#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.

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#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.

Are you contemplating year-end-tax-related moves? Focus on the big picture.

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Some tax-cutting strategies make good financial sense. Others are simply bad ideas, often because tax considerations are allowed to override basic economics.

 

 

 

Here’s one example of the tax tail wagging the economic dog. Let’s say that you operate an unincorporated consulting business. You want an additional tax write-off, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) – and stuck with furniture that you don’t really need.

Other situations in which the focus on tax considerations ignores the bigger financial picture include:

● Increasing the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

● Hesitating to pay off a mortgage, just to keep the interest deduction.

● Turning down extra income, due to worries about being “pushed into a higher tax bracket.”

● Holding an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are part of a bigger financial picture. If you’re contemplating year-end tax-related moves, we can help make sure that everything stays in focus.

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.

Planning a wedding over the holidays? Plan for taxes too

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Will wedding bells be ringing for you along with holiday sleigh bells this year? If so, add tax planning to your to-do list. Here are tax tips for soon-to-be newlyweds.

 
Check the effect marriage will have on your tax bill. If you both work and earn about the same income, you may need to adjust your tax withholding to avoid an unexpected tax bill next April, as well as potential penalty and interest charges for underpayment of taxes.

 
Notify your employer. Both you and your spouse will need to file new Forms W-4, Employee’s Withholding Allowance Certificate, with your employers to reflect your married status.

 
Notify the IRS. You can use Form 8822, Change of Address, to update your mailing address if you move to a new home.

 
Notify the insurance marketplace. If you receive advance payments of the health insurance premium tax credit, marriage may change the amount you can claim.

 
Update your social security information. You’ll need a certified copy of your marriage certificate to accompany Form SS-5, Application for a Social Security Card, if you change your name. Otherwise the IRS won’t be able to cross-match your new name and your social security number when you file your return with your spouse.

 
Review your financial paperwork. Update your estate plan, making appropriate changes to wills, powers-of-attorney, and health care directives. Also review the beneficiary designations on your retirement plans and insurance policies.

Have questions? Contact us. We’ll help you get the financial part of your married life off to a great start.

#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.

The timing of your business’s income and deductible expenses can have a big impact on your tax liability. Here’s how to determine the right timing strategies for you this year.

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Typically, it’s better to defer tax. One way is through controlling when your business recognizes income and incurs deductible expenses. Here are two timing strategies that can help businesses do this:

 

  1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
  2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.

Are frequent flyer miles ever taxable?

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If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.

 
Usually tax free
As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.
The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

 
Exceptions
There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.
For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.
The value of the miles for tax purposes generally is their estimated retail value.

 
If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.

Now’s the time to start thinking about “bunching” — miscellaneous itemized deductions, that is

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Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.

 
Should you bunch into 2016?
If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:
• Deductible investment expenses, including advisory fees, custodial fees and publications
• Professional fees, such as tax planning and preparation, accounting, and certain legal fees
• Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.
But beware …
These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.
Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).
If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.