KKAJ Blog Posts in Tax Information

March 28, 2017

Remember the New FBAR Filing Deadline

Do you have an interest in — or authority over — a foreign financial account? If so, the IRS wants you to provide information about the account by filing a form called the "Report of Foreign Bank and Financial Accounts" (FBAR). 
The annual deadline for filing FBARs has been changed. It now coincides with the tax filing deadlines for individuals, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. So, for accounts held in 2016, you must generally file FBARs by April 18, 2017. (Formerly, the deadline was June 30, excluding weekends and holidays.)
Important note: If you fail to meet the annual FBAR due date, the Financial Crimes Enforcement Network (FinCEN) will grant an automatic extension to October 15. Accordingly, specific requests for this extension aren't required.
Reporting Requirements
FBARs are not filed with federal tax returns. Each year, citizens and resident aliens of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file an FBAR form electronically with the FinCEN if:
1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts, and
2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.
An individual who jointly owns an account with a spouse may file a single FBAR report as an individual. FBARs may be required even if the foreign account doesn't produce any taxable income. 
Taxpayers also may be subject to FBAR compliance if they file an information return related to certain foreign corporations, foreign partnerships, foreign disregarded entities, or transactions with foreign trusts and receipt of certain foreign gifts. Some individuals are exempt, however.
Exceptions to the Rules
FBAR filing exceptions are available for the following U.S. taxpayers or foreign financial accounts:
•Certain foreign financial accounts jointly owned by spouses,
• United States persons included in a consolidated FBAR,
•Correspondent/nostro accounts,
•Foreign financial accounts owned by a governmental entity,
•Foreign financial accounts owned by an international financial institution,
•IRA owners and beneficiaries,
•Participants in and beneficiaries of tax-qualified retirement plans, 
•Certain individuals with signature authority over — but no financial interest in — a foreign financial account,
•Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust), and
•Foreign financial accounts maintained on a United States military banking facility.
Important note: Filers living abroad may coordinate FBAR filing with their tax return deadline (June 15, 2017).
Penalties for Noncompliance
Take the FBAR requirement seriously. Failing to file an FBAR can result in the following penalties if assessed after August 1, 2016, and associated violations occurred after November 2, 2015:
•An inflated-adjusted civil penalty of as much as $12,459 per violation, if the failure wasn't willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
•A civil penalty equal to the greater of: 1) 50% of the account, or 2) $124,588 per violation, if the failure to report was willful.
•Criminal penalties and time in prison.
The IRS states that the FBAR "is a tool to help the U.S. government identify persons who may be using foreign financial accounts to circumvent U.S. law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad."
Beyond FBARs
Another initiative to combat tax fraud using offshore accounts is the Foreign Account Tax Compliance Act (FATCA). It led to the creation of Form 8938, "Statement of Specified Foreign Financial Assets." This form must be attached to your federal income tax return each year if your specified foreign financial assets exceed these reporting thresholds:
•For unmarried taxpayers living in the United States, the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
•For married taxpayers filing a joint income tax return and living in the United States, the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
•For married taxpayers filing separate income tax returns and living in the United States, the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Different reporting rules and limits apply for taxpayers living abroad. Form 8938 covers an expanded list of foreign assets not covered by FBAR. And filing Form 8938 does not exempt you from having to file an FBAR.
The penalty for failing to file Form 8938 is $10,000, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to a transaction related to the nondisclosed assets can also be imposed.
For Assistance
Consult with a tax professional if you have an interest in — or authority over — a foreign account. Your tax advisor can ensure you meet the requirements for reporting foreign accounts and help avoid penalties for noncompliance.
February 15, 2017

10 Important Tax-Related Developments for 2016

Several significant tax developments happened last year that may affect federal income tax returns that individual and business taxpayers file in 2017. Here's a quick look at 10 key changes that you should be aware of during this tax season.

1. Stand-Alone HRAs

On December 13, 2016 — just over a month before leaving office — President Obama signed the 21st Century Cures Act into law. In addition to funding cutting-edge medical research, this new legislation allows an employer with fewer than 50 employees and no other group health insurance plan to establish Health Reimbursement Arrangements (HRAs) for its employees. 
These standalone HRAs aren't subject to certain penalties and restrictions imposed by the IRS under the Affordable Care Act (ACA). Plan ahead: The 21st Century Cures Act applies to plan years beginning after 2016.
2. ACA Reporting
Although the ACA might be repealed or modified in 2017, it's still in effect for 2016. Under the ACA, employers must file information returns with the IRS and provide information to employees and other responsible individuals. 
Recently, the IRS offered some consolation: It extended to March 2, 2017, the due date for furnishing to individuals 2016 Form 1095-B, "Health Coverage," and 2016 Form 1095-C, "Employer-Provided Health Insurance Offer and Coverage." This gives employers an extra 30 days to get their paperwork in order.
3. Premium Tax Credits
Taxpayers required to acquire health insurance under the ACA may qualify for premium tax credits to offset part of the cost. Although existing regulations include several favorable safe-harbor rules for determining eligibility, those rules don't apply where an individual, with reckless disregard of the facts, provides incorrect information to a health insurance exchange. 
New final regulations clarify that this provision for "reckless disregard of the facts" applies only to the conduct of the individual — not to information provided by any third parties.
4. Standard Mileage Rates
Each year, the IRS adjusts the standard mileage rates that taxpayers may use in lieu of tracking actual driving expenses. Due to lower gas prices, the rates have been reduced for 2017. The IRS recently announced that the flat rate for business driving is 53.5 cents per mile in 2017 (down from 54 cents per mile in 2016). Also, the rates for driving attributable to medical and moving purposes dropped to 17 cents per mile in 2017 (down from 19 cents per mile in 2016). Finally, the rate for charitable driving, which is set statutorily, remains at 14 cents per mile in 2017. In all cases, related tolls and parking fees can be added to the flat rate. 
5. Valuations for Vehicles
Employees are taxed on the fair market value (FMV) of their personal use of company-provided vehicles. For convenience, the IRS permits FMV accounting methods based on the cents-per-mile rule (see "Standard Mileage Rates" above), as well as a fleet average value for employers with 20 or more vehicles, with the maximums updated annually. 
Under a recent IRS Notice, the cents-per-mile thresholds in 2017 are $15,900 for automobiles (the same as in 2016) and $17,800 for trucks and vans (up from $17,700 for 2016). The thresholds for the fleet average rule in 2017 are $21,100 for a passenger auto (down from $21,200 for 2016) and $23,300 for a truck or van (up from $23,100 for 2016).
6. CPEOs
The IRS has now provided detailed requirements for certified professional employer organizations (CPEOs) — often called leasing companies — to remain certified. The IRS also has established procedures for suspending and revoking certification. Small businesses often contract with CPEOs to ensure compliance with workplace laws and regulations. 
Under the Tax Increase Prevention Act of 2014, a CPEO may be treated as the sole employer of employees for purposes of paying and withholding employment taxes. Professional employer organizations can be certified as CPEOs effective as of January 1, 2017.
7. Delayed Refunds
A new tax law change requires the IRS to hold refunds for tax returns claiming the Earned Income tax credit or the additional child credit until at least February 15, 2017. As a result, many early filers still won't have access to their refunds until the week of February 27 or even later. 
Under the new rules, the IRS must delay the entire refund, even the portion that isn't associated with the Earned Income tax credit or additional child credit. The IRS is advising taxpayers that the fastest way to get a refund is to file electronically and choose the direct deposit method.
8. ABLE Accounts
The Achieving a Better Life Experience (ABLE) Act of 2014 authorized special tax-favored savings accounts for individuals who are disabled before age 26. After the IRS issued regulations on this issue, individual states began rolling out ABLE accounts in 2016. 
With an ABLE account, contributions aren't tax deductible. But the amounts set aside in ABLE accounts are distributed tax-free to recipients if they're used to pay for qualified disability expenses. Contributions to ABLE accounts may be sheltered by the annual gift tax exclusion of $14,000 for 2017 (the same as in 2016). Note, however, that if the account balance exceeds $100,000 it will impact SSI (Supplemental Security Income) eligibility.
9. Self-Certified Rollover Waivers
In general, an individual has 60 days to complete a tax-free rollover of a distribution from an Individual Retirement Account (IRA) or workplace retirement plan to another eligible retirement program. If you inadvertently miss this deadline, the distribution is usually taxable unless you obtain a waiver from the IRS. Thanks to a new ruling from the IRS in 2016, a taxpayer can self-certify that mitigating circumstances caused the failure. 
For this purpose, a waiver may be allowed due to:
•A distribution check being misplaced and never cashed, 
•Severe damage to the taxpayer's home, 
•Death of a family member, 
•A serious illness of the taxpayer or a relative, 
•The taxpayer's incarceration, or 
•Restrictions imposed by a foreign country. 
The new rules went into effect on August 24, 2016. 
Important note: Don't forget that qualifying taxpayers may still make contributions, whether deductible or nondeductible, to a traditional IRA until the day taxes are due, without extension. They also have until Tax Day to make a nondeductible contribution to a Roth IRA for 2016. Put simply, the deadline for individuals to contribute to traditional or Roth IRAs for 2016 is April 18, 2017.
10. FBAR Reporting
Generally, a taxpayer who has over $10,000 in foreign bank accounts at any time during the year must file a Report of Financial Bank and Financial Accounts (FBAR). In the past, the filing deadline was June 30 of the following year. Now the FBAR due date has been moved to coincide with federal income tax filings. 
Accordingly, 2016 FBARs must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2017. Also, FinCEN will grant filers missing the April 18, 2017, deadline an automatic extension until October 16, 2017.
Just a Sampling
This brief article covered just a few noteworthy tax developments in 2016. The IRS made many other changes that could affect your tax obligations, depending on your personal situation. Contact your tax advisor if you have any questions.
Uncertain Fate of Tax Extenders
In 2016, Congress adjourned without addressing numerous temporary tax provisions that were set to expire at the end of the year. Congress generally renews these "tax extenders" when they expire, but there aren't any guarantees.
For example, Congress extended all 52 provisions that had expired after 2014 in the Protecting Americans from Tax Hikes (PATH) Act of 2015. Unlike previous tax extenders legislation, however, the PATH Act made a number of these provisions permanent. Several others were extended through 2019, while many provisions were temporarily extended for two years, through 2016. 
Stay tuned for additional information on the fate of the tax extenders currently in limbo, as well as details of tax reform measures under the Trump administration and the Republican majority in Congress

January 24, 2017

Tax Fraud Awareness: How to Protect Your Identity and Assets

The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.

Understand How Tax Fraud Happens

Dishonest individuals may steal taxpayers' personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer's data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds. 

Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don't usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it's received another tax return in his or her name, the thief is long gone and has already cashed the refund check. 
In addition to refund fraud, thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer's knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect. 
Recognize the Warning Signs
Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:
Your electronic tax return is rejected. When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, first check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return? 
You're asked to verify information on your tax return. The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn't file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number. 
You receive tax forms from an unknown employer. Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn't do work for in 2016. Someone else may be using the phony forms to claim a fraudulent refund. 
You receive a tax refund or transcript that you didn't ask for. Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.
You receive a mysterious prepaid debit card. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they later use to collect a fraudulent electronic refund.
If you suspect foul play, contact your tax preparer immediately. He or she can help determine whether you're a victim of tax-related identity theft and identify steps to remedy the situation. 
Take Preventive Measures
You may wonder how many taxpayers file electronic vs. paper returns. "There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they're done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn't, or skipping an important computer security update, leaving them vulnerable to hackers," said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See "IRS Creates Security Summit Group" above.)
How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:
1. Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with "https" in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers and symbols).
2. Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what's being sent. Don't install software from unfamiliar websites or disable pop-up blockers.
3. Protect personal information. Treat personal information like cash. Don't carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about new car or home purchases, past addresses, vacations and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing. 
4. Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.
Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS begins processing tax returns on January 23. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number. 
Join the Fight 
The deadline for filing your 2016 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2016, and it's on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.
IRS Creates Security Summit Group
In 2015, the IRS formed the Security Summit Group, a collaboration of federal and state tax agencies and tax practitioners to find new ways to protect taxpayers and safeguard the tax system. In 2016, Security Summit Group efforts led to a 50% reduction in the number of new reports of stolen identities on federal tax returns compared to 2015.
One example of the new-and-expanded safeguards for taxpayers is the introduction of a Form W-2 Verification Code. Starting this tax season, certain payroll service providers will have to supply this 16-digit code to help the IRS validate wage and tax withholding information. The code is expected to appear on approximately 50 million W-2s in 2017, up from 2 million forms in 2016.
If your W-2 contains the code and you file taxes electronically, make sure your tax preparer enters it on your 2016 tax return. The IRS will still accept your tax return without the code. But including it could help speed up your refund and reduce requests from the IRS to provide additional information to verify your identity.
August 17, 2016

Ten Potential Mistakes to Avoid in Estate Planning

Ten Potential Mistakes to Avoid in Estate Planning

Sometimes people attempt to make an estate plan without consulting legal and financial professionals. 

Mostly this is because they may have a general understanding of estate planning and believe 
they can do it themselves without paying for professional services. This may be valid to a point, but it often fails because of the detailed knowledge it requires to draft the documents that cover the nuances of their lives.
Everyone is different and a boilerplate form isn't sufficient. Here is a list of 10 potential mistakes in estate planning that you can help avoid with professional counseling.
Mistake #1: Having an outdated estate plan. Your life and financial circumstances may change and your estate plan should change with them. For instance:
•Your parents may have died so they can no longer be beneficiaries;
•Your children may have gotten married and had kids of their own;
•You may have divorced and remarried;
•Your assets have grown (or decreased) significantly; and
•You no longer own a house or you purchased property. 
Your estate plan should take these and other changed circumstances into account. It's a good idea to review your plan at least once a year.
Mistake #2: Failing to revise your will. The will you had drafted many years ago may no longer apply for the reasons listed above and others. Some people believe that if they scratch out a part of an old will, add information and initial the document, it will be valid. This is never the case.
Mistake #3: Relying only on joint tenancy to avoid probate. Many assets are transferred outside of wills. For example, joint tenancy assets pass to the surviving joint tenant. Let's say you bought your first home in joint tenancy with your brother who shared the house with you. You then had a falling out. Your brother relocated to another state and you got married. You changed your will to leave everything to your spouse, but you neglected to change the joint tenancy. The house will generally pass on to your brother, rather than your spouse.
In addition, say you and your spouse own a home as joint tenants to avoid probate. This move really only avoids probate on the first death. When the surviving spouse dies, the home will typically end up in probate. And what happens if you both die in an accident? 
Mistake #4: Not coordinating a will and a trust. Creating a trust and transferring assets to it may help you avoid probate and save taxes. However, if you have a will and a trust, be sure the documents are aligned so your wishes will ultimately be carried out. If a will and a trust are not consistent, it can lead to delays and unnecessary costs.
Mistake #5: Incorrectly titling assets. You want your intentions to be carried out for all assets, including your primary residence, vacation home, bank accounts, brokerage accounts, retirement accounts and even vehicles. Be sure to make beneficiary designations and properly title accounts. Designate a beneficiary (or beneficiaries) on IRAs, 401(k)s, company plans and other accounts. Take time annually to review them as they will control the distribution of those assets.
Why is this important? Assets could wind up in the hands of people you never intended. For example, there have been many cases where a couple divorces but one spouse forgets to update a beneficiary designation on a 401(k) plan. The ex-wife then receives the account balance -- regardless of what the decedent's will says.
Mistake #6: Not naming successor or contingent beneficiaries. Let's say you name one beneficiary on an account and that individual dies. If you don't update the beneficiary designation, there will be no successor to receive the account assets. In this case, the assets may go to someone you didn't want to receive them -- or they may wind up in your estate. It's important to name more than one beneficiary on accounts and to keep your designations up to date.
Mistake #7: Failing to name a person to make health care decisions. You've probably heard about the nightmare that can occur when family members don't agree what to do with a loved one on life support. 
All 50 states permit you to express your wishes as to medical treatment and to appoint someone to communicate for you in the event you become incapacitated. Depending on the state, these legal documents are known as living wills, medical directives, health care proxies or advance health care directives. On one of these legal documents, designate someone you trust to follow your wishes.
Mistake #8: Relying on outdated or stale financial powers of attorney. You may have selected someone to make financial decisions for you with a power of attorney. However, after you signed the document, your circumstances or your relationship with the person may have changed. Consult with an attorney about how to proceed.
Mistake #9: Failing to consider Medicaid planning. Many people wait too long to plan for a nursing home or extended care and then want to apply for Medicaid. These issues should be reviewed long before a person nears the time when long-term care may be necessary.
Mistake #10: Thinking that estate taxes don't apply. With the current relatively generous federal estate tax rules (a $5.45 million exemption for 2016), many people believe their estates won't be liable. But keep in mind that many states have their own death taxes. If you live in one of these places, your estate can be exempt from the federal estate tax but still exposed to a significant estate tax hit imposed by your state. Don't just focus on the federal rules. Consult with your estate planning advisor to minimize state taxes and ensure you establish domicile in the state that you want.
These issues can be complex. Speak with your estate planning advisor to help ensure you have a proper and solid estate plan so that your heirs are taken care of in the way you wish. 

August 3, 2016

7 Tax-Savvy Ways to Give to Charity

7 Tax-Savvy Ways to Give to Charity

Charitable giving is on the rise. And the momentum is expected to continue, given the natural disasters and human tragedies that have happened in recent months. 
Last year, charitable donations reached an all-time high of approximately $373.25 billion, according to Giving USA 2016: The Annual Report on Philanthropy for the Year 2015. This report is published jointly by the Giving USA Foundation, a public-service initiative of The Giving Institute and the Indiana University Lilly Family School of Philanthropy.
Besides fulfilling their philanthropic needs, donors may also benefit from charitable deductions on their personal tax returns. If you're considering donating to a new cause or a long-standing favorite one, remember that gift-giving may come in many different forms. Here are seven ways you can offer support:

1. Monetary Contributions

If you donate cash to a qualified charity, your gift is generally tax deductible. The same holds true for cash-equivalent contributions, such as an online payment to the charity using a credit or debit card. 
Important note. To determine if an organization qualifies as a charitable organization, go to the IRS Exempt Organizations Select Check. Giving money to an individual or a foreign organization is generally not deductible, except for donations made to certain qualifying Canadian not-for-profits. Political donations also don't qualify for a deduction.
The deduction limit for your total annual donations, including cash gifts, is 50% of your adjusted gross income (AGI) (or 30% to the extent donations are made to a private foundation). Any excess may be carried forward up to five years. In addition, the tax code imposes strict recordkeeping requirements for charitable contributions. For example, if you make a cash donation of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity that states the amount of the donation and whether any goods or services were received in exchange for it. 

2. Gifts of Property

You may also donate property — such as marketable securities, artwork or clothing — to a qualified charitable organization. In some situations, this can result in an extra tax break: For property that would have qualified for long-term capital gains treatment had you sold it — such as marketable securities you've owned longer than a year — you may deduct the full fair market value of the property. Thus, the appreciation in value while you owned the property will never be taxed.
For you to deduct the fair market value of gifts of appreciated tangible personal property, the property must be used to further the charity's tax-exempt mission. For instance, if you give a work of art to a museum, it has to be included in its collection, rather than auctioned off at a fundraiser. Gifts of appreciated property are limited to 30% of your AGI, subject to the same five-year carryforward rule as cash gifts. 
For you to deduct gifts of clothing or household goods, the items generally must be in good used condition or better. Your deduction equals the current fair market value of the item, which likely is substantially less than what you paid for it. 
For a donation of property worth $250 or more, you must obtain a contemporaneous written acknowledgment from the charity describing the property, including a statement of whether any goods or services were received in exchange for the donation and a good-faith estimate of the gift's value. Note that an independent appraisal generally is required for a charitable gift of property valued above $5,000 other than publicly traded securities.

3. Quid Pro Quo Contributions

In some cases, a charitable donor may receive a benefit in return for the contribution. These are referred to as "quid pro quo contributions." If you make a donation at least partially in exchange for goods or services exceeding $75, the charity should provide you with a good faith estimate of the goods and services received and the amount of payment exceeding the value of the benefit. Your deduction is limited to the difference between these amounts.
For example, suppose you attend a charitable fundraising dinner. You pay $200, but the charity values the meal at $50. In this case, your deduction is limited to $150. Low-cost trinkets and nominal gifts, such as a mouse pad featuring the charity's logo, won't reduce your deduction.

4. Volunteer Services

Unfortunately, you can't deduct the value of the time you spend helping out a qualified charity. But you may be eligible to write off out-of-pocket expenses you pay on behalf of the organization. This includes such items as travel, mailing costs and lodging at a convention where you're an official delegate. But travel expenses aren't deductible if the trip is merely a disguised vacation. 
If you have to buy special clothing for your charitable activities — such as a Boy Scout or Girl Scout uniform for a troop leader — the cost is deductible. And any uniform cleaning costs also may be deductible as a miscellaneous expense, subject to the usual 2%-of-AGI floor. 

5. Donor-Advised Funds

A donor-advised fund may appeal to someone who wants to retain some control over how the charity will spend his or her contributions. Typically, these funds are established with a reputable institution that vets charities for you and doles out money based on your recommendations. A minimum deposit of at least $5,000 may be required.
As with other donations to qualified charities, contributions to a donor-advised fund are fully deductible within the usual rules and limits. Donor-advised funds are usually easy to set up and maintain because the institution does all the administrative work for you. If you want to stay out of the limelight, you can even arrange to make your gifts anonymous. The increase in the popularity of donor-advised funds has been documented in the Giving USA reports in recent years.

6. Booster Clubs

Do you support your alma mater or a local college by contributing to its athletic booster club? Typically, these clubs enable you to purchase preferred seating at the school's sporting events. For example, booster club members might receive priority ticket ordering privileges for home football and basketball games. 
Under the current rules, you can deduct 80% of the cost of a donation made to a booster club. Any part of the payment that goes toward the purchase of actual tickets is nondeductible. But you might want to grab this tax break while it's still available: The Obama administration has advocated its repeal and support for repeal is also growing in Congress.

7. Conservation Easements

Usually, you must give something away in order to claim a charitable donation deduction. However, under the rules for conservation easements, you can donate an interest in real estate to a qualified organization, such as a government unit or publicly supported charity, without relinquishing ownership and still qualify for a deduction. The donation generally preserves or protects the land or building in its current state so it can be viewed or studied.
The amount of the deduction is based on the difference between the fair market value of the land with and without the easement. Under special rules, the annual deduction is limited to 50% of AGI (or 100% for farmers and ranchers), as opposed to the usual 30%-of-AGI limit. Any excess may be carried forward for up to 15 years instead of five years. This tax break was recently made permanent by the Protecting Americans from Tax Hikes Act of 2015.
The catch is that the gift must be made in perpetuity. In other words, you or your heirs can't alter the property or rescind the organization's rights to the property at a later date.

Considering a Charitable Donation?

There are many creative gifting options available to philanthropic individuals — and many types of donations also qualify for a tax break on your federal return. But special tax rules may apply, so consult with a tax adviser to help ensure that your donation is deductible and your recordkeeping is sufficient.

Highlights of the Giving USA Report

A recent report, Giving USA 2016: The Annual Report on Philanthropy for the Year 2015, shows charitable-giving trends based on contributions made by individuals, foundations, estates and corporations. Here's the breakdown of where donations came from and how much they increased in 2015: 
Source                        Amount donated               Increase from 2014 to 2015 
Living individuals         $264.58 billion                     3.8% 
Foundations                $58.46 billion                       6.5% 
Charitable bequests    $31.76 billion                       2.1% 
Corporate giving          $18.45 billion                       3.9% 
Total                            $373.25 billion                     4.1% 
Contributions from living people accounted for about 71% of the total donations, underscoring the importance of individual donations. For a free copy of this report, visit The Giving Institute's website.

July 29, 2016

FAQs about Social Security Retirement Benefits

For years, people have questioned...

the long-term viability of the Social Security system. In June, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds. It projects that the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds will become depleted in 2034. Additionally, the Disability Insurance Trust Fund will become depleted in 2023.
More generally, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are the answers to several common inquiries.

How Soon Can I Start Collecting Retirement Benefits?

If you want to receive full retirement benefits from the SSA, you must wait until you reach the so-called full retirement age (FRA). But you may apply for benefits as early as age 62. Starting early will reduce your monthly benefits by as much as 30%, but, of course, you'll receive benefits for more years. Your tax adviser can help figure out the exact monthly benefit reduction and help you determine if you likely will be better off waiting until your FRA to start taking benefits.

What Is My FRA?

Your FRA depends on the year in which you were born. 
Year of Birth           Full Retirement Age
1937 or earlier         65
1938                        65 and 2 months
1939                        65 and 4 months
1940                        65 and 6 months
1941                        65 and 8 months
1942                        65 and 10 months
1943–1954              66
1955                        66 and 2 months
1956                        66 and 4 months
1957                        66 and 6 months
1958                        66 and 8 months
1959                        66 and 10 months
1960 and later         67
If you were born on January 1 of any year, refer to the previous year. If you were born on the first of the month, the SSA figures your benefit (and your FRA) as if your birthday were in the previous month.

How and When Do I Apply for Social Security Retirement Benefits?

Apply for retirement benefits three months before you want your payments to start. The SSA may request certain documents in order to pay benefits, including:
•Your original birth certificate or other proof of birth,
•A marriage certificate or divorce decree when applying for spousal benefits,
•Proof of U.S. citizenship or lawful alien status if you were not born in the United States,
•A copy of your U.S. military service paper(s) if you performed military service before 1968, and
•A copy of your W-2 Form(s) and/or self-employment tax return for the prior year.
For most retirees, the easiest way to apply for benefits is by using the online application.

What Happens if I Receive Social Security Retirement Benefits While Still Working?

If you're under FRA and earn more than the annual limit (subject to inflation indexing), your benefits will be reduced, as follows:
•If you're under FRA for the entire year, you forfeit $1 in benefits for every $2 earned above the annual limit. For 2016, the limit is $15,720.
•In the year in which you reach FRA, you forfeit $1 in benefits for every $3 earned above a separate limit, but only for earnings before the month you reach FRA. The limit in 2016 is $41,880.
Beginning with the month in which you reach FRA, you can receive your benefits without regard to your earnings.

Can I Collect More Benefits if I Retire After My FRA?

You can receive increased monthly benefits by applying for Social Security after reaching FRA. The benefits may increase by as much as 32% if you wait until age 70, but of course you'll receive benefits for fewer years. After age 70, there is no further increase. Your tax adviser can help calculate the payout for waiting to collect your retirement benefits and help you determine if you likely will be better off waiting beyond your FRA to start taking benefits.

Can I Manage Retirement Benefits for an Incapacitated Person?

If a Social Security recipient needs help managing his or her retirement benefits — perhaps an elderly parent — contact your local Social Security office. You must apply to become that person's representative payee in order to assume responsibility for using the funds for the recipient's benefit.

Do I Qualify for Social Security Survivors Benefits?

A spouse and children of a deceased person may be eligible for benefits based on the deceased's earnings record as follows: 
A widow or widower can receive benefits:
•At age 60 or older,
•At age 50 or older if disabled, or
•At any age if she or he takes care of a child of the deceased who is younger than age 16 or disabled.
A surviving ex-spouse might also be eligible for benefits under certain circumstances. In addition, unmarried children can receive benefits if they're: 
•Younger than age 18 (or up to age 19 if they are attending elementary or secondary school full-time), or
•Any age and were disabled before age 22 and remain disabled.
Under certain circumstances, benefits also can be paid to stepchildren, grandchildren, stepgrandchildren or adopted children. In addition, dependent parents age 62 or older who received at least one-half support from the deceased may be eligible to receive benefits.
A one-time payment of $255 may be made only to a spouse or child if he or she meets certain requirements. Survivors must apply for this payment within two years of the date of death.

Are Social Security Benefits Subject to Income Tax?

You'll be taxed on Social Security benefits if your provisional income (PI) exceeds the thresholds within a two-tier system. 
PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers). Recipients in this range are taxed on the lesser of 1) one-half of their benefits or 2) 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers). 
PI above $44,000 ($34,000 for single filers). Recipients above this threshold are taxed on 85% of the amount by which PI exceeds $44,000 ($34,000 for single filers) plus the lesser of 1) the amount determined under the first tier or 2) $6,000 ($4,500 for single filers). 
PI equals the sum of 1) your adjusted gross income, 2) your tax-exempt interest income, and 3) one-half of the Social Security benefits received.
If you have additional questions about receiving Social Security retirement benefits, contact your financial adviser. He or she can help you navigate the application process and understand tax issues related to receiving retirement benefits.

Highlights of New Trustees Report

In its annual report to Congress, the Social Security Board of Trustees announced that the asset reserves of the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds increased by $23 billion in 2015. The combined trust fund reserves are still growing and will continue to do so through 2019.
Here are some other highlights from the report:
•Total income, including interest, to the combined OASDI Trust Funds amounted to $920 billion in 2015. 
•Total expenditures from the combined OASDI Trust Funds amounted to $897 billion in 2015.
•The SSA paid benefits of $886 billion in calendar year 2015. There were about 60 million beneficiaries at the end of the calendar year.
•During 2015, an estimated 169 million people had earnings covered by Social Security and paid payroll taxes.
•The combined Trust Fund asset reserves earned interest at an effective annual rate of 3.4% in 2015.
Even though the income exceeded expenses from the OASDI Trust Funds and asset reserves increased in 2015, the reserves are projected to be gradually depleted over the next 18 years. Unless Congress takes action to reverse the situation, the OASDI Trust Funds are expected to be insolvent by 2034. 
This underscores the importance of saving for retirement while you're working. Social Security benefits should be viewed only as a supplement to your other assets.

June 24, 2016

Dirty Dozen Tax Scams to Watch For

Every year, the Internal Revenue Service  releases its list of tax scams, spotlighting the myriad ways that people try to separate you from your money.1 

The 2016 "Dirty Dozen"

Identity Theft
Using your personal information, an identity thief can file a fraudulent tax return and claim for a refund. If you've been a victim of stolen personal information, you can contact the IRS so the agency can protect your tax account.
Phishing
Be wary of fake emails or websites looking to steal your personal information. if you receive a request for information that appears to be from the IRS, contact the IRS directly (not using the links or contact information in the email) to verify the request. 
Telephone Scams
Scammers will contact you pretending to be from the IRS. They may say that you are due a large refund or owe money (even threatening arrest or revocation of your driver's license). If you receive such a call, call the IRS and contact the Federal Trade Commission using their "FTC Complaint Assistant" at FTC.gov. 
Promises of "Free Money"
Posing as tax preparers, scam artists may promise large tax refunds and charge big fees, while filing false returns with big refunds payable to them. Individuals may never know a tax filing was ever made in their name. 
Return Preparer Fraud
Dishonest preparers may use tax preparation as an excuse to steal your personal information, so only use a preparer who signs the return and has an IRS Preparer Tax identification Number.  
Hiding Income Offshore
The IRS has strengthened its ability to identify offshore holdings, and the failure to report them will be costly. 
Impersonation of Charitable Organizations
Fraudulent charities raise money or obtain private information from individuals looking to help.  Donate only to recognized charities, and beware of charities whose names sound similar to the well-known ones.
False Income, Expense or Exemptions
Falsifying your tax return is a high risk, low reward exercise, especially in this age of Big Data. 
Frivolous Tax Arguments
Ignore promoters of frivolous arguments that promise you tax relief. Not only are they expected to fail, but you may be subjected to penalties and possible jail time. 
Falsely Padding Deductions or Returns
Dishonestly reporting deductions to reduce tax bills or inflate refunds may open you up to penalties and prosecution.
Abusive Tax Structures
If someone is proposing to eliminate or substantially reduce your taxes through complex tax structures, walk away. They may be offering nothing more than illegal tax evasions.
Excessive Claims for Business Tax Credits
This happens when taxpayers or their tax preparers improperly claim the research credit or the fuel tax credit, which is generally limited to off-highway uses, such as farming. 
December 28, 2015

A Gift from Uncle Sam: Congress Passes the Extenders Package

This holiday season, taxpayers are receiving a "gift" from Washington, D.C. It's the Protecting Americans from Tax Hikes Act of 2015 or, simply, the PATH Act. It does more than just extend expired tax provisions for another year. The bipartisan deal makes about one-third of these tax provisions permanent. Many others have been extended for periods ranging from two to five years. 

Several of these provisions can produce significant savings for taxpayers on their 2015 income tax returns, but quick action (before January 1, 2016) may be needed to take advantage of some of them. Here are some details on this tax savings package.
Which Tax Breaks Are Now Permanent for Individuals?
Major tax provisions made permanent by the PATH Act (some with modifications) that may help you save taxes include:
Enhanced American Opportunity credit. The new law makes permanent this credit of up to $2,500 per year for the first four years of post-secondary education. It phases out for adjusted gross income (AGI) starting at $80,000 (if single) and $160,000 (if married filing jointly). 
Educator expense deductions. Qualifying elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses. Without this deduction, unreimbursed professional development expenses would be deductible only as unreimbursed-employee-business-expenses miscellaneous itemized deductions subject to the 2%-of-AGI floor.
In addition, the PATH Act includes provisions that permanently and retroactively allow individual taxpayers to:
•Deduct state and local general sales taxes in lieu of deducting state and local income taxes,
•Apply a special rule for contributions of capital gains real property made for conservation purposes, and
•Take tax-free distributions from IRAs for charitable purposes.
It also makes permanent the enhanced child credit and calls for "program integrity" and other safeguards to reduce improper payments under the child credit and American Opportunity credit programs.
Which Tax Breaks Are Now Permanent for Businesses?
For business taxpayers, major provisions that were permanently and retroactively reinstated by the PATH Act include:
Research credit. This credit equals the sum of: 
1. 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit),
2. The university basic research credit, which is generally 20% of the basic research payments, and
3. 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium.
Important note: There are many additional rules attached to the research credit. If your business has already filed returns for a fiscal year that includes part of 2015, ask your tax adviser about filing an amended return to claim a refund for the amount of any additional tax paid because of not claiming amounts now eligible for the research credit.
In addition, for tax years that begin after December 31, 2015, eligible small businesses with $50 million or less of gross receipts may claim this credit against their alternative minimum tax liability. Also, for tax years that begin after December 31, 2015, small start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of the credit against their employer FICA tax liability. 
Increased Section 179 expensing election. For 2015, the new law revives the increased Sec. 179 expensing limit for qualifying fixed assets and phaseout threshold to $500,000 and $2 million, respectively. Under the previous rules, these amounts were set at $25,000 and $200,000, respectively, for tax years beginning after 2014. 
Beginning in 2016, both of these amounts will be indexed for inflation. The special rules that allow expensing for computer software have also been permanently extended, as well as the rules for expensing qualified real property. 
In addition, the new law permanently allows companies to use 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
Reduction in S corporation recognition period for built-in gains tax. An S corporation generally isn't subject to tax, but instead passes through its income to its shareholders, who pay tax on their pro-rata shares of the company's income. When a C corporation elects to become an S corporation (or when an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a "recognition period."
Under the new law, this recognition period is five years (instead of the generally applicable 10-year period). It begins with the first day of the first tax year for which the corporation was an S corporation (or beginning with the date of acquisition of assets if the rules applicable to assets acquired from a C corporation applied). If an S corporation disposes of assets in a tax year beginning in 2012 (or after) and the disposition occurred more than five years after the first day of the relevant recognition period, the gain or loss on the disposition won't be taken into account in determining the net recognized built-in gain.
Exclusion of gains on certain small business stock. The new law allows taxpayers to exclude all of the gain on the disposition of qualified small business stock acquired after September 27, 2010. None of the excluded gain is subject to the alternative minimum tax. (Under the previous rules, the exclusion would have been limited to 50% of gain for stock acquired after December 31, 2014, and 7% of the excluded gain would have been an alternative minimum tax preference.)
Important note: You must hold the shares for more than five years to be eligible for this tax break, and companies must meet the definition of a qualified small business corporation.
Other common business tax breaks that were made permanent under the new law include:
•Enhanced charitable deduction for contributions of food inventory,
•Basis adjustment to stock of S corporations making charitable contributions of property,
•Employer wage credit for employees who are active duty members of the uniformed services,
•Subpart F exception for active financing income of the U.S. parent of a foreign subsidiary,
•9% minimum low-income housing tax credit rates for non-federally subsidized buildings,
•Military housing allowance exclusion for determining whether a tenant in certain counties is low-income, and
•Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Tax Act.
Which Tax Provisions Have Been Temporarily Extended?
Not every break that expired December 31, 2014, has been permanently extended by the PATH Act. The following individual tax breaks have been retroactively extended only through 2016:
•Exclusion for discharged home mortgage debt,
•Mortgage insurance premiums as deductible qualified residence interest, 
•Above-the-line deduction for higher education expenses, and
•Various energy-efficiency tax credits. 
In addition, several major business-related provisions have been extended through 2019, such as:
First-year bonus depreciation. In general, for new property purchased and put in service this tax year through tax years starting in 2017, the first-year bonus depreciation percentage is 50%, and then it decreases to 40% in 2018 and 30% in 2019. The PATH Act continues to allow taxpayers to elect to accelerate the use of alternative minimum tax (AMT) credits in lieu of bonus depreciation under special rules for 2015. But beginning in the 2016 tax year, it would increase the amount of unused AMT credits that may be claimed in lieu of bonus depreciation.
Expanded Work Opportunity credit. This credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). If the employee is a long-term family assistance recipient, this credit is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages. However, it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For long-term family assistance recipients, it includes an additional 50% of qualified second-year wages.
The maximum wages that can be used to calculate the credit for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000 or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the credit-eligible hiring date.
The new law retroactively extends this credit to eligible veterans and non-veterans who begin work for the employer before January 1, 2019. With respect to individuals who begin work for an employer after December 31, 2015, this credit also applies to employers who hire qualified long-term unemployed individuals, who have been unemployed for 27 weeks or more. The credit with respect to such long-term unemployed individuals is 40% of the first $6,000 of wages. 
Other business tax breaks that have been temporarily extended through 2019 include: 1) the look-through rule for payments between related controlled foreign corporations under foreign personal holding company income rules, and 2) the New Markets credit for qualified equity investments to acquire stock in a community development entity.
Miscellaneous business tax provisions extended only through 2016 include:
•Employment credit for certain Indian tribe members and their spouses, 
•Domestic production activities deduction for Puerto Rico,
•Qualified zone academy bond limitation,
•Empowerment Zone tax breaks for certain economically depressed areas, and
•Various energy-efficiency tax credits.
Where Can You Go for More Information?
Many of these tax breaks may seem familiar, because they're continuations from previous years. But some of the previous rules have been modified under the new law, so don't assume you know all the details. Moreover, we've only highlighted some of the more common individual and business tax breaks that have been extended. For more information on more obscure tax breaks and last-minute tax planning strategies, contact your tax adviser before year end.
The Last-Minute Dash to Buy Fixed Assets
Many taxpayers put their equipment and vehicle purchases on hold, waiting to see if enhanced Section 179 and bonus depreciation deductions would be revived for 2015 to make it worth their while. In light of the recently extended tax breaks under the Protecting Americans from Tax Hikes (PATH) Act of 2015, some business owners may want to make an eleventh-hour dash to purchase qualifying fixed assets before year end.
Understand the Revised Expensing Limits
Before the PATH Act, the maximum Sec. 179 deduction for tax years beginning in 2015 would have been only $25,000, and the deduction would have been phased out dollar-for-dollar to the extent that total qualifying fixed asset purchases for the year exceeded $200,000. No Sec. 179 deductions would have been permitted for real estate improvements. And the 50% first-year bonus depreciation deduction generally wouldn't have been allowed for fixed assets placed in service in 2015. 
Thankfully, Congress restored the $500,000 maximum Sec. 179 deduction with a $2 million phaseout threshold, as well as the Sec. 179 deduction for qualifying real estate improvements, indexing these amounts for inflation beginning in 2016. It also restored the 50% first-year bonus depreciation deduction for tax years beginning in 2015 through 2017. (The bonus depreciation deduction decreases to 40% in 2018 and 30% in 2019, however.)
Read the Fine Print 
Qualifying assets can't just be ordered or delivered on your loading dock in a box or pallet on December 31, however. Assets must be placed in service (that is, hooked up and ready for business use) by the end of the tax year to be eligible for Sec. 179 and the bonus depreciation deduction.
The current favorable Sec. 179 and bonus depreciation rules can be a big tax-saver. But there are several restrictions that you might not know about. For example, the Sec. 179 deduction cannot exceed the taxpayer's business taxable income calculated before the deduction. As another example, special limitations apply to partnership and S corporation businesses and their owners. 
Consult your tax adviser for details on how to most effectively take advantage of today's taxpayer-friendly Sec. 179 and bonus depreciation rules.
December 17, 2015

Develop a Strong Hand to Negotiate Loan Covenants

If you are about to ask for a business loan, expect to deal with the issue of covenants -- constraints lenders impose on your company to keep it operating within specified financial ratios and to prevent it from taking certain actions.
These clauses are meant to help the lender mitigate risk and get its money back. But if you are not careful, they can put your company in a stranglehold. Under some very strict loan agreements, if your firm violates a covenant, it can automatically go into default and be forced to pay the loan in full immediately. Typical commercial-loan covenants can require your business to, among other things:
•Hold a minimum credit balance on deposit;
•Maintain specific capital or financial ratios, such as tangible net worth, working capital and debt servicing;
•Keep collateral property insured and in good repair;
•Provide periodic financial statements and tax returns;
•Avoid taking on additional debt or borrowings; and
•Keep the current management or ownership structure.
When considering a loan, you want to try to at least loosen, if not eliminate, the obligations that will be most difficult for your business to meet. Try to negotiate covenants that leave you the flexibility to run your business prudently. Some loan requirements set sound benchmark metrics that can help keep your company healthy. Others, however, could be too difficult to meet and result in disastrous consequences. 
Here are four important considerations before you officially ask for -- or agree to -- a commercial loan:
1. Take your lender's perspective. Your loan officer has to deal with internal policies and external regulators and, depending on the size of the loan, may have to persuade a formal loan committee that the loan presents no undue risk given the covenants involved. Gather up your business and strategic plans, financial projections and other relevant financial information and try to come up with a set of covenants you would expect the bank to require as well as a set your organization can live with. Keep in mind that the loan panel will be looking at how profitable the lending relationship will be for its company.
2. Run some critical calculations. Some financial covenants, such as debt service coverage ratios, liquidity and performance ratios, and current ratio/working capital, involve several financial statements. Take the time to run various scenarios through your company's most recent financial statements to determine which covenants would be the best and worst for your operation.
3. Ask "What If." Once you have analyzed your company's financials and have a grasp of how sensitive potential covenants will be to changes in your projections, start discussing matters with your lender. Keep the talks on the level of simply asking "what would happen if ..."   This is a chance for you and your banker to feel each other out and determine each other's expectations before drafting a formal agreement.
4. Avoid strict technical default clauses. This is critical. The default section of the loan agreement gives the lender the right to demand immediate repayment of the loan if your business does not live up to a covenant. You need to be sure that inadvertent or unintentional defaults will not be triggered without your business receiving prior notice and having a chance to take care of the problem.
For example, if you have a monthly fixed-rate loan, the bank could argue that your company's financial controls should make such notice unnecessary. You, on the other hand, could maintain that missed deadlines can sometimes result from computer malfunctions or business trips where executives with check-signing authority are out of town. This type of discussion could be sparked by each default provision. Some give and take is required to reach a compromise. For instance, you and your lender might agree to a limit on the number of late payment notices allowed before your business is in default. The goal is to make it easier for your company to avoid default while assuring the lender there are adequate mechanisms in place to protect its interests.
Although you have to expect to agree to certain covenants when you take out a commercial loan, get guidance from your accountant as well as your attorney on how to effectively negotiate fair and reasonable terms that you don't inadvertently violate. It could accelerate a premature demand for repayment and cause financial hardship for your company.  
More Tips to Bolster Your Company's Position 
When talking to lenders, make sure your enterprise's financial projections include a full financial model of income statement, balance sheet and statement of cash flows on a monthly basis. This will reflect any seasonal fluctuations in the business plan.
Develop early warning mechanisms to alert management if your company reaches a point where it may violate a covenant. Have a checklist of steps to monitor compliance with all provisions of the loan agreement.
Reassure your lenders that you are on top of the terms your company accepted. Explain the plan of action your business will take if it breaches any obligations. Lenders want to know that your organization's management is taking steps to protect their collateral and to ensure that the loan is repaid.

December 2, 2015

Last-Minute Tax Savings: Hurry Before Time Runs Out

Another tax year is drawing to a close. But there's still time for individual taxpayers to trim their tax liabilities for 2015 and beyond, before the New Year begins. Here are 10 eleventh-hour moves that you can still make before the clock strikes midnight on January 1.
1. Increase Your 401(k) Deferral 
Consider increasing your 401(k) deferral for the last few paychecks of the year. Doing so can add to your retirement savings and lower your tax liability. Many taxpayers will have plenty of room to spare with an annual deferral limit of $18,000 in 2015 ($24,000 if you're age 50 or over). It's especially easy to do if you've exceeded the Social Security wage base of $118,500 in 2015 — if you just allocate the Social Security tax savings to your 401(k) account, you won't cut your take-home pay.
2. Assess Your AMT Situation
With the help of your tax adviser, you should have enough information in December to make a reasonable estimate of whether you'll be subject to alternative minimum tax (AMT) for 2015. Don't panic if it looks like you'll owe significant AMT in 2015 — there's still time to take steps to lower your income for AMT purposes. For instance, you may be able to postpone certain tax preference items (such as tax-exempt interest on certain private activity bonds). Also, consider deferring expenses that aren't deductible for the AMT (such as state and local taxes) to next year so you don't lose the benefit of the deduction. 
3. Take Your RMD
Generally, you need to take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs every year once you hit age 70½. Contact your tax adviser immediately if you've waited this long to arrange an RMD for 2015. The penalty for failing to take an RMD equals 50% of the amount that should have been withdrawn — and that's on top of the regular tax. The amount of your RMD in 2015 is based on IRS life expectancy tables and account balances on December 31, 2014.
4. Visit Your Doctor or Dentist
Unreimbursed medical and dental expenses are deductible only to the extent that the annual total exceeds 10% of your adjusted gross income (AGI) or 7.5% of AGI if you're age 65 or older. If you're close to this threshold (or you've exceeded it), additional elective expenses — such as a dental work or eyeglasses — can boost your deduction. If your medical and dental expenses are too low to be deductible, you might as well wait until next year to visit a health care professional for services that aren't covered by insurance (unless it's an emergency situation).
5. Convert to a Roth IRA
Invest in your future by converting all (or part) of a traditional IRA to a Roth IRA this year. Unlike distributions from traditional IRAs, which are fully subject to tax, qualified distributions from a Roth IRA — generally, those made after age 59½ — are 100% tax-free after five years. But you must pay tax in the year of the conversion. Typically, it makes sense to convert IRA funds over several years to lessen the tax bite in a given year and avoid being pushed into a higher tax bracket. This strategy generally makes more sense if you're in a lower tax bracket today than you expect to be in when you receive retirement distributions. Although a Roth conversion will actually increase your taxes in 2015, it might save significant tax in future tax years.
6. Support a College Graduate
If your child graduated from college this year and is under age 24, you may claim a dependency exemption for him or her as long as you provided more than half of the child's support in 2015. However, it might be difficult to clear that threshold, especially if the child has landed a job that pays well. Barring other extenuating tax circumstances (for example, a potentially high "kiddie" tax), consider making this holiday season extra-special by giving a generous cash gift that will help support your child — and put you over the support threshold for the tax year. 
7. Prepay Tuition for Next Semester
Parents of children enrolled in higher education programs may qualify for one or two higher education credits: the Lifetime Learning credit and the American Opportunity credit. If you pay next semester's tuition before January 1 — even for a semester beginning as late as March 2016 — some or all of the expense may reduce your tax liability dollar-for-dollar for 2015. Unfortunately, these credits are gradually phased out for higher-income parents. Other rules and limits apply, so be sure to contact your tax adviser before implementing this strategy.
8. Prepay Expenses on Real Property
Assuming you don't owe an AMT liability and don't expect to be in a higher tax bracket next year, it generally makes sense to accelerate deductible expenses into the current year to reduce your 2015 tax bill. Then you can worry about your 2016 tax bill next year end. 
Among the largest itemized deductions for most taxpayers are mortgage interest and property taxes on their personal residences and vacation homes. Homeowners can lower their 2015 taxes by prepaying mortgages and state and local property taxes in December 2015 that are due in early 2016. 
9. Sell Securities
Keep taxes in mind as you plan year-end stock transactions. Net long-term gain is taxed at a maximum rate of 20% for those in the top income tax bracket. If you expect to have a net capital gain, losses resulting from the sales of securities can offset the gain plus up to $3,000 of ordinary income. Alternatively, if you have a net loss, any capital gains from sales are tax-free up to the amount of the loss. If you want to claim a transaction for the 2015 tax year, the trade date must be on or before December 31.
10. Charge Your Donations
If you itemize expenses on your personal tax return, you can deduct charitable contributions made to a qualified organization in 2015 as long as they're charged before midnight on January 1 — even if you don't pay your credit card bill until 2016. Mailed checks must be postmarked on or before December 31 to be deducted on your 2015 tax return.
November 12, 2015

Tax Advice for Military Families and Veterans

Members of the U.S. Armed Forces and veterans are required to pay taxes on their income like everyone else. But special rules sometimes apply. Here's an overview of key tax benefits that the IRS provides to military personnel to thank them for risking their lives for our country.
Combat Zone Exemption
One of the most significant tax breaks for active military members is that they don't owe taxes on income earned while working in so-called "combat zones." A combat zone is essentially an area in which Armed Forces are or have been engaging in combat. These zones also include a number of locations where service members are stationed to support forces in a combat area. 
Currently, three areas are designated as combat zones:
1. Arabian Peninsula,
2. Kosovo, and
3. Afghanistan.
In addition, three parts of the former Yugoslavia — Bosnia and Herzegovina, Croatia, and Macedonia — have been designated as "qualified hazardous duty areas" that are treated as combat zones for federal tax purposes. Your tax adviser can provide a list of specific combat zones and areas used to support operations there. 
When it comes to excluding military pay earned in combat zones, there are some limits. Nontaxable income generally is capped at the highest enlisted pay level plus hostile fire or imminent danger pay. For 2015, the applicable amount is $8,119.50 per month. In addition, these exclusions are available only for those on active duty or hospitalized due to injuries sustained while serving in a combat zone. Bear in mind that the hospitalization needn't be in a combat zone.
Moving Expenses
Frequent relocations are a fact of life for most military families. Those in the military may claim qualifying unreimbursed moving expenses, such as travel, storage and moving service costs. If a military member is on active duty and moves because of a permanent change of station, he or she doesn't even have to meet the time and distance tests in order to claim moving costs.
A permanent change of station includes moves from: 
•Home to the member's first post of active duty,
•One permanent post of duty to another, and
•The last post of duty to home or to a nearer point in the United States.
 In general, military members also aren't required to include in gross income moving and storage costs reimbursed by the government when a change of station is permanent. If the reimbursed expenses are not included in income, they may not be claimed as an expense.
Special Itemized Deductions
Military members and reservists may be allowed to deduct unreimbursed expenses for the cost and upkeep of uniforms if regulations ban them from wearing the uniforms off duty. Qualifying expenses also may include articles that don't replace regular clothing, such as insignia of rank, corps devices, epaulets, aiguillettes and swords. 
In addition, military members may deduct qualifying unreimbursed professional dues and educational costs directly related to their positions in the Armed Forces.
Military Family Tax Relief Act
Military members may be entitled to other special tax breaks under the Military Family Tax Relief Act, such as:
•A tax-free $12,000 death benefit payable to survivors for deaths occurring after September 10, 2001. Previously, the death gratuity was $6,000 and only $3,000 was tax-free.
•Option to suspend the five-year ownership-and-use period before the sale of a residence for up to 10 years for taxpayers on qualified official extended duty.
•Unreimbursed overnight travel expenses (including gas, food and lodging) for National Guard members and reservists who are reporting for duty more than 100 miles away from their residence. This benefit is available even if a taxpayer doesn't itemize deductions and instead opts to take the standard deduction.
•Tax-free payments to offset the adverse effects on housing values of military base realignments or closures under the Department of Defense Homeowners Assistance Program.
•Tax-free dependent care assistance programs.
To learn more about the rules and exceptions, discuss these benefit programs with your tax adviser.
Special EITC Rules
Because military personnel can exclude income earned during service in combat zones, veterans' benefits, and other basic living allowances from gross income, they often have an easier time qualifying for the earned income tax credit (EITC). The amount of this credit varies depending on the number of children the taxpayer has and his or her taxable wages.
The refundable EITC generally helps lower to middle-class households and it's subject to certain income caps. In 2015, the caps range from $14,820 for a single taxpayer with no children to $53,267 for a married taxpayer who files jointly and has three or more children.
Until a taxpayer exceeds the income cap, the more earned income reported, the higher his or her EITC will be. The IRS permits Armed Service members the option of declaring certain nontaxable items (such as combat zone pay and basic allowance for housing and subsistence) as earned income when calculating the credit. 
Important note: If you make this election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election.
This election doesn't make sense for every taxpayer. So, it's important to calculate the credit with and without the election to determine which method provides the greater tax benefit.
Tax Deadlines and Extensions
Service members stationed abroad have until June 15, 2016, to file their 2015 income tax return. Members of the Armed Forces may be eligible for an additional 180-day extension if they:
•Serve in a combat zone,
•Serve outside of the U.S., away from their permanent duty station in a contingency operation,
•Spent time in a "missing status," such as missing in action or as a prisoner of war,
•Are support personnel (for example, Red Cross personnel), or
•Are spouses of service members serving active duty in combat zones or contingency operations.
Taxpayers who qualify for extensions must file their taxes 180 days after:
•The last day they're in the combat zone or serve in a contingency operation,
•The last day of any continuous qualified hospitalizations for injuries sustained during service in combat zones or during contingency operations.
The deadline is extended beyond these 180 days by the number of days remaining for an individual to take action with the IRS before he or she started duty in a combat zone or contingency operation.
Tax Benefits for Veterans
Favorable tax treatment for military personnel extends beyond the dates of their active service. Veterans who served at least 24 continuous months in active duty and aren't released with "dishonorable" status may be eligible for continuing benefits, including life insurance, health care, education and training programs, home loans, and disability compensation. 
Although veterans are required to pay taxes on retirement pay, qualifying disability pay isn't taxable and doesn't need to be reported. Pensions are also a tax-free benefit for veterans with little or no income who are 65 years of age or older or who are permanently disabled because of a service-related incident or cause.
In many cases, veterans' benefits extend to family members. For example, a veteran's surviving spouse may be entitled to tax-free monthly "dependency and indemnity compensation," including additional payments for dependent children, if the deceased military member died or became permanently disabled during active service or from a service-related incident or condition. Low-income surviving spouses and children may also receive a survivor's pension for a deceased veteran with wartime service. The government even offers tuition and education assistance to survivors and dependents of deceased or permanently disabled veterans.
Additionally, each state maintains its own Veterans Affairs office that provides benefits to veterans. If you're a veteran, ask your tax adviser for more details on what types of benefits you qualify for at the state and federal levels. 
Pass It On
Whether they're active or discharged from service, members of the Armed Forces have risked their lives to preserve and protect the American way of life. These tax breaks are a small token of appreciation offered by the government. Share these tips with the service men and women in your life this holiday season. 
September 10, 2015

Revising Estate Strategy Assumptions

When the rules of the game change, tactics should follow in response to the new landscape. While estate tax exemptions have ridden an uncertain roller coaster in recent years, the rules appear to be stabilizing, prompting many to reconsider conventional estate strategies.¹ 
A few years ago, Congress raised the estate and gift tax exemption to $5 million per person, and has adjusted for the rate of inflation since then. For 2015, the estate exemption is $5.43 million and the top rate is 40 percent.² 
This exemption increase means that potentially hundreds of thousands of additional American households may be able to pass on their assets free of estate taxes than in previous years. It also means that individuals may want to revisit their current approach to estate management. 
Changes in Gift Strategies 
One of the objectives of gifting assets is to manage estate taxation on its future growth. Since more assets are excluded from the estate tax, the need to gift assets for tax purposes may no longer be necessary. 
For many estates, there may now be no reason to gift assets during a lifetime, unless there is a present need with a family member. 
Joint Ownership of Assets 
An individual may want to consider re-titling assets to joint ownership with a spouse to take advantage of the step-up when the first spouse dies, which may save capital gains taxes when the asset is subsequently sold by the surviving spouse. 
Rethinking Trust Strategies 
Spouses no longer need to create or maintain a trust in order to take full advantage of both spousal exemptions since the surviving spouse is now able to claim the deceased spouse's exemption. Indeed, previously established trusts may actually raise tax bills by missing out on the step-up.³ 
Creating an estate strategy is complex and should be done with the assistance of an tax or legal advice. Suffice it to say that these recent changes represent a good reason to revisit your existing approach to estate management.
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1.The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. 
2.Internal Revenue Service, 2015 
3.Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations. 
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite. 
March 3, 2015

Small Business Reprieve on Health Premium Reimbursement Plans

Historically, companies that wanted their employees to be protected with health coverage, but didn't want the hassle of having a company health plan, could simply give employees an amount of money sufficient to reimburse them for the cost of buying that coverage or some portion of it. As long as the individuals provided evidence that they used those funds for that purpose, the dollars were excludable from taxable income for the employees. 
Alternatively, companies could just pay the premiums directly to the insurance carrier. 
Back in November 2014, however, the Department of Labor (DOL) declared that companies reimbursing employees for medical care instead of offering a health care plan is equivalent to a health plan and is subject to the Affordable Care Act (ACA). And since those reimbursement arrangements failed to meet ACA requirements in two ways -- that is, the condition that group health plans have no annual limits on benefits, and also that no co-pay for certain preventive health services must be paid -- they were ruled to be noncompliant with the law. 
$36,500 Per Employee Penalty
This DOL ruling doubled down on a 2013 decree by the IRS saying essentially the same thing. The kicker was that, beginning in 2014, companies with such reimbursement arrangements in place would be subject to a $36,500 penalty per employee. 
The only remedy offered by the DOL was for companies to gross up those contributions (that is, add to them enough money to cover the tax liability employees would incur as a result of receiving the payments), plus make it clear to employees that they could do whatever they wanted with all of the money they received. In other words, they could not be required to use it to pay for health coverage. 
The IRS's latest ruling, Notice 2015-17, which the tax agency says is in sync with the most recent DOL policy on the matter, gives everyone time to catch their breath. 
Specifically, small businesses with reimbursement plans in place will not be penalized unless they maintain them beyond June 30 of this year. Small businesses are also off the hook for having to file Form 8928, which is the form that covers failures to satisfy group health plan requirements. Originally that form would have to have been filed with companies' 2014 tax returns. 
The reprieve also applies to plans that help retirees pick up the tab for Medicare Part B and D premiums. 
Employees with Subchapter S Corp Stock
Employees who own at least 2 percent of their employers' stock (if the company is a Subchapter S corp) might come in for different treatment. Such employees were required to report the premium reimbursement payments as income on their 1040s, even though the payments were not subject to payroll tax. But those same employees could also take a deduction equal to the amount of that income, leaving them tax-neutral.
In IRS Notice 2015-17, the tax agency warns that it and the DOL "are contemplating publication of additional guidance on the application of the market reforms to a 2 percent shareholder-employee healthcare arrangement." Until then, however, the companies are off the hook. So, too, are the employees who will continue to be allowed to deduct that income as self-employed health insurance premiums. 
The Notice reconciles the IRS with a position the DOL had taken earlier -- that is, declaring reimbursement plans as merely taxable payments to employees doesn't prevent them from being deemed health plans. That means the only way to help employees secure health coverage without having a bona fide health plan is to just give each employee a raise and hope they will use it to buy their own health coverage. (Keep in mind, small business with fewer than 50 employees and full-time equivalents are not required to provide health plans under the ACA.)
Notice 2015-17 also made it clear that the ACA's market reforms, as they pertain to this issue, don't extend to arrangements covering only a single employee (regardless of whether that employee is a 2 percent-or-more shareholder). That means if you own your company and aren't an employee, but have one employee and want to reimburse that person for the cost of buying individual coverage, you won't be subject to any penalties.
Monthly Health Allowances
Meanwhile, the entrepreneurial spirit of America is at work to help small businesses that just want to help employees pay for individual coverage, but don't want to run afoul of the IRS and DOL. One benefits company offers a web-based defined contribution arrangement it calls "Individual Health Reimbursement for Small Business," which gives employees access to a "monthly health allowance." However, companies considering such arrangements should consult legal counsel for an opinion as to whether the plan would pass muster with the IRS and DOL.
Changes to Small Business Health Care Tax Credit
Small businesses should be aware of changes to the small business health care tax credit for tax years beginning in 2014. Under the Affordable Care Act, this tax credit is available to eligible small employers that provide health care to their employees. Here's a summary of the recent changes that may affect your business:
  • For 2014, the credit percentage increased from 35 percent to 50 percent of employer-paid premiums. For tax-exempt employers, the percentage increased from 25 percent to 35 percent.
  • Small businesses may claim the credit for only two consecutive taxable years beginning in tax year 2014 and beyond.
  • For 2014, the credit is phased out beginning when average wages equal $25,400 and is fully phased out when average wages exceed $50,800. The average wage phase-out is adjusted annually for inflation.
  • Generally, small businesses are required to purchase a Qualified Health Plan from a Small Business Health Options Program Marketplace to be eligible to claim the credit. Transition relief from this requirement is available to certain small employers.
Small employers may still be eligible to claim the tax credit for tax years 2010 through 2013. Companies that were eligible to claim this credit for those prior years -- but did not do so -- may consider amending prior years' returns if they're eligible to do so in order to claim the credit. Contact your tax pro for more information about the small businesses health care tax credit or assistance with completing Form 8941, Credit for Small Employer Health Insurance Premiums.
January 20, 2015

Defending the Status of Independent Contractors

Many companies use independent contractors to slash payroll taxes and the high cost of fringe benefits. But using outside workers can result in other problems. It's no secret that Uncle Sam wages battle with businesses over freelancers. And the situation is getting worse.
In recent years, many workers have turned to a career of consulting. The IRS is on the lookout for companies that use these consultants improperly -- especially those that lay off workers and then hire them back as independent contractors to cut labor costs. 
Tactics like that don't go over well at the tax agency, so it published guidelines on how auditors should analyze consultants and independent contractors. Often, an audit of the worker means the companies that hire them are also scrutinized by the IRS.
If your independent contractors are legitimately independent, there's no problem. But if they're employees in disguise, the IRS can "reclassify" them as employees and you're slapped with hefty bills for back taxes, plus interest and penalties. And audits by state agencies are also common and frequently occur when freelancers apply for unemployment compensation. 
Your company's pension plan isn't immune either. As independent contractors, workers are generally excluded from retirement plan contributions. If the IRS reclassifies them, your company may be penalized and your qualified plan might be disqualified. 
To stay on the safe side, consult your tax adviser and make sure freelancers sign contracts that specify: 
They are not employees for federal income tax purposes and are responsible for paying their own Social Security and Medicare taxes. 
They are not entitled to employee benefits and are not covered by workers' compensation. 
Have your regular employees sign contracts, too. By varying the two types of documents, you can make the case that both categories of employees perform different tasks. 
Here are four more tips to safeguard your company: 
  1. Consistently treat all workers performing similar tasks as either independent contractors or employees. If contractors must wear ID badges or use company vehicles, make sure their contracts explain why. For example, the policy was instituted after customers expressed safety concerns about deliveries in unmarked cars.
  2. Give outside workers considerable discretion about how and when they perform their duties. In general, independent contractors must control the way they get the job done. 
  3. Send each contractor a Form 1099 showing non-employee income if you pay $600 or more in a calendar year. 
  4. Don't supply freelancers with services you give employees. Some companies have run into trouble with the IRS for providing contractors with office space, computers, cars and other perks. Independents generally furnish their own tools and materials. 

So what if you do rehire some laid-off employees as independent contractors? It's difficult -- but still possible -- to classify them as contractors. But don't let freelancers work in your office and give them new titles. For example, your retained employees might be staff representatives while your new workers are outside service agents.

There's nothing illegal about rehiring former workers as freelancers. You just have to make sure you structure the deals properly so you don't have the IRS breathing down your neck.

October 28, 2014

10 Year-End Tax Planning Ideas for Individuals

Another year is winding down. Before the hustle and bustle of the holidays sets in, it's a good time to brainstorm ideas to lower your 2014 tax bill. Here's an overview of what's happening in the world of tax -- and 10 simple tax-saving strategies that you can implement before year end.
1. Game the Standard Deduction
If the combined total of your annual itemized deductions is usually close to the standard deduction amount, consider the strategy of bunching together expenditures for itemized deductions every other year. Itemize in those years to deduct more than the standard deduction figure. Then claim the standard deduction in the years that your itemized deductions are lower. 
Over time, this drill can save substantial tax dollars by increasing your cumulative write-offs. That's because you'll claim higher itemized deductions in alternating years and relatively generous standard deductions in the other years. So regardless of what happens with tax rates, you'll come out ahead. 
For 2014, the standard deduction is $12,400 for married joint-filing couples, $6,200 for singles, and $9,100 for heads of households. For 2015, the projected standard deduction amounts are $12,600, $6,300, and $9,250, respectively.
2. Prepay Deductible Expenditures
If you itemize deductions, it could make sense to accelerate some deductible expenditures to produce higher 2014 write-offs. This generally works if you expect to be in the same or lower tax bracket next year.
If you Game the Standard Deduction (above), prepaying deductible expenditures makes sense in the alternating years in which you itemize. This strategy can maximize deductible expenditures in the years that you itemize your deductions -- and minimize deductible expenditures in the years that you claim the standard deduction. 
Perhaps the easiest deductible expense to prepay is your house payment due on Jan. 1. Accelerating that payment into this year will give you 13 months' worth of deductible interest in 2014. You can use the same prepayment drill with a vacation home. However, if you prepay this year, you'll have to continue the policy for next year and beyond. Otherwise, you'll have only 11 months' worth of interest in the first year you stop (which could work to your advantage if you Game the Standard Deduction, above).
Another item that's easy to prepay is state and local income and property taxes that are due early next year. Prepaying those bills before year end can decrease your 2014 federal income tax bill, because your itemized deductions will be that much higher.
Consider prepaying expenses that are subject to deduction limits based on your adjusted gross income (AGI), which is the number at the bottom of page 1 of your Form 1040. The two prime candidates are:
Medical costs. For most people, these costs are deductible only to the extent they exceed 10 percent of AGI. However, if you or your spouse will be age 65 or older as of year end, the deduction threshold is a more manageable 7.5 percent of AGI. 
Miscellaneous deductions. These count only to the extent they exceed 2 percent of AGI. Examples of miscellaneous deductions include investment expenses, job-hunting expenses, unreimbursed employee business expenses and fees for tax preparation and advice. If you can bunch these kinds of expenditures into a single calendar year, you'll have a fighting chance of clearing the 2-percent-of-AGI hurdle and getting some tax savings.
Important Note: The prepayment drill can be a bad idea if you owe the alternative minimum tax (AMT) in 2014. That's because write-offs for state and local income and property taxes, as well as miscellaneous itemized deductions, are completely disallowed under the AMT rules. Before using this strategy, ask your tax adviser if you are in danger of owing AMT in 2014.
3. Prepay College Tuition Bills
If your 2014 modified adjusted gross income (MAGI) allows you to qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit, consider prepaying tuition bills that are not due until early 2015 if it would result in a larger credit on this year's Form 1040. Specifically, you can claim a 2014 credit based on prepaying tuition for academic periods that begin in January through March of next year. 
American Opportunity Tax Credit. The maximum annual credit is $2,500 per student, but it's phased out if your MAGI is too high. MAGI refers to AGI from the last line on page 1 of your Form 1040, increased by certain tax-exempt income from outside the United States. The 2014 phaseout range for unmarried individuals is MAGI between $80,000 and $90,000. The range for married joint filers is MAGI between $160,000 and $180,000. 
Lifetime Learning Credit. The maximum annual credit is $2,000 per tax return. Like the American Opportunity Tax Credit, the Lifetime Learning Credit is also phased out if your MAGI is too high. The 2014 phaseout range for unmarried individuals is MAGI between $54,000 and $64,000. The 2014 range for married joint filers is MAGI between $108,000 and $128,000. 
If your MAGI is too high to be eligible for the Lifetime Learning Credit, you might still qualify to deduct up to $2,000 or $4,000 of college tuition costs -- but only if Congress resurrects this break for 2014. If so, consider prepaying tuition bills that are not due until early 2015 if that would result in a higher deduction this year. As with the higher education tax credits, your 2014 tuition deduction can be based on prepaying tuition for academic periods that begin in the first three months of 2015. 
4. Consider Deferring Income
It may also pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2015. For example, if you're a self-employed, cash-basis taxpayer, you might postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won't receive these payments until early 2015. 
You can also defer taxable income by accelerating some deductible business expenditures into this year. Both moves will postpone taxable income from this year until next year. Deferring income can also be helpful if you're affected by unfavorable phaseout rules that reduce or eliminate various tax breaks, such as the child credit or higher-education tax credits. By deferring income every other year, you may be able to take more advantage of these breaks every other year. (This also works well in conjunction with the Game the Standard Deduction strategy, above.)
5. Sell Loser Stocks Held in Taxable Accounts 

Selling losing investments held in taxable brokerage firm accounts can lower your 2014 tax bill, because you can deduct the resulting capital losses against this year's capital gains. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment, alimony or interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2015 and beyond. 

6. Gift Appreciated Assets to Family Members in Lower Tax Brackets

For 2014, the federal income tax rate on long-term capital gains and qualified dividends is still zero percent for gains and dividends that fall within the 10 percent or 15 percent rate brackets. While your tax bracket may be too high to take advantage of the zero percent rate, you probably have loved ones who are in the lower tax brackets. If so, consider gifting these individuals appreciated stock or mutual fund shares. They can sell the shares and pay zero percent federal income tax on the resulting long-term gains. 
Important Notes: Gains will be considered long-term if your ownership period plus the gift recipient's ownership period equals at least a year and a day. Giving away dividend-paying stocks is another tax-smart idea. As long as the dividends fall within the gift recipient's 10 percent or 15 percent rate bracket, they will qualify for the zero percent federal income tax rate. 
The annual gift tax exclusion is $14,000 in 2014. If you give away assets worth over $14,000 (or $28,000 for married couples) during 2014 to an individual gift recipient, it will reduce your $5.34 million unified federal gift and estate tax exemption. 
If your gift recipient is under age 24, the "kiddie tax" rules could potentially cause some of his or her capital gains and dividends to be taxed at the parent's higher rates. Contact your tax adviser if you have questions about the kiddie tax. 
7. Convert Traditional IRA into Roth IRA
The best scenario for this strategy is when you expect to be in the same or higher tax bracket during retirement. There is a current tax cost for converting, because a Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. After the conversion, all the income and gains that accumulate in the Roth account, and all qualified withdrawals, will be exempt from federal income taxes. 
In general, qualified withdrawals are those taken after: 
- You have had at least one Roth account open for more than five years, and 
- You have reached age 59 1/2. 
With qualified withdrawals, you avoid having to pay higher tax rates that may apply during your retirement years. While the current tax hit from a Roth conversion is unwelcome, it could be a relatively small price to pay for the future tax savings. If the Roth conversion idea sounds appealing, contact your tax adviser for a full analysis of all the relevant variables.
8. Donate Stock to a Charity

If you have appreciated stock or mutual fund shares (currently worth more than you paid for them) that you've owned for over a year, consider donating them to IRS-approved charities. You can generally claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

9. Sell Under-Performing Stock and Donate Proceeds to a Charity

If you've owned stocks that are worth less than you paid for them, don't donate them directly to a charity. Instead, sell the stock, book the resulting capital loss and give away the cash proceeds to a charity. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself. Only taxpayers who itemize deductions will gain any tax-saving benefit from charitable donations, however.

10. Consult with your Tax Pro

These tax-saving tips are generally geared toward deferring income and accelerating deductions to minimize 2014 taxes. This approach may also help minimize or avoid phaseouts of various tax breaks based on a taxpayer's AGI (or MAGI). As always, however, year end tax planning doesn't occur in a vacuum. It must take into account each taxpayer's particular situation and planning goals. While most taxpayers will come out ahead by following the traditional approach of lowering the current year's taxable income, others with special circumstances may do better by accelerating income and deferring deductions.

To further complicate year end tax planning in 2014, many tax-saving opportunities expired at the end of 2013, such as the higher education tuition deduction, the option to deduct state and local sales taxes and the tax credit for energy-efficient home improvements. If Congress decides to reinstate the expired tax breaks, many more opportunities will be available for individuals seeking to lower their 2014 tax bills. Consult with your tax adviser before year end to devise a tax-saving plan that most effectively meets your tax planning goals and factors in the latest tax rules.
October 14, 2014

Medical Costs: Can I Really Get a Tax Break for That?

It's difficult for many people to write off medical expenses because of the limits imposed under the tax laws. But you may qualify by including every expense allowed. Some of the qualified procedures may surprise you. 
For example, most insurance plans won't cover laser eye surgery, such as radial keratotomy or "Lasik," because they consider it a cosmetic procedure. But it generally qualifies for a medical deduction and as an expense in a flexible spending account. (The IRS used to disallow Lasik as a medical expense.) With the cost running $1,000 or more in most parts of the country, it's a considerable outlay. 
As with most tax laws, the medical rules can be tricky. You can't deduct over-the-counter vitamins but the Tax Court has ruled that medically prescribed vitamins to treat a specific condition are allowed. 
There are also many exceptions to the general laws. For instance, you can't write off the cost of unnecessary cosmetic surgery to improve your appearance. That generally means no face lifts, electrolysis or liposuction. But you can deduct cosmetic surgery that's needed to improve a deformity directly related to a congenital abnormality, an injury from an accident, or a disfiguring disease.
A list of some other expenses that are eligible or ineligible for tax breaks appears in the chart below. Here's a rundown of the basic rules:
Flexible spending accounts (FSAs). These tax-advantaged accounts generally have a "use-it-or-lose-it" feature on money left at the end of the year. Note: Some FSAs allow participants an extra two-and-a-half-month grace period to use up the money in accounts if the employer properly amends its plan.
So plan to empty your account by buying eyeglasses, filling prescriptions, getting a dental checkup or spending money on the eligible items listed in the chart.
Medical deduction. Medical and dental expenses that are not reimbursed by insurance are deductible to the extent your annual total generally exceeds 10 percent of your adjusted gross income (AGI) in 2014 (unchanged from 2013). This can be a difficult threshold for many taxpayers to meet. To qualify for medical deductions, you must also itemize.
Note: If you or your spouse is age 65 or older at year end, the new 10 percent-of-AGI threshold will not take effect until 2017.
When adding up your medical costs, don't forget the cost of traveling to your doctor or medical facility for treatment. If you go by car, you can deduct a flat rate, adjusted by the IRS each year, or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs. The medical rate for 2013 is 24 cents per mile (up from 23 cents per mile in 2012).
With either the actual costs or the cents-per-mile method, you can add in the amounts paid for parking and tolls. If you must travel out of town for medical treatment, you may also qualify to write off some of the cost.
As year-end approaches, take a look at your medical expenses. If you are close to -- or exceed the 10 percent threshold -- you may want to get as many expenses as possible into this year. Otherwise, you may as well postpone elective expenses until next year when you have another shot at a deduction. 
Tax Breaks
ELIGIBLE NOT ELIGIBLE
A weight-loss program undertaken at a physician's direction to treat obesity or a condition such as heart disease. A weight-loss program to maintain your appearance. Meal replacements, diet foods and supplements that are substitutes for the food that you would normally consume.
Treatment at a drug or alcohol clinic. Smoking-cessation program and prescribed drugs for nicotine withdrawal. Trips your doctor recommends to rest or improve your morale
Acupuncture Marriage counseling
Dentures, hearing aids and orthopedic shoes. Household help, even if recommended by a doctor.
Admission and transportation to a medical conference if the conference concerns the chronic illness of you, your spouse, or a dependent. (Meals and lodging are not deductible.) The collection and storage of DNA, unless you can show how DNA will be used for diagnostic testing. (IRS Private Letter Ruling 200140017).
Lamaze classes for a mother-to-be. Maternity clothes.
Teeth cleaning and orthodontia Teeth bleaching and toothpaste
A wig purchased on the advice of a physician for the mental health of a patient bald from disease.  Hair transplants
Contact lenses and peripheral materials as saline solution and enzyme cleaner.  Retin-A for wrinkles
Nursing services at home or a care facility, including giving medication, changing dressings, bathing and grooming. Nursing services for a normal, healthy baby. (But you might be able to take a credit for child-care expenses.)

August 25, 2014

Who Are the Latest IRS Targets? A List of 22 Audit Triggers

What triggers an IRS tax audit? While the IRS isn't about to publish a list, there are a number of items that are known to raise the IRS's interest in a return.

What are your chances of being audited? For individuals, it depends on your income. In fiscal year 2013, returns reporting income of under $200,000 stood a 0.88 percent chance of an audit. Those with incomes of $200,000 and more had a 3.26 percent chance. And if your income was $1 million or more, you had a 10.85 percent chance. While audit rates were generally down in 2013 from the previous couple of years, they're still much higher than in earlier years.

In addition to income, it's the entries onyour return that are likely to flag it. What items are likely to trigger a letter from the IRS? Here's a list of items some tax preparers believe trigger an audit. Some items only apply to individuals or individuals who file a Schedule C, while others apply to both individuals and businesses. In some cases, items are likely to only generate a letter from the IRS requesting documentation for the item.

1. Outsized charitable contributions.The IRS publishes data on the average size of charitable contributions for various income levels. If you take a deduction for an amount that is materially larger than the averages, you could get a letter.

2. Large property contributions.Significant charitable contributions of property require an appraisal and certain return attachments. Appraisals are often challenged by the IRS.

3. Unmatched alimony. If you take a deduction for $24,000 of alimony, your ex-spouse should be reporting $24,000 of income.

4. High mortgage interest. The maximum amount of qualified home indebtedness is $1.1 million (including home equity loan). A mortgage interest deduction that's in excess of a certain percentage of the debt limit could indicate an excessive deduction.

5. Unreported income. Failure to report gambling winnings, interest and dividends, non-employee compensation (1099-MISC), K-1 items, etc. may just trigger a letter and bill from the IRS -- or it could generate an audit.

6. Gambling losses. You're allowed to deduct losses on Schedule A up to the amount of your winnings. But the IRS knows that many taxpayers don't keep the required records.

7. Miscellaneous itemized deductions. Breaking the 2 percent of adjusted gross income threshold is difficult, so large miscellaneous itemized deductions may perk the interest of the IRS.

8. Foreign bank accounts. Checking the box indicating that you have a foreign bank account on Schedule B could increase your chances of an audit. But not checking the box, when you should, could too. The IRS continues to get information on many foreign bank accounts.

9. Unreimbursed employee business expenses. These expenses may be deductible, but substantial amounts are likely to raise questions because they are frequently reimbursed by an employer. If the expenses involve travel and entertainment or auto usage, your chances of hearing from the IRS may increase further.

10. Cash transactions. Banks and merchants are required to report cash transactions in excess of $10,000. If you have a business, the IRS may want to know where you got cash.

11. Rental losses of a real estate professional. A qualifying individual can deduct rental losses in excess of the usual $25,000 limit. Meeting the required time involved in real estate activities and substantiating it isn't easy. Checking the box on Schedule E could increase your audit chances.

12. Casualty losses. This can be a complicated area where appraisals and other outside information may be required.

13. Bad debt losses. Again, this is often a complex area. Many taxpayers lose on this issue because they can't show a bona fide debt existed or that a loss occurred in an earlier or later year.

14. Home office. If you use a portion of your home exclusively for your business, you can deduct the expenses and depreciation associated with the space. But you've got to show the business connection and that the space was used exclusively for business. Both can be challenged by the IRS. The tax agency can also question the expenses involved in a home office. There's plenty of opportunity for an IRS auditor to make adjustments. In general, the higher the percentage of the home claimed for business, the greater your audit chances.

15. Day-trading losses. Claiming to be a day trader and taking losses on Schedule C is a red flag.

16. Net operating loss. If your business (sole proprietorship, S corporation, partnership) has losses you may have an NOL (net operating loss) that can be carried back or forward to offset income in other years. You may be asked to substantiate the loss if you claim a refund for an earlier year or on a later return where the NOL is used.

17. Rental losses. These could be challenged if there's no revenue from the property.

18. Hobby losses. Multi-year losses on Schedule C (or a pass-through entity such as an S corporation) may be scrutinized, particularly if the business is listed as one that has elements of personal pleasure such as horse breeding, photography or auto racing. Your audit chances increase if the losses offset substantial other income on the return.

If you file a business return such as a Schedule C, S corporation or LLC, there are other triggers. Some of them also apply to rental properties.

19. Travel and entertainment. Because of the recordkeeping requirements, and the fact that some deductions can be questionable, this is always a ripe area for the IRS.

20. Auto usage. Again, the IRS is well aware that many taxpayers fail to keep the required records, making it a fruitful area for an IRS adjustment during an audit.

21. Repairs and maintenance. What property owners believe is a repair and what the tax law considers a repair is often different. The IRS may require you to capitalize and depreciate expenses that you deducted.

22. Zero officer salaries for an S corporation. If an S corporation is active, showing no salary for officers is a red flag.

What should you do? It doesn't make sense to not take a deduction you're entitled to, such as for a home office. Just make sure you're entitled to the deduction and have the required records and tax law justification to back it up. For example, if you're not sure if the part business/part personal trip is deductible, give your tax adviser the facts and get a professional opinion.

In terms of an IRS audit, larger businesses may have to undergo detailed examinations involving many issues, but for individual taxpayers and Schedule C filers, audits may be limited to selected items -- unless those items indicate problems.

January 16, 2013

Chaos at the IRS

Many of you may have heard in recent news reports that because of the late passage of the law to avoid the “fiscal cliff” the Internal Revenue Service will not be able to process tax returns until after January 30, 2013.  We want you to be assured that even though the IRS will not be working, KKAJ is. As soon as we have your information (tax organizer), we will prepare your returns. By getting your information in early, you will know your refund amount or amount due sooner and ensure that your tax returns are ready to be filed as soon as the IRS will accept them. 

Because of the law changes, tax compliance will be more complicated than ever. It is imperative that you do not delay in getting your information to us.  

January 2, 2013

Tax Changes Included in Congress’ Fiscal Cliff Legislation (January 1, 2013)

The following is a summary of the provisions included in Congress’ “Fiscal Cliff” legislation passed on New Year’s Day, which the President is expected to sign.

Tax rates beginning January 1, 2013

A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.

2% Social Security reduction gone

AMT permanently patched

A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012.

Dividends and capital gains

The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above).

Itemized deduction and personal exemption phase-outs

The Pease itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single.

Estate tax

The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).

Personal tax credits

The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.

Other personal deductions and exclusions

The following deductions and exclusions are extended through 2013:

  • Discharge of qualified principal residence exclusion;
  • $250 above-the-line teacher deduction;
  • Mortgage insurance premiums treated as residence interest;
  • Deduction for state and local taxes;
  • Above-the-line deduction for tuition; and
  • IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).

Business provisions

  • The Research Credit and the production tax credits, among others, will be extended through 2013;
  • 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
  • Work Opportunity Credit extended through 2013;
  • Bonus depreciation extended through 2013; and
  • The §179 deduction limitation is $500,000 for 2012 and 2013.

KKAJ will keep you informed as new information becomes available. As always, if you wish to discuss your specific situation, contact the KKAJ tax and accounting professionals at (818) 848-5585 or (661) 705-4222.