2016 Year-End Tax Planning for Businesses

Dear Client:

As 2016 draws to a close, there is still time to reduce your 2016 tax bill and plan ahead for 2017. This letter highlights several potential tax-saving opportunities for business owners to consider. I will arrange to meet with you to discuss specific planning opportunities and issues that you might have in mind.

 

Deferring Income into 2017

Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your taxable income to be higher in 2016 than in 2017, or if you anticipate being in the same or a higher tax bracket in 2016 than in 2017, you may benefit by deferring income into 2017. Of course, if an individual is subject to the alternative minimum tax, standard tax planning may not be warranted. Some ways to defer income include:

Use of Cash Method of Accounting: By adopting the cash method of accounting instead of the accrual method, you can generally put yourself in a better position for accelerating deductions and deferring income. There is still time to implement this planning idea, because an automatic change to the cash method can be made by the due date of the return including extensions. The following three types of businesses can make an automatic change to the cash method: (1) small businesses with average annual gross receipts of $1 million or less (even those with inventories that are a material income producing factor); (2) certain C corporations with average annual gross receipts of $5 million or less in which inventories are not a material income producing factor; and (3) certain taxpayers with average annual gross receipts of $10 million or less. Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.

Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. So if you are expecting to sell property prior to the end of 2016, and it makes economic sense, consider selling the property and report the gain under the installment method to defer payments (and tax) until next year or later.

Delay Billing: If you are on the cash method, delay year-end billing to clients so that payments are not received until 2017.

Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2016. If you have control or influence over when dividends are paid to you, we should discuss this when we meet.

 

Accelerating Income into 2016

You may benefit from accelerating income into 2016. For example, you may anticipate being in a higher tax bracket in 2017, or perhaps you need additional income in 2016 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2016 could be disadvantageous if you expect to be in the same or lower tax bracket for 2017.

If you report your business income and expenses on a cash basis, issue bills and pursue collection before the end of 2016. Also, see if some of your clients or customers are willing to pay for January 2017 goods or services in advance. Any income received using these steps will shift income from 2017 to 2016.

Qualifying Dividends: Qualified dividends are subject to rates similar to the capital gains rates. Qualified dividend income is subject to a 15% rate for taxpayers below the 39.6% tax bracket. For taxpayers in the 39.6% bracket, the rate is 20%. Note that qualified dividends may be subject to an additional 3.8% net investment income tax. Qualified dividends are typically dividends from domestic and certain foreign corporations. The corporate board may consider the tax impact of declaring a dividend on its shareholders. If you are not in the highest bracket for 2016, but you expect to be in 2017, consideration should be made as to authorizing any dividend payment prior to the end of 2016 to utilize the 15% favorable tax rate vs. the 20% rate at higher income levels.

 

Accelerating Business Deductions

Bad Debts: If you use the accrual method, you can accelerate deductions into 2016 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2016 year-end financial statements. For non-business bad debts (such as uncollectible loans), the debts must be wholly worthless to be deductible, and will probably only be deductible as a capital loss.

2016 Bonuses: In general, if you are paying a bonus to employees, you may accrue that liability and deduct that amount if all the events are satisfied that fix that liability even though you pay the bonus next year, and you do not have a unilateral right to cancel the bonus at any time prior to payment. Generally, you will accelerate the bonus deduction into 2016 while your employees will report the income in 2017 if they are cash method taxpayers. Furthermore, any compensation arrangement that defers payment will be currently deductible only if paid within 2 ½ months after the employer’s year-end.

Highlights of Tax Credits

Research and Development Tax Credit: Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the research and development tax credit against alternative minimum tax liability, and the credit can be used by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.

Employer Wage Credit for Employees in the Military: Some employers continue to pay all or a portion of the wages of employees who are called to active military service. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. Beginning in 2016, employers of any size with a written plan for providing such differential wage payments are eligible for the credit.

Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred for employees hired and who began work during certain years the credit was available. Employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) will be entitled to an increased credit amount (i.e., 40% of the first $6,000 of wages) for new hires that begin to work for an employer on or after January 1, 2016 through December 31, 2019.

 

S Corporations

S Corporation Built-In Gains Tax Recognition Period: An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation’s income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all unrealized gains that were built-in at the time of the election for a defined recognition period of five years.

Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property: The basis of an S corporation shareholder’s stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. For example, if an S corporation contributes property with a $200 adjusted basis and $500 fair market value to a charity when its sole shareholder has a $500 stock basis, the shareholder’s stock basis is reduced by $200 instead of $500.

 

Qualified Small Business Stock

Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as “small business stock” under §1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. A 100% gain exclusion applies for qualified small business stock acquired after September 27, 2010 and held for more than five years. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010 (and held for at least five years). A 50% exclusion applies for qualified small business stock acquired before February 18, 2009 (and held for at least five years).

 

General Business Considerations

Business Deductions

Equipment Purchases: If you purchase equipment, you may make a “§179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service during tax years beginning in or after 2016 are eligible for this deduction. You may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,010,000), and the deduction is subject to a business income limit. If the cost of your §179 property placed in service during 2016 is $2,510,000 or more, you cannot take a §179 deduction.

In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2016. In general, under the “half-year convention,” you may deduct six months’ worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.)

Bonus Depreciation: For property acquired and placed in service during 2016 through 2019 (with an additional year for certain property with a longer production period), the bonus depreciation percentage is 50% for property placed in service during 2016 and 2017 is scheduled to phase down to 40% in 2018, and to 30% in 2019.

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI floor. Self Employed Health Insurance includes eligible long term health care premiums.

Vehicles Weighing Over 6,000 Pounds: A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit for depreciation: $3,160 for 2016; $3,560 in the case of vans and trucks (if bonus depreciation is taken, the 2016 amounts increase to $11,160 for cars and $11,560 for vans and trucks). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.

Capitalization of Tangible Property: Recent rules clarify whether certain items you purchase for use in your business (i.e. copiers, computers) can be expensed in the year purchased, or must be capitalized and deducted over several years. The rules include certain elections that may simplify your recordkeeping and/or increase your current deductions. We should discuss these rules when we meet.

Domestic Production Activities Deduction: Businesses that engage in domestic production activities are allowed to deduct a certain percentage of their qualified production activities income. The domestic production activities deduction is available to corporations and individuals, as well as to owners of partnerships and S corporations. The deduction may also be effective for state tax purposes, although some states may decide to “decouple” from the federal deduction in order to avoid a loss of business tax revenue. Whether you qualify for the deduction depends on the nature of your business.

Home Office Deduction: Expenses attributable to using the home office as a business office are deductible if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business. If you have been using part of your home as a business office, we should talk about the amount of any deduction you would like to take because an IRS safe harbor could be used to minimize audit risk.

NOL Carryback Period: If your business suffers net operating losses for 2016, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2014. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years. A corporation may file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to recover any overpayment of estimated tax for the tax year over the final income tax liability expected for the tax year. If you are expecting a tax loss for the current year and have paid estimated taxes, we should discuss this process as to quickly recover your cash payments. For losses expected to be incurred on an individual return, the filing of Form 1045, Application for Tentative Refund may be applicable.

Inventories Subnormal Goods: You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2016, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.

 

Business Credits

Small Employer Pension Plan Startup Cost Credit: Certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.

Employer-Provided Child Care Credit: For 2016, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures.

Health Care and Other Employee Benefit Planning

SHOP Exchanges: In 2016, the Small Business Health Options Program generally is available for employers with 50 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working 30 or more hours per week. Each exchange will offer its own SHOP marketplace. Self-employed persons with no employees cannot use the SHOP Exchange.

Credit for Employee Health Insurance Expenses of Small Employers: Eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,900 or less are eligible for the full credit. In 2016, the credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,900. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $51,800 or more. The credit is available on a sliding scale for up to 50% of the employer’s contribution toward employee health insurance premiums, is only allowable if the health insurance is purchased through a Small Business Health Options Program (SHOP) Exchange. The credit is available only for two consecutive taxable years after 2013, so it is not available to you if you or a predecessor claimed it for 2014 and 2015.

Pay to Play Excise Tax: For the 2016 plan year, if you have 50 or more employees, you could be subject to an excise tax, which could be as much as $2,160 per full-time employee, for failure to offer a health care plan that is minimum essential coverage to at least 95% of your full-time employees if at least one employee obtains subsidized coverage through a public health insurance exchange. The first 30 workers are excluded from the penalty excise tax. If you do offer coverage but it is not adequate or is unaffordable, the excise tax could be $3,390 for each full-time employee who obtains subsidized coverage through an exchange. Larger employers should be considering their health care plan option in light of this potential excise tax liability.

Health Care Reporting: Filings for 2016 Form 1095-C and Form 1094-C, generally for employers with 50 or more full-time equivalent employees, and Form 1095-B and Form 1094-B, for employers with self-insured plans and other providers of minimum essential coverage, are due earlier for 2016, specifically by February 28, 2017 if you are filing on paper, or by March 31, 2017, if you are filing electronically. Statements to employees are due by January 31, 2017.

Permissible Mid-Year Changes to Safe Harbor Qualified Plans: The IRS provided in 2016 additional guidance on mid-year changes to a safe harbor plan under §401(k) and §401(m) of the IRC. The notice provides that a mid-year change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is a mid-year change, provided that applicable notice and election opportunity conditions are satisfied and the mid-year change is not a prohibited mid-year change, as described in the notice. If mid-year changes to your plans are necessary you should discuss this with your qualified plan advisor.

 

Reporting

Tax Returns: For C corporations reporting on a calendar year, the 2016 filing deadline is now on or before April 15th. For C corporations reporting on a fiscal year other than one ending June 30, the filing date is the 15th day of the fourth month following the close of the taxable year. For June 30 fiscal year C corporation filers, the filing deadline remains the 15th day of the third month following the close of the taxable year (September 15). Effective for returns for tax years beginning after December 31, 2016 and before January 1, 2026, there is an automatic five month extension for calendar year C corporations, and an automatic seven month extension for fiscal-year C corporations with a taxable year ending on June 30. After 2025, both extensions become six months. For partnerships reporting on a calendar year, the filing deadline is March 15th, and for partnerships reporting on a fiscal year, the filing deadline is the 15th day of the third month following the close of the fiscal year. The reporting deadlines for S corporations have not changed and remains March 15th or the 15th day of the third month following the close of the taxable year for fiscal year S corporations.

FBAR: U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The due date for 2016 is the same as the U.S. tax filing deadline of April 15, 2017 (unless extended by a weekend or holiday), with a maximum six-month extension to October 15.

FATCA: The Foreign Account Tax Compliance Act (FATCA) requires reporting and possible withholding on payments made to foreign entities, whether the foreign payees are financial institutions or not. Your compliance processes need to be in place in advance of making any payments to foreign entities.

Uncertain Tax Positions: A corporation must file Schedule UTP to disclose certain uncertain tax positions with its income tax return if it: (1) files Form 1120, Form 1120-F, Form 1120-L, or Form 1120-PC; (2) has assets of $10,000,000; (3) issued (or a related party issued) audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and (4) has one or more tax positions that must be reported on Schedule UTP. A taxpayer that files a protective Form 1120, Form 1120-F, Form 1120-L, or Form 1120-PC and satisfies the conditions set forth above also must file Schedule UTP.

 

Electronic Deposits

Electronic Funds Transfer: A corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS’s Electronic Federal Tax Deposit System (EFTPS).

 

Estimated Tax Payments

A corporation (other than a large corporation) or an individual taxpayer (or single-member LLC that is treated as a disregarded entity) generally may be able to avoid any underpayment penalties by paying estimated taxes based on 100% of the tax shown on the prior year return. A large corporation is a corporation that had taxable income of $1 million or more for any of the three tax years immediately preceding the current year. If an individual’s adjusted gross income as shown on the tax return for the preceding tax year exceeds $150,000 ($75,000 in the case of a married individual who files separately), the amount of the required installment is generally increased to 110% of the tax shown on the prior year’s return. Otherwise, such corporations or individuals generally must pay estimated taxes based on 100% of the current year’s tax; an income tax projection should be completed in order to determine the best option.

A corporation or an individual using the cash method of accounting may want to consider paying their fourth quarter state estimated taxes before December 31st, rather than in the first quarter of next year, if they are able to use a state income tax deduction for the current year. We would need to run an income tax projection to determine the best option.

 

 

2016 Year-End Tax Planning for Individuals

As 2016 draws to a close, there is still time to reduce your 2016 tax bill and plan ahead for 2017. This letter highlights several potential tax-saving opportunities for you to consider. I would be happy to meet with you to discuss specific strategies.

As a general reminder, there are several ways in which you can file an income tax return: married filing jointly, head of household, single, and married filing separately. A married couple, which includes same-sex marriages, may elect to file one return reporting their combined income, computing the tax liability using the tax tables or rate schedules for “Married Persons Filing Jointly.” If a married couple files separate returns, in certain situations they can amend and file jointly, but they cannot amend a jointly filed return to file separately. A joint return may be filed even though one spouse has neither gross income nor deductions. If one spouse dies during the year, the surviving spouse may file a joint return for the year in which his or her spouse died. Certain married persons who do not elect to file a joint return may be entitled to use the lower head of household tax rates. Generally, in order to qualify as a head of household, you must not be a resident alien, you must satisfy certain marital status requirements, and you must maintain a household for a qualifying child or any other person who is your dependent, if you are entitled to a dependency deduction for that person.

Basic Numbers You Need to Know

Because many tax benefits are tied to or limited by adjusted gross income (AGI)—IRA deductions, for example—a key aspect of tax planning is to estimate both your 2016 and 2017 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2015 tax return and your 2016 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI.

Another important number is your “tax bracket,” i.e., the rate at which your last dollar of income is taxed. The tax rates for 2016 have not changed from 2015 and are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).

Gift Giving

Annual Gift Tax Exclusion: The most commonly used method for tax-free giving is the annual gift tax exclusion, which, for 2016, allows a person to give up to $14,000 to each donee without reducing the giver’s estate and lifetime gift tax exclusion amount. A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donees (family and non-family). Thus, if an individual makes $14,000 gifts to 10 donees, he or she may exclude $140,000 from tax. In addition, because spouses may combine their exclusions in a single gift from either spouse, married givers may double the amount of the exclusion to $28,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year. Qualifying tuition payments and medical payments do not count against this limit.

IRA, Retirement Savings Rules

Tax-saving opportunities continue for retirement planning due to the availability of traditional and Roth IRAs and other retirement savings incentives.

Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2016 is $5,500. For 2016, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,500 for these individuals. Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2016, the AGI phase-out range for deductibility of IRA contributions is between $61,000 and $71,000 of modified AGI for single persons (including heads of households), and between $98,000 and $118,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

In addition, an individual will not be considered an “active participant” in an employer plan simply because the individual’s spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $184,000 to $194,000 ($0 – $10,000 if married filing separately) for 2016. Above this range, no deduction is allowed.

IRA Rollovers: As of 2016, taxpayers may make only one IRA-to-IRA rollover per year. (Direct rollovers from trustee to trustee are not affected.) An attempted rollover after the first will be treated as a withdrawal and taxed at regular rates, plus a possible 10% early withdrawal penalty.

Spousal IRA: If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,500 for 2016 plus age 50 catch-up contributions ($1,000 for 2016), or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).

Roth IRA: This type of IRA permits nondeductible contributions of up to $5,500 for 2016, but no more than an individual’s compensation. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 591/2. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2016 for persons with an AGI above certain amounts: $184,000 to $194,000 for married filing jointly, and $117,000 to $132,000 for single taxpayers (including heads of households); and between $0 and $10,000 for married filing separately who lived with the spouse during the year.

Roth IRA Conversion Rule: Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.

If you already made a conversion earlier this year, you have the option of undoing the conversion. This is a useful strategy if the investments have gone down in value so that if you were to do the conversion now, your taxes would be lower. This is a complicated calculation and we should meet to determine what are your best options.

In addition, for 2016, if your §401(k) plan, §403(b) plan, or governmental §457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from such account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual.

401(k) Contribution: The §401(k) elective deferral limit is $18,000 for 2016. If your §401(k) plan has been amended to allow for catch-up contributions for 2016 and you will be 50 years old by December 31, 2016, you may contribute an additional $6,000 to your §401(k) account, for a total maximum contribution of $24,000 ($18,000 in regular contributions plus $6,000 in catch-up contributions).

SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $12,500 for 2016. If your SIMPLE plan has been amended to allow for catch-up contributions for 2016 and you will be 50 years old by December 31, 2016, you may contribute an additional $3,000.

Catch-Up Contributions for Other Plans: If you will be 50 years old by December 31, 2016, you may contribute an additional $6,000 to your §403(b) plan, SEP or eligible §457 government plan.

Saver’s Credit: A nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. For 2016, only taxpayers filing joint returns with AGI of $61,500 or less, head of household returns with AGI of $46,125 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $30,750 or less, are eligible for the credit. The amount of the credit is equal to the applicable percentage (10% to 50%, based on filing status and AGI) of qualified retirement savings contributions up to a maximum credit of $2,000.

Required Minimum Distributions: For 2016, taxpayers who are at least 701/2must take their required minimum distribution from IRAs or defined contribution plans (§401(k) plans, §403(a) and §403(b) annuity plans, and §457(b) plans that are maintained by a governmental employer). The distribution must be taken by December 31, 2016. However, if you turn 70 1/2 during 2016, the first distribution is not required until April 1, 2017.

Maximize Retirement Savings: In many cases, employers will require you to set your 2017 retirement contribution levels before January 2017. But, if you did not elect the maximum 401(k) contribution for 2016, you may be able to increase your amount for the remainder of 2016 to lower your AGI in order to take advantage of some of the tax breaks described above. Maximizing your contribution is generally a good tax-saving move.

Deferring Income to 2017

If you expect your AGI to be higher in 2016 than in 2017, or if you anticipate being in the same or a higher tax bracket in 2016, you may benefit by deferring income to 2017. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Deferring income could be disadvantageous, however, if your deferred income is subject to §409A, thus making the income includible in gross income and subject to additional tax. Some ways to defer income include:

Delay Billing: If you are self-employed and on the cash-basis, delay year-end billing to clients so that payments will not be received until 2017.

Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.

Accelerating Income into 2016

In limited circumstances, you may benefit by accelerating income into 2016. For example, you may anticipate being in a higher tax bracket in 2017, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2016 will be disadvantageous if you expect to be in the same or lower tax bracket for 2017. In any event, before you decide to implement this strategy, we should “crunch the numbers.”

If accelerating income will be beneficial, here are some ways to accomplish this:

Accelerate Collection of Accounts Receivable: If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection before the end of 2016. Also see if some of your clients or customers might be willing to pay for January 2017 goods or services in advance. Any income received using these steps will shift income from 2017 to 2016.

Year-End Bonuses: If your employer generally pays year-end bonuses after the end of the current year, ask to have your bonus paid to you before the end of 2016.

Retirement Plan Distributions: If you are over age 591/2 and you participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2017.

You may also want to consider making a Roth IRA rollover distribution, as discussed above.

Deduction Planning

Individual Deductions

Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels, AMT, and filing status. If you are a cash-method taxpayer, keep the following in mind:

Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid. Under this rule, if your tax rate is going to increase in 2017, it is a smart strategy to postpone spending until after year end to take the deduction in 2017.

Payment by Check: Date checks before the end of the year and mail them before January 1, 2017.

Promise to Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2016, you can take the deduction even though you won’t pay your credit card bill until 2017.

AGI Limits: For 2016, the overall limitation on itemized deductions (“Pease” limitation) applies to taxpayers whose AGI exceeds an “applicable amount.” For 2016, the applicable amount is $311,300 for a married couple filing a joint return or a surviving spouse, $285,350 for a head of household, $259,400 for an unmarried individual, and $155,650 for a married individual filing a separate return. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 10% for medical expenses (7.5% for certain older taxpayers), 2% for miscellaneous itemized deductions, and 10% for casualty losses.

Standard Deduction Planning: Deduction planning is also affected by the standard deduction. For 2016 returns, the standard deduction is $12,600 for married taxpayers filing jointly, $6,300 for single taxpayers, $9,300 for heads of households, and $6,300 for married taxpayers filing separately. As you can see from the numbers, for 2016, the standard deduction for married taxpayers is twice the amount as that for single taxpayers. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. You can do this by paying in 2016 deductible expenses, such as mortgage interest due in January 2017.

Medical Expenses: For 2016, medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 10% of AGI. Unless extended by Congress, 2016 is the last year the special 7.5% limitation applies for taxpayers age 65 or older.

State and Local Income Taxes and General Sales Taxes: If you anticipate a state income tax liability for 2017 and plan to make an estimated payment most likely due in January, consider making the payment before the end of 2016. Or, you may elect to itemize and deduct state and local general sales taxes in lieu of the itemized deduction for state and local income taxes on your 2016 return.

Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2016 even though you will not pay the bill until 2017. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.

To avoid capital gains, you may want to consider giving appreciated property to charity.

Regarding charitable contributions please remember the following rules: (1) no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better; (2) the IRS may deny a deduction for any item with minimal monetary value; and (3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return. Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.

A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual who has reached age 701/2.

Business Deductions

Equipment Purchases: If you are in business and purchase equipment, you may make a “section 179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. The allowable deduction is $500,000 (with a phaseout beginning at $2,010,000).

In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2016. In general, under the “half-year convention,” you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.) Cars/vans/trucks are typically limited in the amount of first-year expensing/depreciation. If bonus depreciation is not claimed, the limit is $3,160 for 2016 ($3,560 in the case of vans and trucks). If bonus depreciation is taken, the 2016 amounts increase to $11,160 for cars and $11,560 for vans and trucks. A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Such vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated more than 6,000 but not over 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.

NOL Carryback Period: If your business suffers net operating losses for 2016, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2014. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.

Bonus Depreciation: Bonus depreciation under §168(k) for assets purchased and placed in service in 2016 is available; you must elect out of bonus depreciation if you do not wish to take advantage of it.

Capitalization v. Expensing for Materials and Supplies and Repairs: Under regulations, a deduction is allowed for materials and supplies that have an acquisition or production cost of $200 or less. Also, a de minimis safe harbor states that for repairs to be deductible, among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by the invoice for taxpayers with applicable financial statements and $2,500 per invoice for taxpayers without applicable financial statements.

Education and Child Tax Benefits

Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year’s return. In order to qualify for 2016, the taxpayer must be allowed a dependency deduction for the qualifying child. Another qualifying determination is that the qualifying child must be younger than the taxpayer. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers. These amounts are not adjusted for inflation. A portion of the credit may be refundable. The threshold earned income level to determine refundability is set by statute at $3,000.

Credit for Adoption Expenses: For 2016, the adoption credit limitation is $13,460 of aggregate expenditures for each child, except that the credit for an adoption of a child with special needs is deemed to be $13,460 regardless of the amount of expenses. The credit ratably phases out for taxpayers whose income is between $201,920 and $241,920.

Education Credits: The American Opportunity Tax Credit is available for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer’s spouse, or a dependent) who is enrolled on at least a half-time basis. The maximum credit is $2,500 (100% on the first $2,000, plus 25% of the next $2,000). The credit is available for the first four years of the student’s post-secondary education. The credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers. Forty percent of the credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes. The term “qualified tuition and related expenses” includes expenditures for “course materials” (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance). One way to take advantage of the credit for 2016 is to prepay spring 2017 tuition. In addition, if you know what books your student will need for the spring 2017 semester, those can be bought in 2016 and the costs qualify for the credit for 2016.

The Lifetime Learning credit maximum in 2016 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the American Opportunity Tax Credit, eligible students include the taxpayer, the taxpayer’s spouse, or a dependent. For 2016, the Lifetime Learning credit is phased out at modified AGI levels between $111,000 and $131,000 for joint filers, and between $55,000 and $65,000 for single taxpayers.

Coverdell Education Savings Account: The aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account. The limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. The AGI amounts are not indexed for inflation. The contributions to the account are nondeductible but the earnings grow tax-free.

Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any “qualified education loan.” The maximum deduction is $2,500. The deduction for 2016 is phased out at a modified AGI level between $130,000 and $160,000 for joint filers, and between $65,000 and $80,000 for individual taxpayers.

Kiddie Tax: The kiddie tax applies to: (1) children under 18 who do not file a joint return; (2) 18-year-old children who have unearned income in excess of the threshold amount, do not file a joint return, and who have earned income, if any, that does not exceed one-half of the amount of the child’s support; and (3) children between the ages of 19 and 23 if, in addition to the above rules, they are full-time students. A parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” One of the requirements for the parental election is that a child’s gross income is more than $1,050 but less than $10,500 for 2016. If a child has more than $2,100 for 2016 in interest, dividends, and other unearned income, and the income is not or cannot be reported on a parent’s return by filing Form 8814, part of that income may be taxed to the child at the parent’s tax rate instead of the child’s tax rate.

Achieving a Better Life Experience (ABLE) Accounts: This is a relatively new type of savings account for individuals with disabilities and their families. For 2016, taxpayers can contribute up to $14,000. Distributions are tax-free if used to pay the beneficiary’s qualified disability expenses.

Energy Incentives

Residential Energy Efficient Property Credit: Tax incentives are available to taxpayers who install certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. A credit is available for the expenditures incurred for such property up to a specific percentage, except that a cap applies for fuel cell property. Unless extended by Congress, the credit for qualified fuel cell power plants, qualified small wind energy property, and qualified geothermal heat pump property expires on December 31, 2016. If you have made improvements to your home or plan to by the end of 2016, please contact me to discuss the amount of the credit you may qualify for.

Nonbusiness Energy Property Credit: Taxpayers may claim a nonrefundable nonbusiness energy property credit for qualified residential energy efficiency improvements installed during the tax year and residential energy property expenditures paid or incurred during the tax year. Such property includes qualified windows, insulation, boilers, hot water heaters, and circulating air fans. Each type of property has its own dollar limits, with a cumulative total lifetime limit of $500. However, unless extended by Congress, such property must be installed by the end of 2016.

Business Credits

Small Employer Pension Plan Startup Cost Credit: For 2016, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% in qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.

Employer-Provided Child Care Credit: For 2016, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility and for resource and referral expenditures.

Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment, including the long-term unemployed. This gives your business an expanded opportunity to employ new workers and be eligible for a tax credit against the wages paid.

Investment Planning

The following rules apply for most capital asset transactions in 2016:

  • Capital gains on property held one year or less are taxed at an individual’s ordinary income tax rate.
  • Capital gains on property held for more than one year are taxed at a maximum rate of 20% (0% if an individual is in the 10% or 15% marginal tax bracket; 15% for individuals in the 25%, 28%, 33% and 35% brackets).

An additional 3.8% tax is levied on certain unearned income. The tax is levied on the lesser of net investment income or the amount by which modified AGI exceeds certain dollar amounts ($250,000 for joint returns and $200,000 for individuals). Investment income is: (1) gross income from interest, dividends, annuities, royalties, and rents (other than from a trade or business); (2) other gross income from any business to which the tax applies; and (3) net gain attributable to property that is not attributable to an active trade or business. Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and the trading in financial instruments or commodities. With this additional tax, the maximum net capital gains rate is 23.8% in 2016. Because distributions from qualified retirement plans are not subject to the tax, taxpayers may want to invest in retirement accounts, if possible, rather than taxable accounts.

Timing of Sales: You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income. When and whether to recognize such losses should be analyzed in light of the possible future changes in the capital gains rates applicable to your specific investments.

Dividends: Qualifying dividends received in 2016 are subject to rates similar to the capital gains rates. Therefore, qualifying dividends are taxed at a maximum rate of 20% (23.8% if subject to the net investment tax). Qualifying dividends include dividends received from domestic and certain foreign corporations. Nonqualifying dividends are subject to ordinary income rates (up to 43.4% (39.6% income tax rate and 3.8% net investment income tax rate)).

Exclusion of Gain Attributable to Certain Small Business Stock: 100% of the gain on the sale of “small business stock” under §1202 that is acquired after September 27, 2010, is excluded from income. The stock must be held for more than five years to qualify. If you acquired such stock on or before September 27, 2010, other exclusion percentages apply. If you are in this situation, we can discuss the details.

Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. So if you are expecting to sell property at year-end, and it makes economic sense, consider selling the property using the installment method to defer payments (and tax) until next year or later.

Selling Your (Underwater) Home: Qualified principal residence mortgage debt discharged by your lender in 2016 is excludible from gross income. Unless extended by Congress, this exclusion does not apply after December 31, 2016.

Social Security: Depending on the recipient’s modified AGI and the amount of Social Security benefits, a percentage — up to 85% — of Social Security benefits may be taxed. To reduce that percentage, it may be beneficial to defer receipt of other retirement income. One way to do so is to elect to receive a lump-sum distribution from a retirement plan and to rollover that distribution into an IRA. Alternatively, it may be beneficial to accelerate income so as to reduce the percentage of your Social Security taxed in 2017 and later years.

Other Tax Planning Opportunities: We also can discuss the potential benefits to you or your family members of other planning options available for 2016, including §529 qualified tuition programs and§529A qualified ABLE accounts.

Health Care Planning

Individual Mandate: Under the 2010 health care reform law, sometimes called Obamacare, there is an individual mandate requiring individuals and their dependents to have health insurance that is minimum essential coverage or pay a penalty unless they are exempt from the requirement. Many people already have qualifying coverage, which can be obtained through the individual market, an employer-provided plan or coverage, a government program such as Medicare or Medicaid, or an Exchange. For lower-income individuals who obtain health insurance in the individual market through an Exchange, a premium tax credit and cost-sharing reductions may be available to offset the costs.

Health Care Savings Accounts: For 2016, cafeteria plans can provide that employees may elect no more than $2,550 in salary reduction contributions to a health FSA.

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the general 10% of AGI floor.

Health Savings Accounts: A health savings account (HSA) is a trust or custodial account exclusively created for the benefit of the account holder and his or her spouse and dependents, and is subject to rules similar to those applicable to individual retirement arrangements (IRAs). Contributions to an HSA are deductible, within limits. For 2016, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,350; for an individual with family coverage under a high deductible health plan is $6,750. For 2016, a “high deductible health plan” is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.

Alternative Minimum Tax

For 2016, the alternative minimum tax exemption amounts are: (1) $83,800 for married individuals filing jointly and for surviving spouses; (2) $53,900 for unmarried individuals other than surviving spouses; and (3) $41,900 for married individuals filing a separate return. Also, for 2016, nonrefundable personal credits can offset an individual’s regular and alternative minimum tax, and capital gains will be taxed at lower favorable rates for AMT. For 2016, the amount of AMTI above which the 28% rate applies is $93,150 for married taxpayers filing separate returns and $186,300 for married individuals filing joint returns, single taxpayers (other than surviving spouses), and estates and trusts.

If you have a stock holding due to the exercise of an incentive stock option during this year that is now below the value at the exercise date (underwater), consider selling the shares before the end of the year to avoid the AMT tax due on the original exercise of the option.

Some of the standard year-end planning ideas will not reduce tax liability if you are subject to the alternative minimum tax (AMT) because different rules apply. Because of the complexity of the AMT, it would be wise for us to analyze your AMT exposure.

Reporting

FBAR: U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The due date for 2016 is the same as the U.S. tax filing deadline of April 15, 2017 (unless extended by a weekend or holiday), with a maximum six-month extension to October 15.

Penalties: The tax code imposes a host of penalties for failure to file returns with the IRS, failure to furnish information returns, and failure to pay tax. Many penalties are subject to inflation adjustments.

If you have any questions, please do not hesitate to call. I would be happy to meet with you at your convenience to discuss the strategies outlined above. While we are getting very close to the end of the year, there is still time to implement these strategies to minimize your 2016 tax liability.

Habits That Threaten Your Identity and Pocketbook

Article Highlights

  • What’s in Your Wallet or Purse
  • Your Fear of the IRS
  • Using Public Internet Connections
  • Not Screening Your E-Mails
  • E-Mailing and Texting Sensitive Information
  • Being Free and Easy with Passwords
  • Using Identical Passwords

They’re just old habits. You likely to do them without even thinking. But these habits could be making you vulnerable to hacks, scams, ID theft and Internet phishing schemes out to separate you from your hard-earned money.

1. What’s in Your Wallet or Purse? Does it contain items that include your Social Security Number (SSN) and birth date? For instance, does it contain your driver’s license and either your Social Security card or Medicare card? If it does, and the wallet or purse falls into the wrong hands, the thief will have both your SSN and birth date, the two key items that can be used to compromise your identity. If your ID gets hacked, you are in for a long-running and expensive nightmare. Make sure your wallet or purse isn’t a jackpot for an ID thief.

2. Your Fear of the IRS. It is common for most folks to have a natural fear of the IRS. Get a letter in the mail from the IRS, and the adrenalin kicks in and your pulse rate quickens. Scammers play on that emotion to ply their scams on the unsuspecting who don’t want to have any problems with the IRS. These range from e-mail messages to personal calls threatening arrest, property seizure or other dire consequences. But wait a minute! The IRS only initially communicates by U.S. mail, so any other form of communication is fake, and you can hang up on the caller or delete the e-mail without fearing you’ll incur the IRS’s wrath. Still unsure? Call your tax preparer. Don’t be a victim!

3. Using Public Internet Connections. These days you can find public Internet connections almost anywhere – at the airport, your favorite coffee house and even shopping malls. Getting work done or taking care of financial dealings while you are out and about may seem like a good idea, but remember the cyber thieves also have access to that Wi-Fi and they have the know-how to access your computer through that Wi-Fi connection. Only use secure Internet connections to get work done or conduct financial transactions, and save public connections for personal browsing purposes.

4. Not Screening Your E-Mails. ID thieves send out e-mails trying to entice you into clicking on an imbedded link within the e-mail, which will then allow them access to your computer and whatever is on it. They will try to sucker you into clicking on the imbedded link by promising free this and that, or even telling you that you have won a monetary prize and need to go to a website to claim it. Don’t be tempted; just remember, if it’s too good to be true it probably isn’t true. Just delete the e-mail!

5. E-Mailing and Texting Sensitive Information. What we all forget is how easy it is for e-mail and text messages to get hacked. You have to worry not only about your end getting hacked but also about the one to whom you are sending the message. Never send documents that include sensitive information. A common error is to inadvertently send a document with your SSN, birth date, passwords, or other information. The best practice is to always assume your e-mails and texts can be seen by others and act appropriately.

6. Being Free and Easy with Passwords. It may not seem like a big deal to share your password with a family member that you’re close to, but even if that person is completely trustworthy, they may not be as safety conscious as you and may accidently leak the password. You should always keep your passwords completely confidential to ensure that they don’t fall into the wrong hands.

7. Using Identical Passwords. It is easier to remember one password than several, and in today’s digital world just about everything needs a password. But if you use just one and it gets compromised, then all your accounts are compromised. It is a best practice to use a different password for every account. In addition, it is a good idea to periodically change your passwords.

Bottom line, stop and think before you act, always be skeptical of unsolicited and unexpected communications, guard your sensitive information like you are guarding Fort Knox and when in doubt call this office for assistance.

Social Security

Social Security recipients will see a tiny 0.3% hike in their benefits in 2017.  The earnings test limits will head up.  People who turn 66 next year will not lose any benefits if they earn $44,880 or less before they reach that age.  Individuals who are 62 through 65 by the end of 2017 can make up to $16,920 before they lose any benefits.  There is no earnings once a beneficiary turns 66.  The amount needed to qualify for coverage will rise to $1,300 a quarter.  So earning $5,200 anytime during 2017 will net the full four quarters of coverage.  You need 40 quarters of coverage to qualify for Social Security retirement benefits.

Energy Credit

Can I get a tax break for putting energy-efficient windows in my home?  Yes, a limited credit is available if you install them by Dec. 31.  The tax law extended through 2016 the credit for energy- saving items added to one’s residence, such as windows, insulation, roofs and doors.  It stays at 10% with a $500 maximum.  Any credits taken in prior years count against the $500.  And many items are capped.  No more than $50 for circulating fans, $150 for furnaces, and $200 for windows.

What if I add solar panels?  You can claim a credit for 30% of the total cost.  For solar energy systems installed in a residence, the full credit applies through 2019 and then phases out until it ends after 2021.  The break for geothermal heat pumps, residential wind turbines and fuel cell property currently expires after this year.

2016 Tax Planning

I heard changes are in store for seniors on the medical expense write-off.  Is this true?  Yes.  Beginning with 2017 returns due in 2018, the threshold for deducting medical costs on Schedule A jumps to 10% of adjusted gross income for taxpayers who are age 65 or older.  This higher floor, set as part of Obamacare, has applied to younger filers since 2013.  But older people got a four- year reprieve.  Seniors who think they will exceed or get close to this year’s 7.5% of AGI threshold should consider getting and paying for elective health procedures before year end.

Tax Effects of Divorce or Separation If

Tax Effects of Divorce or Separation
If you are divorcing or recently divorced, taxes may be the last thing on your mind. However, these events can have a big impact on your wallet. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:
• Child Support. Child support payments are not deductible and if you received child support, it is not taxable.
• Alimony Paid. You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree, regardless of whether you itemize deductions. Voluntary payments made outside a divorce or separation decree are not deductible. You must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
• Alimony Received. If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.
• Spousal IRA. If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
• Name Changes. If you change your name after your divorce, be sure to notify the Social Security Administration. File Form SS-5, Application for a Social Security Card. You can get the form on SSA.gov or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can cause problems in the processing of your return and may delay your refund. Health Care Law Considerations.
• Special Marketplace Enrollment Period. If you lose health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. You may enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period, if you lose coverage due to a divorce.
• Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year. These changes include a change in marital status, a name change, a change of address, and a change in your income or family size. Reporting these changes will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting too much or too little credit in advance.
• Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation. For more on this topic, see Publication 504, Divorced or Separated Individuals. You can get it on IRS.gov/forms at any time.

Previous Older Entries