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2016 Year-End Tax Planning for Individuals

 

Although tax planning is a 12-month activity, year-end is traditionally the time to review tax strategies from the past and to revise them for the future. Year-end has also become a time when there is an increasing need to take a careful look at what’s changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes – as they impact each taxpayer’s unique situation—should not be overlooked. This is particularly the case during year-end 2016. Here are some of the many consideration that taxpayers should review as year-end 2016 approaches.

Data, including 2015 return

Year-end planning should start with data collection and a review of prior year returns. This includes losses or other carry-overs, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes. Alternative minimum tax liability also needs to be explored as well as potential liability for the net investment income tax and the Additional Medicare Tax.

Investments

Taxpayers holding investments toward the end of the year, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling (or like-kind exchanging). Balancing the existing tax rates within those considerations is part of that challenge: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.

Income caps on benefits

Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • itemized deductions
  • personal exemptions
  • education savings bond interest exclusion
  • maximum child’s income on parent’s return (form 8814):
  • medical savings account adjustments
  • education credits
  • student loan interest deduction
  • adoption credits
  • maximum Roth IRA contributions
  • maximum IRA contributions for individuals

PATH Act “extenders” and more

Year to year, the tax law changes; and with it, opportunities and pitfalls that need particular attention at year-end. In many cases, these changes are accounted for based on a tax-year period. Once the current tax year is over, there often is no going back for a “do-over” for a missed opportunity or to correct a costly mistake. Year-end 2016 is no exception to this rule.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted immediately before the start of 2016, permanently extended many tax incentives that were previously temporary, removing for the first time in many years the year-end concern over whether these incentives will be extended either retroactively for the current year or prospectively into the coming year. Not all of these “extenders” provisions were extended beyond 2016, however; and some were modified in the process. Others were extended for up to five years, deferring to “tax reform” a more lasting solution. Here’s a list of the major changes made by the PATH Act, especially focused on how they impact year-end transactions:

  • permanent American Opportunity Tax Credit
  • permanent teachers’ $250 “classroom” expense deduction
  • permanent state and local sales tax deduction election, in lieu of state income taxes
  • permanent exclusion for direct charitable donation of IRA funds of up to $100,000
  • permanent 100-percent gain exclusion on qualified small business stock
  • permanent conservation contributions benefits
  • five-year solar energy property
  • non-business energy property credit through 2016
  • fuel cell motor vehicle credit through 2016
  • mortgage insurance premium deduction through 2016
  • tuition and fees deduction through 2016

Life events

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. A change in filing status will affect tax liability. The possibility of significant changes and/ or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income, losses or deductions.

Retirement strategies

Taxpayers may want to take a look at a number of different provisions in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. Among others, these include contributions to employer plans, strategic use of IRAs and “required minimum distributions,” and timing Roth IRA conversions and reconversions to maximize your retirement nest egg.

Affordable Care Act compliance

The Affordable Care Act (ACA) imposes new requirements on individuals and tightens or eliminates some tax incentives. Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Acceleration or delay

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income acceleration/deferral. Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies. These may include:

  • sell appreciated assets
  • receive bonuses before January
  • sell outstanding installment contracts
  • redeem U.S. Savings Bonds
  • accelerate debt forgiveness income
  • avoid mandatory like-kind exchange treatment

Deduction acceleration/deferral. A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions, including those made in connection with:

  • January mortgage payment in December
  • tuition prepayment
  • estimated state taxes

A New Administration

When the new Administration moves into Washington in January 2017, it is clear that changes will follow. How these changes will impact upon your long-term tax situation remains to be developed. That, and an eventual groundswell for tax reform, make the future more difficult to read than in prior years. Nevertheless, in looking toward the future, you should not lose sight of the short-term tax dollars to be saved immediately through 2016 year-end strategies.

Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.

Tax Effects of Divorce or Separation

If you are divorcing or recently divorced, taxes may be the last thing on your mind. However, these events can have a big impact on your wallet. Alimony and a name or address change are just a few items you may need to consider. Here are some key tax tips to keep in mind:

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

SOURCE:  IRS Summertime Tax Tip 2016-23

How Selling Your Home Can Impact Your Taxes

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain. Here are ten tips to keep in mind if you sell your home this year.

1. Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.

2. Exceptions May Apply. There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication523 , Selling Your Home.

3. Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.

4. May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.

5. When You Must Report the Sale. You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions.

6. Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.

7. Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.

8. First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.

9. Home Sold at a Loss. If you sell your main home at a loss, you can’t deduct the loss on your tax return.

10. Report Your Address Change. After you sell your home and move, update your address with the IRS.

Time to Start Organizing Your Deductions

A deduction is an expenditure that will reduce your taxable income. There are two kinds of deductions: adjustments to income and itemized deductions. The adjustments to income are the better of the two, as they reduce adjusted gross income, or “AGI.” Itemized deductions reduce your taxable income.

 

First, we will look at some adjustments to income.

Educator expenses apply to K – 12th grade educators, and are limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized deduction.

A health savings account is an account set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse or dependents.

Moving expenses include qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses.

Self-employment tax. If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax.

Self-employed pension plans. You can deduct all qualified contributions to self-employed SEP, SIMPLE, and qualified plans.

Self-employed health insurance deduction. For this deduction you must be a sole proprietor or an active partner with net business income or a more than 2% shareholder of an S-corporation. The deduction is limited to net profit. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings is deductible and you will find this fee on your form 1099-INT. These penalties are typically incurred when you cash in a CD prematurely.

Alimony paid is deductible, but you must include the Social Security number of the recipient.

IRA deduction. Report only deductible traditional IRA contributions. Roth IRA contributions are not deductible.

Student loan interest. Up to $2,500 of the interest paid on a qualified student loan is deductible. There are income limitations. You will receive Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees deduction. Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.

 

Itemized Deductions

Medical expenses in excess of 10% of AGI are deductible as itemized deductions. If you or your spouse is age 65 or older by year end, you may deduct medical expenses in excess of 7.5% of AGI. Medical expenses are deductible in the year paid.

Taxes. State and local income taxes as well as real estate taxes for all property owned are deductible in the year paid. Most income taxes paid to a foreign country or US possession are either deductible as an itemized deduction or can be taken as a credit against tax.

 Mortgage interest paid is deductible, with limitations. Mortgage interest is deductible on up to two homes with a combined secured acquisition debt of $1.1 million (home equity debt is generally limited to $100,000). Points on the purchase or a refinance to make major improvements are deductible, but they may need to be amortized over the life of the loan.

 Charitable contributions must have written substantiation. If less than $250 is given at one time, the bank draft is sufficient. If the gift is $250 or greater, a written acknowledgement of receipt from the charity is required. In most situations, the charitable deduction is limited to 50% of AGI. Non-cash contributions are limited to the fair market value of the items contributed, if they are used items.

 Casualty and theft losses are subject to a $100 deduction and a reduction of 10% of AGI per casualty loss. A casualty is damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

 Miscellaneous deductions are subject to a reduction of 2% of AGI. They include expenses for generating and protecting income, job-related expenses, and unreimbursed employee business expenses.

 Other miscellaneous deductions are deductions that are not subject to the 2% of AGI reduction. Some examples are gambling losses up to the amount of gambling winnings, and special job-related expenses of the disabled.

Be sure to let your tax advisor know if you feel you could be eligible for any of these deductions.

As an enrolled agent (EA), your tax professional must take many hours of continuing education each year to stay up-to-date on the constant changes to the tax code. He or she had to pass a stringent three-part exam, or have relevant experience as a former IRS employee in order to qualify for the EA license.  It’s reassuring to know that your tax adviser is an EA: licensed by the US Department of the Treasury, with unlimited rights of representation before the IRS.

Mid-Year Tax Planning – 2014

Tax Season 2014 has come and gone and now it’s time to think about tax planning for tax year 2014.  Items which could impact your 2014 taxes include certain life events and expired tax provisions.

Certain Life Events

Have you recently had a birth, adoption or death in your family?  Have you gotten married, divorced, retired, or changed jobs this year? If any of these life events occur in 2014, they will have a potential impact on your 2014 taxes.  For example:

1)      For Qualifying Children under the age of 17, a tax credit up to $1,000 per qualifying child may be allowed (which may be refundable.)

2)      If you have retired (or are planning on retiring), we need to analyze how your change in income resulting from receiving IRA or pension distributions, and/or Social Security benefits will impact your tax liability.

3)      A divorce or marriage could impact your tax situation in multiple ways (for example, alimony paid or received, deductions for mortgage interest and real estate taxes on your home, QDROs (qualified domestic relations orders) and potential changes in the standard deduction and personal exemptions allowed.)

Expiring Tax Provisions

Given the current political climate, it is not known if or when an agreement on extending the Expiring Tax Provisions (“extenders”) may be reached. These extenders have made tax planning a challenge for both taxpayers and tax professionals. Therefore, if any of these provisions impact you, it is important that you contact me so that we may discuss the possible tax consequences:

1)      Sales Tax Deduction: Prior to 01/01/2014, taxpayers may have been eligible to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. This included the sales tax paid on the purchase of a vehicle. This deduction is no longer available to individuals.

2)      Mortgage Insurance Premiums: Prior to 01/01/2014, taxpayers may have been eligible to deduct the amounts paid for qualified mortgage insurance premiums along with their mortgage interest (subject to adjusted gross income limitations). Effective 01/01/2014, no deduction is allowed for these premiums paid or accrued after this date.

3)      Tax-free Distributions from Individual Retirement Plans for Charitable Purposes: Prior to 01/01/2014, taxpayers over 70 ½ may have been eligible to exclude from their gross income distributions up to $100,000 from their IRA to a qualified charitable organization. This permitted taxpayers to satisfy their Required Minimum Distribution (RMD) and not include the amount in their income. As this reduced their Adjusted Gross Income (AGI), which favorably impacted the taxable amount of Social Security benefits received, this was a large tax advantage for taxpayers.This special distribution provision is not available for distributions after 2013.

4)      Qualified Principal Residence Debt Exclusion:  Prior to 01/01/2014, the discharge of principal residence debt (qualified mortgage on a taxpayer’s main home incurred to buy, build or substantially improve his or her main home) was generally excluded from gross income. As many taxpayers are still experiencing financial difficulties resulting inforeclosures, short sales or debt forgiveness on their primary residence, the tax ramifications for 2014 will have major tax consequences.

Other Steps to Consider Before the End of the Year

You should thoroughly review your situation before year end to determine the best tax strategies for 2014 and the impact on 2015 as well. Accelerating income/deferring deductions into 2014 or deferring income/accelerating deductions to 2015 are just a couple of approaches that could benefit you.

If you have any foreign assets, be aware that there are reporting and filing requirements for those assets. Noncompliance carries stiff penalties.

Please call us with any questions you may have.