When should you adjust your income tax withholding?

w4If you got a big tax refund or owed the IRS a lot of money when you filed your 2014 tax return, it may be time to adjust your income tax withholding.

Many people like to receive a refund from the IRS, thinking of it as a form of forced saving. If you’re of this opinion, that’s fine. But too big a refund means you’re wasting your money, giving an interest-free loan to the government.

On the other side, if you underpay your taxes by more than $1,000 and don’t meet certain exceptions, you could be hit with a penalty.

Adjusting your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Or you can increase withholding by specifying an extra dollar amount to be withheld from every paycheck.

When reviewing your 2015 tax payments, keep a couple of general rules in mind. Generally, you must pay (through withholding or quarterly estimated payments) at least 100% of last year’s tax liability (110% if your prior year’s adjusted gross income is over $150,000), or at least 90% of what you’ll owe for this year.

However you do it, you should adjust your withholding to match the taxes you expect to owe. If you need assistance figuring out your 2015 tax payments, give us a call.

New depreciation limits for 2015 business vehicle purchases

The IRS has published depreciation limits for business vehicles first placed in service this year. The limits for passenger autos remain the same as the 2014 limits, but the second year limit for light trucks and vans is $100 higher.

50% bonus depreciation is no longer allowed for most business equipment purchases, including vehicles.

Here’s a quick review of the limits for 2015.minivan-41476__180 For business cars first placed in service this year, the first-year depreciation limit is $3,160. After year one, the limits are $5,100 in year two, $3,050 in year three, and $1,875 in all following years.

The 2015 first-year depreciation limit for light trucks and vans is $3,460. Limits for year two are $5,600, in year three $3,350, and in each succeeding year $1,975.

For details relating to your 2015 business vehicle purchases, contact our office.

Tax-exempt accounts that can help you or a family member with disabilities

The “tax extenders” legislation that became law in December 2014 included the “Achieving a Better Life Experience Act” (also called the ABLE Act). This law provides for tax-exempt accounts that can help you or a family member with disabilities pay for qualified expenses related to the disability. These “ABLE accounts” are exempt from income tax although contributions to an account are not deductible on your federal income tax return. ABLE accounts are generally not means tested and some can provide limited bankruptcy protection.

You or a family member are eligible to open an ABLE account if:download

  1. You’re entitled to social security disability benefits due to blindness or other disability, and that blindness or disability occurred before age 26; or
  2. You file a disability certification with the IRS for the tax year.

Annual contributions to an ABLE account are limited to the amount of the annual gift tax exclusion ($14,000 for 2015). Distributions are tax-free as long as they are less than your qualified disability expenses for the year. The list of qualified disability expenses includes housing, education, employment training/support, health prevention/wellness services, financial management, legal fees, and funeral expenses. Other expenses are also approved under the regulations.

Distributions exceeding qualified disability expenses are included in taxable income and are generally subject to a 10% penalty tax. Distributions can be rolled over to another ABLE account for another qualified beneficiary and beneficiaries can be changed between family members. Funds in the account can earn interest or dividends and are not subject to federal income tax as long as distributions are used for qualified disability expenses. ABLE accounts do not have a “use it or lose it” feature and funds can carry over to future years.

The balance remaining in the account after the beneficiary passes away can be used to reimburse state Medicaid payments made on behalf of the beneficiary after the account was established. The remainder goes to the deceased’s estate or to another qualified designated beneficiary. After-death distributions that are not used for qualified disability purposes are subject to income taxes, but not the 10% penalty.

If you are thinking many of these rules sound familiar, you’re correct. ABLE accounts are modeled on 529 college savings accounts. Give us a call so we can help you make the most of this new opportunity.

3 things you should consider if you are lending money to family

money-652560__180Lending to family members probably dates back to the invention of money. The IRS entered the mix a great deal later, but it now looms large in the equation. Tax problems can arise when you first lend money, as you’re being repaid, or if you’re not repaid. The issues usually involve imputed income, gift tax, or bad debts.

1. Imputed income. Imputed income is revenue presumed earned but neither recognized nor received by the alleged recipient. The IRS may impute interest on a loan at the “applicable federal rate” (AFR) when a lower rate (or no interest) is charged. The agency then assesses tax on the excess of the imputed interest over the amount required by the terms of the loan.

2. Gift tax issue. When the IRS imputes phantom interest, it also creates phantom taxable gifts. The imputed interest is treated as though the borrower actually paid it to the lender, whereupon the lender returned it to the borrower as a gift. Since the lender “constructively received” the additional interest, he or she owes income tax on it. Since the lender then presumably gave the interest back to the borrower, he or she also owes gift tax on it, unless an exclusion or credit applies.

3. Bad debt deduction. Normally, a loan that goes bad is deductible, either against ordinary income (if made for a business purpose) or as a short-term capital loss. However, when the defaulting party is related, the IRS may demand clear and convincing evidence that the original loan was not actually a gift. Once a loan is recharacterized as a gift, no bad debt deduction will be allowed if the loan isn’t repaid, and the lender also may owe gift tax on the principal unless an exclusion or credit applies.

Interest need not be charged and will not be imputed on a family loan of $10,000 or less unless the loan directly relates to purchasing or carrying income-producing assets. Without a written document imposing interest at the applicable federal rate (AFR) or higher, the loan probably will be considered a gift and thus will not be deductible if not repaid.

Interest will be imputed on a family loan over $10,000 if the stated rate is below the AFR. However, unless the principal exceeds $100,000, imputed interest will be limited to the borrower’s annual net investment income, and no interest will be imputed if that income is $1,000 or less.

Obviously, lending to relatives can create unintended tax consequences. You should always have a written loan agreement on family loans to document the transaction for the IRS. Please contact us for guidance before you make any family loans.

What should you as a business owner consider when you are faced with this important decision?

 to grow or not to grow

There can be opportunity and profit in growth, but there can be perils and risks as well.

► BENEFITS. First, analyze the potential benefits of expanding your business.

  • The business can often achieve attractive economies of scale from increased buying power and operational efficiency. This can often reduce your cost structure and improve your margins. Growing your margins at a faster rate than your sales growth can achieve remarkable financial results.
  • Growing organizations can often attract more skilled employees who prefer larger organizations with more opportunities for promotion and development.
  • Growing organizations generally have a greater opportunity to go public.

► RISKS. Next, take a look at the risks your business faces if you expand operations.

  • Larger organizations typically require more elaborate systems and tend to be less personal than smaller companies. As it grows, the business will probably have a more rigid management structure.
  • Increased complexity can result as operational issues tend to expand faster than anticipated. Operating remote locations can be very challenging.
  • Loss of control may be a consequence of expanded operations. Growing companies face significant integration changes, and developing capable managers can be difficult.

For help in analyzing your company’s situation, please talk to us. We can help you weigh the benefits and risks of expanding your business.

April 15th is quickly approaching … Here’s what you need to know

Wednesday, April 15, is the deadline for filing certain returns and taking certain tax-related actions. Here are the major deadlines:calendar-148311__180

  • Filing 2014 income tax returns for individuals. If you cannot file your return by this deadline, be sure to file an extension request by April 15. The automatic extension (you don’t need to explain to the IRS why you need more time) gives you until October 15, 2015, to file your return. An extension does not, generally, give you more time to pay taxes you still owe. To avoid penalty and interest charges, taxes must be paid by April 15.
  • Filing 2014 partnership returns for calendar-year partnerships.
  • Filing 2014 income tax returns for calendar-year trusts and estates.
  • Filing 2014 annual gift tax returns.
  • Making 2014 IRA contributions.
  • Paying the first quarterly installment of 2015 individual estimated tax.
  • Amending 2011 individual tax returns (unless the 2011 return had a filing extension).
  • Original filing of 2011 individual income tax return to claim a refund of taxes. Some taxpayers have tax refunds due them for prior years, and unless a return is filed to claim the refund by the three-year statute of limitations, the refund is lost forever.

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Contact us today and let Preferred Pay provide you with a road-map to hassle-free payroll processing.

* Preferred Pay is a payroll service offered by McFadyen & Sumner, CPAs PA