#TaxTipTuesday-Be sure to claim all the home-related tax breaks you’re entitled to

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Saving tax with home-related deductions and exclusions

Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:

Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

#TaxTipTuesday-Making a 2016 IRA contribution by April 18 can provide a valuable tax deduction. But it can be beneficial even if it isn’t deductible.

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2016 IRA contributions — it’s not too late!

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

  1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.
  2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
  3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

#TaxTipTuesday- Did you know you may be able to deduct miles driven for purposes other than business?

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Deduct all of the mileage you’re entitled to — but not more

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

 

 

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

 

 

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

 

 

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

You don’t have to itemize to claim these deductions on your 2016 return

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Can’t itemize? You can still claim some expenses on your 2016 federal income tax return. Here’s how you can benefit.

 

 

 

 

* IRA and HSA contributions

If you made a contribution to your traditional IRA for 2016, or if you plan to make a 2016 contribution by April 18, 2017, you may qualify to deduct up to the maximum contribution amount of $5,500 ($6,500 if you’re age 50 or older). Income limitations apply in some cases, and you can’t deduct contributions to Roth IRAs.

Health Savings Accounts (HSAs) are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow on a tax-deferred basis, and you’re allowed to withdraw money in the account tax-free to pay for your unreimbursed medical expenses. For 2016, you can deduct up to the contribution limit of $3,350 if you’re filing single and $6,750 when you’re married filing jointly. You may also be able to deduct an additional $1,000 if you were age 55 or older and made a catch-up contribution to your HSA.

* Student loan interest and tuition fees

Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents on your 2016 return. For 2016 returns, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.

* Self-employment deductions

If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.

* Other deductions

Alimony you pay, certain moving expenses, and early savings withdrawal penalties are also deductible on your 2016 return, even if you don’t itemize. Teachers can deduct up to $250 for classroom supplies purchased out-of-pocket in 2016.

Contact our office for more information on these and other costs you may be able to deduct on your 2016 tax return.

#TaxTipTuesday-Your business might be able to take a 2016 deduction for bonuses paid in 2017.

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You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.

 
For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.

 
The all-events test
For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:

 
1. All events have occurred that establish the taxpayer’s liability,
2. The amount of the liability can be determined with reasonable accuracy, and
3. Economic performance has occurred.

 
Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

 
For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.

 
How a bonus pool works
In a 2011 ruling, the IRS said that employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer. Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year, even though amounts allocated to specific employees aren’t determined until the payment date.

 
Additional rules and limits apply to this strategy. To learn whether your current bonus plan allows you to take 2016 deductions for bonuses paid in early 2017, contact us. If you don’t qualify this year, we can also help you design a bonus plan for 2017 that will allow you to accelerate deductions next year.

#TaxTipTuesday-Ensure your year-end donations will be deductible on your 2016 return

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Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.

When’s the delivery date?

To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.

#TaxTipTuesday-Reduce Your 2016 Tax Bill by Accelerating Your Property Tax Deduction

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Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial. One deductible expense you may be able to control is your property tax payment.

 
You can prepay (by December 31) property taxes that relate to 2016 but that are due in 2017, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2017 and deduct the payment on this year’s return.

 
Should you or shouldn’t you?
As noted earlier, accelerating deductible expenses like property tax payments generally is beneficial. Prepaying your property tax may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

 
However, under the President-elect’s proposed tax plan, some taxpayers (such as certain single and head of household filers) might be subject to higher tax rates. These taxpayers may save more tax from the property tax deduction by holding off on paying their property tax until it’s due next year.

 
Likewise, taxpayers who expect to see a big jump in their income next year that would push them into a higher tax bracket also may benefit by not prepaying their property tax bill.

 
More considerations
Property tax isn’t deductible for AMT purposes. If you’re subject to the AMT this year, a prepayment may hurt you because you’ll lose the benefit of the deduction. So before prepaying your property tax, make sure you aren’t at AMT risk for 2016.

 
Also, don’t forget the income-based itemized deduction reduction. If your income is high enough that the reduction applies to you, the tax benefit of a prepayment will be reduced.

 
Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2016 (or should consider deferring to 2017)? Contact us. We can help you determine the best year-end tax planning strategies for your specific situation.

#TaxTipTuesday- Year-end tax strategies for accrual-basis taxpayers

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The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.

 
Record and recognize
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:
• Commissions, salaries and wages,
• Payroll taxes,
• Advertising,
• Interest,
• Utilities,
• Insurance, and
• Property taxes.

 
You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.

 
Look at prepaid expenses
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

 
Miscellaneous tax tips
Here are a few more year-end tax tips to consider:
• Review your outstanding receivables and write off any receivables you can establish as uncollectible.
• Pay interest on all shareholder loans to or from the company.
• Update your corporate record book to record decisions and be better prepared for an audit.

 
Consult us for more details on how these and other year-end tax strategies may apply to your business.

Wrap up #TaxBenefits for Year-End Charitable Gifts

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Are you contemplating gifts to charity at the end of this year? Not only do you help out a worthy cause, you can also reduce your 2016 tax bill if you itemize your deductions. Here’s how to make sure you’ll get the full benefit.

 
The general rule. Generally, you can deduct the full amount of contributions you make to a qualified charitable organization, up to 50% of your adjusted gross income for the year. Did you make a large contribution? You can carry the excess forward for five years. Just remember that you have to get written acknowledgment from the charity for monetary gifts of $250 or more.
     Tip: A contribution made by credit card late in the year is still deductible if posted to your account this year. You can charge an online donation on December 31, and take a deduction on your 2016 return, even if you don’t pay the credit card bill until 2017.

 
“This for that” gifts. When you make a gift of more than $75 that entitles you to receive goods or services in return, the charity must provide a good faith estimate of the goods or services received and the amount of payment exceeding the value of the gift. You can deduct the portion that exceeds the fair market value.

 
Gifts of your time. Although you can’t deduct the value of volunteer services you provide, you can write off out-of-pocket expenses incurred on behalf of a charity. Examples include long-distance travel, lodging, and local transportation.

 
Gifts of property. In general, the annual deduction for gifts of property is 30% of your adjusted gross income. You can carry the remainder forward for five years. If you donate appreciated property you’ve owned for more than a year, in most cases you can deduct the property’s fair market value. You’ll need an independent appraisal for gifts over $5,000.
     Tip: To claim the full deduction, the gift must be used to further the charity’s tax-exempt mission. For instance, if you donate a painting to your alma mater, it must be displayed where students can study it.
If you have questions about charitable giving tax rules, contact us. We’ll help you lock in deductions before January 1.

#TaxTipTuesday-#Self-employed? Here’s how to meet your employment tax obligations and perhaps even save tax.

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.

The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.

Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.

If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.

Deductions for the self-employed

For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.