149,000 noncitizen spouse annual exclusion amount (for 2017). Made gifts of future interests — such as certain gifts in trust and certain unmarketable securities — in any amount. Or contributed to a 529 plan and elected to accelerate future annual exclusion amounts (up to five years’ worth) into the current year.
No gift tax return is required if you:
Paid qualifying educational or medical expenses on behalf of someone else directly to an educational institution or health care provider. Made gifts of present interests that fell within the annual exclusion amount. Made outright gifts to a spouse who’s a U.S. citizen, in any amount, including gifts to marital trusts that meet certain requirements, or made charitable gifts and aren’t otherwise required to file Form 709. If a return is otherwise required, charitable gifts should also be reported. 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. In some cases it’s even advisable to file Form 709 to report non-gifts. For example, suppose you sold assets to a family member or a trust. Again, filing a return triggers the statute of limitations and prevents the IRS from claiming, more than three years after you file the return, that the assets were undervalued and, therefore, partially taxable.
Please contact email@example.com or 508-888-2000 if you made gifts last year and are unsure if you should file a gift tax return.
Individual taxpayers who itemize their deductions can deduct either state and local income taxes or state and local sales taxes. The ability to deduct state and local taxes — including income or sales taxes, as well as property taxes — had been on the tax reform chopping block, but it ultimately survived. However, for 2018 through 2025, the Tax Cuts and Jobs Act imposes a new limit on the state and local tax deduction. Will you benefit from the sales tax deduction on your 2017 or 2018 tax return?
Your 2017 Return
The sales tax deduction can be valuable on your 2017 return if you reside in a state with no or low income tax or purchased a major item in 2017, such as a car or boat. How do you determine whether you can save more by deducting sales tax on your 2017 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax. This isn’t as difficult as you might think: 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).
Your 2018 Return
Under the TCJA, for 2018 through 2025, your total deduction for all state and local taxes combined — including property tax — is limited to $10,000. You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000. Also keep in mind that the TCJA nearly doubles the standard deduction. So even if itemizing has typically benefited you in the past, you could end up being better off taking the standard deduction when you file your 2018 return. So if you’re considering making a large purchase in 2018, you shouldn’t necessarily count on the sales tax deduction providing you significant tax savings. You need to look at what your total state and local tax liability likely will be, as well as whether your total itemized deductions are likely to exceed the standard deduction.
Let us know if you have questions about whether you can benefit from the sales tax deduction on your 2017 return or about the impact of the TCJA on your 2018 tax planning. We’d be pleased to help at 508-888-2000 or firstname.lastname@example.org.
Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down. The TCJA also makes a lot of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes.
One interrelated group of changes affecting many taxpayers are those to personal exemptions, standard deductions and the child credit. For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up. For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase. Standard deduction Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated. For 2017, the standard deductions are $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly. The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.) For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit. Child Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17. The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phase-out thresholds of $110,000 and $75,000, respectively. The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.
Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond. What’s discussed here is just the tip of the iceberg. For example, the TCJA also makes many changes to itemized deductions. For help assessing the impact on your tax situation, please contact us at 508-888-2000 or email@example.com.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us at 508-888-2000 or firstname.lastname@example.org to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
File 2017 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS and provide copies to recipients.
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return”.
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.
File 2017 Forms 1099-MISC with the IRS if they’re not required to be filed earlier and you’re filing paper copies. (Otherwise, the filing deadline is April 2.)
If a calendar-year partnership or S Corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15 (if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to? But it can be a good idea to file as close to January 29 as possible, doing so helps protect you from tax identity theft.
In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns. A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is. Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours. The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense. In order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments. If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help. Earlier refunds Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days. E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us at 508-888-2000 or email@example.com.
The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.
Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 17 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 15.
But there’s another date you should keep in mind: the day the IRS begins accepting 2017 returns (usually in late January). Filing as close to this date as possible could protect you from tax identity theft.
Why it helps
In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.
Tax identity theft can cause major complications to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.
What to look for
Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2017 interest, dividend or reportable miscellaneous income payments. So be sure to keep an eye on your mailbox or your employer’s internal website.
An additional bonus: If you’ll be getting a refund, filing early will generally enable you to receive and enjoy that money sooner. (Bear in mind, however, that a law requires the IRS to hold until mid-February refunds on returns claiming the earned income tax credit or additional child tax credit.) Let us know if you have questions about tax identity theft or would like help filing your 2017 return early at 508-888-2000 or firstname.lastname@example.org.
On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.
The following is a brief overview of some of the most significant provisions:
Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%; Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately); Elimination of personal exemptions; Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit; Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018; New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers); Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions; Elimination of the deduction for interest on home equity debt; Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters); Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses); Elimination of the AGI-based reduction of certain itemized deductions; Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances); Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers; Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing); Be aware that additional rules and limits apply and this is just a brief overview and these changes (except when noted) are for tax years following December 31, 2017 and before January 1, 2026.
Also, there are many more changes in the new tax bill will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us at 508-888-2000 or email@example.com.
Many businesses are hosting holiday parties for employees this time of year. It’s a great way to reward your staff for their hard work and have a little fun. You can probably deduct 100% of your 2017 party’s cost as a meal and entertainment (M&E) expense. Next year may be a different story. Businesses generally are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses for: recreational or social activities for employees, such as holiday parties and summer picnics, food and beverages furnished at the workplace primarily for employees, and that are excludable from employees’ income as de minimis fringe benefits. There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules. There are a number of additional requirements to whether you deduct 50% or 100% of allowable expenses, including certain records you must keep to prove your expenses. If your company has substantial meal and entertainment expenses, you can reduce your 2017 tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.
In 2018 it appears that there are possible changes to the M&E deduction for employee parties — along with deductions for many other M&E expenses — will be eliminated under the reconciled version of the Tax Cuts and Jobs Act. For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction when you file your 2017 return, please contact us at 508-888-2000 or firstname.lastname@example.org.
5 Common Mistakes When Applying For Financial Aid
Given the astronomical cost of college, even well-off parents should consider applying for financial aid. A single misstep, however, can harm your child’s eligibility. Here are five common mistakes to avoid:
1. Presuming you don’t qualify. It’s difficult to predict whether you’ll qualify for aid, so apply even if you think your net worth is too high. Keep in mind that, generally, the value of your principal residence or any qualified retirement assets isn’t included in your net worth for financial aid purposes.
2. Filing the wrong forms. Most colleges and universities, and many states, require you to submit the Free Application for Federal Student Aid (FAFSA) for need-based aid. Some schools also require it for merit-based aid. In addition, a number of institutions require the CSS/Financial Aid PROFILE®, and specific types of aid may have their own paperwork requirements.
3. Missing deadlines. Filing deadlines vary by state and institution, so note the requirements for each school to which your child applies. Some schools provide financial aid to eligible students on a first-come, first-served basis until funding runs out, so the earlier you apply, the better. This may require you to complete your income tax return early.
4. Picking favorites. The FAFSA allows you to designate up to 10 schools with which your application will be shared. Some families list these schools in order of preference, but there’s a risk that schools may use this information against you. Schools at the top of the list may conclude that they can offer less aid because your child is eager to attend. To avoid this result, consider listing schools in alphabetical order.
5. Mistaking who’s responsible. If you’re divorced or separated, the FAFSA should be completed by the parent with whom your child lived for the majority of the 12-month period ending on the date the application is filed. This is true regardless of which parent claims the child as a dependent on his or her tax return.
The rule provides a significant planning opportunity if one spouse is substantially wealthier than the other. For example, if the child lives with the less affluent spouse for 183 days and with the other spouse for 182 days, the less affluent spouse would file the FAFSA, improving eligibility for financial aid.
Ensuring Your Year-End Donations Are Tax-Deductible
Many people make donations at the end of the year. To be deductible on your 2017 return, a charitable donation must be made by December 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you write a check or charge an online gift to your credit card? Or is it the date the charity actually receives the funds? In practice, the delivery date depends in part on what you donate and how you donate it. Here are a few common examples:
Checks. The date you mail it.
Credit cards. The date you make the charge.
Pay-by-phone accounts. The date the financial institution pays the amount.
Stock certificates. The date you mail the properly endorsed stock certificate to the charity.
To be deductible, a donation must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions. The IRS’s online search tool, “Exempt Organizations (EO) Select Check,” can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access it at https://www.irs.gov/charities-non-profits/exempt-organizations-select-check. Information about organizations eligible to receive deductible contributions is updated monthly. For more information about applying for financial aid and ensuring your year-end donations are tax-deductible, please contact us at 508-888-2000 or email@example.com.
The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2017 tax liability — you just must act by December 31:
1. Pay your 2017 property tax bill that’s due in early 2018.
2. Make your January 1 mortgage payment.
3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the 10% of adjusted gross income floor).
4. Pay tuition for academic periods that will begin in January, February or March of 2018 (if it will make you eligible for a tax credit on your 2017 return).
5. Donate to your favorite charities.
6. Sell investments at a loss to offset capital gains you’ve recognized this year.
7. Ask your employer if your bonus can be deferred until January.
8. Pay and possibly increase your state estimate.
Many of these strategies could be particularly beneficial if tax reform is signed into law this year that reduces tax rates and limits or eliminates certain deductions (such as property tax, certain mortgage interest, state tax deduction) beginning in 2018. 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. (Even with tax reform legislation, some taxpayers might find themselves in higher brackets next year.) If you’re unsure whether these steps are right for you, please contact us at 508-888-2000 or firstname.lastname@example.org.
As the end of the year approaches, most of us have a lot of things on our to-do lists, from gift shopping to donating to our favorite charities to making New Year’s Eve plans. For taxpayers “of a certain age” with a tax-advantaged retirement account, as well as younger taxpayers who’ve inherited such an account, there may be one more thing that’s critical to check off the to-do list before year end: Take required minimum distributions (RMDs). After you reach age 70½, you generally must take annual RMDs from your: IRAs (except Roth IRAs), and Defined contribution plans, such as 401(k) plans (unless you’re still an employee and not a 5%-or-greater shareholder of the employer sponsoring the plan). An RMD deferral is available in the initial year, but then you’ll have to take two RMDs the next year. The RMD rule can be avoided for Roth 401(k) accounts by rolling the balance into a Roth IRA. For taxpayers who inherit a retirement plan, the RMD rules generally apply to defined-contribution plans and both traditional and Roth IRAs. Special rules apply when the account is inherited from a spouse. RMDs usually must be taken by December 31. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. 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 in the long run. 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 508-888-2000.
Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases. Section 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements. The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually. Under the initial version of the House bill, the limit on Section 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022. The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill. For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Unfortunately, Massachusetts does not allow bonus depreciation. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020. The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period). The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify. If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum 179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation, email@example.com or 508-888-2000.
Come tax time, owner-employees face a variety of distinctive tax planning challenges, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. Whether you’re thinking about your 2017 filing or planning for 2018, it’s important to be aware of the challenges that apply to your particular situation.
Partnerships and LLCs: If you’re a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). And this income likely will be subject to self-employment taxes — even if the income isn’t actually distributed to you. This means your employment tax liability typically doubles, because you must pay both the employee and employer portions of these taxes. The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income and modified adjusted gross income, which are the triggers for certain additional taxes and phaseouts of many tax breaks. But flow-through income may not be subject to self-employment taxes if you’re a limited partner or the LLC member equivalent. And be aware that flow-through income might be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.
S and C corporations: For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively — but not unreasonably — low and increasing your distributions of company income (which generally isn’t taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply. In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, are taxed at the shareholder level and could be subject to the 3.8% NIIT). Whether your entity is an S or a C corporation, tread carefully, however. The IRS remains on the lookout for misclassification of corporate payments to shareholder-employees. The penalties and additional tax liability can be costly.
As you can see, tax planning is extra important for owner-employees. Plus, tax law changes proposed by the President and the Republican majority in Congress could affect tax treatment of your income in 2018. Please contact us for help identifying the ideal strategies for your situation.
Charitable giving is a key part of estate planning for many people. If you’re among them and own valuable works of art, they may be ideal candidates for charitable donations during your life. Generally, it’s advantageous to donate appreciated property because, in addition to gaining a valuable tax deduction, you can avoid capital gains taxes. Because the top capital gains rate for art and other “collectibles” is 28%, donating art can be particularly effective.
If you’re considering a donation of art, here are five tips that can help you maximize your tax savings:
1. Obtain an appraisal. Most art donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal. IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.
2. Donate to a public charity. To maximize your charitable deduction, donate artwork to a public charity, such as a museum or university with public charity status. These donations generally entitle you to deduct the artwork’s full fair market value (provided the related-use rule is also satisfied). If you donate art to a private foundation, your deduction will be limited to your cost.
3. Understand the related-use rule. For you to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. So, for example, if you donate a painting to a museum for display or to a university for use in art history research, you’ll satisfy the related-use rule. But if you donate it to, say, an animal shelter to auction off at its fundraising event, you won’t satisfy the rule.
4. Transfer the copyright. If you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.
5. Consider a fractional donation. If you’re not ready to give up your artwork but are willing to part with it temporarily, consider donating a fractional interest. This allows you to generate tax savings while continuing to enjoy your art for part of the year. For example, if you donate a 25% interest in your art collection to a museum, the museum receives the right to display the collection for three months of each year. You deduct 25% of the collection’s fair market value immediately and continue to display the art in your home for nine months of each year.
The rules surrounding donations of art are complex. We can help you achieve your charitable goals while maximizing your tax benefits whether you wish to donate artwork or other valuables.
One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step. If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement. A traditional 401(k) offers many benefits: Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax. Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions. Your employer may match some or all of your contributions pretax. For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld. If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). 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. Employers can include a Roth option in their 401(k) plans. If your plan offers this, you can designate some or all of your contribution as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free. Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. On the other hand, if you expect your tax rate to be lower in retirement, you may be better off sticking with traditional 401(k) contributions. Finally, keep in mind that any employer matches to Roth 401(k) contributions will be pretax and go into your traditional 401(k) account. Have questions about how much to contribute or the best mix between traditional and Roth contributions? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.
The extended deadline for filing 2016 individual federal income tax returns is October 16. If you extended your return and know you owe tax but can’t pay the bill, you may be wondering what to do next.
First and foremost, file your return by October 16. Filing by the extended deadline will allow you to avoid the 5%-per-month failure-to-file penalty. The only cost for failing to pay what you owe is an interest charge. Because an extension of time to file is NOT an extension of time to pay, generally the interest (and possibly penalties) will begin to accrue after the April 18 filing deadline even if you filed for an extension. If you still can’t pay when you file by the extended October 16 due date, interest will continue to accrue until you pay the tax.
So when must you pay the balance due? As soon as possible, if you want to halt the IRS interest charges. Pay with a credit card. You can pay your federal tax bill with American Express, Discover, MasterCard or Visa. But before pursuing this option, ask about the one-time fee your credit card company will charge (which might be deductible) and the interest rate. Take out a loan. If you can borrow at a reasonable rate, this may be a good option. Arrange an IRS installment agreement. You can request permission from the IRS to pay off your bill in installments. Approval of your installment payment request is automatic if you 1. Owe $10,000 or less (not counting interest or penalties) 2. Propose a repayment period of 36 months or less 3. Haven’t entered into an earlier installment agreement within the preceding five years 4. Have filed returns and paid taxes for the preceding five tax years. As long as you have an unpaid balance, you’ll be charged interest. But this may be at a much lower rate than what you’d pay on a credit card or could arrange with a commercial lender. Be aware that, when you enter into an installment agreement, you must pledge to stay current on your future taxes. Filing a 2016 federal income tax return is important even if you can’t pay the tax due right now as the failure-to-pay penalty is only 0.5% per month (vs. the failure-to-file penalty of 5% per month). If you need assistance or would like more information, please contact us at 508-888-2000 or firstname.lastname@example.org.
With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option, which can be especially beneficial if the children in question still have many years until they’ll be starting their higher education, is a Section 529 plan. Tax-deferred compounding 529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So these plans can be particularly powerful if contributions begin when the child is quite young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service 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. More pluses 529 plans offer other benefits as well: They usually have high contribution limits. There are no income-based phaseouts further limiting contributions. There’s generally no beneficiary age limit for contributions or distributions. You can control the account, even after the child is a legal adult. You can make tax-free rollovers to another qualifying family member. 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, which means you can make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse) in 2017. In the case of grandparents, this also can avoid generation-skipping transfer taxes. Minimal minuses: One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary. But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months. We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more about either type of 529 plan, please contact us. We can also tell you about other tax-smart strategies for funding education expenses.
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth 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. October 1: Establish SIMPLE IRA for current year. October 16: If a calendar-year C corporation that filed an automatic six-month extension: File a 2016 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2016 to certain employer-sponsored retirement plans. October 31: Report income tax withholding and FICA taxes for third quarter 2017 (Form 941) and pay any tax due. November 13: Report income tax withholding and FICA taxes for third quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due. December 15: If a calendar-year C corporation, pay the fourth installment of 2017 estimated income taxes. December 31: Establish Defined-Benefit plan, Defined-Contribution plan, 401(k), and 403(b) for current year.
As you plan your estate, don’t overlook the generation-skipping transfer (GST) tax. Despite a generous $5.49 million GST tax exemption, complexities surrounding its allocation can create several tax traps for the unwary. The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, other family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). If your child predeceases his or her children, however, they’re no longer considered skip persons. GST tax applies to gifts or bequests directly to a skip person and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $14,000 per recipient; $28,000 for gifts split by married couples) are also shielded from GST tax. To take full advantage of the GST tax exemption, you (or your estate’s representative) must properly allocate it to specific gifts and bequests (on a timely filed gift or estate tax return). Allocating the exemption wisely can provide substantial tax benefits. Suppose, for example, that you contribute $2 million to a trust for the benefit of your grandchildren. If you allocate $2 million of your GST exemption to the trust, it will be shielded from GST taxes, even if it grows to $10 million. If you don’t allocate the exemption, you could trigger a seven-figure GST tax bill. To help prevent costly mistakes like this from happening, the tax code and regulations provide for automatic allocation under certain circumstances. Your exemption is automatically allocated to direct skips as well as to contributions to “GST trusts.” These are trusts that could produce a generation-skipping transfer, subject to several exceptions. Often, the automatic allocation rules work well, ensuring that GST exemptions are allocated in the most tax-advantageous manner. But in some cases, automatic allocation can lead to undesirable results. Suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST taxes. If you plan to make gifts to skip persons, or to trusts that may benefit skip persons, consider your potential GST tax exposure. Also, keep in mind that repeal of the GST tax, along with the gift and estate tax, has been proposed. We’ll keep you abreast of any tax law changes that affect estate planning, and we can answer your questions regarding the GST tax.
If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.
Complacency can be costly:
During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. It is common for the parties to wrangle over taxes at this stage. Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently. You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via post-merger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Merging accounting functions:
One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments.
There’s no time to waste:
You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition. To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system. The tax consequences of mergers and acquisitions decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.
A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family. If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection.
Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans. IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy.
The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million. The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy. To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected. Outside bankruptcy, the protection afforded an IRA depends on state law.
What about inherited IRAs? In 2014, the U.S. Supreme Court held that inherited IRAs don’t qualify as retirement accounts under bankruptcy law. The Court reasoned that money in an IRA retirement account was set aside “at some prior date by an entirely different person.” But after an inheritance, it no longer bears the legal characteristics of retirement funds because the heir can withdraw funds at any time without a tax penalty and take other steps not required with noninherited IRAs. Therefore, they’re not protected in bankruptcy. (Clark v. Rameker) Consult with your attorney about protection for retirement accounts in a nonbankruptcy context.
If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.
Converting a traditional IRA to a Roth IRA can provide tax-free growth and the ability to withdraw funds tax-free in retirement. But what if you convert a traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover that you would have been better off if you hadn’t converted it? Fortunately, it’s possible to undo a Roth IRA conversion, using a “recharacterization".
There are several possible reasons to undo a Roth IRA conversion. For example:
- You lack sufficient liquid funds to pay the tax liability.
- The conversion combined with your other income has pushed you into a higher tax bracket.
- You expect your tax rate to go down either in the near future or in retirement.
- The value of your account has declined since the conversion, which means you would owe taxes partially on money you no longer have.
Generally, when you convert to a Roth IRA, if you extend your tax return, you have until October 15 of the following year to undo it. (For 2016 returns, the extended deadline is October 16 because the 15th falls on a weekend in 2017.) In some cases it can make sense to undo a Roth IRA conversion and then redo it. If you want to redo the conversion, you must wait until the later of 1) the first day of the year following the year of the original conversion, or 2) the 31st day after the recharacterization. Keep in mind that, if you reversed a conversion because your IRA’s value declined, there’s a risk that your investments will bounce back during the waiting period. This could cause you to reconvert at a higher tax cost.
Recharacterization in action: Nick had a traditional IRA with a balance of $100,000. In 2016, he converted it to a Roth IRA, which, combined with his other income for the year, put him in the 33% tax bracket. So normally he’d have owed $33,000 in federal income taxes on the conversion in April 2017. However, Nick extended his return and, by September 2017, the value of his account drops to $80,000. On October 1, Nick recharacterizes the account as a traditional IRA and files his return to exclude the $100,000 in income. On November 1, he reconverts the traditional IRA, whose value remains at $80,000, to a Roth IRA. He’ll report that amount on his 2017 tax return. This time, he’ll owe $26,400 — deferred for a year and resulting in a tax savings of $6,600. If the $20,000 difference in income keeps him in the 28% tax bracket or tax reform legislation is signed into law that retroactively reduces rates for 2017, he could save even more. If you convert a traditional IRA to a Roth IRA, monitor your financial situation. If the advantages of the conversion diminish, we can help you assess your options.
Most of the talk about possible tax legislation this year has focused on either wide-sweeping tax reform or taxes that are part of the Affordable Care Act. But there are a few other potential tax developments for individuals to keep an eye on. Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The question now is whether Congress will extend them for 2017. An education break One break the PATH Act extended through 2016 was the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers). You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings. But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts. Mortgage-related tax breaks Under the PATH Act, through 2016 you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. The deduction phased out for taxpayers with AGI of $100,000 to $110,000. The PATH Act likewise extended through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modified the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. So even if this break isn’t extended, you might still be able to benefit from it on your 2017 income tax return. Act now Please check back with us for the latest information. In the meantime, keep in mind that, if you qualify and you haven’t filed your 2016 income tax return yet, you can take advantage of these breaks on that tax return. The deadline for individual extended returns is October 16, 2017. Contact our office or subscribe to our newsletter to stay up-to-date.
If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.
Reasons to reimburse:
While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why? It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted. On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan. Per diem method The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.) The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities. You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria: It must pay expenses that would otherwise be deductible by the employee. Payments must be for “ordinary and necessary” business expenses. Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly. Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days. If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee). Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.
If you recently filed for your 2016 income tax return, you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples: Significant inconsistencies between previous years’ filings and your most current filing, gross profit margin or expenses markedly different from those of other businesses in your industry, and miscalculated or unusually high deductions. If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call. More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation. If the IRS selects you for an audit, our firm can help you: understand what the IRS is disputing (it’s not always crystal clear), gather the specific documents and information needed, and respond to the auditor’s inquiries in the most expedient and effective manner. Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place. If you are notified that you are being audited, please contact our office for our assistance through this stressful event.
In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear: 1. Consider your bracket The top income tax rate is 39.6% for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold , consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6% bracket or you can’t avoid the bracket.) You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017). 2. Look at investment income This year, the capital gains rate for taxpayers in the top bracket is 20%. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule. Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8% net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both. 3. Plan for medical expenses The threshold for deducting medical expenses is 10% of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.) Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor. These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.
According to IRS Publication 5137, Fringe Benefit Guide, a fringe benefit is “a form of pay (including property, services, cash or cash equivalent), in addition to stated pay, for the performance of services.” But the tax treatment of a fringe benefit can vary dramatically based on the type of benefit. Generally, the IRS takes one of four tax approaches to fringe benefits: 1. Taxable/includable. The value of benefits in this category are taxable because they must be included in employees’ gross income as wages and reported on Form W-2. They’re usually also subject to federal income tax withholding, Social Security tax (unless the employee has already reached the current year Social Security wage base limit) and Medicare tax. Typical examples include cash bonuses and the personal use of a company vehicle. 2. Nontaxable/excludable. Benefits in this category are considered nontaxable because you may exclude them from employees’ wages under a specific section of the Internal Revenue Code. Examples include: Working-condition fringe benefits, which are expenses that, if employees had paid for the item themselves, could have been deducted on their personal tax returns (such as subscriptions to business periodicals or websites and some types of on-the-job training), De minimis fringe benefits, which include any employer-provided property or service that has a value so small that accounting for it is “unreasonable or administratively impracticable” (such as occasional coffee, doughnuts or soft drinks and permission to make occasional local telephone calls), Properly documented work-related travel expenses (such as transportation and lodging), Up to $50,000 in group term-life insurance, as long as the policy meets certain IRS requirements, and Employer-paid health care premiums under a qualifying plan. 3. Partially taxable. In some cases, the value of a fringe benefit will be excluded under an IRC section up to a certain dollar limit with the remainder taxable. A public transportation subsidy under Section 132 is one example. 4. Tax-deferred. This designation applies to fringe benefits that aren’t taxable when received but that will be subject to tax later. A common example is employer contributions to a defined contribution plan, such as a 401(k) plan. Are you applying the proper tax treatment to each fringe benefit you provide? If not, you could face unexpected tax liabilities or other undesirable consequences. Please contact us with any questions you have about the proper tax treatment of a particular benefit you currently offer or are considering offering.
Bartering might seem like something that happened only in ancient times, but the practice is still common today. And the general definition remains the same: the exchange of goods and services without the exchange of money. Because no cash changes hands in a typical barter transaction, it’s easy to forget about taxes. But, as one might expect, you can’t cut Uncle Sam out of the deal. A taxing transaction The IRS generally treats a barter exchange similarly to a transaction involving cash, so you must report as income the fair market value of the products or services you receive. If there are business expenses associated with the transaction, those can be deducted. Any income arising from a bartering arrangement is generally taxable in the year you receive the bartered product or service. And income tax liability isn’t the only thing you’ll need to consider. Barter activities may also trigger self-employment taxes, employment taxes or an excise tax. Barter in action Let’s look at an example. Mike, a painting contractor, requires legal representation for a lawsuit. He engages Maria as legal counsel to represent him during the litigation. Maria charges Mike $6,000 for her work on the case. Being short of cash, Mike agrees to paint Maria’s office in exchange for her $6,000 fee. Both Mike and Maria must report $6,000 of taxable gross income during the year the exchange takes place. Because Mike and Maria each operate a viable business, they’re entitled to deduct any business expenses resulting from the barter transaction. Using an exchange company You may wish to arrange a bartering deal though an exchange company. For a fee, one of these companies can allow you to network with other businesses looking to trade goods and services. For tax purposes, a barter exchange company typically must issue a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” annually to its clients or members. Although bartering may appear cut and dried, the tax implications can complicate the deal. We can help you assess a bartering arrangement and manage the tax impact
Here are some of the key tax-related deadlines affecting businesses and other employers during the second 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. July 31 Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.) File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension. August 10 Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due. September 15 If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes. If a calendar-year S corporation or partnership that filed an automatic six-month extension: File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due. Make contributions for 2016 to certain employer-sponsored retirement plans.
A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family. If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection. Employer plans Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans. IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy. IRAs The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million. The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy. To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected. Outside bankruptcy, the protection afforded an IRA depends on state law. What about inherited IRAs? In 2014, the U.S. Supreme Court held that inherited IRAs don’t qualify as retirement accounts under bankruptcy law. The Court reasoned that money in an IRA retirement account was set aside “at some prior date by an entirely different person.” But after an inheritance, it no longer bears the legal characteristics of retirement funds because the heir can withdraw funds at any time without a tax penalty and take other steps not required with noninherited IRAs. Therefore, they’re not protected in bankruptcy. (Clark v. Rameker) Consult with your attorney about protection for retirement accounts in a nonbankruptcy context. Protect yourself If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.
Has your small business procrastinated in setting up a retirement plan? You might want to take a look at a SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” If you decide you’re interested in a SIMPLE IRA, you must establish it by no later than October 1 of the year for which you want to make your initial deductible contribution. (If you’re a new employer and come into existence after October 1, you can establish the SIMPLE IRA as soon as administratively feasible.) Pros and cons Here are some of the basics of SIMPLEs: They’re available to businesses with 100 or fewer employees. They offer greater income deferral opportunities than individual retirement accounts (IRAs). However, other plans, such as SEPs and 401(k)s, may permit larger annual deductible contributions. Participant loans aren’t allowed (unlike 401(k) and other plans that can offer loans). As the name implies, it’s simple to set up and administer these plans. You aren’t required to file annual financial returns. If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions. Contribution amounts Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE. An employee may defer up to $12,500 in 2017. This amount is indexed for inflation each year. Employees age 50 or older can make a catch-up contribution of up to $3,000 in 2017. If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions. Consider your choices A SIMPLE IRA might be a good choice for your small business but it isn’t the only choice. You might also be interested in setting up a simplified employee pension plan, a 401(k) or other plan. Contact us to learn more about a SIMPLE IRA or to hear about other retirement alternatives for your business.
From our associates at Cushing & Dolan, P.C.:
Great news from the Supreme Judicial Court for elders and other individuals trying to protect their assets from the exorbitant cost of long term nursing home care!
On May 30, 2017, the Supreme Judicial Court in the cases of Daley (Daley v. Secretary of the Executive Office of Health and Human Services & Another (SJC 12200)) and Nadeau (Nadeau v. Director of the Office of Medicaid (SJC 12205)), reversed two Superior Court decisions which had originally held that assets in an income only irrevocable Medicaid trust were considered countable assets for MassHealth purposes. In both cases, the elder had transferred their home to a so-called Medicaid trust. In the Daley case, the elder had reserved a life estate in the deed, while in Nadeau, the elder had reserved the right to use and occupy the property in the trust itself.
In the lower court, the Superior Court upheld a Fair Hearing Officer's findings that these provisions caused the assets to be considered countable and therefore disqualified the elder from receiving MassHealth benefits in connection with their entry into a nursing home. The Supreme Judicial Court disagreed. The decisions provide guidance and certainty as well as opportunity for those who wish to protect their assets from the cost of long term care.
Congratulations to the Litigation Group of Cushing & Dolan, PC and Attorneys Leo J. Cushing, CPA, LLM and Thomas J. McIntyre who drafted and submitted an Amicus Brief with the Supreme Judicial Court on behalf of the Real Estate Bar Association for Massachusetts in the Daley case. Leo is currently the Chairperson of the Estate Planning, Trusts & Estate Administration Committee of the Real Estate Bar Association.
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, your employer might not offer a Roth 401(k) or another Roth option, and modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute to a Roth IRA. Fortunately, there is a solution: the “back door” Roth IRA. Are you phased out? The 2017 contribution limit for all IRAs combined is $5,500 (plus an additional $1,000 catch-up contribution if you’ll be age 50 or older by December 31). You can make a partial contribution if your MAGI falls within the applicable phaseout range, but no contribution if it exceeds the top of the range: For married taxpayers filing jointly: $186,000–$196,000. For single and head-of-household taxpayers: $118,000–$133,000. (Note: Married taxpayers filing separately are subject to much lower phaseout ranges.) Using the back door 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, which should be little, if any, assuming you’re able to make the conversion quickly. More limited tax benefit in some cases If you do already have a traditional IRA, the back-door Roth IRA strategy is still available but there will be more tax liability on the conversion. A portion of the amount you convert to a Roth IRA will be considered attributable to deductible contributions and thus be taxable. It doesn’t matter if you set up a new traditional IRA for the nondeductible contributions; all of your traditional IRAs will be treated as one for tax purposes. Roth IRAs have other benefits and downsides you need to factor into your decision, and additional rules apply to IRA conversions. Please contact us for assistance in determining whether a backdoor Roth IRA is right for you.
Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it’s a great time to take a look at your records for previous tax years to see what you can purge. Consider the statute of limitations 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 — or electronically purge — most records related to tax returns for 2013 and earlier years (2012 and earlier if you filed for an extension for 2013). In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the limitations period jumps to six years. And there is no statute of limitations if you fail to file a tax return or file a fraudulent one. Keep some documents longer You’ll need to hang on to certain records beyond the statute of limitations: Tax returns. Keep them forever, so you can prove to the IRS that you actually filed. W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year. Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations). This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.
Reimbursing employees for education expenses can both strengthen the capabilities of your staff and help you retain them. In addition, you and your employees may be able to save valuable tax dollars. But you have to follow IRS rules. Here are a couple of options for maximizing tax savings. A fringe benefit Qualifying reimbursements and direct payments of job-related education costs are excludable from employees’ wages as working condition fringe benefits. This means employees don’t have to pay tax on them. Plus, you can deduct these costs as employee education expenses (as opposed to wages), and you don’t have to withhold income tax or withhold or pay payroll taxes on them. To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the employees’ current occupations and not qualify them for new jobs. There’s no ceiling on the amount employees can receive tax-free as a working condition fringe benefit. An educational assistance program Another approach is to establish a formal educational assistance program. The program can cover both job-related and non-job-related education. Reimbursements can include costs such as: Undergraduate or graduate-level tuition, Fees, Books, and Equipment and supplies. Reimbursement of materials employees can keep after the courses end (except for textbooks) aren’t eligible. You can annually exclude from the employee’s income and deduct up to $5,250 (or an unlimited amount if the education is job related) of eligible education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or withhold or pay payroll taxes on these reimbursements. To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated employees, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available. Train and retain If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Please contact us for more details.
While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them. June 15 File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States. Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES). September 15 Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES). October 2 If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed. October 16 File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States). Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed. File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed. December 31 Make 2017 contributions to certain employer-sponsored retirement plans. Make 2017 annual exclusion gifts (up to $14,000 per recipient). Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.
Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017: Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT). Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes. Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it. Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction. Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible. Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable. Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it. The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform. Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.
Here are some of the key tax-related deadlines affecting businesses and other employers during the second 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. April 18 If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans. If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes. May 1 Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.) May 10 Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due. June 15 If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.
Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea. Benefits beyond a deduction Tax-advantaged retirement plans like IRAs 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. This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible. Contribution options The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18: 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 2016 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, however, may reduce or eliminate your ability to contribute. 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.
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 limits 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 you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby. The hobby loss rules Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules. If you haven’t earned a profit from your business in three out of five consecutive years, including the current year, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. But if this profit test can be met, the burden falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:Do you carry on the activity in a business-like manner? Does the time and effort put into the activity indicate an intention to make a profit? Do you depend on income from the activity? If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business? Have you changed methods of operation to improve profitability? Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business? Have you made a profit in similar activities in the past? Does the activity make a profit in some years? Do you expect to make a profit in the future from the appreciation of assets used in the activity? Dangers of reclassification If your enterprise is reclassified as a hobby, you can’t use a loss from the activity to offset other income. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.
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: • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse), • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse, • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016, • Of future interests — such as remainder interests in a trust — regardless of the amount, or • Of jointly held or community property. 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.
Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely. How it works Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property. Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall. Executing the deal Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance. When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer. An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days. The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.
As you file your 2016 return and plan your charitable giving for 2017, it’s important to keep in mind the available deduction. It can vary significantly depending on a variety of factors. What you give Other than the actual amount you donate, one of the biggest factors that can affect your deduction is what you give: 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 for more than one year. Tangible personal property. Your deduction depends on the situation: If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis. If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), you can deduct the fair market value. Vehicle. Unless the vehicle is 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. Other factors Your annual charitable donation deductions may be reduced if they exceed certain income-based limits. And if you receive some benefit from the charity, your deduction generally must be reduced by the benefit’s value. In addition, various substantiation requirements apply. And the charity must be eligible to receive tax-deductible contributions. Finally, keep in mind that tax law changes could be passed later this year that might affect your 2017 charitable deductions. If you have questions about how much you can deduct on your 2016 return, let us know. We also can keep you apprised of the latest information on any tax law changes.
The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this deadline is nothing new for S corporation returns, it’s earlier than previous years for partnership returns. In addition to providing continued funding for federal transportation projects, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the due dates for several types of tax and information returns, including partnership income tax returns. The revised due dates are generally effective for tax years beginning after December 31, 2015. In other words, they apply to the tax returns for 2016 that are due in 2017. The new deadlines The new due date for partnerships with tax years ending on December 31 to file federal income tax returns is March 15. For partnerships with fiscal year ends, tax returns are due the 15th day of the third month after the close of the tax year. Under prior law, returns for calendar-year partnerships were due April 15. And returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year. One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April 15 deadline (April 18 in 2017 because of a weekend and a Washington, D.C., holiday). After all, partnership (and S corporation) income flows through to the owners. The new date should allow owners to use the information contained in the partnership forms to file their personal returns. Extension deadlines If you haven’t filed your partnership or S corporation return yet, you may be thinking about an extension. Under the new law, the maximum extension for calendar-year partnerships is six months (until September 15). This is up from five months under prior law. So the extension deadline doesn’t change — only the length of the extension. The extension deadline for calendar-year S corporations also remains at September 15. But you must file for the extension by March 15. Keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. But if filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 18 deadline. Filing for an extension can 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 the filing deadlines that apply to you or avoiding interest and penalties.
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.
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.
Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous. SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested. Deadline for set-up and contributions A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example: A calendar-year partnership or S corporation has until March 15, 2017, to establish a SEP for 2016 (September 15, 2017, if the return is extended). A calendar-year sole proprietor or C corporation has until April 18, 2017 (October 16, 2017, if the return is extended), because of their later filing deadlines. The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return. Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017). Contribution amounts Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee. For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively. Setting up a SEP is easy A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement. Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us.
In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax. The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income. Additional 0.9% Medicare tax Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus. Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare 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 your employer might not withhold the tax even though you are liable for it due to your self-employment income. If you do owe the tax but your employer isn’t withholding it, 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. Deductions for the self-employed For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.) As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks. For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us
Was a college student in your family last year? Or were you a student yourself? You may be eligible for some valuable tax breaks on your 2016 return. To max out your higher education 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: 1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education. 2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years. 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. Be aware that the tuition and fees deduction expired December 31, 2016. So it won’t be available on your 2017 return unless Congress extends it or makes it permanent. 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 2016 tax returns — and which will provide the greatest tax savings — please contact us.
In many respects, estate planning for single parents of minor children is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask: 1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan recently, do so as soon as possible to ensure that it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future. 2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown. 3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents don’t have a “backup” income in the event they can no longer work. 4. What if I become incapacitated? As a single parent, it’s particularly important for you to include in your estate plan a living will or advance directive to specify your preferences for the use of life-sustaining medical procedures and a health care power of attorney to designate someone to make other medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances. 5. Have I established a trust for my children? Trust planning is one of the most effective ways to provide for children regardless of their age. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees, and you specify when and under what circumstances funds should be distributed to your kids. But a trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator. If you’re a single parent, we can help answer all of your estate planning questions.
It’s crucial to review and update your estate plan in light of significant life changes or new tax laws. It’s equally important to be aware of strategies that can be implemented after your death to achieve your estate planning goals. The flexibility postmortem strategies provide is especially important during times of estate tax law uncertainty, like now. If you’re married, here are two postmortem estate planning strategies you should know about. 1. Spousal right of election The spousal right of election provides a way to alter the planned distribution of your wealth after you’re gone. In most states, a surviving spouse has the right to circumvent his or her spouse’s will and take an elective share (one-half or one-third, for instance) of certain property. So, for example, let’s say you leave all of your assets to your children or other beneficiaries. Your spouse might exercise his or her right of election if it would produce a more favorable tax outcome. Even if the federal estate tax is repealed, which is on the agenda of President Trump and the Republican majority in Congress, there may be state estate tax or income tax consequences to consider. 2. QTIP trust Qualified terminable interest property (QTIP) trusts are often used to take advantage of the marital deduction while ensuring that assets are preserved for the children (particularly children from a previous marriage). They also receive some creditor protection. Ordinarily, to qualify for the marital deduction (which allows assets to transfer from one spouse to the other free of federal gift and estate tax), you must transfer assets to your spouse with no strings attached. The QTIP trust is an exception to this rule. So long as your spouse receives all of the QTIP trust income for life and certain other requirements are met, your estate can enjoy the benefits of the marital deduction while still preserving assets for your children or other beneficiaries. When your spouse dies, any remaining trust assets pass to your beneficiaries but are included in your spouse’s taxable estate. Here’s where the postmortem planning comes in: To claim the marital deduction for amounts transferred to a QTIP trust, your executor (called a “personal representative” in some states) must make an election on your estate tax return. A properly designed QTIP trust gives your executor the flexibility to make the election, not make the election or make a partial election, depending on which strategy would produce the optimal results. Because a QTIP trust creates opportunities for postmortem estate planning, it may be a good strategy even if you don’t need it to protect your children or assets. Contact us to learn more about postmortem estate planning strategies.
Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two available credits are especially for small businesses that provide certain employee benefits. And one of them might not be available after 2017. 1. Small-business health care credit The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. 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 2016, 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 claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2016 may be a good idea. Why? It’s possible the credit will go away for 2018 because lawmakers in Washington are starting to take steps to repeal or replace the ACA. Most likely any ACA repeal or replacement wouldn’t go into effect until 2018 (or possibly later). So if you claim the credit for 2016, you may also be able to claim it on your 2017 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available. 2. 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 start-up 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. If you didn’t create a retirement plan in 2016, it might not be too late. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. Maximize tax savings Be aware that additional rules apply beyond what we’ve discussed here. We can help you determine whether you’re eligible for these credits. We can also advise you on what other credits you might be eligible for when you file your 2016 return so that you can maximize your tax savings.
Is a family-owned business your primary source of wealth? If so, it’s critical to plan carefully for the transition of ownership from one generation to the next. The best approach depends on your particular circumstances. If your net worth is well within the estate tax exemption, you might focus on reducing income taxes. But if you expect your estate to be significantly larger than the exemption amount, estate tax reduction may be a bigger concern. IDGT An intentionally defective grantor trust (IDGT) is an income defective trust. As such, it can be an effective tool for transferring business interests at a minimal gift and estate tax cost. An IDGT is designed so that contributions are completed gifts, removing the trust assets and all future appreciation in their value from your taxable estate. At the same time, it’s “defective” for income tax purposes; that is, it’s treated as a “grantor trust” whose income is taxable to you. This allows trust assets to grow without being eroded by income taxes, thus leaving a greater amount of wealth for your children or other beneficiaries. The downside of an IDGT is that, when your beneficiaries inherit the business, they’ll also inherit your tax basis, which may trigger a substantial capital gains tax liability if they sell the business. This result may be acceptable if the estate tax savings outweigh the income tax cost. But what if the value of your business and other assets is less than the current estate tax exemption amount, so that estate taxes aren’t an issue? In this case, you might consider an estate defective trust. Estate defective trust An estate defective trust is designed so that beneficiaries are the owners for income tax purposes, while the assets remain in the estate for estate tax purposes. Assuming your beneficiaries are in a lower tax bracket, this strategy will result in lower “familywide” taxes. And, because the trust assets remain in your estate, the beneficiaries’ basis in the assets is “stepped up” to fair market value, reducing or eliminating their potential capital gains tax liability. Work with us to determine the right strategy to implement when transferring ownership of your business to your heirs.
Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The PATH Act, signed into law a little over a year ago, extended 50% bonus depreciation through 2017. Claiming this break is generally beneficial, though in some cases a business might save more tax in the long run if they forgo it. However, 2016 may be an especially good year to take bonus depreciation. Keep this in mind when you’re filing your 2016 tax return. Eligible assets 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 improvement property. And beginning in 2016, the qualified improvement property doesn’t have to be leased. It isn’t enough, however, to have acquired the property in 2016. You must also have placed the property in service in 2016. Now vs. later 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 2016, 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 paying a higher tax rate. Making a decision for 2016 The greater tax-saving power of deductions when rates are higher is why 2016 may be a particularly good year to take bonus depreciation. With both President Trump and the Republican-controlled Congress wishing to reduce tax rates, there’s a good chance that such legislation could be signed into law. This means your tax rate could be lower for 2017 (if changes go into effect for 2017) and future years. If that happens, there’s a greater likelihood that taking bonus depreciation for 2016 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years. Also keep in mind that, under the PATH Act, bonus depreciation is scheduled to drop to 40% for 2018, drop to 30% for 2019, and expire Dec. 31, 2019. Of course, Congress could pass legislation extending 50% bonus depreciation or making it permanent — or it could eliminate it or reduce the bonus depreciation percentage sooner. If you’re unsure whether you should take bonus depreciation on your 2016 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.
In recognition of inauguration day, we should look at the new President’s stated proposals. No matter your political persuasion, this is something that you need to be aware of. With that being said, here is President Trump’s tax reform plan that could affect you:
• Reducing the number of income tax brackets from seven to three, with rates on ordinary income of 12%, 25% and 33% (reducing rates for many taxpayers but resulting in a tax hike for certain single filers),
• Aligning the 0%, 15% and 20% long-term capital gains and qualified dividends rates with the new brackets,
• Eliminating the head of household filing status (which could cause rates to go up for some of these filers, who would have to file as singles),
• Abolishing the net investment income tax,
• Eliminating the personal exemption (but expanding child-related breaks),
• More than doubling the standard deduction, to $15,000 for singles and $30,000 for married couples filing jointly,
• Capping itemized deductions at $100,000 for single filers and $200,000 for joint filers,
• Abolishing the alternative minimum tax, and
• Abolishing the federal gift and estate tax, but disallowing the step-up in basis for estates worth more than $10 million.
The House Republicans’ plan is somewhat different. And because Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, they may need to compromise on some issues in order to get their legislation through the Senate. The bottom line is that exactly which proposals will make it into legislation and signed into law is uncertain, but major changes are just about a sure thing. There will be many changes that could come about, so please check back for updates for proposed legislation.
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. 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.
A great deal of attention is paid to individual tax identity theft — when a taxpayer’s personal information (including Social Security number) is used to fraudulently obtain a refund or commit other crimes. But businesses can also be victims of tax identity theft. Significant consequences Business tax identity theft occurs when a criminal uses the identifying information of a business, without permission, to obtain tax benefits or to enable individual identity theft schemes. For example, a thief could use an Employer Identification Number (EIN) and file a fraudulent business tax return to claim a refund or refundable tax credits. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for the “employees” to claim refunds. In many cases, businesses don’t even know their information has been stolen until they’re contacted by the IRS. The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation. Signs your business could be a victim There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if you receive: A notice from the IRS about fictitious employees. An IRS letter stating that more than one tax return has been filed in your business name. A notice from the IRS that you have a balance due when you haven’t yet filed a return. Steps to take If you receive a letter or notice from the IRS that leads you to believe someone fraudulently has used your business EIN, respond immediately to the contact information provided. Contact us for more information about how to proceed.
When planning their estates, many people agonize over the negative impact their wealth might have on their children. To address these concerns, some people establish quiet trusts, also known as silent trusts. In other words, they leave significant sums in trust for their children; they just don’t tell them about it. An interesting approach, but is it effective? A questionable strategy Many states permit quiet trusts, but the risks associated with them may outweigh the potential benefits. For one thing, it’s difficult — if not impossible — to keep your wealth a secret. Even if your children are unaware of the details of your estate plan, their expectations of a future inheritance can encourage the same irresponsible behavior the quiet trust was intended to avoid. A quiet trust may also increase the risk of litigation. The trustee has a fiduciary duty to act in the beneficiaries’ best interests. When your children become aware of the trust years or decades later, they’ll likely seek an accounting from the trustee and, with the help of counsel, may challenge any past decisions of the trustee that they disagree with. A better alternative The idea behind a quiet trust is to avoid disincentives to responsible behavior. But it’s not clear that such a trust will actually accomplish that goal. A better approach may be to design a trust that provides incentives to behave responsibly — sometimes referred to as an incentive trust. It provides an opportunity for you or the trustee to help shape the beneficiaries’ future behavior. With a quiet trust, you keep your beneficiaries’ inheritance a secret and hope that, without the negative influence of future wealth, they will behave responsibly. With an incentive trust, on the other hand, you provide positive reinforcement by communicating the terms of the trust, letting beneficiaries know what they must do to receive their rewards, and providing them with the help they need to succeed. Questions on the benefits of either of these trusts? We can provide the answers, 508-888-2000.