Category Archives: Taxes

Year-End Tax Checklist

As the year draws to a close, there are several tax-saving ideas you should consider. Use this checklist to make sure you don’t miss an opportunity before the year is out.

  • Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.
  • Consider RMD donation.  If you don’t need your required minimum distribution, consider donating it to charity.  Ask us about how to accomplish this before year-end.
  • Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your ordinary income.
  • Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you’ve owned more than a year. You often can make a larger donation – and get a larger deduction – without paying capital gains taxes.
  • Noncash contribution opportunity. Gather up noncash items for donation, document the items and give those in good condition to your favorite charity. Make sure you get a receipt from the charity, and take a photo of the items donated just in case.
  • Gifts to dependents and others. You may provide gifts to an individual of up to $14,000 this year, without needing to file a gift tax return. Remember that all gifts given (birthdays, holidays, etc.) count toward the total.
  • Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.

Planning for 2016 Taxes

The Protecting Americans from Tax Hikes Act of 2015 made several tax incentives permanent.  Among the most beneficial for businesses is the Section 179 expensing limitations and phase-outs.  The new thresholds allow $500,000 of immediate expensing of qualified business equipment, with a phase out of $2,000,000.  If you are planning on making some big equipment purchases by year end, you will be able to write-off the entire purchase (or any portion) on your 2016 income tax return.

A separate provision allows 50% of the cost of improvements to be written off under “bonus depreciation”.  This provision was extended for five years.

And, another permanent change allows retailers and restaurants to depreciate remodeling and other improvements to their stores over 15 years, rather than the previous standard of 39 years.

Minimum Wage Increases Effective 1/01/2017

With the passage of Initiative 1433 in Washington State, minimum wage rates will take a big jump over the next few years.  Beginning January 1, 2017, the minimum wage rate required to be paid to workers 18 years old and older will increase to $11.00 per hour from the current rate of $9.47 per hour.

The rate will increase to $11.50 per hour in 2018, $12.00 per hour in 2019, and $13.50 per hour in 2020.  Subsequent increases will be inflation adjustments.

Starting in 2018, employers will be required to pay sick leave; earned at the rate of one hour per every 40 hours worked.

New W-2 and 1099 Reporting Rules

Beginning with 2016 returns, due dates for Forms W-2 and certain Forms 1099 have been moved up, and the penalties for late or inaccurate forms have substantially increased.

* Form W-2 is due to the Social Security Administration on January 31, 2017, instead of February 28, whether you file electronically or by paper. (If you file 250 or more forms, you must file electronically.)

* Form 1099 must be submitted by January 31, 2017 if you're reporting non-employee compensation in Box 7. Otherwise, the forms are due to the IRS on February 28, the same as in prior years, or March 31 if you file electronically.

In addition to filing on time, you need to make sure the information on the forms is accurate.

Penalties for Failure to File Correct Information Returns may apply if you:

  • don’t file a correct information return by the due date and a reasonable cause is not shown,
  • file on paper when you were required to file electronically,
  • fail to report a Taxpayer Identification Number (TIN),
  • report an incorrect TIN, or
  • fail to file paper forms that are machine readable.

Penalties for Failure to Furnish Correct Payee Statements may apply if:

  • you don’t provide a correct payee statement by the applicable date and a reasonable cause isn’t shown,
  • all required information isn’t shown on the statement, or
  • incorrect information is included on the statement.

How much are the penalties? If you fail to file on time and your business gross receipts are less than $5 million, penalties can range from $50 per return for up to 30 days late, to $260 per return for filing after August 1. The maximum dollar penalty can range from $186,000 to $1,064,000. If the IRS says you intentionally disregarded the rules, you can be fined $530 per return, with no maximum.

Start Planning for 2016 Income Taxes Using 2015 Tax Return

You have just filed your 2015 return and now you're ready to forget all about taxes until next year. But wait! Your 2015 tax return is a great tool to help you plan for 2016. Here's what to look at-

Review your withholding. If you paid additional tax in 2015 or received a large refund, consider adjusting your tax withholding. Underpaying your tax may result in interest and penalties. By overpaying you give the government an interest-free loan. To change your withholding you need to complete Form W-4 and submit it to your employer.

Consider changes in the coming year. Life's big events may affect your taxes. Are you moving for a new job, starting a business, buying a home, going back to school, or having a baby? You may be able to take advantage of certain deductions or tax credits. Look into the requirements for available deductions/credits so you'll have the documentation needed to take advantage of any tax savings.

Age Related in 2016
Age 65
Medicare
If you're not already getting benefits, you should contact Social Security about three months before your 65th birthday to sign up for Medicare, even if you don't plan to retire at age 65.

Hospital insurance Part A There is no premium to pay for Part A

Medical insurance Part B If eligible for free Medicare Part A, you may enroll in Part B by paying a monthly premium. Beneficiaries with higher incomes pay higher monthly Part B premiums.

Income Tax
Beginning at age 65, you generally receive a higher standard deduction.

Age 66
You have reached full retirement age and may receive social security benefits with no reduction in benefits if you continue to earn wages or self-employment income.

Delaying receipt of your social security benefits until age 70 increases your benefit amount by 8% for each year you delay. For example, at age 70, you would receive 32% more than at age 66.

Age 70 ½
After reaching age 70½ you are generally required to start withdrawing a minimum distribution from a 401(k) or traditional IRA (doesn't apply to Roth IRAs).

Reevaluate your retirement. Saving for retirement is one of the most effective ways to reduce your tax bill while keeping money in your own pocket. If you missed maxing out your retirement plan in 2015, look into increasing your 401(k) contribution or contributing to an IRA.

Add up itemized deductions. Will you have enough deductions to itemize in 2016? The standard deduction for 2016 is $6,300 for single, and $12,600 for married filing jointly. Think about changes during 2016 that may increase or decrease the itemized deductions you can claim, such as buying a home, prepaying your real estate taxes, or donating to charity.

Stay informed. Tax laws evolve and staying informed is important. If you need help, we're available year-round. It's never too late – or too early – to start planning for 2016 income tax.

HOME REFINANCING – Understanding the Tax Issues

Are you thinking of refinancing your home mortgage? The following are tax rules to keep in mind.

Refinanced home acquisition debt - Any secured debt you use to refinance home acquisition debt will only qualify as home acquisition debt up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to build, or substantially improve (add value, or prolong the useful life) of the home is not home acquisition debt, but it may qualify as home equity debt.

Track "points" - A point is a fee equal to 1% of the loan amount. While you can fully deduct the points you pay when buying your home (if $1 million or less), points paid on refinancing are generally amortized over the term of the new mortgage. The points related to the home improvement are deductible. If you refinance a loan for a second time, the undeducted points from the previous loan are deductible that year, which is also the case when you sell your home.

You can only deduct points on loans secured by your second home over the life of the loan.

 Trace your use of funds - When you "cash out", or convert $100,000 or less of your home equity to cash during a refinance, the interest is tax deductible. If you take additional amounts, the interest may or may not be deductible depending on how the funds are used. When you use funds to expand your business, the interest may be deductible business interest. If you buy investments, the interest may be investment interest expense.

 

For more information on refinancing or mortgage interest tax deductions, give us a call.

IRS Offers Simpified Home-Office Deductions

For 2013, there is a new simplified method of claiming home-office deductions. The new procedure doesn't replace the current actual cost method, but it offers a "safe-harbor" alternative.

Under the current "actual" method, you determine the actual home office expenses such as depreciation, property taxes, insurance, utilities, repairs and mortgage interest (or rent, if a tenant). Deductible expenses are based on the percentage of your home devoted to business use (square footage of your home office to the entire home).

Under the optional "simplified" new method, you simply multiply the square footage of your home office by $5.00. The maximum allowable area for for home-office deductions is 300 square feet, which caps the deduction at $1,500.

The following considerations apply to either method:

  • The area claimed must be regularly and exclusively for business. This means it must be either your principle place of business or a place where you meet or deal with customers in the ordinary course of business. If you're an employee, the use of your home must be for your employer's convenience.
  • For each year, the deduction is limited to the net business income remaining after all other deductions have been subtracted.
  • Business expenses not connected to the use of your home (such as supplies, advertising, and wages) remain fully deductible.

You are permitted to change between the simplified and actual methods from year to year, but the method you choose is irrevocable for that year. If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

New Estate Tax Rules Bring Calm After the Storm

To the relief of taxpayers and planners, Congressional action made only small changes to the
estate rules.

  • The estate and gift tax exemptions are $5,250,000 in 2013, up from $5,120,000 in 2012. This will adjust for inflation going forward.
  • The top tax rate for estates and gifts exceeding the exemption is 40%, up from 35% in 2012, but better than the 55% rate that would have been the law had Congress not acted.
  • A surviving spouse is still able to access the unused portion of the estate exemption of the deceased husband or wife.

It's important to note that the exemption applies to both inheritances and lifetime gifts. The cumulative combined "transfer" exemption will be $5,250,000 whether the money is given away before or after you die. In addition, you can give away up to $14,000 annually to as many recipients as you like without tapping into your lifetime transfer tax exemption.

Average folks with estates far under $5 million may wonder how any of this applies to them. But the reality is everyone needs an estate plan. The backbone of your estate plan is a will, an essential legal tool to ensure your final wishes are honored. A will can also indicate who will take care of your children should you pass away, and how the children can access their inheritance. If you want to include your favorite charity in your estate plans, there are strategies available to benefit both family and charity alike.

Also, it is important to remember that states have their own rules. Washington State does not have a gift tax, but the estate tax starts at $2 million.

While it’s tempting to breathe a sigh of relief, don't let the current rules lull you into complacency. Contact us and your attorney for a review of your estate plans today.

Health Care Tax Benefits

With all the talk this year about medical costs and government benefits, it is easy to lose sight of the basic health care tax benefits already provided by Congress.

In 2012 taxpayers who itemize deductions on their tax return can deduct medical costs exceeding 7.5% of their (AGI) adjusted gross income, (increasing to 10% for taxpayers under age 65 in 2013).

Here's a tip: What counts is when you paid the bill, not when the treatment or prescription was received.

Types of costs that qualify for the medical deduction

Eligible expenses include those required to treat, prevent, or mitigate a disease or other medical condition. Such costs include prescription drugs, hospital bills, and premiums paid on health and dental insurance. And these costs can be incurred on behalf of yourself, a spouse, or a dependent. Just be sure to keep all applicable receipts to substantiate your expenses.

A deduction often overlooked is travel expenses incurred to receive medical care.

  • Travel by car: You can either deduct actual out-of-pocket expenses or the medical mileage rate of 23¢ per mile.
  • Lodging expenses for medical care are limited to $50 per night. You can include lodging for a person traveling with the person receiving the medical care, (a parent traveling with a sick child, up to $100 per night). Lodging is only deductible if the medical treatment is received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital and the lodging is primarily for or essential to the medical care received. Meals are NOT deductible.

Non-deductible Costs

Non-deductible costs (merely beneficial to general health) include:

  • Babysitting expenses to enable parent to visit a doctor
  • Hair transplant
  • Health club dues
  • Hygiene supplies
  • Illegal operations and treatments
  • Imported prescription drugs
  • Insurance (accidental loss of life, limb, loss of earnings during disability)
  • Marriage counseling
  • Maternity clothes
  • Medicines and drugs from other countries
  • Nonprescription drugs and medicines
  • Nutritional supplements, including vitamins
  • Trips, for general improvement of health
  • Weight loss program to improve appearance

To further explore your deduction options, contact our office.