Back to top

Blog

Welcome to our new Blog. We will post updates on a regular basis starting January 2017. Please come back often and see if you find our Blog interesting, thanks !

Six Overlooked Tax Breaks for Individuals

Posted by Dieter Posted on Mar 04 2017
 

Six Overlooked Tax Breaks for Individuals

 

 

Confused about which credits and deductions you can claim on your 2016 tax return? You're not alone. Here are six tax breaks that you won't want to overlook.

1. State Sales and Income Taxes

Thanks to the PATH ACT of 2015, taxpayers filing their 2016 returns can deduct either state income tax paid or state sales tax paid, whichever is greater.

Here's how it works. If you bought a big-ticket item like a car or boat in 2016, it might be more advantageous to deduct the sales tax, but don't forget to figure any state income taxes withheld from your paycheck just in case. If you're self-employed, you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2015 tax return in 2016, you can include the amount when you itemize your state taxes this year on your 2016 return.

2. Child and Dependent Care Tax Credit

Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent--such as an elderly parent--who is physically or mentally unable to care for him or herself. The credit is worth a maximum of $1,050 or 35 percent of $3,000 of eligible expenses per dependent.

3. Job Search Expenses

Job search expenses are 100 percent deductible, whether you are gainfully employed or not currently working--as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses greater than two percent of your adjusted gross income (AGI). Also, you cannot deduct job search expenses if you are looking for a job for the first time.

4. Student Loan Interest Paid by Parents

Typically, a taxpayer is only able to deduct interest on mortgage and student loans if he or she is liable for the debt; however, if a parent pays back their child's student loans that money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.

5. Medical Expenses

Most people know that medical expenses are deductible as long as they are more than 10 percent of Adjusted Gross Income (AGI) for tax year 2016. What they often don't realize is which medical expenses can be deducted, such as medical miles (19 cents per mile in 2016 and 17 cents per mile in 2017) driven to and from appointments and travel (airline fares or hotel rooms) for out of town medical treatment.

Other deductible medical expenses that taxpayers might not be aware of include health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.

If you're self-employed, you may be able to deduct medical, dental, or long-term care insurance. Even better, you can deduct 100 percent of the premium. In addition, if you pay health insurance premiums for an adult child under age 27, you may be able to deduct those premiums as well.

6. Bad Debt

If you've ever loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify, however, the debt must be totally worthless in that there is no reasonable expectation of payment.

Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.

Are you getting all of the tax credits and deductions that you are entitled to?

Maybe you are...but maybe you're not. Why take a chance? Call the office today and make sure you get all of the tax breaks you deserve.

Retirement & Taxes

Posted by Dieter Posted on Feb 08 2017

RETIREMENT AND TAXES: SHOULD YOU PAY NOW OR LATER?

When saving for retirement, you have a number of options for how you’ll pay taxes: now, later or both. Just as you diversify your investments, diversifying how you save for retirement from a tax perspective is also important.

Here’s why: When you save in both taxable and non-taxable accounts, you set yourself up to have more money to spend when you’re actually in retirement. And you can better manage how you withdraw your money annually to avoid jumping into higher tax brackets.

What Are My Savings Options?

  1. Pay no tax now, but pay in retirement. This includes savings options like employer-sponsored plans, such as 401(k)s and 403(b)s; simplified employee pensions (SEPs); and traditional individual retirement accounts (IRAs).

    These “qualified” accounts allow you to save pretax money now, which will grow tax deferred. However, you will pay tax on the money you take from your account (known as a distribution). In fact, when you retire (or turn 70½, depending on the type of account), you’ll be forced to take annual distributions known as Required Minimum Distributions (RMDs).

    There are limits to how much you can contribute to each of these types of accounts in a given year. In addition, unless an exception applies, you’ll pay a penalty if you take money out of these accounts prior to turning 59½.
  2. Pay taxes now, not later. These types of accounts are frequently referred to as Roth accounts. Roth 401(k)s or Roth IRAs allow you to save with after-tax dollars now. You’re not taxed on the growth of your money; and when you take it in retirement, you won’t pay tax either.

    There are also limits to how much you can contribute to these accounts yearly, and if you make too much money, you can’t contribute to some. You also may pay a penalty if you take money out of these accounts prior to 59½.
  3. Pay taxes now, as your money grows and later. Non-qualified investments—basically anything that’s not in a tax-qualified account like a 401(k)—are another option. You invest money that has already been taxed in non-qualified investments. Depending on the investment, you may be taxed on earnings or distributions along the way. And then when you sell those investments, you will pay tax on any increase in value. For instance, let’s say you invest $1,000 in a mutual fund today and then sell it 10 years from now for $1,700. The $700 you made will be treated as capital gain income the year you sell it, and the capital gains tax bracket is based on the ordinary income tax bracket you are currently in.

    There is no limit on the amount of non-qualified investments you make in a year, and you can get your money anytime without paying a penalty.

Other Ways to Supplement Retirement Income

The primary purpose of life insurance is for the death benefit; however, because whole life insurance grows tax free and is guaranteed never to go down, the cash value that has grown in a life insurance policy can also be a great option to help supplement retirement income. This can give you added flexibility in years when the market is down or if you need to reduce your taxable income in a given year.

So What Option Is Best for You?

The answer to the question is different for everyone’s unique situation, but it’s a good idea to include a mix of different accounts to give yourself flexibility and greater spending power in the future. After all, you may not be in a lower tax bracket when you retire, and tax brackets are currently at historical lows. So while pretax retirement accounts can be a great start, they shouldn’t be your only savings.

Call us to have your specific situation analyzed and find the best solution.

Filing Deadlines Changed

Posted by Dieter Posted on Feb 03 2017

FILING DEADLINES

 

Some  filing  due  dates  have  changed,  starting  with  2016  returns  filed  in  2017.

 

  • Employers  are  required  to  file  W-2s  with  the  federal  government  by  Jan.  31

up  from  the  prior  deadlines  of  Feb.  28  for  paper  returns  and  .March  31  for  c-filings.

This  earlier  deadline  matches  the  date  for  sending  copies  of  the  forms  to  employees.

 

  • The  Jan.  31  due  date  also  applies  to  1099s  reporting  nonemployee  compensation.

 

  • Returns  of  partnerships  are  due  2%  months  after  year-end...March  15

for  calendar  year  firms.  Those  needing  more  time  can  request  a  six-month  extension.

The  due  date  for  most  regular  corporations  is  3 1/2  months  after  year-end...

generally  April  15  for  calendar  year  firms...but  they  can  request  a  five-month  extension.

 

  • The  deadline  for  S corporations  with  a  June  30  fiscal  year  hasn't  changed.

 

  • The  filing  date  for  owners  of  foreign  accounts  is  moved  up  to  April  15.

Also,  taxpayers  for  the  first  time  are  able  to  request  an  additional  six  months  to  file.

In  the  past,  U.S.  owners  of  these  accounts  had  until  June  80  to  file  FinCEN  Form  114

to  report  them  if  the  total  value  exceeded  $10,000  at  any  time  during  the  prior  year.

Business Taxes - Auto Mileage

Posted by Dieter Posted on Feb 03 2017

BUSINESS  TAXES    

 

  • The  2017  standard  mileage  rate  for  business  driving  falls  to  53.5c  a  mile, a  0.50c  drop.
  • The  rate  decreases  to  17c  a  mile  for  travel  for  medical  purposes

and  job-related  moves. 

  • But  the  rate  for  charitable  driving  remains  at  14c  per  mile.

 

  • $510,000  of  assets  can  be  expensed  in  2017,  and  this  figure  phases  out

dollar  for  dollar  once  over  $2,030,000  of  assets  are  put  into  service  during  the  year.

  • Two  business  tax  breaks  first  apply  on  2016  returns  filed  in  2017:
  1. Small  start-ups  can  opt  to  claim  $250J000  of  R&D  costs  to  offset  payroll  taxes

instead  of  their  regular  income  tax  liability.  The  election  is  available  to  companies

in  business  for  five  years  or  less  that  have  gross  receipts  under  $5  million.

Businesses  that  hire  the  long-term  unemployed  get  a  tax  credit.

  1. The  work  opportunity  tax  credit  is  expanded  to  cover  employers  that  hire  people

who've  been  out  of  work  for  27  weeks  or  more  and  received  unemployment  benefits.

The  40%  credit  on  the  first  $6,000  in  wages  applies  for  those  beginning  work  after  2015.

2016 Filing Season Begins on January 23, 2017

Posted by Dieter Posted on Jan 23 2017

IRS Announces that 2016 Filing Season Begins on January 23, 2017

The IRS notified taxpayers and practitioners that the 2017 individual income tax filing season (for 2016 Forms 1040) will open on January 23, 2017. Because Emancipation Day, a holiday in Washington, D.C., will be observed on Monday, April 17, the normal filing deadline will be pushed back to Tuesday, April 18, 2017.

The 2017 individual income tax filing season (for 2016 Forms 1040) will open on Monday, January 23, 2017 (News Release IR-2017-1). The IRS expects more than 153 million tax returns to be filed in 2017. More than four out of five returns are expected to be filed electronically, with a similar proportion of refunds issued through direct deposit.

While 2016 tax returns will not be processed before January 23, 2017, taxpayers who are e-filing can still submit returns to their software provider before that date, in which case the provider will hold the returns and transmit them to the IRS when the IRS's processing systems open. The IRS also reminds taxpayers that they don't have to wait until January 23 to contact their tax professional.

Observation: As a practical matter, most taxpayers will have to wait until they receive one or more Forms W-2 and/or 1099 before they can prepare and file their return. While the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) revised the deadline for filing Form W-2 and certain types of Forms 1099 with the IRS, the revised deadline also affects the Form W-2 copy filed with the Social Security Administration. The deadline for providing electronic or paper Forms W-2 to employees, and for providing Forms 1099 to payees (including recipients of nonemployee compensation), remains January 31; specifically, Tuesday, January 31, 2017, for 2016 forms.

Filing Deadline Pushed back for Emancipation Day

According to Reg. Sec. 301.7503-1, when the deadline for filing tax returns or paying tax falls on a Saturday, Sunday, or legal holiday, the deadline is delayed until the next business day. For this purpose, the term "legal holiday" means legal holidays in the District of Columbia.

Paper tax returns are treated as timely filed if the envelope is properly addressed, postmarked, and deposited in the mail by the due date. Electronically filed tax returns are not considered filed until the IRS acknowledges acceptance of the electronic portion of the tax return for processing. The IRS accepts individual income tax returns electronically only if the taxpayer signs the return using a Personal Identification Number (PIN). If the provider transmits the electronic portion of a return on or shortly before the due date, and the IRS rejects it but the provider and the taxpayer comply with the requirements for timely resubmission of a correct return, the IRS considers the return timely filed.

April 15 falls on a Saturday in 2017, and while Emancipation Day in the District of Columbia is Sunday, April 16, 2017, it will be observed on Monday, April 17, 2017. This in means that taxpayers will have until Tuesday, April 18, 2017, to file their 2016 tax returns and pay any tax due.

Delayed Receipt of Some Tax Refunds

In 2016, the IRS issued 111 million individual tax refunds, and the IRS expects more than 70 percent of taxpayers to receive a refund in 2017. However, a new law requires the IRS to hold refunds claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until February 15. This additional period is due to several factors, including banking and financial systems needing time to process deposits, as well as the IRS confirming the identities and wages and withholdings of those claiming the credit.

While the IRS will begin releasing EITC and ACTC refunds on February 15, it cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of February 27. The IRS wants taxpayers to know it will take additional time for their refunds to be processed and for financial institutions to accept and deposit the refunds to their bank account. Furthermore, many financial institutions do not process payments on weekends or holidays, which can affect when refunds reach taxpayers. For example, the President's Day holiday weekend may affect the receipt of the taxpayer's refund.

Where's My Refund? irs.gov and the IRS2Go phone app will be updated with projected deposit dates for early EITC and ACTC refund filers a few days after February 15. Taxpayers will not see a refund date on Where's My Refund? through their software packages until then. The IRS, return preparers, and software providers will not have additional information on refund dates, so Where's My Refund? remains the best way to check on the status of a refund.

Form 1065 Filing Deadline One Month Earlier in 2017

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 made an important change to the due date for partnership tax returns, effective for tax years beginning after 2015. Now, partnerships are required to file their returns by the 15th day of the third month following the close of a tax year. For calendar year partnerships, the due date for the 2016 Form 1065 will be March 15, 2017, instead of April 15. The Act did not change the filing deadlines for S corporation returns, which means that partnership and S corporation returns share the same due date.

The March 15 deadline for calendar year partnerships and multi-member LLCs taxed as partnerships should make it a little easier for individuals who are partners or LLC members to file their tax return by (or soon after) the April 18, 2017, filing deadline.

IRA Early Withdrawal Penalty

Posted by Dieter Posted on Jan 23 2017

While Sympathetic, Tax Court Finds No Financial Hardship Exception to IRA Early Withdrawal Penalty

The Tax Court held that distributions from a taxpayer's IRA in 2011 to support herself and her children, after she was laid off from her long-time job and was unable to find another one, were subject to the Code Sec. 72(t) early withdrawal penalty tax. While "sympathetic to her financial straits," the court found that that none of the statutory exceptions were available to the taxpayer, and thus the distributions were subject to the Code Sec. 72(t) penalty tax. Elaine v. Comm'r, T.C. Memo. 2017-3.

Background

In June 2009, Candace Elaine was laid off from her job of 23 years as a call center manager with a mutual fund company. At that time and during the year in issue, she was a single mother, raising two daughters on her own without support from anyone else. On account of the economic downturn, she was unable to find another job, and remained unemployed for several years.

To provide for her own subsistence and that of her daughters, Elaine made a series of withdrawals from her individual retirement account (IRA). During 2011, at which time she was not yet age 59she received four distributions totaling $119,000 from that account. For each distribution, the bank issued Elaine a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. According to the IRS's wage and income transcript for Elaine's 2011 tax year, each Form 1099-R reported that the entire distribution was taxable and was an early distribution with "no known exception." Each Form 1099-R also reflected federal income tax withheld.

Elaine prepared and filed timely her Form 1040 for 2011. She reported taxable IRA distributions of $119,675, among other items of income (including unemployment compensation) and loss. After itemized deductions totaling $45,148 and exemptions totaling $11,100 (for herself and her daughters), Elaine reported taxable income of $33,184 and total tax of $4,119. She did not report the additional tax on early distributions from her IRAs, and did not attach Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to the return. After reporting her federal income tax withheld, Elaine claimed an overpayment of $4,849, which was refunded to her in May 2012.

On June 3, 2013, the IRS proposed changes to Elaine's 2011 return attributable to her not reporting any additional tax on her IRA distributions. Elaine timely responded to the IRS and explained that, because the IRA was her only means of income to pay bills and support herself and her daughters, she thought that the distributions from her IRA would fall under a financial hardship exception. In subsequent correspondence to the IRS, Elaine continued to plead financial hardship.

The IRS subsequently issued a notice of deficiency which assessed a Code Sec. 72(t) 10 percent penalty tax on the 2011 distributions from Elaine's IRA, as well as a substantial understatement of tax penalty. Elaine timely petitioned the Tax Court. She stated that she believed that the amounts withheld from her IRA distributions included a "10% federal and a 10% state penalty," and asked that she not be held liable for the tax and the penalty on the ground that, during 2011, she was experiencing financial hardship.

Analysis

Taxpayers can withdraw assets from their traditional IRA at any time. However, distributions before age 59are considered early distributions. Generally, an individual who takes an early distribution from a traditional IRA must pay a 10 percent additional penalty tax. Under Code Sec. 72(t)(1), the 10 percent penalty tax applies only to the part of the distribution that the individual must include in gross income, and is in addition to any regular income tax on the amount.

However, an individual who receives a distribution before age 59may not be subject to the penalty tax under several circumstances, such as if:

  • The individual has unreimbursed medical expenses that are more than 10% of his/her AGI.
  • The distribution is not more than the cost of medical insurance due to a period of unemployment.
  • The individual is totally and permanently disabled.
  • The individual is the beneficiary of a deceased IRA owner.
  • The individual is receiving distributions in the form of an annuity.
  • The distribution is used for qualified higher education expenses.
  • The distribution is used to buy, build, or rebuild a first home.
  • The distribution is due to an IRS levy on the plan.

Before the Tax Court, Elaine testified that the distributions were essentially her only means of income to pay bills and to support herself and her daughters. She indicated that she used a portion of the distributions to pay monthly medical insurance premiums and her student loan debt. While the court noted that the relevant statutory exceptions to the 10 percent penalty tax include distributions to an unemployed individual for health insurance premiums, as well as distributions for qualified higher education expenses, it found Elaine's testimony regarding the insurance premiums and student loan debt to be too general, and noted that she was unable to produce any documentation substantiating her testimony.

After concluding that Elaine took withdrawals from her IRA because of financial hardship, the Tax Court repeated what it has held on many other occasionsthat there is no exception under Code Sec. 72(t) for financial hardship (e.g., see Dollander v. Comm'r, T.C. Memo. 2009-187; Milner v. Comm'r, T.C. Memo. 2004-111; and Gallagher v. Comm'r , T.C. Memo. 2001-34). While "sympathetic to taxpayer's financial straits," the Tax Court stated that it could not disregard the express and unambiguous wording of the statute. Since none of the enumerated statutory exceptions applied to Elaine, all distributions from her IRA in 2011 were subject to the Code Sec. 72(t) additional penalty tax.

However, the Tax Court also held that Elaine was not liable for the substantial understatement of tax penalty under Code Sec. 6662. This was based on the (1) common misunderstanding among taxpayers that financial hardship is an exception to the Code Sec. 72(t) penalty tax; and (2) the fact that, "for whatever reason," the IRS closed an examination of Elaine's 2010 tax return for the same Code Sec. 72(t) issue without change. Because of that, Elaine "proceeded under that misunderstanding not only with respect to 2011 but apparently with respect to 2012 as well."