#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.

Learn what auditors will look for when trying to prove your deductions so you are prepared

download (3)Tax audits still remain relatively rare, but should you face one, be prepared for questions. Tax authorities tend to deny everything and then make you prove that your deductions are valid. Here are some suggestions.

 
To prove your deduction most auditors are looking for two required documents.

 
Receipts. The receipt should clearly show the company or entity, the date, the value of the activity, and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

 
Proof of payment. You will need a canceled check, a bank statement, or a credit card receipt and related statement.

 
Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common:

 
Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

 
Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles, and any medical mile deductions.
Business records. You will need financial statements for any business-related activity with supporting documentation.

 
Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.

 
Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses were not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers, and anyone who uses their own tools to do their job for their employer.

 
While you can never be completely sure you won’t face an audit in your lifetime, you now know which documents an auditor will want.

Is an automatic tax filing extension the right move for you?

question-mark-2010009__340Can’t finish your federal income tax return by the April 18 deadline? There’s still time to get an automatic six-month extension.

 
There are four ways to obtain an extension:

 
1. File a paper copy of Form 4868 with the IRS and enclose your payment of estimated tax due.
2. File for an extension electronically using the IRS e-file system on your computer.
3. Using IRS Direct Pay, you can pay all or part of your estimated income tax due and indicate the payment is for an extension.
4. Have your tax preparer e-file for an extension on your behalf.

 
Remember that even if you file for an extension, you are still required to pay any taxes you owe by the April 18 filing deadline. An extension gives you more time to file your tax return, but not more time to pay the taxes you owe. You will be charged interest on any taxes you owe and do not pay by the filing deadline. If you are unable to pay on time, contact the IRS to set up a payment agreement.

 
Special extension rules apply to members of the military serving in combat zones and to certain others who live outside the U.S. Give us a call so we can discuss whether or not an extension is right for your situation.

2013 unclaimed tax refunds

 

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The IRS announced that an estimated one million taxpayers who did not file an income tax return in 2013 could claim their share of $1 billion in unclaimed refunds for the 2013 tax year. The law gives most taxpayers a three-year time period to claim a tax refund. After that time, the money belongs to the U.S. Treasury. So if you did not file in 2013, to be safe, send your 2013 tax return via certified mail to arrive at the IRS by April 18.

Springtime remodeling – know the tax impacts

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Spring fever often influences homeowners to update and remodel. Maybe you’re considering a new project, too. You may need to replace your deck or remodel your kitchen. If you have a remodeling project coming up, you should understand the tax consequences.

 
If your project qualifies as an improvement to your home, you’ll enjoy some tax benefits. But if the project is a repair, there’s generally no tax benefit. Unfortunately, it’s not always easy to tell the difference.

 
An improvement is defined by the IRS as something that adds value to your home or extends its life. Putting in a new kitchen, building an extension or adding a new deck are considered improvements because they add value. Replacing the roof is an improvement because it extends the life of your home.

 
On the other hand, a repair merely keeps the home in good working order. Examples of repairs include painting the interior or exterior or replacing a few missing shingles.
You can get tax benefits by adding the cost of your home improvements to your original cost basis. That’s the amount you first paid for the home. When you sell, a higher cost basis means a smaller capital gain. And generally you’ll only pay tax on a capital gain greater than $500,000 ($250,000 for singles). So, the smaller your capital gain, the less likely you are to owe tax when you sell.

 
That’s why it’s important to save bills and receipts for any projects that may qualify as improvements. Include notes that describe the related home improvement. You may need to keep these receipts for years until you sell your home. But when you do, these updates could be the key to reducing a possible tax bill.

 
If you want to know whether your project is a repair or an improvement, please call our office.

IRS interest rates remain the same for second quarter 2017

Interest rates charged by the IRS on underpaid taxes and applied by the IRS on tax overpayments will remain the same for the second quarter of 2017 (April 1 through June 30). Therefore, the rates will be as follows for individuals and corporations:

 

For individuals:
• 4% charged on underpayments; 4% paid on overpayments.

 
For corporations:
• 4% charged on underpayments; 3% paid on overpayments.
• 6% charged on large corporate underpayments.
• 1.5% paid on the portion of a corporate overpayment exceeding $10,000.

 

#TaxTip Tuesday-2017 Q2 tax calendar: Key deadlines for businesses and other employers

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Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes

Apply for an extension if you can’t file by April 18

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Tax time can be stressful, but don’t panic if you can’t file your tax return on time. There’s still time to get an automatic six-month deadline extension.

 

 

 
There are four ways to obtain an extension:
1. File a paper copy of Form 4868 with the IRS and enclose your payment of estimated tax due.
2. File for an extension electronically using the IRS e-file system on your computer.
3. Using Direct Pay, the Electronic Federal Tax Payment System, pay all or part of your estimated income tax due and indicate that the payment is for an extension.
4. Have your tax preparer e-file for an extension on your behalf.

 
Remember that even if you file for an extension, you are still required to pay any taxes you owe by the April 18 filing deadline. An extension gives you more time to file your tax return, but not more time to pay the taxes you owe. You will be charged interest on any taxes you owe and do not pay by the filing deadline. If you are unable to pay on time, contact the IRS to set up a payment agreement.

 
Special extension rules apply to members of the military serving in combat zones and to certain others who live outside the U.S. Give us a call so we can discuss whether or not an extension is right for your situation.

#TaxTipTuesday- Who can-and who should-take the American Opportunity Credit?

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If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

 The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

Do you need to make estimated payments?

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Estimated tax payments – Who needs to make them? When are they due?

 

 
April 18 is both the day individual income tax returns for 2016 are due and the due date for the first estimated tax payment for 2017. So, even as you finalize, file, and pay your 2016 federal income taxes, you might need to be thinking about how much you’ll owe for 2017. If you’re required to make estimated payments, missing the deadline could lead to penalties – even if your return shows a refund.

 

So what are estimated payments? Like the withholding deducted from your wages, estimated payments are prepayments of the tax you expect to owe for the current year. The difference is that you have to calculate the amount due and make the payment yourself, typically four times a year.

 
How do you know if you’re required to make estimated payments? Generally, you need to prepay at least 90% of the total tax you owe each year. You can do this by having tax withheld on income such as wages, pensions, or IRA distributions. But if you operate your own business, or receive alimony, investment, or other income that’s not subject to withholding, you may need to pay your tax through estimated payments.

 
There are exceptions to the general 90% rule. For instance, say you anticipate the balance due on your 2016 federal individual income tax return will be less than $1,000 after subtracting withholding and credits. In this case, you can skip the estimated payments and remit the final balance with your return next April.

 
Other exceptions may also apply, and state laws can differ from federal requirements. In addition, farmers and fishermen are subject to special rules.

 
If your 2017 income will be substantially higher than it was last year, give us a call. We’ll be happy to review the estimated tax rules with you and help you avoid underpayment penalties