#TaxTipTuesday-Why making annual exclusion gifts before year end can still be a good idea

A tried-and-true estate planning strategy is to make tax-free gifts to loved ones during life, because it reduces potential estate tax at death. There are many ways to make tax-free gifts, but one of the simplest is to take advantage of the annual gift tax exclusion with direct gifts. Even in a potentially changing estate tax environment, making annual exclusion gifts before year end can still be a good idea.

 
What is the annual exclusion?
The 2016 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free without using up any of your $5.45 million lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $28,000 per recipient. The gifts are also generally excluded from the generation-skipping transfer tax, which typically applies to transfers to grandchildren and others more than one generation below you.

 
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can also avoid gift and estate taxes.

 
Making gifts in 2016
The exclusion is scheduled to remain at $14,000 ($28,000 for split gifts) in 2017. But that’s not a reason to skip making annual exclusion gifts this year. You need to use your 2016 exclusion by Dec. 31 or you’ll lose it.

 
The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your daughter this year, you can’t add $14,000 to your 2017 exclusion to make a $28,000 tax-free gift to her next year.

 
While the President-elect and Republicans in Congress have indicated that they want to repeal the estate tax, it’s uncertain exactly what tax law changes will be passed, since the Republicans don’t have a filibuster-proof majority in the Senate. Plus, in some states there’s a state-level estate tax. So if you have a large estate, making 2016 annual exclusion gifts is generally still well worth considering.

 
We can help you determine how to make the most of your 2016 gift tax annual exclusion.

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#TaxTipTuesday- There’s Still Time to Benefit on Your 2016 Tax Bill by Buying Business Assets

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016.

 
Section 179 deduction
The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.

 
The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $200,010,000.

 
Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.

 
Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

 
First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture.

 
Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

 
Contemplate what your business needs now
If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.

Are you changing jobs? Here are tax-smart options for your old retirement plan

There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:

 
1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.

 
2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.

 
3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.

 
If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.

 
Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.

 
There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.

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.

Putting your home on the market? Understand the tax consequences of a sale

As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

 
Gains
If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

 
Losses
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

 
Second homes
If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

 
Learn more
If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.

Here’s What to Consider as You Make Asset Purchasing Decisions This Year

 

Did you know that a recent law made changes to the section 179 expensing election for 2016? These modifications took effect as of January 1. Here’s what to consider as you make asset purchasing decisions this year.
● Change #1. Beginning in 2016, section 179 is indexed for inflation. This year, the basic section 179 expensing limit will be $500,000. That limit is reduced dollar-for-dollar once your purchases exceed $2,010,000.
● Change #2. The definition of “section 179 property” now permanently includes computer software and real property such as qualified leasehold and retail improvements and restaurant property. That means you can elect to use section 179 expensing when you purchase those assets.
● Change #3. You may be able to deduct more of qualified leasehold and retail improvements and restaurant property in 2016. Beginning this year, the law eliminated the $250,000 cap on the amount of section 179 you could claim for this property.
● Change #4. Beginning in 2016, air conditioning and heating units are eligible for section 179 expensing.

 
Contact us for help in maximizing the section 179 deduction for your business asset purchases.

QSB stock offers 2 valuable tax benefits

 

By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:

 
1. Tax-free gain rollovers. If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.

 
2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.

 
The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).

 
Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.

 
Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, such as your risk tolerance, time horizon and overall investment goals.

 

 

 

 

 

 

 

 

Are you exposing your business to these catastrophic risks?

Is your business adequately diversified? Relying on too few customers, vendors, or key employees can leave you open to risks that can be catastrophic.

 

Here’s what to consider.

 

Customers. Do you depend on just a few customers for the majority of your sales? What will happen to your business if your largest customer requests a major price reduction, starts buying from your competitor, or is bought out? Even if your company sells to many customers, you aren’t adequately diversified if most of them are in the same industry. This is known as concentration risk. Reduce it by targeting customers in different industries.

 
Vendors. How many suppliers do you rely on for the smooth operation of your business? Do you have a backup option if a key vendor raises prices, can’t provide enough product, or goes out of business?

 
Employees. Do you count on the skills and reliability of one key second-in-command person? What would happen if that individual suffered a family emergency and had to leave unexpectedly? Sharing information and allocating responsibilities among employees can keep the work flowing.

 
When your business is new, diversification may be difficult. But putting a plan in place to reduce your vulnerability to manageable risks is essential for your long-term success. Contact us for tips and suggestions.

 

Victim of a disaster, fire or theft? You may be eligible for a tax deduction

 

If you suffer damage to your home or personal property, you may be able to deduct these “casualty” losses on your federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

 
Here are some things you should know about deducting casualty losses:

 
When to deduct. Generally, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

 
Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)

 
$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

 
10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

 
Have questions about deducting casualty losses? Contact us!

 

 

 

 

3 income-tax-smart gifting strategies

If your 2015 tax liability is higher than you’d hoped and you’re ready to transfer some assets to your loved ones, now may be the time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall:

 
1. Gift appreciated or dividend-producing assets to loved ones eligible for the 0% rate. The 0% rate applies to both long-term gain and qualified dividends that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.

 
2. Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0% rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8% net investment income tax on dividends from the assets or if you sold the assets.

 
3. Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.

 
If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.

To learn more about tax-smart gifting,contact us.