How to calculate the amount of your loss and ease financial burdens when violent weather wreaks havoc.

Violent weather can wreak emotional and financial havoc. If your home, vehicle, or other personal property is damaged or destroyed by a sudden, unexpected casualty, an itemized tax deduction may help ease the financial burden.

 
In most cases, you claim a casualty loss in the taxable year the calamity strikes. However, if you’re in a federally declared disaster area, you have the option of amending your prior year return. Either way, to receive the maximum benefit you’ll need to calculate the amount of your loss. Here’s how.

 
File an insurance claim. If your property is insured, file a timely claim.

 
Get an appraisal. An appraisal determines the decline in fair market value caused by the casualty. Tax rules require that you measure the difference between what your home or property would have sold for before the damage and the probable sales price afterward.

 
Establish basis. Generally, adjusted basis is what you originally paid for the damaged property, plus improvements. If your records were lost in the casualty, recreate them using reasonable estimates or the best information you have.

 
Keep receipts for repairs. In some situations, repairs you make to restore your property to pre-casualty condition can be used as an indicator of the decline in the fair market value.

 
Remember, you’re not alone. In the aftermath of a casualty, we’re here to help you resolve the tax issues.

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FSA or HSA? Choosing between health accounts

 

Are you confused about your choices for paying medical expenses under your employer’s benefit plan? Here are differences between two types of commonly offered accounts: a health savings account (HSA) and a health care flexible spending account (FSA).

 
Overview. An FSA is generally established under an employer’s benefit plan. You can set aside a portion of your salary on a pretax basis to pay out-of-pocket medical expenses. An HSA is a combination of a high-deductible health plan and a savings account in which you save pretax dollars to pay medical expenses not covered by the insurance.

 
Contributions. For 2016, you can contribute up to a maximum of $2,550 to an FSA. Typically, you have to use the funds by the end of the year. Why? Unused amounts are forfeited under what’s commonly called the “use it or lose it” rule. However, your employer can adopt one of two exceptions to the rule.
If you are single, the 2016 HSA contribution limit is $3,350 ($6,750 for a family). You can add a catch-up contribution of $1,000 if you are over age 55. You do not have to spend all the money you contribute to your HSA each year. You can leave the funds in the account and let the earnings grow.

 
Earnings. FSAs do not earn interest. Your employer holds your money until you request reimbursement for qualified expenses. HSAs are savings accounts, and the money in the account can be invested. Earnings held in the account are not included in your income.

 
Withdrawals. Distributions from both accounts are tax- and penalty-free as long as you use the funds for qualified medical expenses.

 
Portability. Normally, your FSA stays with your employer when you change jobs. Your HSA belongs to you, and you can take the account funds with you from job to job. That’s true even if your employer makes contributions to your HSA for you.

 
Because you generally can’t contribute to both accounts in the same year, understanding the differences can help you make a decision that best fits your circumstances. Contact us for help as you consider your benefit choices.

 

 

 

#Documentation is the key to #business #expense #deductions

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

 
Case 1: Insufficient records
In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

 
The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.” (TC Memo 2016-158)

 
Case 2: Documents destroyed
In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

 
The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

 
There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to ”undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”

 
The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

 
Be prepared
Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

Returning home as an adult

Are you thinking of returning to your childhood home to live with your parents? Although heading home after graduation or a divorce may feel like a setback, a temporary return to living with your parents can present opportunities to improve your financial situation.

 
For example, living with your parents means you can share the cost of rent, utilities, and food, resulting in reduced expenses. By establishing a realistic budget, you can make the most of these lower costs, and repay student loans or other debt more quickly. You can also build up savings for emergencies and long-term goals, such as buying a home of your own. A sound plan is to avoid additional debt while you’re working toward your financial independence. You also might consider paying expenses in cash to reduce your reliance on credit and help you stick to your budget.

 
For best results, establish clear expectations for both you and your parents before you move in together. Consider a written agreement that outlines the financial responsibilities of everyone in the household, and what the consequences will be for not living up to your promises. In addition, determine specific milestones you want to reach before you move out, and communicate them clearly. Goals could include accumulating $5,000 in savings, or reaching a six-month work anniversary at your job.

 
Contact us for suggestions about how to create an achievable financial plan.

 

 

Designate beneficiaries to avoid unintended consequences

After your death, the disposition of retirement accounts, life insurance policies, annuities, and accounts at financial institutions are governed by beneficiary designations. If those designations are outdated, unspecific, or wrong, your assets may not be distributed the way you would like. Here are items to consider.

Be specific and stay current. When you name a beneficiary, your assets can pass directly to that person or entity without going through a legal process called probate. Update the designations for life events such as divorce, remarriage, births, deaths, job changes, and retirement account conversions.

 

Think about unexpected outcomes. Be alert for the effect of taxes and unintended consequences. For example, if the money in your accounts is distributed directly to your heirs, they may be stuck with a large unexpected tax bill. For wealthier heirs, estate tax may also play a role. In 2016, the estate tax exclusion is $5.45 million and the top estate tax rate is 40%. Another concern: If one of your designated beneficiaries is disabled, government benefits may be reduced or eliminated by the transfer of assets. You may want to consult an attorney to establish a special needs trust to ensure your loved one is not adversely affected.

 

Name contingent beneficiaries. If your primary beneficiary dies or is incapacitated, having a backup, or contingent, selection will ensure that your assets are properly distributed. In some cases, a primary beneficiary may choose to disclaim, or waive, the right to the assets. In that case, contingent beneficiaries can step up to primary position.

 

Practice good recordkeeping. Keep your beneficiary designation forms in a safe location, and maintain current copies with your financial institution, attorney, or advisor.

Beneficiary designations are an important part of estate planning. Contact us for more information.

If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?

 

 

Investors
Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.
That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.

 
Traders
Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.
Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.

 
Passing the trader test
What does it take to successfully meet the test for trader status? The answer is twofold:
1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.
2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.

 
If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.

Work-related education costs may be deductible

Are you going to school this fall to earn an advanced degree or to brush up on your work skills? If so, you might be able to deduct what you pay for tuition, books, and other supplies.

 

If you’re self-employed or working for someone else, you may be able to claim a deduction for out-of-pocket educational costs if the training is necessary to maintain your skills or is required by your employer.

Just remember that even when the education meets those two tests, if you’re qualified to work in a new trade or business when you’ve completed the course, your expenses are personal and nondeductible. That’s true even if you do not get a job in the new trade or business.

Work-related education expenses are an itemized deduction when you’re an employee and a business expense when you’re self-employed. You may also be eligible for other tax benefits, such as the lifetime learning credit.

For more information, please contact our office.