Messner & Hadley LLP Blog http://www.messnerandhadley.com/blog/ Read the latest articles from Messner & Hadley LLP en-us Are Charity Auction Purchases Deductible Contributions? http://www.messnerandhadley.com/blog/are-charity-auction-purchases-deductible-contributions/22710 http://www.messnerandhadley.com/blog/are-charity-auction-purchases-deductible-contributions/22710 Messner & Hadley LLP Article Highlights: Purchase of Items At Charity Auction Auction Donor Appreciated Property Fair Market Value (FMV) Unrelated Use It is common practice for charities to hold auction events where attendees will bid upon and purchase items. The question often arises whether the money spent on the items purchased constitutes a charitable donation. The answer to that question is some, but not all, of what’s paid for the item may be deductible. So if you purchase items at a charity auction, you may claim a charitable contribution deduction for the excess of the purchase price paid for the item over its fair market value. You must be able to show, however, that you knew that the value of the item was less than the amount you paid for it. For example, a charity may publish a catalog, given to each person who attends an auction, providing a good faith estimate of items that will be available for bidding. Assuming you have no reason to doubt the accuracy of the published estimate, if you pay more than the published value, the difference between the amount you paid and the published value may constitute a charitable contribution deduction. In addition, if you provide goods for charities to sell at an auction, you may wonder if you are entitled to claim a fair market value charitable deduction for your contribution of appreciated property to the charity that will later be sold. Under these circumstances, the law limits your charitable deduction to your tax basis in the contributed property and does not permit you to claim a fair market value charitable deduction for the contribution. Specifically, the Treasury Regulations (Sec 170) provide that if a donor contributes tangible personal property to a charity that is put to an unrelated use, the donor's contribution is limited to the donor's tax basis in the contributed property. The term unrelated use means a use that is unrelated to the charity's exempt purposes or function. The sale of an item is considered unrelated, even if the sale raises money for the charity to use in its programs. Please contact this office for additional information. Thu, 03 Sep 2015 19:00:00 GMT Get Credit for Generating Your Own Home Power http://www.messnerandhadley.com/blog/get-credit-for-generating-your-own-home-power/37190 http://www.messnerandhadley.com/blog/get-credit-for-generating-your-own-home-power/37190 Messner & Hadley LLP Article Highlights Solar Heating System Solar Electric System Fuel Cell Plant Wind Energy Geothermal Heat Pump Through 2016, taxpayers can get a tax credit on their federal tax return equal to 30% of the costs for installing certain power-generating systems on their homes. The credit is non-refundable, which means it can only be used to offset a taxpayer’s current tax liability, but any excess can be carried forward to offset tax through 2016. Systems that qualify for the credit include the following: Solar water heating system - Qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purposes is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed. Solar electric system - This is a qualified system that uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a main or second residence by the taxpayer. Fuel cell plant - A fuel cell power plant is a system installed in the taxpayer’s principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but is limited to $500 for each 0.5 kilowatt of the fuel cell property’s capacity to produce electricity. Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer is eligible for the credit. Qualified geothermal heat pump - This is a system in which a pump uses the ground or ground water as a thermal energy source to heat the dwelling unit used as a main or second residence by the taxpayer or as a thermal energy sink to cool the dwelling unit. The system must meet the Energy Star program requirements in effect when the expenditure is made. Other aspects of the credit include the following: Limited carryover - The credit is a non-refundable personal credit that limits the credit to the taxpayer’s tax liability for the year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. Installation costs - Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, and for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit. Swimming pool - Expenditures that are for heating a swimming pool or hot tub are not taken into account for purposes of the credit. Newly constructed homes - The credit can be taken for newly constructed homes if the costs of the residential energy efficient property can be separated from the other home construction expenses and the required certification documents are available. Certification - A taxpayer may rely on a manufacturer’s certification that a product is Qualified Energy Property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement with the packaging of the product, in printable form on the manufacturer’s website, or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes. Installation costs - Costs for labor allocable to onsite preparation, assembly, or original installation of the qualified residential energy property may be included. If you have questions about how you can benefit from this credit, please give this office a call. Tue, 01 Sep 2015 19:00:00 GMT Back-to-School Tax Tips for Students and Parents http://www.messnerandhadley.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 http://www.messnerandhadley.com/blog/back-to-school-tax-tips-for-students-and-parents/37713 Messner & Hadley LLP Article Highlights: Sec. 529 plans Coverdell Education Savings Accounts. The Lifetime Learning credit Qualified Education Loan Interest. Going to college, and figuring out how to pay for it, can be stressful for students and parents. In recent years, Congress has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. The benefits may even cover vocational schools. If your child is below college age, there are tax-advantaged plans that allow you to save for the cost of college. Although providing no tax benefit for contributions to the plans, they do provide tax-free accumulation; so the earlier they are established, the more you benefit from them. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2015, you can contribute $14,000 without gift tax implications (or $28,000 for married couples who agree to split their gift). The annual amount is subject to inflation-adjustment. There is also a special gift provision allowing the donor to prepay five years of Sec 529 gifts up front without gift tax. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). This is the only one of the educational tax benefits that allows tax-free use of the funds for below college-level expenses. A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when the modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly, and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse, and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. o The American Opportunity Credit - is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. Forty percent of the American Opportunity credit is refundable (if the tax liability is reduced to zero). This credit phases out for joint filing taxpayers with modified adjusted gross income between $160,000 and $180,000, and between $80,000 and $90,000 for others. o The Lifetime Learning Credit - is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. For 2015 this credit phases out for joint filing taxpayers with modified adjusted gross income between $110,000 and $130,000, and between $55,000 and $65,000 for others. The credit is not allowed for taxpayers who file Married Separate returns. Qualifying expenses for these credits are generally limited to tuition. However, student activity fees and fees for course-related books, supplies, and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as having received the payment from the third party, and, in turn, pay the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and this could include home equity loans, credit card debt, etc., if the debt was incurred solely to pay for qualified higher education expenses. For 2015, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. This deduction is not allowed for taxpayers who file married separate returns. We all know that a child’s success in life has a great deal to do with the education they receive. You cannot start the planning process too early. Please call this office if you would like assistance in planning for your children’s future education. Thu, 27 Aug 2015 19:00:00 GMT Partnership, S-Corp and Trust Extensions End September 15 http://www.messnerandhadley.com/blog/partnership-s-corp-and-trust-extensions-end-september-15/40814 http://www.messnerandhadley.com/blog/partnership-s-corp-and-trust-extensions-end-september-15/40814 Messner & Hadley LLP Article Highlights: September 15 is the extended due date for partnership, S-corporation, and trust tax returns. Late-filing penalty for partnerships and S-corporations Late-filing penalty for trust returns If you have a calendar year 2014 partnership, S-corporation, or trust return on extension, don't forget the extension for filing those returns ends on September 15, 2015. Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items. If all of the aforementioned entities could obtain an automatic extension to file their returns on the same extended date as allowed to individuals, it would be difficult for individuals to meet the filing deadline without estimating the pass-through information and then later filing an amended return when the actual data was received. To overcome this problem, the automatic extension period for partnerships and trusts is set at 5 months, thus providing individual taxpayers with a month's grace period to complete their individual 1040 returns. The original due date for calendar year S-corporation returns was March 15, and they are allowed a 6-month extension period, making the due date for these returns also September 15. Thus, individual S-corp shareholders also have a month to finish up their individual returns. An S-corporation or partnership which fails to file on time is liable for a monthly penalty equal to $195 times the number of persons who were partners, or shareholders for S corps, during any part of the taxable year, for each month or fraction of a month for which the failure continues. In addition, a $100 penalty may be imposed on the partnership or S-corp for each Schedule K-1 that it fails to timely provide to partners or S-corp members (maximum penalty per year is $1.5 million). These penalties can be substantial. Trusts are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed up to a maximum of 25% of the tax due. A $100 per beneficiary penalty may also apply for failure to timely provide a Schedule K-1. Each beneficiary, who receives a distribution of property or an allocation of an item of the estate, is required to be provided a Schedule K-1. If this office is waiting for some missing information to complete your pass-through return, we will need that information at least a week before the September 15 due date. The late-filing penalties are substantial, so please call this office immediately if there are anticipated complications related to providing the needed information so a course of action can be determined to avoid the potential penalties. Tue, 25 Aug 2015 19:00:00 GMT September 2015 Individual Due Dates http://www.messnerandhadley.com/blog/september-2015-individual-due-dates/33942 http://www.messnerandhadley.com/blog/september-2015-individual-due-dates/33942 Messner & Hadley LLP September 1 - 2015 Fall and 2016Tax Planning Contact this office to schedule a consultation appointment. September 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.September 15 - Estimated Tax Payment Due The third installment of 2015 individual estimated taxes is due. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. Sun, 23 Aug 2015 19:00:00 GMT September 2015 Business Due Dates http://www.messnerandhadley.com/blog/september-2015-business-due-dates/33943 http://www.messnerandhadley.com/blog/september-2015-business-due-dates/33943 Messner & Hadley LLP September 15 - Corporations File a 2014 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.September 15 - S Corporations File a 2014 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. September 15 - Corporations Deposit the third installment of estimated income tax for 2015 for calendar year corporations.September 15 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in August. September 15 - Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in August. September 15 - Partnerships File a 2014 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.September 15 - Fiduciaries of Estates and Trusts File a 2014 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1. Sun, 23 Aug 2015 19:00:00 GMT Avoiding IRS Underpayment Penalties http://www.messnerandhadley.com/blog/avoiding-irs-underpayment-penalties/21915 http://www.messnerandhadley.com/blog/avoiding-irs-underpayment-penalties/21915 Messner & Hadley LLP Article Highlights: Pay-as-you-go System Safe Harbor Payments Situations Triggering Underpayments True Safe Harbors Congress considers our tax system as a "pay-as-you-go" system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the "pay-as-you-go" requirement. These include: Payroll withholding for employers; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This nondeductible interest penalty is higher than what might be earned from a bank and is computed on a quarter-by-quarter basis. Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty. The second safe harbor – and the one taxpayers rely on most often – is based on your tax in the immediately preceding tax year. If your current year’s payments equal or exceed 100% of the amount of your prior year’s tax, you can escape a penalty. If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount. Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year. Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments. Another frequently encountered situation is when a taxpayer retires and his payroll income is replaced with pension and Social Security income without adequate withholding. Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around. Bottom line, 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas the 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts. Please contact this office promptly if you have a substantial increase in income, so that withholding or estimated tax payments can be adjusted to avoid a penalty. Thu, 20 Aug 2015 19:00:00 GMT What Small Business Owners Need To Know About Balance Sheets http://www.messnerandhadley.com/blog/what-small-business-owners-need-to-know-about-balance-sheets/40800 http://www.messnerandhadley.com/blog/what-small-business-owners-need-to-know-about-balance-sheets/40800 Messner & Hadley LLP The most effective way for small business owners to be sure that they are aware of their company's financial status is to have an accurate balance sheet that reflects the most current information available. By keeping this information up to date every quarter, you can help yourself avoid a lot of problems and surprises down the road. A balance sheet provides you with an at-a-glance summary of your company's financial health as of a specific day. It is broken down into what the business's assets are, what the business's liabilities are, and the amount of owner or shareholder equity. The balance sheet gets its name from the fact that the assets must be balanced by and equal to the liabilities plus the equity. Some business owners have found current balance sheets so helpful that they update them every month. Understanding the Asset Portion of the Balance Sheet When entering assets onto the balance sheet, the business owner needs to include everything that is owned by the business, whether current or liquid assets, fixed assets, or some other type of asset. Current or liquid assets include: Cash that is immediately available  Money that is owed to you (Accounts Receivable)  Products currently in stock (Inventory)  Expenses paid in advance, such as insurance premiums  Money-market accounts, investments and other securities  Additional monies owed to you  Fixed assets are items that can't be easily sold or moved, including equipment and furnishings, buildings, land and vehicles. In most cases these assets depreciate, or decrease in value. Beyond current and fixed assets, items that are intangible, such as goodwill, copyrights and patents, are also considered assets on a balance sheet. It is important to note that money that is owed to you that you expect will not be paid is classified as a Reserve for Bad Debts, which decreases the amount of the Accounts Receivable on the balance sheet. Understanding the Liability Portion of the Balance Sheet When entering liabilities onto the balance sheet, the business owner needs to include all of the business's debts, both current and long term. Current liabilities include accounts payable, sales and payroll taxes, payments on short-term business loans such as a line of credit, and income taxes. Long-term liabilities are those that are paid over a longer period of time, generally over more than a year. These include mortgages and leases, future employee benefits, deferred taxes and long-term loans. Understanding the Equity Portion of the Balance Sheet When entering information onto the equity portion of the balance sheet, you should include the value of any capital stock that has been issued, any additional payments or capital from investors beyond the par value of the stock, and the net income that has been kept by the business rather than distributed to owners and shareholders. In order to be sure that all of the information on the balance sheet is correct, you can double-check your numbers by subtracting assets from liabilities - the result should equal the equity amount. For more information on how to structure a balance sheet, check out this website: sample balance sheet. The Value of a Balance Sheet At first glance a balance sheet may look like an incomprehensible collection of numbers, but once you understand all of the various components and how they relate to one another, they will provide you with the opportunity to detect trends and spot issues before they become problems. Your balance sheet can alert you to: Times when inventory is outpacing revenue, thus alerting you to a need for better management of your inventory and production process  Cash flow problems and a shortage of cash reserves  Inadequacies in your cash reserves that are making it difficult to invest in continued growth  Problems with collecting accounts receivables  The most essential tools that are available to you as a small business owner for gauging your operation's financial health are the balance sheet, the income statement and the cash flow statement. If you are uncomfortable with preparing these documents for yourself or don't have the time, then let a qualified professional take over and give yourself the information that you need. Wed, 19 Aug 2015 19:00:00 GMT Keep Track of Your Investment Basis http://www.messnerandhadley.com/blog/keep-track-of-your-investment-basis/32698 http://www.messnerandhadley.com/blog/keep-track-of-your-investment-basis/32698 Messner & Hadley LLP Article Highlights: What is Basis? Cost Basis Gift Basis Inherited Basis Events That Adjust Basis First-in, First Out In taxes, there is a saying: “Those who keep records win.” If you are an investor, you may have a variety of securities, including stocks, bonds, mutual funds, etc. When you sell those securities, naturally you want to minimize your gains or maximize your losses for tax purposes. Gain or loss is measured from your tax basis in the investment (asset), which makes it important to keep track of the basis in all your investments. What is Basis? Generally, your basis in an investment begins with the price that was paid to purchase the investment. However, that will not be the case if the investment was acquired by gift or inheritance. For inherited assets, the basis generally begins with the FMV of the asset on the decedent’s date of death or an alternative valuation date, if chosen by the executor of the estate. Assets acquired by gift actually have a basis for gain - the donor’s basis - and a basis for loss - the fair market value of the asset on the date of the gift. When an asset is acquired through a division of property in a divorce, the asset retains the basis it had when it was owned jointly by the couple. Basis is not a fixed value; it can change during the time the asset is owned and is adjusted by certain events. For an investment asset, these events include: Reinvested cash dividends, Stock splits and reverse splits, Stock dividends, Return of capital, Additional investments, Broker’s commissions, Interest previously taken into income under an election under the accrued market discount rules, Interest taken into income under the original issue discount rules, Attorney fees, Acquisition costs, Depletion, Casualty losses, etc. These events can increase or decrease the tax basis in the investment, which makes adequate recordkeeping so important. Another issue associated with basis is when a portion of the investment is sold. Let’s say 100 shares of a particular stock were purchased in 2011 at $10 a share and another 100 shares in 2013 at $20 a share. The investor plans on selling 100 shares of the stock at $30 a share. Using the general rule of “first in - first out,” there would be a $20 per share gain. However, if the investor can identify each specific block of stock sold, such as the 100 share block bought in 2013, there would only be a $10 per share profit. This is known as the “specific identification” method. The following is a discussion of the more commonly encountered basis adjustments where recordkeeping is essential: Reinvested cash dividends – Investors are frequently given the opportunity to reinvest their dividends instead of taking them in cash. By participating in these plans, they are actually purchasing additional sales with their taxable dividends. Unless records are kept, the investor can’t prove how much he or she paid for the shares or establish the amount of gain that is subject to tax (or the amount of loss that can be deducted) when it is sold. Stock dividends – It is possible to receive both taxable and nontaxable stock dividends. Stock dividends that are taxable provide the investor with additional stock with a basis equal to the taxable stock dividend. If the dividends are nontaxable, the number of shares that are owned increases, but the basis remains unchanged. If the investor can associate the dividends with a specific block of stock, then the basis of that block can be adjusted accordingly. If not, the adjustment will apply to the entire holdings in that particular stock. Return of capital – A return of capital is a nontaxable return of a portion of the investment. Thus, a return of capital will reduce the investor’s basis in security. Suppose an investor has 100 shares of XYZ Corporation that cost $1,000 ($10 per share), and the corporation distributes to him a $100 nontaxable return capital. His basis in the stock is reduced to $900 ($1,000 - $100) or $9.00 per share. If, over a period of time, the return of capital exceeds his basis in the investment, then the excess becomes taxable because he cannot have a negative basis. Stock splits – Stock splits can be confusing if they are not tracked as they occur. Let’s assume that an investor owns 100 shares of XYZ Corporation for which he paid $2,000 ($20 a share). Later on, the corporation splits the stock 2 for 1. The result is that he now owns 200 shares, but his basis in each has been reduced to $10 per share (200 shares times $10 equals $2,000 – what was paid for the original shares). This generally occurs when the “per share value of stocks” becomes too high for small investors to purchase 100 share blocks. Also watch for reverse splits, which have the opposite effect. Stock spin-off – Occasionally, corporations will spin-off additional companies. The most classic example is the break up of AT&T some years ago into regional phone companies, who themselves later split into additional companies or merged with others. Each time one of these transactions takes place, the corporation will provide documentation on how to split the prior basis between the resulting companies. Tracking these events as they happen is very important, as it may be difficult to reconstruct the information several years down the road. Broker fees – Although broker fees are a deductible expense, they are generally already accounted for in most stock and bond transactions. The purchase price of a block of stock generally includes the broker fees, and the sales price reported to the IRS (gross proceeds of sale) is the net of the sales costs. Depending upon the investment vehicle, tracking the basis in an investment can be quite complicated. If you have questions, please contact this office. Tue, 18 Aug 2015 19:00:00 GMT Don't Lose Your Insurance Subsidy in 2016 Because You Haven't Filed Your 2014 Return! http://www.messnerandhadley.com/blog/dont-lose-your-insurance-subsidy-in-2016-because-you-havent-filed-your-2014-return/40789 http://www.messnerandhadley.com/blog/dont-lose-your-insurance-subsidy-in-2016-because-you-havent-filed-your-2014-return/40789 Messner & Hadley LLP Article Highlights: Insurance Subsidy  Advance Premium Tax Credit  Non-filers  2016 Consequences of Not Filing  If you are one of the over 1 million individuals who received an Obamacare health insurance premium subsidy last year and have yet to file your 2014 tax return, you are risking your opportunity to receive a subsidy in 2016. The subsidy, which is paid by the government to your insurer to reduce the premiums you owe, is actually an advance payment of the premium tax credit (PTC) based upon your “estimated” income for the year. Your actual PTC is based on your “actual” income as determined on your tax return. If the advance PTC (subsidy) was less than the actual PTC as determined on your tax return, you are entitled to the difference. On the other hand, if your actual PTC is less than the advance amount, you may owe Uncle Sam some or all of the difference. Whether you are entitled to additional PTC or owe some back cannot be determined without filing your return. The IRS estimates that 710,000 individuals who received an advance PTC have yet to file a 2014 return or did not file an extension. Add that to the approximately 360,000 taxpayers who received an advance PTC and have filed an extension, and there are over 1 million individuals who need to reconcile their 2014 PTC who have not yet filed. Because the Marketplace will determine eligibility for advance PTC for the 2016 coverage year during the fall of 2015, if you haven't filed your 2014 return yet, you can substantially increase your chances of avoiding a gap in receiving this help if you file your 2014 tax return as soon as possible, even if you have an extension until October 15th. Navigating the complicated Obamacare forms developed by the IRS is difficult for many taxpayers, and most seek professional assistance. The IRS is currently sending letters to individuals who received advance PTC subsidies and have yet to file. The letter encourages taxpayers to file within 30 days of the date of the letter in order to avoid a gap in receiving advance payments of the PTC in 2016. It is never a good idea not to file, even if you owe and can't pay. The IRS just gets more aggressive as time goes on. So whether you don't feel you can do your own return, are afraid you may owe some of the PTC back, or think you may be subject to penalties for failing to have health insurance coverage, we encourage you to give this office a call. There are penalty exceptions for being uninsured, or if you owe a PTC repayment there's a possibility it can be reduced, and it may all work out OK. Procrastinating isn't going to change the outcome and could put your 2016 advance PTC at risk. Who knows, you may even be entitled to more PTC and a refund. Thu, 13 Aug 2015 19:00:00 GMT Only One IRA Rollover Every 12 Months - Period! http://www.messnerandhadley.com/blog/only-one-ira-rollover-every-12-months-period/40780 http://www.messnerandhadley.com/blog/only-one-ira-rollover-every-12-months-period/40780 Messner & Hadley LLP Article Highlights: One rollover per 12-month period  Tax consequences  Difference between a rollover and a transfer  Relief  Although this subject has been brought up before-and, yes, we are harping on the subject because of the profound tax consequences-this is a reminder that, beginning this year, individuals are only allowed one IRA rollover in any 12-month period (this includes SEP and Simple accounts, traditional and Roth IRAs). That is, 12 months must have elapsed from the date a rollover is completed before another rollover can be made. Failure to abide by this rule can be expensive. And the rule applies no matter how many IRAs an individual owns. Example - Joe makes an IRA rollover on March 1, 2015. He cannot roll over another IRA distribution, without penalties, until March 2, 2016. If Joe, in the example, were to make another IRA rollover before March 2, 2016, that entire distribution would be treated as a taxable distribution and would also be subject to the 10% early distribution penalty if Joe is under the age of 59.5 at the time of the distribution. Additionally, if Joe deposited the distributed amount into another IRA, or redeposited the funds into the same IRA, those funds are treated as an excess contribution and are subject to a 6% penalty per year for as long as they remain in the IRA. That doesn't mean you can't transfer funds between IRA trustees multiple times during the year. In a rollover, a taxpayer takes possession of the funds and then must redeposit them within 60 days to avoid being taxed on the distribution. In contrast, a transfer moves the funds directly from one trustee to another with the taxpayer never taking possession of the funds. Unlimited direct transfers are allowed, including moving traditional IRA funds to a Roth IRA (called a conversion). If, through no fault of yours, a trustee does not follow your instructions to make a transfer and instead distributes the funds to you, procedures are available to obtain relief. If you are planning an IRA rollover, before taking the distribution, please check with your IRA trustee or call this office to ensure you are not violating the 12-month rule. Tue, 11 Aug 2015 19:00:00 GMT Tax Tips for Disabled Taxpayers http://www.messnerandhadley.com/blog/tax-tips-for-disabled-taxpayers/25490 http://www.messnerandhadley.com/blog/tax-tips-for-disabled-taxpayers/25490 Messner & Hadley LLP Article Highlight: Increased Standard Deduction Tax Exempt Income Impairment-Related Work Expenses Earned Income Tax Credit Credit for the Elderly or Disabled Child or Dependent Care Credit Special Medical Deductions Qualified Medicaid Waiver Payments ABLE Accounts Taxpayers with disabilities may qualify for a number of tax credits and benefits. Parents of children with disabilities may also qualify. Listed below are several tax credits and other benefits that are available if you or someone else listed on your federal tax return is disabled. Increased Standard Deduction – If a tax return filer and/or spouse are legally blind, they are entitled to a higher standard deduction on their tax return. Exclusions from Gross Income - Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income. Impairment-Related Work Expenses - Employees, who have a physical or mental disability limiting their employment, may be able to claim business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work. Credit for the Elderly or Disabled - This credit is generally available to certain taxpayers who are 65 and older, as well as to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability. Earned Income Tax Credit - EITC is available to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, taxable benefits that were received under your employer’s disability retirement plan are considered earned income until a minimum retirement age is reached. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65, may qualify for EITC. Additionally, if the taxpayer’s child is disabled, the age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund that is received because of the EITC will not be considered income when determining whether a taxpayer is eligible for benefit programs, such as Supplemental Security Income and Medicaid. Child or Dependent Care Credit - Taxpayers who pay someone to come to their home and care for their dependent or disabled spouse may be entitled to claim this credit. For children this credit is usually limited to the care expenses paid only until age 13, but there is no age limit if the child is unable to care for him- or herself. Special Medical Deductions – In addition to conventional medical deductions, the tax code provides special medical deductions related to disabled taxpayers and dependents. They include: • Impairment-Related Expenses - Amounts paid for special equipment installed in the home, or for improvements, may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may only be partly included as a medical expense.• Learning Disability - Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders can be included in medical expenses. A doctor must recommend that the child attend the school. Tutoring fees recommended by a doctor for the child’s tutoring by a teacher who is specially trained and qualified to work with children who have severe learning disabilities might also be included. • Drug Addiction - Amounts paid by a taxpayer to maintain a dependent in a therapeutic center for drug addicts, including the cost of the dependent's meals and lodging, are included in medical expenses. Exclusion Of Qualified Medicaid Waiver Payments – Payments made to care providers caring for related individuals in the provider’s home are excluded from the care provider’s income. Qualified foster care payments are amounts paid under the foster care program of a state (or political subdivision of a state or a qualified foster care placement agency). For more information please call. ABLE Accounts - Qualified ABLE programs provide the means for individuals and families to contribute and save for the purpose of supporting individuals with disabilities in maintaining their health, independence, and quality of life. Federal law enacted in 2014 authorizes the States to establish and operate an ABLE program. Under the ABLE program, an ABLE account may be set up for any eligible state resident, which would generally be the only person who could take distributions from the account. ABLE accounts are very similar in function to Sec 529 plans. However, they should not be considered as estate planning devices, as is sometimes the case with 529 plans; the main purpose of ABLE accounts is to shelter assets from means testing required by government benefit programs. Individuals can contribute to ABLE accounts subject to Gift Tax limitations. Distributions to the disabled individual are tax free if the funds are used for qualified expenses of the disabled individual. These accounts are new and must be established at the state level before taxpayers can start making contributions to them. Call the office for more information. For more information on tax credits and benefits available to disabled taxpayers, please consult this office. Thu, 06 Aug 2015 19:00:00 GMT Don’t Forget Your Retirement! http://www.messnerandhadley.com/blog/don8217t-forget-your-retirement/26954 http://www.messnerandhadley.com/blog/don8217t-forget-your-retirement/26954 Messner & Hadley LLP Article Highlights: Simplified Employee Pension Plans (SEP) Qualified Plan (Keogh) Savings Incentive Match Plan for Employees (SIMPLE Plan) Individual 401(k) Plan Small Employer Pension Startup Credit Even though retirement may be years away, and it may not be the most pressing issue on your mind these days, don’t forget your retirement contributions, especially with generous government incentives involved. There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner on his or her own behalf and for employees can be tax-deductible. Furthermore, the earnings on the contributions grow tax-free until the money is distributed from the plan. Here are some retirement plan options: Simplified Employee Pension Plan (SEP). This plan was designed to avoid the complications of a qualified plan. Contributions to the plan are held in the beneficiaries’ IRA accounts; hence, the title “simplified.” Deductible contributions for 2015 are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. A SEP can be established and funded after the close of the year. Qualified Plan (Keogh). Generally, the rules surrounding a Keogh are more complex. This type of plan may include a discretionary contribution profit sharing plan or a mandatory contribution money purchase plan, or a combination of these. SEP plans are favored over Keogh plans by most self-employed individuals. For 2015, deductible contributions are limited to the lesser of 25% of the participant’s compensation (up to $265,000) or $53,000. These plans must be established before the end of the tax year, but contributions can be made afterwards. Savings Incentive Match Plan for Employees (SIMPLE Plan). Under this plan, the business owner takes a deduction, and employees receive a salary deferral. For 2015, the contribution limit is $12,500 (per employer or employee), with an additional catch-up contribution limit of $3,000 for participants aged 50 or older. The employer can match the contribution up to 3% of compensation or make a non-elective contribution of 2% of compensation. Individual 401(k) Plan. The individual 401(k) plan is similar to the traditional 401(k) plan with added benefits for the small business owner. For 2015, the owner can contribute and deduct up to 25% of compensation plus an additional $18,000 salary deferral, up to a $53,000 maximum $59,000 for those who are age 50 and over). For employees, the contribution and salary deferral limit is $18,000, with an additional $6,000 catch-up contribution available to those aged 50 or over. Employers can match employee contributions. If you do establish a new qualified pension plan for your business, you may be entitled to the “small employer pension startup credit.” The credit is equal to 50% of administrative and retirement-related education expenses for the plan for each of the first three plan years, with a maximum credit of $500 for each year. Plan-related expenses in excess of the amount of the credit claimed are generally deductible as ordinary expenses of the business. The first credit year is the tax year that includes the date the plan becomes effective, or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles. If you would like assistance in selecting a retirement plan for your business or to explore the tax benefits relevant to your particular circumstances, please give this office a call. Tue, 04 Aug 2015 19:00:00 GMT Eldercare Can Be a Medical Deduction http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/36545 http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/36545 Messner & Hadley LLP Article Highlights: Nursing Homes Meals and Lodging Home care Nursing Services Household Employees With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care. Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense. As an alternative to nursing homes, many elderly individuals or their care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee's pay attributable to household chores would not be a deductible medical expense. Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee's share of these taxes and to pay the employer's payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the federal payroll taxes to be paid annually in conjunction with the employer's individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the household employee agree to withhold income tax. However, the employer is still required to issue a W-2 to the employee and file the form with the federal government. A federal employer ID number (FEIN) and a state ID number must be obtained for reporting purposes. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the federal reporting requirements. The employer’s portion of the employment taxes (Social Security, Medicare, and federal and state unemployment taxes) that relate to the employer’s deductible medical expenses are also allowed as a medical expense. If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements. Thu, 30 Jul 2015 19:00:00 GMT Reverse Mortgages - A Cash Flow Solution for Seniors http://www.messnerandhadley.com/blog/reverse-mortgages-a-cash-flow-solution-for-seniors/34711 http://www.messnerandhadley.com/blog/reverse-mortgages-a-cash-flow-solution-for-seniors/34711 Messner & Hadley LLP Article Highlights: Reverse Mortgages Reverse Mortgage Terms Who deducts the Interest? When is the Interest Deductible? Some retirees are faced with mounting debt and inadequate income. What options do these seniors have, especially if they have a mortgage on their home and their retirement income is too low to cover the mortgage payments and have enough left over to have some enjoyment in their golden years? One option that you see promoted on television is the “reverse mortgage” which allows a homeowner to borrow against the equity they have built up in their home over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the heirs can pay off the debt by selling the house and any remaining equity goes to them. If at that time the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home’s worth. In order to be eligible for this loan, the borrower must be at least 62 years of age and have equity in the home. The reverse mortgage must be a first trust deed. Thus any existing loans would have to be paid off with separate funds or with the proceeds from the reverse mortgage. The amount that can be borrowed is based upon age, and the older the borrower, the greater amount that can be borrowed and the lower the interest rate. The loan amount will also depend on the value of the home, interest rates and the amount of equity built up. The borrower has the option of taking the loan as a lump sum, a line of credit, or as fixed monthly payments. In addition, the money generally can be used for any purpose, without restrictions imposed. One question that always comes up when discussing reverse mortgages is, when will the interest be deductible? When determining whether reverse mortgage interest is deductible, when it is deductible and by whom, these are factors to consider: Interest (regardless of type) is not deductible until paid. A reverse mortgage loan is not required to be repaid as long as the borrower lives in the home. Therefore, the interest on a reverse mortgage is not deductible by anyone until the loan is paid off. Generally reverse mortgages are classified as equity loans and the deductible interest would be limited to the interest accrued on the first $100,000 of debt. There are exceptions where the reverse mortgage paid off an existing acquisition debt loan. Equity debt interest is not deductible by taxpayers subject to the alternative minimum tax (AMT). So who deducts the interest when the loan is paid off? Debtor - If the debtor pays off the loan while still living, the debtor is the one that deducts the sum of the interest they would have been entitled to deduct each year had it been paid, subject to the limitations discussed in 1 & 2 above. Estate – If the estate pays off the mortgage after the debtor has passed away, the estate would deduct the interest it on its income tax return. The amount deductible would be the sum of the interest the debtor would have been entitled to deduct each year had they paid it, subject to the limitations discussed in 1 & 2 above. Beneficiary – If the beneficiary, or beneficiaries, who inherit the home, pays off the mortgage, the interest would be deductible as an itemized deduction on their personal 1040 income tax return(s). The amount deductible would be the sum of the interest the debtor would have been entitled to deduct each year had they paid it, subject to the limitations discussed in 1 & 2 above. Reverse mortgages have brought financial security to many seniors so that they can live a comfortable life. If you are a senior who is struggling with your finances, carefully explore your options, including the possibility of a reverse mortgage. Keep in mind, however, that some reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high, especially if you don’t plan to be in your home for a long time or only need to borrow a small amount.If you have questions about reverse mortgages and the mortgage interest deduction, please give this office a call. Tue, 28 Jul 2015 19:00:00 GMT August 2015 Individual Due Dates http://www.messnerandhadley.com/blog/august-2015-individual-due-dates/33379 http://www.messnerandhadley.com/blog/august-2015-individual-due-dates/33379 Messner & Hadley LLP August 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during July, you are required to report them to your employer on IRS Form 4070 no later than August 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Thu, 23 Jul 2015 19:00:00 GMT August 2015 Business Due Dates http://www.messnerandhadley.com/blog/august-2015-business-due-dates/33380 http://www.messnerandhadley.com/blog/august-2015-business-due-dates/33380 Messner & Hadley LLP August 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time. August 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July. August 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in July. Thu, 23 Jul 2015 19:00:00 GMT Bunching Your Deductions Can Provide Big Tax Benefits http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/33400 http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/33400 Messner & Hadley LLP Article Highlights: Itemized Versus Standard Deductions Medical Expenses Taxes Charitable Contributions If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy. The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used: Medical Expenses - You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 10% of your adjusted gross income (AGI) is actually deductible. If you are 65 or over the medical deduction floor is 7.5% through 2016, unless you are caught by the Alternative Minimum Tax (AMT). Then only the amount that exceeds 10% of your AGI is actually deductible. So, there is no tax benefit in bunching medical deductions unless the expenses exceed these limitations. If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 10% (7.5% threshold is less. Taxes - Property taxes on real estate are generally billed annually at mid-year, and most locales allow the tax bill to be paid in semi-annual or quarterly installments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings. If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal itemized deduction. So, for instance, if you are paying state estimated tax in quarterly installments, the fourth-quarter estimate is generally due in January of the subsequent year. This gives you the opportunity to either make that payment before December 31st, and be able to deduct the payment on the current year’s return, or pay it in January before the January due date and use it as a deduction in the subsequent year. A word of caution about the itemized deduction for taxes! Taxes are only deductible for regular tax purposes. So, to the extent you are taxed by the AMT, you derive no benefits from the itemized deduction for taxes. Charitable Contributions - Charitable contributions are a nice fit for “bunching” because they are entirely payable at the taxpayer’s discretion. For example, if you normally tithe at your church, you could make your normal contributions during the year and then prepay the entire subsequent year’s tithing in a lump sum in December of the current year, thereby doubling up on the church contribution one year and having no charity deduction for church in the other year. Normally, charities are very active with their solicitations during the holiday season, giving you the opportunity to make the contributions at the end of the current year or simply wait a short time and make them after the end of the year. Be sure you get a receipt or acknowledgment letter from the organization that clearly shows in which year the contribution was made. If you think a “bunching” strategy might benefit you, please call this office to discuss the issue and set up an appointment for some in-depth strategizing. Thu, 23 Jul 2015 19:00:00 GMT 3 Ways to Improve Your Budgeting and Forecasting http://www.messnerandhadley.com/blog/3-ways-to-improve-your-budgeting-and-forecasting/40696 http://www.messnerandhadley.com/blog/3-ways-to-improve-your-budgeting-and-forecasting/40696 Messner & Hadley LLP Budgeting and forecasting are two of the most important financial exercises performed by businesses, regardless of their size. Unfortunately, they are also two exercises that many businesses fail to perform accurately or efficiently. The biggest common problem is that most budgets and forecasts are created without any room for flexibility. Managers are told at the end of the year to make projections for revenue and spending for the next year, but these often end up being optimistic best guesses that are manipulated for the financial benefit of their department. Here are 3 steps to help you improve your company's budgeting and forecasting processes: Build flexibility into your budgeting and forecasting. This is the most important step to better budgeting and forecasting. Static and inflexible budgets and forecasts can lead to many different financial problems. Traditional annual forecasts and projections made by managers are often inaccurate and obsolete by the end of the first quarter. However, managers are still expected to meet them and important business decisions are made based upon them. This leads to frustrated employees who are held accountable for hitting unrealistic numbers - and worse, faulty decisions and plans that can end up being very expensive. Instead, your processes should include a review of your budget and forecasts at the end of each quarter, if not each month. Doing so will allow you to make necessary adjustments that will improve overall accuracy and lead to better business decision-making.   Create rolling forecasts and budgets. This is a flexible alternative to the traditional static annual budgeting and forecasting process that most companies follow. It enables you to regularly update your forecasts and budgets based on actual current business results, not what managers guessed might be happening many months ago. The rolling process involves using actual quarterly financial data to update your forecasts, which typically extend out for five or six quarters. Each quarter, you will update your forecasts for the next quarter based on the most recent quarter's results. You will then adjust your budget so that it reflects these new, updated forecasts. With this process, detailed monthly forecasting at the category level is only done for the next quarter, not the entire year. Subsequent quarters' forecasts are broader, since they will likely be updated in the future. Rolling forecasting and budgeting will enable you to better align your budget with your strategic plan while also improving the accuracy of your forecasts and budgets.   Budget to your plan, instead of planning to your budget. This is a fairly simple but often overlooked concept because it requires discipline on the part of ownership and management. It requires that spending decisions be made based on actual revenue, rather than on opportunities that such spending might (or might not) lead to. Budgeting to plan considers the true impact that spending decisions will have on the company's finances. For example, a business might have an opportunity to grow by acquiring a competitor or taking on a large new client. However, doing so will require assuming significant debt in order to finance the acquisition or buy new equipment or additional inventory. Budgeting to your plan will consider how these costs will impact the budget in both the short and long term and then plan accordingly. Conversely, planning to your budget will just move forward with the debt and figure out later what the impact on the budget will be.  Budgeting and forecasting are too important to leave open to inaccuracies and inefficiency. By following these 3 steps, you will go a long way toward improving your budgeting and forecasting processes. If your small business needs help in setting and managing your budget, feel free to give us a call. Wed, 22 Jul 2015 19:00:00 GMT Receiving Social Security Can Be Taxing http://www.messnerandhadley.com/blog/receiving-social-security-can-be-taxing/40683 http://www.messnerandhadley.com/blog/receiving-social-security-can-be-taxing/40683 Messner & Hadley LLP Article Highlights: Social Security Taxability Taxability Thresholds Working and Drawing Social Security Pension Distributions and Social Security Taxability Planning Pension Distributions Generally, your Social Security (SS) benefits are not taxable until your modified adjusted gross income (MAGI) is more than the base amount for your filing status. MAGI is your regular AGI (without Social Security income) plus 50% of your Social Security income plus tax-exempt interest income plus certain other infrequently encountered modifications. The base amounts (threshold where the SS benefits become taxable) are: $25,000 if you are single, a head of household, a qualifying widow or widower with a dependent child, or married filing separately and did not live with your spouse at any time during the year; $32,000 if you are married and file a joint return; Zero if you are married filing separately and lived with your spouse at any time during the year. Thus, if your only income were SS benefits, you would likely not be subject to income tax on those benefits. However, if you are filing a joint tax return and your MAGI exceeds $32,000, then some portion of the SS benefits will become taxable. The amount that is added to taxable income ranges from 50% to 85% of the SS benefits in excess of the threshold. If you are drawing SS benefits and working, you may find that the added income from working will cause you to be subject to dual taxation. How can this be, you ask? Since your SS taxation is based upon your income, the additional income from working may cause some or a good portion of your SS benefits to be taxable. For example, take a married couple that has a small pension, some investment income, and SS income. Retirement Income Total Without Work Income With Work Income Interest & Dividends 2,500 2,500 2,500 Pension & IRA Income 25,000 25,000 25,000 Social Security Benefits 12,000 750 9,825 Work Income 15,000 Total Income Subject to Tax 28,250 52,325 -----------------> <28,250> Net Increase in Income Subject to Tax 24,075 In the example above, the $15,000 income from working caused an additional $9,075 ($9,825 - 750) of Social Security to become taxable, in effect causing the couple to be taxed on $1.61 for every $1 earned by working. A similar issue can occur when withdrawing from an IRA or other retirement plan. Additional IRA withdrawals can have the same effect as working. For example: you decide you need a new car and take a larger than necessary withdrawal from your IRA account to pay for the vehicle. That extra IRA distribution could create an unpleasant surprise by causing more of your SS benefits to be taxable. This also brings up another important fact. If you have an IRA account and your income is such that you are not required to file or are in an unusually low tax bracket, you might want to consider withdrawing as much as possible from your IRA without triggering any tax, causing any additional SS benefits to be taxable, or hitting the next tax bracket, even if you don’t need the funds. Keep in mind that whether you are currently working and are about to receive Social Security benefits, already receiving SS benefits and planning on returning to work, or are planning to take an abnormally large IRA distribution, the tax implications can be substantial and require your timely attention. Please contact this office for assistance in planning for the additional tax liability created from working, drawing Social Security, and taking IRA distributions. Tue, 21 Jul 2015 19:00:00 GMT Preventing Tax Problems When Employees Travel http://www.messnerandhadley.com/blog/preventing-tax-problems-when-employees-travel/40665 http://www.messnerandhadley.com/blog/preventing-tax-problems-when-employees-travel/40665 Messner & Hadley LLP Article Highlights: Employer Deduction for Travel Expenses  How an Employee Treats Travel Expenses  Employer Accountable Plans  Lodging When Attending Local Employer Events  Tax Home  Temporary Work Location  Sending employees on business trips is essential for countless companies and can result in tax headaches for both the employer and the employee if the tax regulations are not adhered to. If the rules are followed, the cost of the employee's travel will be fully deductible to the employer, with the exception of meals, which are only 50% deductible, and tax-free reimbursement to the employee. In addition, the reimbursement is not subject to FICA or payroll withholding. On the other hand, if the rules are not followed, the expenses are still deductible by the employer, but the reimbursement must be added to the employee's taxable wages, subject to both FICA and payroll withholding. An employer is able to deduct ordinary and necessary business expenses, including an employee's job-related travel and lodging expenses that are not lavish or extravagant, and under the rules of working condition fringe benefits, any such item that is deductible by the employer is not includible in the employee's salary. In addition, an advance or reimbursement made to an employee under an “accountable plan,” which requires the employee to adequately account for the expenses and return any excess advances, is deductible by the employer and not subject to FICA or income tax withholding. Reimbursements not made under an accountable plan are fully taxable to the employee, and the only way for the employee to deduct the expenses is as a miscellaneous itemized deduction on his or her 1040. To do that, the employee must itemize his or her deductions on Schedule A, as opposed to taking the standard deduction. The employee business expense category on Schedule A is subject to a 2% of AGI nondeductible threshold, and this frequently results in the employee not being able to deduct any or only a portion of the expenses. With the exception noted below, to deduct the cost of lodging and meals, the taxpayer must be away from home overnight. Any trip that is of such a length as to require sleep or rest to enable the taxpayer to continue working is considered “overnight.” Under an exception to the away-from-home rule, the cost of local lodging is deductible if the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function and the duration does not exceed five calendar days and does not recur more frequently than once per calendar quarter. For an employee, the employer must require the employee to remain at the activity or function overnight, the lodging must not be lavish or extravagant, and there can be no significant element of personal pleasure, recreation, or benefit. A taxpayer's home, for purposes of determining if he or she is away from home and can deduct lodging and meals, is generally where the taxpayer normally lives and works, although that fact is sometimes difficult to determine, in which case the IRS has numerous special rules that apply. Where an away-from-home assignment, at a single location, lasts for one year or less, it is “temporary,” and the travel expenses are deductible. If the assignment is longer, there is a good chance the expenses will not be deductible based upon some complex rules. The rules for the tax treatment of travel expenses and temporary away-from-home assignments can be complex. Please give this office a call for further details or assistance. Thu, 16 Jul 2015 19:00:00 GMT Receiving Tips Can Be Taxing http://www.messnerandhadley.com/blog/receiving-tips-can-be-taxing/30377 http://www.messnerandhadley.com/blog/receiving-tips-can-be-taxing/30377 Messner & Hadley LLP Article Highlights: Tips are taxable and must be included on your tax return Tip splitting and cover charges Tip reporting to employer Employer tip allocation Daily log for tip record keeping If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes: Tips are taxable - Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation. Include tips on your tax return - You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees. Report tips to your employer - If you receive $20 or more in tips in that month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return, as they are subject to income and social security taxes. Tip-splitting and cover charges - Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement, so you should report to your employer only the net tips you receive. Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages. Employer allocation of tips - Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. If you are in this situation, your allocation amount will be noted on your W-2 form. These allocated tips will not have been included in the total wages box on your W-2, so they must be accounted for as additional wage income on your return, unless you have adequate records to show that the amount is incorrect. Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, to the extent these tips are included in your income, you must report those taxes as additional tax on your return. The IRS frequently issues inquiries when the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return. Keep a running daily log of tip income - Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee's Daily Record of Tips and a Report to Employer for recording your tip income. If you are receiving tips and have any questions about their taxation, please give this office a call. Tue, 14 Jul 2015 19:00:00 GMT Plan for the Potential IRA-to-Charity Provision Extension http://www.messnerandhadley.com/blog/plan-for-the-potential-ira-to-charity-provision-extension/40662 http://www.messnerandhadley.com/blog/plan-for-the-potential-ira-to-charity-provision-extension/40662 Messner & Hadley LLP Article Highlights IRA-to-Charity Transfer Provision  Required Minimum Distribution  Expired in 2014  May Be Extended to 2015  What Should Be Done Now In Case It Is Extended  If you are 70.5 or over, have not taken all or any of your 2015 required minimum distribution (RMD) from your IRA, and plan to but have not yet made a significant charitable contribution, here is a tip that could save some tax dollars. In previous years, there has been a tax provision allowing an individual age 70.5 or older to make a direct transfer of money, up to $100,000, from his or her IRA account to a qualified charity. That provision expired on December 31, 2014. However, Congress has extended that provision in the past, and there is a good chance it may be extended again. In fact, the Senate Finance Committee working group on individual tax reform, just recently, recommended extending the provision. If Congress does not extend it, you will have still satisfied your minimum distribution requirement, and the amount transferred to the charity will still count as a charitable contribution. If Congress does extend it, you can take advantage of the tax benefits described later in this article. If you wait to see whether the provision will be extended, and Congress waits until the last minute, like it did last year, you may not have time to take action, as was the case for most taxpayers last year, or you may have already taken your RMD or made that charitable contribution. If the provision is extended, here is how it will play out on a tax return: The distribution is excluded from income;  The distribution counts towards the taxpayer's Required Minimum Distribution for the year; and  The distribution does NOT count as a charitable contribution.  At first glance, this may not appear to provide tax benefits. However, by excluding the distribution, a taxpayer lowers his or her income (AGI) for other tax breaks pegged at AGI levels such as medical expenses, passive losses, taxable Social Security, etc. Non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution. If you think that this tax provision may affect you and you would like to explore the possibilities with some tax planning, please call this office. Thu, 09 Jul 2015 19:00:00 GMT Tips To Reduce Payroll Stress http://www.messnerandhadley.com/blog/tips-to-reduce-payroll-stress/40660 http://www.messnerandhadley.com/blog/tips-to-reduce-payroll-stress/40660 Messner & Hadley LLP When you hire your first employee, you create an entire new task of complying with employment and labor laws and issuing a payroll. Payroll taxes create more administrative burden for small businesses than any other tax, according to the 2015 Small Business Taxation Survey from the National Business Association. Plus, compliance with payroll laws is a challenge for many businesses. The IRS levied more than $6.9 million in penalties related to employment taxes for the fiscal year ended September 30, 2014, according to the 2014 Internal Revenue Service Data Book. The Stress of Payroll Your payroll responsibilities include making tax payments to appropriate government agencies and filing all the associated paperwork on time. It's not just for the IRS; you have to follow all state rules and laws. If you have employees in more than one state, you have to follow the rules for each state, which vary widely in regards to filing frequencies, deadlines, how you must file, and how you determine taxes. Payroll stress stems not only from taxes but also from the accounting involved in calculating hours and accrued vacation and sick day pay and tracking other employee benefits. You can reduce payroll stress by setting up a system. Here are four steps to take. Get the Initial Paperwork Filled Out. All new employees must complete a Form W-4, Employee's Withholding Allowance Certificate, which you must submit to the IRS. The exemptions claimed on the form determine the amount of tax you withhold from an employee's pay. Check whether your state requires the completion of any forms. Document How You Process Payroll. How often do you pay employees? Some states have specific requirements about pay periods. Are you paying hourly or on salary? How do you track employee hours? What about overtime: Does your state define overtime as working more than eight hours a day or more than 40 hours a week? How do you handle paid time off (vacation and sick leave)? How do you manage items such as health plan premiums and retirement contributions that you deduct from employee paychecks and pay to the appropriate organizations? Set Up a Tracking System. Set up a system to track everything. It could be a manual system using pen and paper or a spreadsheet. You could use accounting and/or payroll software. You or an employee could do the tracking, or you could hire an accountant. Pay Taxes and File Paperwork On Time. You must pay payroll taxes to the IRS within a specific number of days after you pay employees, though you have eight different payroll periods and two deposit schedules to select from. IRS forms you must file include: • Employer’s quarterly payroll tax return (Form 941) • Annual Return of Withheld Federal Income Tax (Form 945) • Annual Federal Unemployment Tax (FUTA) Return (Form 940 or 940EZ) • Wage and Tax Statements (Form W-2) For more information, see the IRS Employer's Tax Guide. You also need to learn your state's requirements for paying and filing paperwork. You can take much of the stress out of payroll by working with a small business professional who understands your business to handle the details. A knowledgeable professional will save you a lot of time and greatly reduce the risk of errors that can lead to penalties. This type of help leaves you to focus on the purpose of your business. Wed, 08 Jul 2015 19:00:00 GMT Beware of Draconian Penalties for Health Reimbursement Plans http://www.messnerandhadley.com/blog/beware-of-draconian-penalties-for-health-reimbursement-plans/40655 http://www.messnerandhadley.com/blog/beware-of-draconian-penalties-for-health-reimbursement-plans/40655 Messner & Hadley LLP Article Highlights: Employer health insurance requirements Reimbursement plans and Obamacare Temporary penalty relief through June 30, 2015 Penalty Beginning in 2015, large employers (those with 100 or more full-time equivalent employees) must begin offering health insurance coverage to their employees. Then, in 2016, employers with 50 or more equivalent full-time employees must do the same or face penalties, called the “large employer health coverage excise tax.” Employers with fewer than 50 full-time equivalent employees are never required to offer their employees an insurance plan, but qualified small employers who do provide coverage may qualify for the small business health insurance credit. In the past, many smaller employers have simply reimbursed their employees for the cost of insurance. They found it less expensive and had fewer administrative costs than having a group insurance plan. However, under the Affordable Care Act (ACA, or Obamacare for short), a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, most commentators believe an employer payment plan will fail to comply with the ACA annual dollar limit prohibition because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Thus, reimbursement plans may be subject to a very draconian penalty. Back in February, the IRS issued Notice 2015-17, which provides small employers limited relief from the stiff $100 per day, per participant, penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided: Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015; and Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided. Well, June 30, 2015 has come and gone … and so has the small employer relief. Therefore, employers who still reimburse employees for their medical expenses are in danger of being subject to the $100 per day ($36,500 a year) per employee penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial enough to bankrupt them. So, the large employer who fails to provide any insurance pays a penalty of only $2,000 per year per employee while the employer who helps employees by reimbursing them for the cost of insurance gets hit with an up to $36,500-per-employee penalty. This is true even if the employer is a small employer (50 or fewer equivalent full-time employees) who is under no legal obligation to provide health insurance plans for its employees, but makes reimbursements simply to help the employees. Does this seem fair? We will let you form your own opinion. Will Congress step in to alleviate the problem? Maybe yes and maybe no, and employers must decide if it is worth the risk to depend on Congress to act. There is one firm, Zane Benefits, which claims to have solved the problem with a reimbursement plan that complies with the code, while others argue that it does not. Bottom line: understand your risks if your business has a medical reimbursement plan and perhaps consider other options. Please give this office a call if you have questions. Tue, 07 Jul 2015 19:00:00 GMT Now That Same-Sex Marriage Is Legal In All States, What Are The Tax Implications? http://www.messnerandhadley.com/blog/now-that-same-sex-marriage-is-legal-in-all-states-what-are-the-tax-implications/40642 http://www.messnerandhadley.com/blog/now-that-same-sex-marriage-is-legal-in-all-states-what-are-the-tax-implications/40642 Messner & Hadley LLP Article Highlights: All states are required to recognize and allow same-sex marriage  Married tax filing requirements  Potential tax benefits  Negative tax aspects  On June 26, the Supreme Court ruled that the Fourteenth Amendment to the Constitution requires all states to license marriages between two people of the same sex and to recognize same-sex marriages performed in other states. This comes approximately two years after the Supreme Court overturned the Defense of Marriage Act (DOMA) enacted by Congress and signed by then President Bill Clinton. DOMA defined marriage as "legal union between one man and one woman as husband and wife." This has wide-ranging implications for married individuals who reside in states that until now have not recognized same-sex marriage and for those who can now marry in their state, including employer-provided employee and spousal benefits, retirement issues, Social Security benefits, and of course tax issues. Since DOMA was overturned, legally married same-sex couples have been required to file their federal returns as “married,” but they have had to file their state returns as single or head of household status if their state did not recognize their marriage as legal. That will now change, and they will be filing using the married status for their state returns as well. Being married for tax purposes is not always beneficial, depending on a number of circumstances. The following are some of the tax breaks available to legally married same-sex couples: The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household);   The opportunity to get tax-free employer-paid health coverage for the same-sex spouse;   The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;   The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse;   The opportunity for the estate of the spouse who dies first to transfer the deceased spouse's unused exclusion amount to the surviving spouse;   The opportunity to consent to make "split" gifts (i.e., gifts to others treated as if made one-half by each); and   The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.  There is a negative side as well. Many same-sex married couples, especially higher-income ones, may find that filing as married has unpleasant income tax ramifications. Divorcing before the end of the year can rectify that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples. A taxpayer who is married and living with his or her spouse cannot file using head of household filing status. So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.   When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two, which could substantially reduce their overall deductions. If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.   As unmarried individuals, same-sex partners were able to adopt each other's children and claim the adoption credit. As married individuals they can no longer do that.  For those who are registered domestic partners (RDPs) in California, the Supreme Court's recent ruling does not address the IRS's position that these individuals are not legally married and therefore not eligible to file as married. Unless IRS changes its interpretation, RDPs will still not be able to file as married for federal purposes. If you are contemplating a same-sex union or live in a state that previously did not recognize same-sex marriages and wish to explore the tax consequences of now filing as married individuals, please give this office a call. Thu, 02 Jul 2015 19:00:00 GMT Planning Your RMD and IRA Distributions For 2015 http://www.messnerandhadley.com/blog/planning-your-rmd-and-ira-distributions-for-2015/33622 http://www.messnerandhadley.com/blog/planning-your-rmd-and-ira-distributions-for-2015/33622 Messner & Hadley LLP Article Highlights: Under Age 59.5 Penalty Age 70.5 Mandatory Distribution Age Impact on Social Security Income Required Minimum Distributions Under-Distribution Penalty Penalty Waiver Other Pension Plans We spend most of our lives saving for retirement by putting funds away in tax-advantaged ways. But many of us forget about planning the withdrawals so that they are tax advantaged as well. Although there are exceptions, retirement funds generally cannot be withdrawn until we are age 59.5. If taken out sooner there is a 10% penalty that applies in most cases (in addition there may be a state penalty). A large number of taxpayers do not take distributions until they are forced to at age 70.5, not realizing they might benefit tax wise by taking money out sooner. For example, if you are in a low or zero tax-bracket this year, you can take a certain amount out with no or minimal tax cost. That is where planning your distributions can save a significant amount of tax dollars. Even if you are under 59.5, if your income for the year is such that it is below the taxable income limit, you can withdraw an amount that brings you up just short of the taxable income threshold and only pay the penalty. If you receive Social Security benefits, keep in mind that Social Security income is tax-free for lower income retirees but becomes taxable as their income increases. IRA distributions can sometimes be planned in order to minimize the taxability of the Social Security income. Once you reach age 70.5 you are required to begin taking the prescribed minimum distributions from your Traditional IRA and other qualified pension plans. But that does not mean you can’t withdraw more than the required amount. If your income is low, it may be appropriate to take more than the minimum to save taxes in the future. Unfortunately all too many people simply take the IRS specified minimum amount without considering the tax planning aspects of the distribution. The penalty for not taking the required minimum distribution (RMD) after reaching age 70.5 is an additional tax of 50% of the amount that should have been taken that year, based upon the RMD rules. The good news is that the IRS will generally, upon request, waive the penalty, provided that you show a corrective distribution was made in the subsequent year. So if you have missed an RMD for the prior year you should seek professional assistance right away with regard to taking corrective action. The RMD is determined by taking the IRA balance on December 31 of the prior year and dividing that total by your remaining life expectancy from the IRS table. If you have more than one IRA, figure the RMD for each one and then combine them to get the total required distribution for the year. (An owner of a Roth IRA is not required to take distributions at any age.) For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual are treated as one, but the actual minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. If you have other qualified plans besides Traditional IRA accounts, the RMD for those must be figured separately for each type and withdrawn from those plans and cannot be combined with the distributions from IRAs or other qualified plans to reach the RMD. A taxpayer who fails to take a distribution in the year age 70.5 is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70.5 is attained and one for the current year. If an IRA owner dies after reaching age 70.5, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. Special Note: The provision allowing a direct transfer from an IRA to a qualified charity to be counted towards the RMD for the year and to be excluded from income expired at the end of 2014. However, it has been previously extended twice late in the year. Taxpayers age 70.5 and older with IRA accounts making a sizable charity donation may wish to make the donation via a direct transfer to the charity from their IRA account in case Congress extends this provision for yet another year. As you can see, there is more to the required minimum distribution than meets the eye, and there are some significant planning opportunities. Give this office a call if you have questions or would like to schedule a planning appointment. Tue, 30 Jun 2015 19:00:00 GMT Supreme Court, in a 6-3 decision, upholds Affordable Care Act (Obamacare) subsidies. http://www.messnerandhadley.com/blog/supreme-court-in-a-6-3-decision-upholds-affordable-care-act-obamacare-subsidies/40616 http://www.messnerandhadley.com/blog/supreme-court-in-a-6-3-decision-upholds-affordable-care-act-obamacare-subsidies/40616 Messner & Hadley LLP Breaking: Supreme Court, in a 6-3 decision, upholds Affordable Care Act (Obamacare) subsidies. The ruling allows federal tax credits to be issued to people who buy health plans through a federally run ACA exchange. Thu, 25 Jun 2015 19:00:00 GMT Mid-Year Tax Planning Checklist http://www.messnerandhadley.com/blog/mid-year-tax-planning-checklist/33529 http://www.messnerandhadley.com/blog/mid-year-tax-planning-checklist/33529 Messner & Hadley LLP Article Highlights: Fall tax planning Changes that can impact your tax liability All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them. Did you get married, divorced, or become widowed? Did you change jobs or has your spouse started working? Did you have a substantial increase or decrease in income? Did you have a substantial gain from the sale of stocks or bonds? Did you buy or sell rental property? Did you start, acquire, or sell a business? Did you buy or sell a home? Did you retire this year? Are you on track to withdraw the required amount from your IRA (age 70.5 or older)? Did you refinance your home or take out a second home mortgage this year? Were you the beneficiary of an inheritance this year? Did you have a child? Time to start a tax-advantaged savings plan! Are you taking advantage of tax-advantaged retirement savings? Have you made any significant equipment purchases for your business? Are your cash and non-cash charitable contributions adequately documented? Are you keeping up with your estimated tax payments or do they need adjusting? Are you aware of and prepared for the 3.8% surtax on net investment income? Did you make any unplanned withdrawals from an IRA or pension plan? Have you updated your income and other information with your Health Marketplace? Have you stayed abreast of every new tax law change? If you anticipate or have already encountered any of the above events, it may be appropriate to consult with this office, preferably before the event, and definitely before the end of the year. Wed, 24 Jun 2015 19:00:00 GMT Tax Tips for Students with a Summer Job http://www.messnerandhadley.com/blog/tax-tips-for-students-with-a-summer-job/39106 http://www.messnerandhadley.com/blog/tax-tips-for-students-with-a-summer-job/39106 Messner & Hadley LLP Article Highlights: W-4 Tips Working For Cash Self-employment Tax Working in a Family Business ROTC Members Newspaper Carriers Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job. Completing Form W-4 When Starting a New Job – This form is used by employers to determine the income taxes that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $6,300 (the standard deduction amount) without being liable for income tax. However, if the student is a dependent and has investment income, the tax determination becomes more complicated and subject to special rules. Tips – If the student works as a waiter, camp counselor, or some other common summer jobs, the student may receive tips as part of the summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The IRS provides publication 1244 that can be used to record tips for a month on a daily basis. The employer withholds FICA (Social Security and Medicare) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. Cash Jobs – Many students do odd jobs over the summer and are paid in cash. Just because the job is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing. Self-Employment Tax – When an individual works for an employer, the employer withholds Social Security and Medicare taxes from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. Self-employed workers are required to pay the combined employee and employer amounts themselves (referred to as self-employment tax) if their net earnings are $400 or more. This tax pays for their future benefits under the Social Security system. Even if a worker is not liable for income tax, this 15.3% tax may apply. Even though skirting the law, some employers prefer to treat their workers as “independent contractors” who receive their pay with no taxes withheld, because the employers avoid paying their share of the employment taxes. While the employees may like getting a larger check each pay day, they may find themselves owing income tax and possibly the self-employment tax on their earnings when they file their tax returns for the year. If the worker is offered a job on an independent contractor basis, and that job would normally be filled by an employee, the worker should seriously consider if this arrangement is suitable under the circumstances. Employed in a Family business - If the family business is unincorporated, and pays wages to a child under age 18, the child is not subject to payroll taxes (FICA) since they do not apply to a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the parent’s business will not have to pay its half either. In addition, paying the child, and thus reducing the business’s net income, can reduce the parent’s self-employment tax. However, the wages must be reasonable for the services performed. ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay—such as pay received during summer advanced camp—is taxable. Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes under the following conditions: • The person is in the business of delivering newspapers; • All of the pay for these services directly relates to sales rather than to the number of hours worked; and • A written contract controls the delivery services and states that the distributor will not be treated as an employee for federal tax purposes. Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. Please call this office if you have additional questions related to a child’s employment. Tue, 23 Jun 2015 19:00:00 GMT July 2015 Individual Due Dates http://www.messnerandhadley.com/blog/july-2015-individual-due-dates/32760 http://www.messnerandhadley.com/blog/july-2015-individual-due-dates/32760 Messner & Hadley LLP July 1 - Time for a Mid-Year Tax Check Up Time to review your 2015 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.July 10 - Report Tips to EmployerIf you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.July 15 - Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in June. Sun, 21 Jun 2015 19:00:00 GMT July 2015 Business Due Dates http://www.messnerandhadley.com/blog/july-2015-business-due-dates/32762 http://www.messnerandhadley.com/blog/july-2015-business-due-dates/32762 Messner & Hadley LLP July 1 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2014. Even though the forms do not need to be filed until July 31, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return. July 15 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in June. July 31 - Self-Employed Individuals with Pension Plans If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2014. July 31 - Social Security, Medicare and Withheld Income Tax File Form 941 for the second quarter of 2015. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.July 31 - Certain Small Employers Deposit any undeposited tax if your tax liability is $2,500 or more for 2015 but less than $2,500 for the second quarter. July 31 - Federal Unemployment Tax Deposit the tax owed through June if more than $500. July 31 - All Employers If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2014. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends. Sun, 21 Jun 2015 19:00:00 GMT Tax Tips for Recently Married Taxpayers http://www.messnerandhadley.com/blog/tax-tips-for-recently-married-taxpayers/38516 http://www.messnerandhadley.com/blog/tax-tips-for-recently-married-taxpayers/38516 Messner & Hadley LLP Article Summary: Social Security Administration Internal Revenue Service U.S. Postal Service Withholding & Estimated Tax Payments Health Insurance Marketplace This is the time of year for many couples to tie the knot. If you marry during 2015, here are some post-marriage tips to help you avoid stress at tax time. Notify the Social Security Administration - Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered your name and SSN don’t match at the time your return is filed. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded. Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your return for 2015. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. In either case, it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for 2015 to make sure that you are not going to be under-withheld and that you don’t set yourself up to receive bad news for the next filing season. Notify the Marketplace - If you or your spouse has health insurance through a government Marketplace (Exchange), you must notify the Marketplace of your change in marital status. If you were included on a parent’s health insurance policy through a Marketplace, then the parent must notify the Marketplace. Failure to notify the Marketplace can create tax filing problems. Blog: If you have any questions about the impact of your new marital status on your taxes, please give this office a call. If you have any questions about the impact of your new marital status on your taxes, please give this office a call. Thu, 18 Jun 2015 19:00:00 GMT Forgot Something on Your Tax Return? It’s Not Too Late to Amend the Return http://www.messnerandhadley.com/blog/forgot-something-on-your-tax-return-it8217s-not-too-late-to-amend-the-return/31733 http://www.messnerandhadley.com/blog/forgot-something-on-your-tax-return-it8217s-not-too-late-to-amend-the-return/31733 Messner & Hadley LLP Article Highlights: Frequently Overlooked Income and Deductions Three-Year Refund Statute of Limitations State returns Interest & Penalties Filing Instructions and Suggestions If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can be because of: Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation. Overlooking an item of income or receiving a corrected 1099. Failing to claim the correct advanced premium credit because of an incorrect 1095-A. Forgetting about a deducible expense. Forgetting about an expense that would qualify for a tax credit. These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2014 return or prior year returns. Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Thus, with the exception of amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2012 through 2014. Some states have a longer statute. The last day to file an amended 2012 return for a refund is April 15, 2016. Generally, you do not need to file an amended return to correct math errors you made on the return. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you amend returns and owe additional tax, you will be subject interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. When amending multiple returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed. If the changes involve another schedule or form, it must be completed and included with the amended return. In addition, it may be appropriate to include documentation to avoid subsequent correspondence from the IRS or state agency. A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. An insufficient explanation can lead to additional correspondence and delays. 8. Depending on why you file an amended federal return, you may be required to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, you will need to amend the state return as well as the federal. An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns. Tue, 16 Jun 2015 19:00:00 GMT Don’t Panic if You Receive an IRS Notice http://www.messnerandhadley.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 http://www.messnerandhadley.com/blog/don8217t-panic-if-you-receive-an-irs-notice/38969 Messner & Hadley LLP Article Highlights: Letter May Be In Error Let Your Tax Professional Respond Procrastination Leads to Bigger Problems Change of Address Complications If it is not your refund check in the mailbox, that letter from the IRS will probably increase your heart rate a little. Don’t panic; many of these letters can be dealt with simply and painlessly. Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account, or to request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what needs to be done to satisfy the inquiry. However, the letters also must advise you of your rights and other information required by law. Thus, these letters can become overly lengthy and sometimes difficult to understand. That is why it is important to either call this office immediately or forward a copy of the letter or notice so it can be reviewed and handled accordingly. Do not procrastinate or throw the letter in a drawer hoping the issue will go away. Most of these letters are computer generated and, after a certain period of time, another letter will automatically be produced. And, as you might expect, each succeeding letter will become more aggressive and more difficult to deal with. Most importantly, don’t automatically pay an amount the IRS is requesting unless you are positive it is correct. Quite often, you really do not owe the amount being billed, and it will be difficult and time consuming to get your payment back. It is good practice to have this office review the notice prior to making any payment. Unfortunately, many taxpayers are issued these letters and don’t know it because they have moved and left no forwarding address. Even though the IRS will register your address change when you file your annual tax return, that may not be timely enough, especially if your return is on extension or you are behind in your filings. It is always better to notify the IRS, and your state if applicable, that you have a new address, just as you would your family and financial and business affiliations. You may not want to receive correspondence from the IRS, but it is easier to deal with the first notice. The complications can only increase as the notices go unanswered. The IRS provides Form 8822 – Change of Address for taxpayers who have relocated between tax filings. It is important for any IRS correspondence to be dealt with promptly and correctly. This office can handle these matters for you; so please call for assistance. Thu, 11 Jun 2015 19:00:00 GMT Five-Year Anniversary of Healthcare Reform: 5 Things You Should Know in '15 About the ACA http://www.messnerandhadley.com/blog/five-year-anniversary-of-healthcare-reform-5-things-you-should-know-in-15-about-the-aca/40579 http://www.messnerandhadley.com/blog/five-year-anniversary-of-healthcare-reform-5-things-you-should-know-in-15-about-the-aca/40579 Messner & Hadley LLP It has been five years since the Patient Protection and Affordable Care Act (the ACA) was signed into law. Healthcare reform has certainly been controversial, but this controversy does not absolve some businesses of certain responsibilities when it comes to offering minimum essential healthcare coverage to their employees. In recognition of the five-year anniversary of healthcare reform, here are 5 things you should know about some of the key ACA requirements for businesses in 2015: The shared responsibility provision of healthcare reform is effective either this year or next year, depending on how many employees you have. Also known as the employer mandate or “play or pay,” this provision requires companies with at least 50 full-time equivalent employees to offer minimum essential healthcare coverage to their full-time employees and their dependents. Or, such businesses - which are referred to by the law as applicable large employers (ALEs) - can pay a substantial non-deductible penalty if they prefer. Companies with 100 or more full-time employees (or full-time equivalents) must begin complying with the shared responsibility provision this year. Specifically, they must offer qualifying healthcare coverage to 70 percent or more of their full-time employees and their dependents this year and 95 percent of them in 2016. Meanwhile, companies with between 50 and 99 full-time employees or equivalents must begin complying with the shared responsibility provision next year.   Depending on the size of your business, you might not be subject to the shared responsibility provision at all. There's good news in the ACA for many small businesses. Companies with fewer than 50 full-time employees or equivalents are not subject to the shared responsibility this year or next year. However, if these businesses want to offer healthcare coverage to their employees, they can buy coverage on the Small Business Health Options Marketplace, or SHOP. This marketplace could lower small firms' health insurance costs by giving them more buying power.   The healthcare coverage your business provides employees under the ACA must meet certain criteria. Specifically, this coverage must be affordable and it must provide minimum value. Healthcare reform considers coverage to be “affordable” if employees' share of their premiums doesn't exceed 9.56 percent of their annual household income in 2015. And it considers “minimum value” to be a policy that covers at least 60 percent of the cost of healthcare services.   Your business might qualify for a tax credit for contributions you make toward employees' premiums. Small businesses with up to 25 full-time equivalent employees could receive a tax credit of up to 50 percent toward their contributions to employees' healthcare premiums. To qualify, your business must pay at least half of the premiums and employees' average annual wages in 2015 cannot be more than $51,600 (adjusted each year for inflation going forward). Also, this tax credit will be reduced if you had more than 10 full-time equivalent employees last year and/or employees' average annual wages last year were more than $25,400 (also adjusted each year for inflation going forward).   The ACA includes requirements to report coverage information to the IRS. ALEs are required to certify that they offered full-time employees and their dependents the opportunity to enroll in minimum essential healthcare coverage by filing Form 1094-C with the IRS. In addition, they must also issue a Form 1095-C employee statement to each full-time employee. These information-reporting requirements were voluntary this year for coverage provided in 2014, but they will be required next year for coverage provided in 2015.  Be sure to contact us with any questions about your company's specific responsibilities under the ACA this year. Wed, 10 Jun 2015 19:00:00 GMT Have a Financial Interest in or Signature Authority over a Foreign Financial Account? Better Read This! http://www.messnerandhadley.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 http://www.messnerandhadley.com/blog/have-a-financial-interest-in-or-signature-authority-over-a-foreign-financial-account-better-read-this/36946 Messner & Hadley LLP Article Highlights: Reporting Threshold FBAR Filing Due Date Penalties Overlooked Accounts Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country) must report that relationship to the U.S. government each calendar year if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. The government uses this reporting mechanism as a means of uncovering hidden foreign accounts and ensuring that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether or not they have a reporting requirement. Reporting is accomplished by electronically filing Form FinCEN 114 commonly referred to as FBAR (for Foreign Bank Account Report), which is due on or before June 30 of the succeeding year. No extensions are available for filing this form. Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed. The penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations. Overlooked Accounts - Many taxpayers overlook the fact that they have a reporting requirement in such situations as: Family Accounts - Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in a foreign country. This practice is common for some ethnic groups. The taxpayer may not really consider the account to be his or hers; nevertheless, it falls under the reporting requirement if he or she has signature or other authority over the account and its value exceeds $10,000. Inherited Accounts - Accounts in a foreign country and inherited accounts fall under the FBAR reporting requirement, even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000. Business Accounts - A corporate officer or Board member may have signature authority over a business account in a foreign country and may overlook the need to meet the FBAR reporting requirements. Foreign Financial Accounts - These financial accounts are maintained by foreign financial institutions and include other investment assets not held in accounts maintained by financial institutions. However, no reporting is required for interests that are held in a custodial account with a U.S. financial institution. If you have questions regarding this reporting requirement or need assistance with the reporting, please contact this office. Tue, 09 Jun 2015 19:00:00 GMT Higher-Income Taxpayers Subject to Exemption & Itemized Deductions Phase-outs http://www.messnerandhadley.com/blog/higher-income-taxpayers-subject-to-exemption--itemized-deductions-phase-outs/40562 http://www.messnerandhadley.com/blog/higher-income-taxpayers-subject-to-exemption--itemized-deductions-phase-outs/40562 Messner & Hadley LLP Article Highlights: Phase-out Thresholds  Personal Exemption Phase-outs  Itemized Deduction Phase-outs  Generally, taxpayers are allowed to deduct personal exemption allowances of $4,000 (2015) each for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large enough, itemized deductions. However, both the personal exemption allowances and itemized deductions are being phased out for higher-income taxpayers. The phase-out begins when a taxpayer's adjusted gross income (AGI) reaches a phase-out threshold amount that is annually adjusted for inflation. The phase-out threshold amounts for 2015 are based on taxpayers' filing statuses, and they are: $258,250 for single filers, $284,050 for individuals filing as heads of households, $309,900 for married couples filing jointly and $154,950 for married individuals filing separately. Here is how the phase-outs work: Personal and Dependent Exemptions - The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer's AGI exceeds the threshold amount for the taxpayer's filing status. Example: Ralph and Louise have an AGI of $422,400 for 2015 and two children, for a total of four exemptions worth $16,000 (4 × $4,000). The threshold for a married couple is $309,900; thus, their income exceeds the threshold by $112,500. Each $2,500 part of this amount reduces the exemption by 2%; there are 45 parts of this amount ($112,500 ÷ $2,500 = 45). Thus, 90% (45 × 2%) of their $16,000 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,600 ([100%-90%] × $16,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $5,643 ($16,000 × 90% × 33%). Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. When a taxpayer is a party to a multiple support agreement, the taxpayer may want to allow another contributing member of the agreement who is not affected by the phase-out to claim the dependent's exemption.   Itemized Deductions - The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount. The reduction is not to exceed 80% of the otherwise allowable itemized deductions. Not all itemized deductions are subject to the phase-out. The following deductions escape the phase-out: o Medical and dental expenses o Investment interest expenses o Casualty and theft losses from personal-use property o Casualty and theft losses from income-producing property o Gambling losses Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out—and 100% of the deductions listed above. Example: Ralph and Louise from the previous example, who had an AGI of $422,400 for 2015, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2015, Ralph and Louise had the following itemized deductions: Subject to Phase-out    Not Subject to Phase-out Home mortgage interest: $10,000 Taxes: $8,000  Charitable contributions: $6,000 Casualty loss: $12,000  Total:  $24,000 $12,000  The phase-out is the lesser of $3,375 or $19,200 (80% of $24,000) which is $19,200. Thus, Ralph and Louise's itemized deductions for 2015 will be $32,625 ($24,000 - $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out will cost them an additional $1,114 ($3,375 × 33%).  Conventional thinking is to maximize deductions. However, taxpayers who normally are not subject to a phase-out may have a high-income year because of unusual income. In these cases, it may be appropriate, if possible, to defer paying deductible expenses to the year following the high-income year or perhaps to deduct the expenses in the preceding year. The standard deduction is not subject to the phase-out. If you have questions about how these phase-outs will impact your specific situation, if you want to adjust your withholding or estimated taxes, or if you want to make a tax planning appointment, please give this office a call. Thu, 04 Jun 2015 19:00:00 GMT Parents Can Get Credit for Sending Kids to Day Camp http://www.messnerandhadley.com/blog/parents-can-get-credit-for-sending-kids-to-day-camp/22357 http://www.messnerandhadley.com/blog/parents-can-get-credit-for-sending-kids-to-day-camp/22357 Messner & Hadley LLP Article Highlights: Child Age Limits  Employment-related Expense  Married Taxpayer Earnings Limits  Disabled or Full-time Student Spouse  Expense Limits  With summer just around the corner, there is a tax break that working parents should know about. Many working parents must arrange for care of their children under 13 years of age (or any age if handicapped) during the school vacation period. A popular solution - with a tax benefit - is a day camp program. The cost of day camp can count as an expense towards the child and dependent care credit. But be careful; expenses for overnight camps do not qualify. For an expense to qualify for the credit, it must be an “employment-related” expense; i.e., it must enable you and your spouse, if married, to work, and it must be for the care of your child, stepchild, or foster child, or your brother or sister or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year and does not provide more than half of his or her own support for the year. Married couples must file jointly and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit. The qualifying expenses are limited to the income you or your spouse, if married, earns from work, using the figure for whomever of you earns less. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled. The qualifying expenses can't exceed $3,000 per year if you have one qualifying child, while the limit is $6,000 per year for two or more qualifying persons. This limit does not need to be divided equally. For example, if you paid and incurred $2,500 of qualified expenses for the care of one child and $3,500 for the care of another child, you can use the total, $6,000, to figure the credit. The credit is computed as a percentage of your qualifying expenses; in most cases, 20%. (If your joint adjusted gross income [AGI] is $43,000 or less, the percentage will be higher, but will not exceed 35%.) Example: Al and Janice both work, each with earned income in excess of $40,000 per year. Janice's job is a part-time job, which coincides with their 11-year-old daughter, Susan's, school hours. However, during the school summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their child credit would be $600 (20% of $3,000). The credit reduces a taxpayer's tax bill dollar for dollar. Thus, in the above example, Al and Janice pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability and any excess is not refundable. The credit cannot be used to reduce self-employment tax or the taxes imposed by the Affordable Care Act. If you have questions about how the childcare credit applies to your particular tax situation, please give this office a call. Tue, 02 Jun 2015 19:00:00 GMT 7 Ways to Boost AR Collections and Improve Cash Flow http://www.messnerandhadley.com/blog/7-ways-to-boost-ar-collections-and-improve-cash-flow/40556 http://www.messnerandhadley.com/blog/7-ways-to-boost-ar-collections-and-improve-cash-flow/40556 Messner & Hadley LLP “A sale isn’t a sale until you’ve collected payment - it’s just a loan,” a wise businessman once said. If you’ve been in business for any length of time, you know how true this is. Many small businesses that were profitable on paper have gone bankrupt waiting for payment from their customers to arrive. This makes accounts receivable (AR) collections one of the most important tasks for small business owners. Unfortunately, it’s also one of the most neglected. Here are 7 strategies you can implement to help boost your AR collections and improve your cash flow: Make sure your invoices are clear and accurate. If invoices are vague, ambiguous or flat-out wrong, this is sure to delay customer payments as they call to try to get things straightened out. In short, you don’t want to give customers a reason not to pay your invoices quickly. Create an AR aging report. This report will track and list the current payment status of all your client accounts (e.g., 0-30 days, 30-60 days, 60-90 days, 90+ days). This will tell you which clients are current in their payments and which clients are past due so you know where to focus your collection efforts. Give a bookkeeping employee responsibility for AR collections. If collecting accounts receivable isn’t the main responsibility of one specific employee, it will probably fall by the wayside as other tasks crowd it out. Therefore, make one of your bookkeeping employees primarily responsible for this task. Move quickly on past-due accounts. Don’t delay taking action once a client’s account reaches the past-due stage. Studies have revealed that the likelihood of collecting past-due receivables drops drastically the longer they go uncollected. Your designated bookkeeping employee should start making collections efforts the day after an account becomes past due. Plan your collections strategy carefully. Decide ahead of time how you will approach late-paying clients. For example, a friendly reminder call and/or email from your designated bookkeeping employee is probably a good first collection step. If this doesn’t get results, you can proceed to more aggressive steps such as sending past due notices and dunning letters. Consider offering a payment plan. Sometimes, customers have legitimate reasons why they can’t pay their invoices on time. Maybe the customer is having temporary cash flow problems and wants to pay you but simply can’t right now. In this scenario, you might consider working out a payment plan that allows the customer to pay the balance due over a period of time. The agreement should be made in writing and signed by both parties. Hire a collection agency. If all of these steps fail to resolve a collection problem, you might have to turn to a collection agency as a last resort. However, this is a serious step that should not be taken lightly, since it will probably jeopardize your relationship with the customer. Decide whether or not collecting the past-due amount is worth possibly losing the customer. Also keep in mind that the collection agency will keep a large percentage of the amount collected. Very few small businesses can afford not to make AR collections a top priority. Following these 7 steps will help you improve your collections - and these improvements will boost both your cash flow and your bottom line. Tue, 02 Jun 2015 19:00:00 GMT Planning Your IRA Withdrawal? http://www.messnerandhadley.com/blog/planning-your-ira-withdrawal/40537 http://www.messnerandhadley.com/blog/planning-your-ira-withdrawal/40537 Messner & Hadley LLP Article Highlights: Early Distributions  Distributions After Age 59.5  Minimum Required Distributions After Age 70.5  Excess Accumulation Penalty  Estate Tax Issues  Advance planning can, in many cases, minimize or even avoid taxes on IRA distributions and other qualified plan distributions. When contemplating future retirement and when to begin tapping taxable IRA and other qualified retirement accounts, taxpayers need to consider a number of important issues. Early Distributions (before 59.5) - If funds are withdrawn before reaching age 59 ½, the taxpayer is also subject to a 10% early withdrawal penalty (and state penalties if applicable) in addition to the income tax on the IRA distribution, unless what is referred to as the substantially equal payment exemption is utilized. Under this exception, an early retiree can begin taking substantially equal payments at least once a year over the owner's life or joint lives of the owner and designated beneficiary. The payments must not cease before the end of the five-year period beginning with the date of the first payment, BUT after the taxpayer reaches age 59.5. Age 59.5 to age 70.5 Distributions - After attaining age 59.5, an individual can take out of their IRA as much or as little as he or she wishes in any year until reaching age 70.5. This withdrawal liberty leaves the retiree to plan his or her distributions to minimize taxes. Techniques involve matching distributions with no- or low-income years. Age 70 ½ and Older - Once a taxpayer reaches age 70 ½, he or she must withdraw at least a minimum amount from their Traditional IRA each year. A taxpayer who fails to take a distribution in the year age 70 ½ is reached, can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70 ½ and one for the current year. Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. The excess accumulation penalty can generally be abated by following IRS abatement procedures. Quite frequently, taxpayers have multiple IRA accounts in addition to one or more types of other retirement plans. This gives rise to a commonly asked question, "Must I take a distribution from each individual account?" For purposes of the annual required minimum distribution, a separate distribution must be taken from each type of plan. However, a taxpayer may have multiple accounts for each type of plan, which for tax purposes are treated as one plan. For example, if you have three IRA accounts, the three separate accounts are treated as one for tax purposes, and the distribution can be taken from any combination of the accounts. Generally, the minimum amount that must be withdrawn in a particular year, after reaching age 70 ½, is the total value of all IRA accounts (as determined on December 31st of the prior year) divided by a factor based on the owner's age from the table below, illustrated for ages 70 - 87 only (the complete table goes to age 115 and over). Minimum Distribution Table Age Factor Age Factor 70 27.4 80 18.7 71 26.5 81 17.9 72 25.6 82 17.1 73 24.7 83 16.3 74 23.8 84 15.5 75 22.9 85 14.8 76 22.0 86 14.1 77 21.2 87 13.4 78 20.3 79 19.5 Estate and Beneficiary Considerations - When planning your distributions, keep in mind that the value of your undistributed IRA account will be included in your gross estate when you pass on, and depending upon the size of your estate, it may be subject to inheritance taxes. In addition, the inherited IRA distributions will be taxable to the individual who inherits the IRA. Therefore, it could be appropriate to utilize the IRA funds first and then dip into other assets after the IRA funds have been depleted. On the other hand, funds left in an IRA do continue to accumulate tax-free which might be better in certain circumstances. If you would like assistance with your tax planning needs or to develop an IRA distribution plan, please call this office for an appointment. Thu, 28 May 2015 19:00:00 GMT Will the IRS Tax Return Data Breach Impact You? http://www.messnerandhadley.com/blog/will-the-irs-tax-return-data-breach-impact-you/40539 http://www.messnerandhadley.com/blog/will-the-irs-tax-return-data-breach-impact-you/40539 Messner & Hadley LLP As you no doubt have heard on the news, the IRS recently announced that cyber thieves have gained access to over 100,000 taxpayers’ tax return information. According to a number of news sources, that breach has been traced to Russia. The criminals did not actually gain access to IRS secure databases by hacking into the IRS computer system. Instead, they simply used an online tool provided by the IRS through which taxpayers are able to obtain transcripts of their previously filed tax returns. That service, called “Get Transcript,” is available to anyone who, with the correct information, can access an individual’s transcripts. The problem is this: the information needed to access “Get Transcript” is readily available from other online sources, which made it easy for the criminals to access a large number of taxpayer accounts. More than 100,000 taxpayer accounts were breached, while another 100,000 attempts failed, compared to 23 million legitimate taxpayers who were able to successfully download their tax history. It is assumed the criminals’ purpose is to obtain taxpayer information needed to file fraudulent tax returns and thus obtain illegitimate refunds. The IRS has already taken steps to mitigate the damage. The “Get Transcript” service provides two ways to receive a transcript, one online and the other by mail. The online version has been shut down for now and transcripts can only be acquired by mail, which takes up to 10 days. All taxpayers whose accounts were accessed, and the additional 100,000 accounts to which access was attempted but failed, will be notified very soon. The IRS is offering free credit monitoring and repair services to those who were affected. All 200,000+ accounts will also be flagged so that fraudulent tax returns cannot be filed. Meanwhile, according to several news services, the Treasury Inspector General, Homeland Security and the FBI have all launched investigations. Moreover, the Senate Finance Committee, which oversees the IRS, will hold a hearing on the data theft. Is there a lesson to be learned here? Absolutely: limit what information you make available on the Internet and to whom you provide it. Once personal data is online, it is very difficult to remove it. Question everyone’s need for any personal information. This is especially true for your SSN, date of birth, bank account numbers, passwords, credit card numbers, etc. Even such things as your mother’s maiden name, where you were born and what high school you attended are frequently used to identify you when accessing accounts. Don’t post any sensitive data on social media sites and educate your children about the information they post on their social profiles. If you believe you are at risk due to a lost or stolen purse or wallet, questionable credit card activity or credit report, you should contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245 (Monday - Friday, 7 a.m. - 7 p.m. local time; Alaska and Hawaii follow Pacific time). You should also complete and file Form 14039 – IRS Identity Theft Affidavit. In addition to reporting a theft or possible theft to the IRS, the following actions are recommended: Report incidents of identity theft to the Federal Trade Commission at www.consumer.ftc.gov or the FTC Identity Theft hotline at 877-438-4338. File a report with the local police. Contact the fraud departments of the three major credit bureaus: Equifax – www.equifax.com, 800-525-6285 Experian – www.experian.com, 888-397-3742 TransUnion – www.transunion.com, 800-680-7289 Close any accounts that have been tampered with or opened fraudulently. If you believe your tax information has been compromised, call this office immediately for assistance. Thu, 28 May 2015 19:00:00 GMT Saver’s Credit Can Help You Save for Retirement http://www.messnerandhadley.com/blog/saver8217s-credit-can-help-you-save-for-retirement/36602 http://www.messnerandhadley.com/blog/saver8217s-credit-can-help-you-save-for-retirement/36602 Messner & Hadley LLP Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit.The saver’s credit, also called the retirement savings credit, helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit for 2015 is determined from the table illustrated below and is based upon both filing status and income (AGI). * Modified AGI - Is determined without regard to the foreign or possessions earned income exclusion and foreign housing exclusion or deduction. Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples if both spouses contribute to a plan), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, may in fact be zero for some taxpayers.The amount of a taxpayer’s saver’s credit is based on his or her filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement programs. Example – Eric and Heather are married and file a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $37,000. The credit is computed as follows: Eric’s 401(k) contribution was $3,000, but only the first $2,000 can be used 2,000 Heather’s IRA contribution was $500, so it can all be used 500 Total Qualifying contributions 2,500 Credit percentage for a joint return with AGI of $37,000 from the table X.20 Saver’s credit $500 This example illustrates how the credit phases out for higher-AGI taxpayers. In this example, the couple’s AGI of $37,000 only allowed them a credit of 20% times their qualifying contributions. Had their AGI been $36,500 or less, their credit percentage would have been 50% of their qualified contributions, for a credit of $1,250. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. Generally, except for Roth IRA contributions, workers’ contributions to retirement plans are tax deductible, either in the form of a deduction on their tax return (traditional IRAs and certain self-employed retirement plans) or through a reduction of wages that would otherwise be taxable (such as pre-tax contributions to a 401(k), 403(b), etc.). So in addition to the saver’s credit, contributions to retirement plans provide a tax deduction for traditional IRAs or income reductions for certain other plans, which will lower an individual’s tax before the credit is applied. The credit itself can only be used to reduce the tax (income and alternative minimum taxes only) to zero, and any amount in excess of a taxpayer’s tax liability is lost. Other special rules that apply to the saver’s credit include the following: Eligible taxpayers must be at least 18 years of age. Anyone claimed as a dependent on someone else’s return cannot take the credit. A full-time student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a full-time student. The credit is provided to encourage taxpayers to save for their retirement. To prevent taxpayers from taking distributions from existing retirement savings and re-depositing them to claim the credit, the qualifying retirement contributions used to figure the credit are reduced by any retirement plan distributions taken during a “testing period.” The testing period includes the prior two tax years, the current year, and the subsequent tax year before the due date (including extensions) for filing the taxpayer's return for the tax year of the credit. As you can see, qualifying for and being able to use this credit involves a complicated set of rules. If you have questions about how this tax benefit might apply in your situation, please give this office a call. Tue, 26 May 2015 19:00:00 GMT Important Date For Taxpayers Living Abroad http://www.messnerandhadley.com/blog/important-date-for-taxpayers-living-abroad/39040 http://www.messnerandhadley.com/blog/important-date-for-taxpayers-living-abroad/39040 Messner & Hadley LLP Article Highlights: June 15th filing due date Additional extension to October 15 available Extension does not relieve late payment penalties Combat zone If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15, 2015 is the filing due date for your 2014 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15, 2015. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below). Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area. In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement that allows you to pay your taxes over a period of up to 72 months. Please contact this office for assistance with an extension request or an installment agreement. Thu, 21 May 2015 19:00:00 GMT June 2015 Individual Due Dates http://www.messnerandhadley.com/blog/june-2015-individual-due-dates/32072 http://www.messnerandhadley.com/blog/june-2015-individual-due-dates/32072 Messner & Hadley LLP June 1 - Final Due Date for IRA Trustees to Issue Form 5498Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2014. The FMV of an IRA on the last day of the prior year (Dec 31, 2014) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2015. If you are age 70½ or older during 2015 and need assistance determining your RMD for the year, please give this office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year. June 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during May, you are required to report them to your employer on IRS Form 4070 no later than June 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. June 15 - Estimated Tax Payment Due It’s time to make your second quarter estimated tax installment payment for the 2015 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: • The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. • The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. June 15 - Taxpayers Living Abroad If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, June 15 is the filing due date for your 2014 income tax return and to pay any tax due. If your return has not been completed and you need additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then, file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline (see below). Caution: This is not an extension of time to pay your tax liability, only an extension to file the return. If you expect to owe, estimate how much and include your payment with the extension. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. Combat Zone - For military taxpayers in a combat zone/qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. This also applies to service members involved in contingency operations, such as Operation Iraqi Freedom or Enduring Freedom. The extension is for 180 consecutive days after the later of: The last day a military taxpayer was in a combat zone/qualified hazardous duty area or served in a qualifying contingency operation, or have qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area), or The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation, or while performing qualifying service outside of the combat zone/qualified hazardous duty area. In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be a substantial penalty. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 72 months. Please contact this office for assistance with an extension request or an installment agreement. June 30 - Taxpayers with Foreign Financial InterestsA U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2015 for 2014. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2014. Contact our office for additional information and assistance filing the form. Tue, 19 May 2015 19:00:00 GMT June 2015 Business Due Dates http://www.messnerandhadley.com/blog/june-2015-business-due-dates/32073 http://www.messnerandhadley.com/blog/june-2015-business-due-dates/32073 Messner & Hadley LLP June 15 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for May 2015. This is also the due date for the non-payroll withholding deposit for May 2015 if the monthly deposit rule applies.June 15 - Corporations Deposit the second installment of estimated income tax for 2015 for calendar year corporations.June 30 - Taxpayers with Foreign Financial Interests A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114 with the Department of the Treasury (not the IRS). The form must be filed with the Treasury Department no later than June 30, 2015 for 2014. No extension of time to file is permitted. The form must be filed electronically; paper forms are not allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2014. Contact our office for additional information and assistance filing the form. Tue, 19 May 2015 19:00:00 GMT Are You Missing Out On The Earned Income Tax Credit? http://www.messnerandhadley.com/blog/are-you-missing-out-on-the-earned-income-tax-credit/40516 http://www.messnerandhadley.com/blog/are-you-missing-out-on-the-earned-income-tax-credit/40516 Messner & Hadley LLP Article Highlights: Earned Income Tax Credit  Refundable Tax Credit  Qualifications  Special Rule for Military  The EITC is for people who work but have lower incomes. If you qualify, it could be worth up to $6,242 in 2015. So you could pay less federal tax or even get a refund. The credit is a refundable credit, so you can receive the benefits of the credit even if you do not owe any taxes. That's money you can use to make a difference in your life. Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it simply because they don't understand the criteria. If you qualify for but failed to claim the credit on your return for 2012, 2013 and/or 2014, you can still claim it for those years by filing an amended return or an original return if you have not previously filed. The EITC is based on the amount of your earned income and whether there are qualifying children in your household. If you have children, they must meet relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. The EITC income qualifications are annually inflation adjusted. The qualifications shown below are for 2015. Please call for those that apply for prior years. If you were employed for at least part of 2015, you may be eligible for the EITC based on these general requirements: You earned less than $14,820 ($20,330 if married filing jointly) and did not have any qualifying children.   You earned less than $39,131 ($44,651 if married filing jointly) and have one qualifying child.   You earned less than $44,454 ($49,974 if married filing jointly) and have two qualifying children.   You earned less than $47,747 ($53,267 if married filing jointly) and have more than two qualifying children.  In addition you must meet a few basic rules:  You must have a valid Social Security Number.   You must have earned income from employment or from self-employment.  Your filing status cannot be married, filing separately.   You must have been a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.   You cannot be a qualifying child of another person.   Your investment income for the year cannot exceed $3,400 (call for other years).   If you do not have a qualifying child, you must: o Be age 25 but under 65 at the end of the year, o Live in the United States for more than half the year, and o Not be a qualifying child of another person.    You cannot file Form 2555 or 2555-EZ (excluding foreign earned income)  Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If that election is made, the military member must include in earned income all nontaxable combat pay received. If spouses are filing a joint return and both spouses received nontaxable combat pay, then each one can make a separate election. If you have questions about your qualifications for this credit or need help amending or filing a prior year return to claim the credit, please give this office a call. Tue, 19 May 2015 19:00:00 GMT 5 Accounting Tips That Will Make Managing Your Small Business a Breeze http://www.messnerandhadley.com/blog/5-accounting-tips-that-will-make-managing-your-small-business-a-breeze/40517 http://www.messnerandhadley.com/blog/5-accounting-tips-that-will-make-managing-your-small-business-a-breeze/40517 Messner & Hadley LLP If you are the owner of a small business, you are endlessly busy. Between keeping track of the day-to-day requirements and monitoring growth and profit, it's easy to get overwhelmed and that means you might neglect important recordkeeping that will help you in the long term. Here are five helpful hints that will make accounting easier and make sure that you don't miss any milestones or deadlines. 1. Business and personal expenses should be kept separate. It's easy to make the mistake of using your business credit card for personal expenses and vice versa, and those errors can always be amended through reimbursements and revised record-keeping, but you'll save yourself a lot of time, trouble and aggravation if you keep the two types of expenses completely segregated from the start. 2. Don't underestimate the difficulty of your taxes - hire a tax professional. If you're smart enough to run your own business, it's natural to assume that you can save yourself the expense of hiring a tax professional to file your taxes. The truth is that there's a lot more to accounting then filling in forms, and a tax professional will be familiar with deductions you don't realize you're entitled to take, or inform you of an underpayment that might lead to trouble down the road. 3. Be realistic about upcoming expenses. When things are moving along swimmingly, it's natural to assume that the status quo will remain, but you need to be realistic and anticipate that office equipment will wear down or need to be upgraded, staffing needs will change, and overhead costs are unlikely to remain the same. By planning for future major expenses and setting aside funding for those eventualities, you will save yourselves many headaches in the future. 4. Don't forget your employees when calculating expenses. A lot of business owners will sit down to forecast their expenses or try to figure out where their money is going, but forget to give proper weight to the amount that they are spending on staffing expenses such as insurance, health care and payroll taxes. Your employees are generally one of your biggest assets, so it's important that when you're calculating costs, you make sure that you haven't forgotten about all of the expenses involved with keeping them, as well as with expanding. 5. Don't lose sight of your Accounts Receivables. If you were an employee of a business that failed to give you a paycheck, you'd be more than just upset - you'd take action to make sure that you get paid. Yet many owners of small businesses get so enmeshed in the minutia and big decisions of their day-to-day operations that they lose track of whether clients are paying promptly and what percentage of invoices remain open. Getting behind on your record keeping regarding accounts receivables lets things get so far behind that it becomes costly and difficult to collect, and you may end up not getting paid or creating negative feelings. Track payments as they come in, note how far behind payments due are, and take note of which clients are presenting you with collection problems. These tips are straightforward and simple, and following them can make a significant difference in your ability to keep your business on track, to keep your forecasts accurate, and to allow you to take action when it's needed. For more information on other steps you can take, contact this firm to make an appointment for a consultation. Tue, 19 May 2015 19:00:00 GMT Using the Home Sale Gain Exclusion for More than Just Your Home http://www.messnerandhadley.com/blog/using-the-home-sale-gain-exclusion-for-more-than-just-your-home/40512 http://www.messnerandhadley.com/blog/using-the-home-sale-gain-exclusion-for-more-than-just-your-home/40512 Messner & Hadley LLP Article Summary: Home Sale Exclusion Primary Residence Second Home Fixer-upper Rental With careful planning, and provided the rules are followed, the tax code allows the home sale gain exclusion every two years. Let’s assume you own a home, perhaps a second (vacation) home, or maybe are even thinking about buying a fixer-upper and flipping it. With careful planning, it is possible to apply the full home sale exclusion to all three of the properties. Here is how it works. The tax code allows you to exclude up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you have lived in it and owned it for two of the five years immediately preceding the sale and you have not previously taken a home sale exclusion within the two years immediately preceding the sale. In addition, there is no limit on the number of times you can use the exclusion, as long as the requirements are met. It makes sense to start off by selling the home you currently live in because you probably already meet the two-out-of-five-years ownership and use tests. The next step, if you have a second home, would be to move into it and make it your primary residence. After you have lived there for two full years and it has been more than two years since the previous home was sold, you can sell the property and take the home sale exclusion again. If you are handy, and find the right property, the next possible step would be to purchase and occupy a fixer-upper while you make repairs and improvements in preparation for its eventual sale after the two-year ownership and occupancy rules have been met. When that time is up, you can sell the fixer-upper and take the third exclusion. This makes it possible for a married couple to exclude as much as $1,500,000 of home sale profit in just over four years if they follow the rules carefully and time the sales correctly. If you own a rental property, and you occupy the rental for two years prior to its sale, you will be able to exclude a portion of the gain for that property as well. Because so many rental owners were occupying their rentals before selling them and taking a home sale exclusion, Congress enacted a law barring the exclusion of gain attributable to rental periods after 2008. Thus, the home sale exclusion can only be used to exclude gain attributable to periods before 2009 and periods after 2008 in which the home was used as a primary residence. Example: You purchased and began renting a residence on July 1, 2005. On July 1, 2013, you occupied the property as your primary residence; and, on August 1, 2015, you sell the property for a gain of $230,000. You had owned the property for a total of 121 months, of which 67 were before 2009 or during which you occupied the property as your primary residence after 2008. Thus .5537 (67/121) of the gain is subject to the exclusion. As a result, $127,351 (.5537 x $230,000) of the gain qualifies for the exclusion. In the preceding example, had the gain exceeded the exclusion limits, $250,000 for single taxpayers and $500,000 married taxpayers, the exclusion would have been capped at the exclusion limits. There is one final issue to consider. If any of the residences were acquired though a tax-deferred (Sec 1031) exchange from another property, then the residence must be owned for a period of five years prior to its sale to qualify for the exclusion. Since situations may differ, we highly recommend that you consult with this office prior to initiating such a plan. Thu, 14 May 2015 19:00:00 GMT Home Mortgage Interest and Unmarried Couples http://www.messnerandhadley.com/blog/home-mortgage-interest-and-unmarried-couples/40497 http://www.messnerandhadley.com/blog/home-mortgage-interest-and-unmarried-couples/40497 Messner & Hadley LLP Article Highlights: Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage.   An exception to the preceding general rule applies for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.   If the person making the mortgage payment is not liable or is not an equitable owner, then that individual is not allowed the interest deduction, nor is the individual who is liable on the debt.   It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home but only one of them is liable for the debt on that home. Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt. For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment, nor is the other person, because he or she did not pay it. This can lead to some complications when one person in a couple earns significantly more income and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns. Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property, even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments. This position was upheld in a Tax Court decision when the court denied a taxpayer's home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments. If you are in a similar situation and have questions related to sharing potentially tax-deductible expenses, please give this office a call. Tue, 12 May 2015 19:00:00 GMT Safe-Harbor Home Office Deduction Is It Better For You? http://www.messnerandhadley.com/blog/safe-harbor-home-office-deduction-is-it-better-for-you/40446 http://www.messnerandhadley.com/blog/safe-harbor-home-office-deduction-is-it-better-for-you/40446 Messner & Hadley LLP Article Highlights: Annual Election  Depreciation  Additional Office Expenses  Limitations & Carryover  Qualifications  Employee Issues  Usage Issues  Taxpayers can elect to take a simplified deduction for the business use of the taxpayer's home. The deduction is $5 per square foot, with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. Here are the details of this simplified method: Annual Election - A taxpayer may elect to take the safe-harbor method or the regular method on an annual basis. Thus, a taxpayer may freely switch between the methods each year. The election is made by choosing the method on a timely filed original return and is irrevocable for that year.   Depreciation - When the taxpayer elects the safe-harbor method, no depreciation deduction for the home is allowed, and the depreciation for the year is deemed to be zero.   Additional Office Expenses - Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the safe-harbor method is used.   Home Interest and Taxes - Prorated home interest and taxes are not allowed as an office expense when using the safe-harbor method. Instead, 100% of the home interest and taxes are deductible as usual on Schedule A.   Deduction Limited by Business Income - As is the case with the regular method, under the safe-harbor method the home office deduction is limited by the business income. For the safe harbor, the deduction cannot exceed the gross income derived from the qualified business use of the home for the taxable year reduced by the business deductions (deductions unrelated to the qualified business use of a home). However, unlike the regular method, any amount in excess of this gross income limitation is disallowed and may not be carried over and claimed as a deduction in any other taxable year.   Home Office Carryover - This cannot be used in a year in which the safe-harbor method is used. The carryover continues to future years and can only be used when the regular method is used.   Qualifications - A taxpayer must still meet the regular qualifications to use the safe-harbor method.   Reimbursed Employee - The safe-harbor method cannot be used by an employee who receives advances, allowances, or reimbursements for expenses related to qualified business use of his or her home under a reimbursement or other expense allowance arrangement with the employer.   Determining Square Footage - To determine the average square footage of the business, use these guidelines: o Square Feet Maximum - Never use more than 300 square feet for any month, even if the taxpayer has multiple businesses. Where there are multiple businesses, use a reasonable method to allocate between businesses. o Determining Average Square Feet for the Year - Use zero for months when there was no business use or when the business was not for a full year. o 15-Day Minimum - Don't count any month in which the business use is less than 15 days. As an example, a taxpayer begins using 400 square feet of her home for business on July 20, 2015, and continues using the space as a home office through the end of the year. Her average monthly allowable square footage for 2015 is 125 square feet (300 x 5 months = 1500/12 = 125).   Multiple Businesses - Where there are multiple businesses, only one method may be used for the year—either the regular or safe harbor.   Mixed-Use Property - A taxpayer who has a qualified business use of a home and a rental use for purposes of § 280A(c)(3) of the same home cannot use the safe-harbor method for the rental use.   Taxpayers Sharing a Home - Taxpayers sharing a home (for example, roommates or spouses, regardless of filing status), if otherwise eligible, may each use the safe-harbor method but not for a qualified business use of the same portion of the home. As an example, a husband and wife, if otherwise eligible and regardless of filing status, may each use the safe-harbor method for a qualified business use of the same home for up to 300 square feet of different portions of the home.    Depreciation Rate When Switching Methods - When the safe-harbor method is used and the taxpayer subsequently switches back to the regular method, use the depreciation factor from the appropriate optional depreciation table as if the property had been depreciated all along. When choosing between the methods, the following factors should be considered: o There is no reduction in basis for depreciation or depreciation recapture when using the safe-harbor method. o When using the regular method, the income limitation takes into account home interest, taxes, and other expenses before allowing the depreciation portion of the deduction. That is not true for the safe-harbor method as the interest, taxes, and other business-use-area expenses are not considered.  If you have questions related to this simplified method of claiming a deduction for the business use of your home, please give this office a call. Thu, 07 May 2015 19:00:00 GMT Tips for Taxpayers Starting a New Business http://www.messnerandhadley.com/blog/tips-for-taxpayers-starting-a-new-business/40429 http://www.messnerandhadley.com/blog/tips-for-taxpayers-starting-a-new-business/40429 Messner & Hadley LLP Article Highlights: Business Entity Type  Types of Business Taxes  Keeping Good Records  Accounting Methods  Anyone starting a new business should be aware of his or her federal tax responsibilities. Here are several things you should know if you plan on opening a new business this year. First, you must decide what type of business entity you are going to establish. The type of business you open will determine which tax form has to be filed. The most common types of business are the sole proprietorship, partnership, corporation, and S corporation.   The type of business you operate will determine what taxes must be paid and how you pay them. The four general types of business tax are income tax, self-employment tax, employment tax, and sales or excise tax.   An employer identification number is used to identify a business entity. Most businesses need an EIN, and your business will definitely need one if you hire employees, regardless of the type of business entity selected. Please call this office to determine whether your business needs an EIN and get assistance in obtaining one if it does.   Good records will help ensure the successful operation of your new business. You may choose any record-keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kinds of records. However, the business you are in will affect the types of records that will have to be kept for federal tax purposes. If you need assistance or guidance in setting up your business records, please give this office a call.   Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.   Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, income is generally reported in the tax year it is received, and expenses are deducted in the tax year they are paid. Under an accrual method, income is generally reported in the tax year it was earned, if not yet received, and expenses are deducted in the tax year they are incurred, even though they are not yet paid.  If you are contemplating starting a business or if you already have one, please call this office if you need assistance with your accounting, bookkeeping, payroll or sales tax reporting, or other federal or state compliance issues. Tue, 05 May 2015 19:00:00 GMT How Long Are You on the Hook for a Tax Assessment? http://www.messnerandhadley.com/blog/how-long-are-you-on-the-hook-for-a-tax-assessment/40404 http://www.messnerandhadley.com/blog/how-long-are-you-on-the-hook-for-a-tax-assessment/40404 Messner & Hadley LLP Article Highlights: Statute of Limitations  Filing Before April Due Date  Filing After April Due Date  Extension  Amended Returns  Three-year Statute Understatement Exceeds 25%  Ten-year Collection Period  Tax Records  A frequent question from taxpayers is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait - as in all things taxes, it is not that clean cut. Here are some complications: You file before the April due date - If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2014 return on February 15, 2015 or April 15, 2015, the statute did not start running until April 15, 2015. You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer's delinquency, or under a filing extension granted by IRS. For example, say your 2014 return is on extension until October 15, 2015, and you actually file on September 1, 2015. The statute of limitations for further assessments by the IRS will end on September 2, 2018. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations. If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return. You file an amended tax return - If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax. You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three-year statute of limitations is increased to six years. In determining if more than 25% has been omitted, capital gains and losses aren't netted; only gains are taken into account. These “omissions” don't include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. You file three years late - Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late filing penalty. No refunds are issued three years after the filing due date. 10-year collection period - Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period. Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don't want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost. If you are behind on filing your returns and would like to get caught up, please give this office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well. Thu, 30 Apr 2015 19:00:00 GMT Read This Before Tossing Old Tax Records http://www.messnerandhadley.com/blog/read-this-before-tossing-old-tax-records/36706 http://www.messnerandhadley.com/blog/read-this-before-tossing-old-tax-records/36706 Messner & Hadley LLP Article Highlights: Reasons to Keep Records Statute of Limitations Maintaining Record of Asset Basis Now that your taxes have been completed for 2014, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records must be kept in the first place. Generally, we keep tax records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we dispose of them. With certain exceptions, the statute for assessing additional taxes is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal law. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return to evade taxes. If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute. Examples - Sue filed her 2011 tax return before the due date of April 15, 2012. She will be able to dispose of most of the 2011 records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day. The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. These need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category: Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements (If you reinvest dividends) - Many taxpayers use the dividends they receive from stocks or mutual funds to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale. Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold. For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records, thinking the large exclusions would cover any potential appreciation in the home’s value. Now that exclusion may not always be enough to cover sale gains, particularly in markets where property values have steadily risen, so records of home improvements are vital. Records can be important, so please use caution when discarding them. What about the tax returns themselves? While disposing of the back-up documents used to prepare the returns can usually be done after the statutory period has expired, you may want to consider keeping a copy of your tax returns (the 1040 and attached schedules/statements plus your state return) indefinitely. If you just don’t have room to keep a copy of the paper returns, digitizing them is an option. If you have questions about whether or not to retain certain records, give this office a call first; it is better to make sure, before discarding something that might be needed down the road. Tue, 28 Apr 2015 19:00:00 GMT Tax Penalty For Not Having Insurance Ratchets Up In 2015 http://www.messnerandhadley.com/blog/tax-penalty-for-not-having-insurance-ratchets-up-in-2015/40367 http://www.messnerandhadley.com/blog/tax-penalty-for-not-having-insurance-ratchets-up-in-2015/40367 Messner & Hadley LLP Article Highlights: Flat dollar amount penalty Percentage of income penalty Household income Modified adjusted gross income Tax filing threshold The penalty for not having minimum essential health insurance for yourself and other members of your tax family takes a substantial jump in 2015. For 2014, the penalty was the greater of the flat dollar amount ($95 for each adult plus $47.50 for each child under age 18, but no more than $285) or 1% of your household income minus your tax-filing threshold amount. For 2015, those amounts take a substantial jump to $325 for each adult and $162.50 for each child (but no more than $975) or 2% of household income minus the amount of your tax-filing threshold. Household income - Estimating the penalty requires you to project your household income for 2015. Household income includes the modified adjusted gross income (MAGI) for all members of your household for whom you claim a dependent exemption and who are required to file a tax return. As an example, say a parent has a teenage child who has a part-time job and earns $7,000 for the year. This $7,000 exceeds the child’s filing threshold (standard deduction for a single individual plus exemption allowance, but since the parents are claiming the child as a dependent, the child cannot claim his or her own exemption). So the child would be required to file a tax return, and the parents would be required to include the child’s MAGI when computing household income. Modified adjusted gross income – MAGI is your regular adjusted gross income with untaxed Social Security benefits, non-taxable interest and dividends, and the foreign earned income exclusion added back. Tax Filing Threshold – A taxpayer’s tax-filing threshold is the sum of the standard deduction and personal exemptions for the filer and spouse. Figuring the penalty – Take for example a family of three, including Dad, Mom and their teenage child. The household income for the family is $65,000, including the child’s earnings of $7,000, and they are subject to the penalty for the entire year of 2015. The flat dollar amount (per person) penalty is: $812.50 ($325 + $325 + $162.50) The percentage of income amount is household income less their filing threshold times 2%. In this example the tax-filing threshold for 2015 would be $20,600, which is the total of $12,600 (standard deduction for married joint) plus $4,000 each for the filer and spouse (personal exemptions). Note that although the dependent child’s income is included in household income (because the child is required to file a return), the child’s standard deduction and exemption allowance are not included in the filing threshold amount used in the calculation of the penalty. The percentage of income amount is $888 (($65,000 - $20,600) x 2%) Thus, in this example, the annual penalty for not being insured for the entire year is $888, the greater of the flat dollar amount or the percentage of income. When a family is uninsured for less than a full year, the penalty would be applied on a monthly basis, which for the example would be $74 per month. If you have questions related to how the penalty might apply to your family, please give this office a call. Thu, 23 Apr 2015 19:00:00 GMT Accounting Terms: Understanding the accounting term EBITDA and how to use it. http://www.messnerandhadley.com/blog/accounting-terms-understanding-the-accounting-term-ebitda-and-how-to-use-it/40369 http://www.messnerandhadley.com/blog/accounting-terms-understanding-the-accounting-term-ebitda-and-how-to-use-it/40369 Messner & Hadley LLP Article Highlights Definition of EBITDA  Use EBITDA to compare businesses  One gauge of a business's financial health  The accounting term EBITDA is an acronym that is widely used. It stands for Earnings Before Interest, Taxation, Depreciation, and Amortization, and it is an extremely helpful tool for understanding how one business or industry is faring based on comparing it to others that are doing the same thing. EBITDA's value lies in the fact that it gives a very quick assessment of a business's earnings potential; but, because it is not part of generally accepted accounting principles, or GAAP, it is frequently excluded from a business's official financial statement. Still, when a business owner is looking to attract additional investment or a potential buyer, EBITDA is often what is provided because it gives an easily understandable glimpse at earnings potential using existing information. With EBITDA, those who are assessing different businesses for possible investment are able to get an at-a-glance look at how the company is performing and use it to compare the business against companies that may be capitalized or accounting differently. The calculation is a simple formula, but requires access to the following information about a business: Income  Expenses (excluding tax, interest, depreciation and amortization)  Interest  Taxes  Depreciation of operational assets, such as equipment  Amortization of intangible assets, such as patents  With those numbers in hand, the formula is: EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization) Or, more simply, EBITDA equals net income plus interest, taxes, depreciation and amortization. Whichever way you approach it, it is important to know that, as useful as EBITDA can be, it is only one way to gauge an organization's financial health and potential. Making the decision to invest in or purchase a business requires a comprehensive view that ensures that you are well informed. If you need additional assistance calculating a small business EBITDA or other accounting ratios, contact this office today to set up a consultation. Wed, 22 Apr 2015 19:00:00 GMT May 2015 Individual Due Dates http://www.messnerandhadley.com/blog/may-2015-individual-due-dates/31256 http://www.messnerandhadley.com/blog/may-2015-individual-due-dates/31256 Messner & Hadley LLP May 11 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 11. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed. Tue, 21 Apr 2015 19:00:00 GMT May 2015 Business Due Dates http://www.messnerandhadley.com/blog/may-2015-business-due-dates/31257 http://www.messnerandhadley.com/blog/may-2015-business-due-dates/31257 Messner & Hadley LLP May 11 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.May 15 - Employer’s Monthly Deposit Due If you are an employer and the monthly deposit rules apply, May 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2015. This is also the due date for the non-payroll withholding deposit for April 2015 if the monthly deposit rule applies. Tue, 21 Apr 2015 19:00:00 GMT Is Your Refund Too High or Do You Owe Taxes? You Probably Need to Adjust Your W-4 http://www.messnerandhadley.com/blog/is-your-refund-too-high-or-do-you-owe-taxes-you-probably-need-to-adjust-your-w-4/40359 http://www.messnerandhadley.com/blog/is-your-refund-too-high-or-do-you-owe-taxes-you-probably-need-to-adjust-your-w-4/40359 Messner & Hadley LLP Article Highlights: Large Refund or Tax Due Employers Withhold Based on W-4 IRS Online Withholding Calculator Self-employed Taxpayers If your income is primarily from wages and you received a very large refund—or worse, if you owed money—then your employer is not withholding the correct amount of tax (but it probably isn’t your employer’s fault). Sure, you like a big refund, but you have to remember you are only getting your own money back that was over-withheld in the first place. Why not bank it and have access to it all year long instead of providing Uncle Sam with an interest-free loan? Employers withhold tax based upon the information you provide them on Form W-4, and to adjust your withholding you will need to provide your employer with an updated W-4. Although the W-4 appears to be an easy form to fill out, this is where many taxpayers go wrong because they have other income, itemize their deductions or qualify for various tax credits. You can solve this problem by using the IRS’s online W-4 calculator that helps taxpayers determine the correct amount of allowances to claim on their W-4. It takes into account a multitude of issues, including itemized deductions, other income, tax credits, and tax already withheld. You will need the following available before using the IRS calculator: Your (and your spouse’s if you file jointly) most recent pay stub A copy of your most recent income tax return You will be required to estimate some values, so remember the results are only going to be as accurate as the input you provide. Click Here To Access The IRS Withholding Calculator Once you have determined the filing status and allowances to claim using the IRS calculator, download a copy of Form W-4, Employee's Withholding Allowance Certificate, fill it in and give it to your employer. Caution: If you are uncomfortable using the IRS’s online calculator, don’t understand some of the terminology, or have multiple jobs or a working spouse, you may need professional help to determine the correct number of W-4 allowances. Also the federal W-4 allowances may not translate properly for your state withholding. Tip: Once your employer has implemented the new W-4 allowance, double-check the withholding to make sure it is approximately what you had intended. It is not uncommon for errors to occur in an employer’s payroll department that could lead to unpleasant surprises at tax time. If you are self-employed, you generally pay estimated taxes instead of having payroll withholding. You may be self-employed and also have salaried employment, or your spouse may have payroll income or be self-employed. There are a multitude of possible combinations. If so, the IRS withholding calculator is not suitable for your needs, and you will probably need professional assistance in determining a combination of estimated taxes and payroll withholding. Please call this office for assistance in preparing your W-4s and determining your estimated tax payments. Tue, 21 Apr 2015 19:00:00 GMT Should You Keep Home Improvement Records? http://www.messnerandhadley.com/blog/should-you-keep-home-improvement-records/40355 http://www.messnerandhadley.com/blog/should-you-keep-home-improvement-records/40355 Messner & Hadley LLP Article Highlights: Keeping home improvement records Home gain exclusion amounts Records may be required to avoid tax Many taxpayers don’t feel the need to keep home improvement records, thinking the potential gain will never exceed the amount of the exclusion for home gains ($250,000 or $500,000 if both filer and spouse qualify) if they meet the 2-out-of-5-year use and ownership tests. Here are some situations when having home improvement records could save taxes: (1) The home is owned for a long period of time, and the combination of appreciation in value due to inflation and improvements exceeds the exclusion amount. (2) The home is converted to a rental property, and the cost and improvements of the home are needed to establish the depreciable basis of the property. (3) The home is converted to a second residence, and the exclusion might not apply to the sale. (4) You suffer a casualty loss and retain the home after making repairs. (5) The home is sold before meeting the 2-year use and ownership requirements. (6) The home only qualifies for a reduced exclusion because the home is sold before meeting the 2-year use and ownership requirements. (7) One spouse retains the home after a divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to married couples. (8) There are future tax law changes that could affect the exclusion amounts. Everyone hates to keep records, but consider the consequences if you have a gain and a portion of it cannot be excluded. You will be hit with capital gains (CG), and there is a good chance the CG tax rate will be higher than normal simply because the gain pushed you into a higher CG tax bracket. Before deciding not to keep records, carefully consider the potential of having a gain in excess of the exclusion amount. If you have questions related to the home gain exclusion or questions about how keeping home improvement records might directly affect you, please give this office a call. Thu, 16 Apr 2015 19:00:00 GMT Is Your Hobby a For-Profit Endeavor? http://www.messnerandhadley.com/blog/is-your-hobby-a-for-profit-endeavor/34881 http://www.messnerandhadley.com/blog/is-your-hobby-a-for-profit-endeavor/34881 Messner & Hadley LLP Article Highlights: Hobby Versus For-Profit Endeavor Factors Used To Determine For-Profit Three out of Five Rule Hobby Deductions Whether an activity is a hobby or a business may not be apparent to the customers of the endeavor, but distinguishing the difference is necessary for tax purposes because the tax treatments are substantially different. The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or if it is engaged in as a hobby. Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.” This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit. Is your hobby really an activity engaged in for profit? In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit. The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby: Does the time and effort put into the activity indicate an intention to make a profit? Do you depend on income from the activity? If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business? Have you changed methods of operation to improve profitability? Do you have the knowledge needed to carry on the activity as a successful business? Have you made a profit in similar activities in the past? Does the activity make a profit in some years? Do you expect to make a profit in the future from the appreciation of assets used in the activity? An activity is presumed to be engaged in for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses). If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. Hobby deductions If it is determined that your activity is not for profit, allowable deductions cannot exceed the gross receipts for the activity. Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of the three categories: Expenses that a taxpayer would otherwise be allowed to deduct, such as home mortgage interest and taxes, may be taken in full. Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category. Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories. If you have questions related to your specific business or hobby circumstances, please give this office a call. Tue, 14 Apr 2015 19:00:00 GMT Do I Have to File a Tax Return? http://www.messnerandhadley.com/blog/do-i-have-to-file-a-tax-return/40338 http://www.messnerandhadley.com/blog/do-i-have-to-file-a-tax-return/40338 Messner & Hadley LLP Article Highlights: When You Are Required to File Self-Employed Taxpayers Filing Thresholds Benefits of Filing Even When Not Required to File Refundable Tax Credits This is a question many taxpayers ask during this time of year, and the question is far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to individuals’ BENEFIT to file a return even if they are not required to file. When individuals are required to file: Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any). Taxpayers are required to file if they have net self-employed income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employed income exceeds $400. Taxpayers are also required to file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for insurance on the marketplace and received a higher advanced premium tax credit than they were entitled to are required to repay part of it. Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution. 2014 – Filing Thresholds Filing Status Age Threshold Single Under Age 65 Age 65 or Older $10,15011,700 Married Filing Jointly Both Spouses Under 65One Spouse 65 or OlderBoth Spouses 65 or Older $20,30021,500 22,700 Married Filing Separately Any Age 3,950 Head of Household Under 6565 or Older $13,05014,600 Qualifying Widow(er)with Dependent Child Under 6565 or Older $16,35017,550 When it is beneficial for individuals to file: There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file: Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return. Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file. Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child. American Opportunity Credit – The maximum credit per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of that credit is refundable when you have no tax liability and are not required to file. Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a marketplace. To extent the credit is greater than the supplement provided by the marketplace, it is refundable even if there is no other reason to file. DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So the refund period expires for 2014 returns, which were due in April of 2015, on April 16, 2018.For more information about filing requirements and your eligibility to receive tax credits, please contact this office. Thu, 09 Apr 2015 19:00:00 GMT Individual Estimated Tax Payments for 2015 Start Soon http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2015-start-soon/38793 http://www.messnerandhadley.com/blog/individual-estimated-tax-payments-for-2015-start-soon/38793 Messner & Hadley LLP Highlights: Pay-as-you-go tax system Tax law changes affecting estimates Underpayment penalties Safe harbor estimates Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, and thanks to Congress’ constant tinkering with the tax laws, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year can be challenging. Recently, several new tax laws and changes took effect that add complexity to estimating one’s tax liability, including: higher ordinary tax rates, higher capital gains tax rates, the phase out of exemptions and itemized deductions for higher income taxpayers, the 3.8% tax on net investment income, and .9% increase in self-employment tax for upper-income self-employed individuals, not to mention a myriad of sun setting tax provisions. When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment of estimated tax penalty. This penalty is the short-term federal rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly, you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for a higher income taxpayer who has AGI exceeding $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. As 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. As you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. If your state has a state tax, the state’s de minimis amount and safe-harbor percentage and amount may be different. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, or when a taxpayer retires. If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2014, please give this office a call. Tue, 07 Apr 2015 19:00:00 GMT Are You Leaving Tax Money On The Table? http://www.messnerandhadley.com/blog/are-you-leaving-tax-money-on-the-table/40330 http://www.messnerandhadley.com/blog/are-you-leaving-tax-money-on-the-table/40330 Messner & Hadley LLP Article Highlights: Unclaimed Refunds Over-Withholding Earned Income Tax Credit Child Tax Credit American Opportunity Credit (AOTC) Premium Tax Credit (PTC) Refund Statute of Limitations Each year the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return. The IRS estimates that approximately half of the unclaimed refunds are for amounts greater than $600. You may not have filed, thinking that because you don’t itemize and your employer is withholding tax that you don’t need to file. But there is a good chance you are leaving money on the table by not filing. Consider the following: Over-Withholding - Your employer may have withheld more than you owe, as withholding is not an exact science. But you have to file to get the excess back. Earned Income Tax Credit (EITC) – An EITC is a credit for lower-income taxpayers. If you worked and earned less than $52,427 last year, you could receive the EITC as a refund if you qualify with or without a child. The credit can be as much $6,143 and is fully refundable. This is a very lucrative credit, but you have to file to benefit from it. Child Tax Credit – If you have at least one child under the age of 17 you probably qualify for the Child Tax Credit. Generally this credit is non-refundable (can only be used to reduce taxes owed). However, if you work, your income is low to moderate and you don’t use the full credit amount to offset taxes, a portion of the $1,000 per child credit may be refundable. American Opportunity Tax Credit (AOTC) - The AOTC is available for four years of post-secondary education expenses and can result in a credit of up to $2,500 per eligible student enrolled at least half time for at least one academic period during the year. Up to 40% of the credit is refundable, so even if you don’t owe any taxes, you may still qualify for the credit. But to claim the credit you must file a return. Premium Tax Credit (PTC) – If you acquired your health insurance last year through a government marketplace, you probably qualify for an insurance subsidy in the form of the PTC. But you have to file to get the credit. If you received the PTC in advance to reduce your premiums, as did most individuals who used a health insurance marketplace, you must file a tax return and reconcile the advance PTC against the actual PTC. If you have not filed in the past, the statute of limitations for a refund is 3 years from the unextended due date of the return, so if you have a refund coming for past years you should file before the statute expires. For example, to claim a refund for a 2012 return you will need to file the 2012 return no later than Wednesday, April 15, 2016, or the refund is gone forever. This firm has expertise in preparing tax returns for all years, including past years, so please contact this office for assistance so you can get the refunds you are entitled to. Thu, 02 Apr 2015 19:00:00 GMT Refund Statute Expiring http://www.messnerandhadley.com/blog/refund-statute-expiring/38758 http://www.messnerandhadley.com/blog/refund-statute-expiring/38758 Messner & Hadley LLP Article Highlights: 2011 refunds are in jeopardy Filing deadline Lost benefits Mailing instructions If you have not yet filed your 2011 federal tax return and have a refund coming, time is running out! The IRS estimates that there are in excess of 1.1 million taxpayers who have not filed their 2011 tax returns and that there is in excess of $1.1 billion dollars of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act quickly because the return must be filed by April 15, 2015 to claim a refund for 2011. Otherwise, the money becomes the property of the U.S. Treasury. By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2011. Many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds, which for unmarried individuals in 2011 were $40,964 for those with two or more children, $36,052 for people with one child, and $13,660 for those with no children. Each amount is $5,080 more for married joint filers. In addition, parents eligible to claim the refundable portion of the child tax credit will forfeit that benefit if they don’t file a return. When filing a 2011 return, the law requires that the return be properly addressed, mailed and postmarked by the April 15th date. There is no penalty for filing a late return qualifying for a refund. As a reminder, taxpayers seeking a 2011 refund should know that their checks will be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past-due federal debts such as student loans. If this office can be of assistance in bringing you current with your tax filing obligations, please call. Tue, 31 Mar 2015 19:00:00 GMT Can't Pay Your Taxes by the April Due Date? http://www.messnerandhadley.com/blog/cant-pay-your-taxes-by-the-april-due-date/40276 http://www.messnerandhadley.com/blog/cant-pay-your-taxes-by-the-april-due-date/40276 Messner & Hadley LLP Article Highlights: If you can't pay  Loans  Credit card payments  IRS Installment agreement  Retirement funds  The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end ends up owing? The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don't. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government's penalties and interest. Here are a few options to consider. Family Loan - Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.   Credit Card - Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.  Installment Agreement - If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years' tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.   Tap a Retirement Account - This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.  Whatever you decide, don't just ignore your tax liability because that is the worst thing you can do. Please call this office for assistance. Thu, 26 Mar 2015 19:00:00 GMT Writing Off Your Start-Up Expenses http://www.messnerandhadley.com/blog/writing-off-your-start-up-expenses/39785 http://www.messnerandhadley.com/blog/writing-off-your-start-up-expenses/39785 Messner & Hadley LLP Article Highlights: $5,000 first-year start-up expense write-off Start-up expense write-off limitations Timely filing requirements Qualifying start-up expenses Business owners – especially those operating small businesses – may be helped by a tax law allowing them to deduct up to $5,000 of the start-up expenses in the first year of the business’s operation. This is in lieu of amortizing the expenses over 180 months (15 years). Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product. As with most tax benefits, there is always a catch. Congress put a cap on the amount of start-up expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)). The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date. Qualifying Start-Up Costs - A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include: Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.; Wages paid to employees and their instructors while they are being trained; Advertisements related to opening the business; Fees and salaries paid to consultants or others for professional services; and Travel and other related costs to secure prospective customers, distributors, and suppliers. For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs. If you have a question related to start-up expenses, please give this office a call. Tue, 24 Mar 2015 19:00:00 GMT How QuickBooks' Custom Fields Can Provide Better Business Insight http://www.messnerandhadley.com/blog/how-quickbooks-custom-fields-can-provide-better-business-insight/40253 http://www.messnerandhadley.com/blog/how-quickbooks-custom-fields-can-provide-better-business-insight/40253 Messner & Hadley LLP QuickBooks' customizability makes it flexible enough for countless business types. Custom fields are a big part of that. QuickBooks makes it possible for your business to create very detailed records for customers, vendors, employees, and items. In fact, you may find that you rarely make use of every field each contains. But you may also find that there are additional fields that you'd like to see in your predefined record formats. That's where custom fields come in. QuickBooks lets you add extra fields and specify what their labels should be. You can define up to 12 total fields for use in customer, vendor, and/or employee records. QuickBooks treats these just as it treats your built-in fields. They appear in the records themselves, of course, and are included when you export a file containing them. You can also search for them in reports. People RecordsThere are separate processes for defining fields for your individual and company contacts and your items. Let's look at how you can set up custom fields for customers, vendors, and employees first. Go to your Customer Center and open a blank Customer record (in newer versions of QuickBooks, you'll click on New Customer & Job in the upper left corner, and then click New Customer). Then click the Additional Info tab in the left vertical pane of the New Customer window, then click on the Define Fields button in the lower right. This window will open (with blank fields): Figure1: You can create up to 12 total custom fields that will be shared by customers, vendors, and employees. It's easy to create your custom field labels. Simply type a word or short phrase on a line under Label, and then click in the box(es) on the same line in the appropriate column(s). While it's possible that you would want to include the same field in multiple record types, you'll most likely have separate labels for each. Consider carefully before creating custom field labels. Ask yourself questions like: What do I want to know about customers/vendors/employees that isn't already covered in the pre-built record formats?  What kinds of information will I want to make available in report filters?  How will I want to separate out individuals for communications like emails, memos, special sale invitations, etc.  Remember that you'll have to go back into existing records and fill in these blanks in order to be consistent. You're not required to complete them, but your searches, reports, etc. will not be comprehensive if you don't. As always, you can consult with us if you want some suggestions. Item Records The custom fields we just created are generally only used internally. That is, they won't automatically appear on sales forms, purchase orders, etc. You may decide that some custom fields in item records, on the other hand, do need to be available on some forms. For example, you might sell shirts in multiple sizes, colors, and styles. To start creating them, open the Lists menu and select Item List. Click the down arrow on the Item menu in the lower left, then click New. Since you will be selling similar items that you'll be keeping in stock, select Inventory Part under TYPE. Then click on the Custom Fields button over on the right and then Define Fields. Figure 2: If you sell similar items that are available with different characteristics, you'll want to create custom fields. As you did with the earlier custom fields, enter a word or phrase under Label and then click in the Use column. After you've entered up to five fields, click OK. A Complicated Process This is where the simplicity of creating and using custom fields for items in reports and transaction forms ends. If you sell t-shirts in various sizes and colors, you're going to need our help in order to see true inventory levels in reports and add those custom fields to sales and purchase transaction forms. Figure 3: Adding custom fields to QuickBooks' standard transaction forms is possible, but you'll need our assistance to make sure inventory tracking is set up right. It may be that you need more inventory-tracking tools than are offered in your version of QuickBooks. If that's the case, we can help you either add an application that will meet your needs or suggest an upgrade. Mon, 23 Mar 2015 19:00:00 GMT April 2015 Individual Due Dates http://www.messnerandhadley.com/blog/april-2015-individual-due-dates/36567 http://www.messnerandhadley.com/blog/april-2015-individual-due-dates/36567 Messner & Hadley LLP April 1 - Last Day to Withdraw Required Minimum DistributionLast day to withdraw 2014’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2014. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2014 were required to make their 2014 IRA withdrawal by December 31, 2014.April 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.April 15 - Individual Tax Returns Due File a 2014 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office. Caution: The extension gives you until October 15, 2015 to file your 2014 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 15 due date. April 15 - Household Employer Return Due If you paid cash wages of $1,900 or more in 2014 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2013 or 2014 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.April 15 - Estimated Tax Payment Due (Individuals) It’s time to make your first quarter estimated tax installment payment for the 2015 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding. When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%. Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules. April 15 - Last Day to Make Contributions Last day to make contributions to Traditional and Roth IRAs for tax year 2014. Sun, 22 Mar 2015 19:00:00 GMT April 2015 Business Due Dates http://www.messnerandhadley.com/blog/april-2015-business-due-dates/36568 http://www.messnerandhadley.com/blog/april-2015-business-due-dates/36568 Messner & Hadley LLP April 15 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in March. April 15 - Corporations The first installment of 2015 estimated tax of a calendar year corporation is due. April 15 - Partnerships File a 2014-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.April 30 - Social Security, Medicare and Withheld Income Tax File Form 941 for the first quarter of 2015. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until May 11 to file the return.April 30 - Federal Unemployment Tax Deposit the tax owed through March if it is more than $500. Sun, 22 Mar 2015 19:00:00 GMT Tax Break for Sales of Inherited Homes http://www.messnerandhadley.com/blog/tax-break-for-sales-of-inherited-homes/40246 http://www.messnerandhadley.com/blog/tax-break-for-sales-of-inherited-homes/40246 Messner & Hadley LLP Article Highlights: Inherited Basis  Certified Appraisals  Loss On Sale  Potential Law Change  People who inherit property are often concerned about the taxes they will owe on any gain from that property's sale. After all, the property may have been purchased years ago at a low cost by a deceased relative but may now have vastly appreciated in value. The usual question is: “Won't the taxes at sale be horrendous?” Clients are usually pleasantly surprised by the answer—that special rules apply to figuring the tax on the sale of any inherited property. Instead of having to start with the decedent's original purchase price to determine gain or loss, the law allows taxpayers to use the value at the date of the decedent's death as a starting point (sometimes an alternate date is chosen). This often means that the selling price and the inherited basis of the property are practically identical, and there is little, if any, gain to report. In fact, the computation frequently results in a loss, particularly when it comes to real property on which large selling expenses (realtor commissions, etc.) must be paid. This also highlights the importance of having a certified appraisal of the home to establish the home's tax basis. If an estate tax return or probate is required, a certified appraisal will be completed as part of those processes. If not, one must be obtained to establish the basis. It is generally not acceptable just to refer to a real estate agent's estimation of value or comparable sale prices if the IRS questions the date of death value. The few hundred dollars it may cost for a certified appraisal will be worth it if the IRS asks for proof of the basis. Another issue is whether a loss on an inherited home is deductible. Normally, losses on the sale of personal use property such as one's home are not deductible. However, unless the beneficiary is living in the home, the home becomes investment property in the hands of the beneficiary, and a loss is deductible but subject to a $3,000 ($1,500 if married and filing separately) per year limitation for all capital losses with any unused losses carried forward to a future year. In some cases, courts have allowed deductions for losses on an inherited home if the beneficiary also lives in the home. In order to deduct such a loss, a beneficiary must try to sell or rent the property immediately following the decedent's death. In one case, where a beneficiary was also living in the house with the decedent at the time of death, loss on a sale was still deductible, when the heir moved out of the home within a “reasonable time” and immediately attempted to sell or rent it. This treatment could change in the future, however. The President's Fiscal Year 2016 Budget Proposal includes a proposal that would eliminate any step up in basis at the time of death and would require payment of capital gains tax on the increase in the value of the home at the time it is inherited. If you have questions related to inheritances or home sales, please give this office a call. Thu, 19 Mar 2015 19:00:00 GMT Tax Filing Deadline Rapidly Approaching http://www.messnerandhadley.com/blog/tax-filing-deadline-rapidly-approaching/38777 http://www.messnerandhadley.com/blog/tax-filing-deadline-rapidly-approaching/38777 Messner & Hadley LLP Article Highlights: Balance due payments Contributions to a Roth or traditional IRA Estimated tax payments for the first quarter of 2015 Individual refund claims for tax year 2011 Just a reminder to those who have not yet filed their 2014 tax return that April 15, 2015 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. In addition, the April 15, 2015 deadline also applies to the following: Tax year 2014 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request. Tax year 2014 contributions to a Roth or traditional IRA – April 15 is the last day contributions for 2014 can be made to either a Roth or traditional IRA, even if an extension is filed. Individual estimated tax payments for the first quarter of 2015 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2015 estimated taxes are due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. If the refund won’t be enough to fully cover the April 15 installment, you may need to make a payment with the April 15 voucher. Please call this office for any questions. Individual refund claims for tax year 2011 – The regular three-year statute of limitations expires on April 15 for the 2011 tax return. Thus, no refund will be granted for a 2011 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2011 returns. If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let the office know right away so that an extension request, and 2015 estimated tax vouchers if needed, may be prepared. If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary. Tue, 17 Mar 2015 19:00:00 GMT Family Home Loan Interest May Not Be Deductible http://www.messnerandhadley.com/blog/family-home-loan-interest-may-not-be-deductible/38547 http://www.messnerandhadley.com/blog/family-home-loan-interest-may-not-be-deductible/38547 Messner & Hadley LLP Article Highlights: Qualified residence interest is deductible interest that is paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. Acquisition indebtedness means that any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer is secured by such residence. Interest on unsecured home debt is generally not deductible. It is not uncommon for individuals to loan money to relatives to help them buy a home. In those situations, it is also not uncommon for a loan to be undocumented or documented with an unsecured note, and the unintended result that the homebuyer can’t claim a tax deduction for the interest paid to their helpful relative. The tax code describes qualified residence interest as interest paid or accrued during the tax year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term "acquisition indebtedness" means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences that a taxpayer may have for purposes of claiming a home mortgage interest tax deduction, but those details are not covered in this article, which focuses on the requirement that the debt be secured. Secured debt means a debt that is on the security of any instrument (such as a mortgage, deed of trust, or land contract): (i) that makes the interest of the debtor in the qualified residence-specific security of the payment of the debt, (ii) under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and (iii) that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law. In other words, the home is put up as collateral to protect the interest of the lender. Thus, interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower but is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Don’t get trapped in this type of situation. Take the time to have a note drawn up and recorded or perfected in accordance with state law. If you have questions related to this situation or other issues related to the deductibility of home mortgage interest, please give this office a call. Thu, 12 Mar 2015 19:00:00 GMT Local Lodging May Be Deductible http://www.messnerandhadley.com/blog/local-lodging-may-be-deductible/40242 http://www.messnerandhadley.com/blog/local-lodging-may-be-deductible/40242 Messner & Hadley LLP Article Highlights: Away-from-home lodging  Non-away-from-home lodging  Requirements to be deductible  Substantiation requirements  A business deduction is allowed for lodging when a taxpayer travels away from his or her “tax home.” A taxpayer's tax home is generally the location (such as a city or metropolitan area) of a taxpayer's main place of business (not necessarily the place where he/she lives). The traveling away from his or her tax home condition creates problems for individuals attending conferences and training sessions within their tax homes that include extended-hour events that preclude traveling back home between the days of the events. To alleviate this problem, IRS proposed regulations, upon which taxpayers may rely, permit certain non-away-from-home lodging expenses to be treated as deductible business expenses by employers and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses if all of these conditions are met: (1) The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function. (2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter. (3) If the individual is an employee, his or her employer requires him or her to remain at the activity or function overnight. (4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit. Example: A business conducts business-related sales training sessions at a hotel and conference center near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight for the bona fide purpose of facilitating the training. If the company pays the lodging costs directly to the hotel, the stay is a working condition fringe benefit to all attendees (even to employees who live in the area who are not on travel status) and the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense. Example: If Warren, a locally based, self-employed consultant, were required by a company to attend the sessions and stay at the hotel, he could deduct the expense if he paid for it himself or exclude the expense if he were reimbursed by the company after accounting for it in full for his costs. Substantiation requirements - Generally lodging expenses are deductible only if they are substantiated in full (record of time, place, amount, and business purpose, plus paid bills or receipts). The expenses can't be substantiated using the lodging component of the federal per-diem rate. If you have questions about the deduction and substantiation of business-related lodging expenses, please give this office a call. Tue, 10 Mar 2015 19:00:00 GMT Checking the Status of Your Federal Tax Refund is Easy http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/40221 http://www.messnerandhadley.com/blog/checking-the-status-of-your-federal-tax-refund-is-easy/40221 Messner & Hadley LLP Article Highlights 24/7 access  How quickly posted  Direct deposit  Information needed to use  If you already filed your federal tax return and are due a refund, you can check the status of your refund online. Where's My Refund? is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where's My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week. If you e-file, you can get refund information 24 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available starting four weeks after mailing your return. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter: Your Social Security Number (or Individual Taxpayer Identification Number);  Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and  The exact refund amount shown on your tax return.  Once your personal information has been entered, one of several personalized responses may come up, including the following:  Acknowledgement that your return was received and is in processing.  The mailing date or direct deposit date of your refund.  Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where's My Refund? feature.  Where's My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online. Where's My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes. IRS2Go is the IRS' first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Google Play Store to download the free IRS2Go app. Where's My Refund? provides the most up-to-date information the IRS has. There's no need to call the IRS unless Where's My Refund? tells you to do so. Where's My Refund? is updated every 24 hours - usually overnight - so you only need to check once a day. Please call this office if you encounter problems. Tue, 03 Mar 2015 19:00:00 GMT Turning 70 1/2 This Year? http://www.messnerandhadley.com/blog/turning-70-12-this-year/40202 http://www.messnerandhadley.com/blog/turning-70-12-this-year/40202 Messner & Hadley LLP Article Highlights: Turning 70 1/2  Traditional IRA Contributions  Excess Contributions Penalty Required Minimum Distributions  Still Working Exception  Excess Accumulation Penalty  If you are turning 70 1/2 this year, you may face a number of special tax issues. Not addressing these issues properly could result in significant penalties and filing hassles. Traditional IRA Contributions - You cannot make a traditional IRA contribution in the year you reach the age of 70 1/2 Contributions made in the year you turn 70 1/2 (and from then on) are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned. You can avoid the penalty by removing the excess and the interest earned on the excess from the IRA prior to April 15 of the subsequent year and including the interest earned on the excess in your taxable income. Even though you can no longer make contributions to a traditional IRA in the year you reach age 70 1/2 you can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits, provided you still have earned income, such as wages or self-employment income, at least equal to the amount of the contribution. If you are married to a non-working or low-earning spouse who has not yet reached age 70 1/2 and you have earned income, your earnings can still be used to qualify your spouse for a contribution to a spousal IRA, even if you are 70 1/2 or older and can't contribute to your traditional IRA.   Required Minimum Distributions (RMDs) - You must begin taking required minimum distributions from your qualified retirement plans and IRA accounts in the year you turn 70 1/2 The distribution for the year in which you turned 70 1/2 can be delayed to the subsequent year without penalty if the distribution is made by April 1 of the subsequent year. That means two distributions must be made in the subsequent year: the delayed distribution and the distribution for that year. In the following years, your annual RMD must be taken by December 31 of each year.   Still Working Exception - If you participate in a qualified employer plan, generally you need to start taking required minimum distributions (RMDs) by April 1 of the year following the year you turn 70 1/2. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RBD is postponed to April 1 of the year following the year you retire. Example: You reached age 70 1/2 in 2015, but chose to continue working and did not retire until June of 2017. Provided your employer's plan includes the option, you can make the “still working election” and delay your RBD until no later than April 1, 2018. Caution: This exception does not apply to an employee who owns more than 5% of the company. There is no “still working exception” for IRAs, Simple IRAs, or SEP IRAs.   Excess Accumulation Penalty - When you fail to take an RMD, you are subject to a draconian penalty called the excess accumulation penalty. This penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year. Example: Your RMD for the year is $35,000, but you only take $10,000. Your excess accumulation penalty for failing to take the full amount of the distribution for the year would be $12,500 (50% of $25,000). The IRS will generally waive the penalty for non-willful failures to take your RMD, provided you have a valid excuse and the under-distribution is corrected.  As you can see, turning 70 1/2 can complicate your tax situation. If you need assistance with any of the issues discussed here, or need assistance computing your RMD for the year, please give this office a call. Thu, 26 Feb 2015 19:00:00 GMT UNDERSTANDING THE LANGUAGE OF TAXES http://www.messnerandhadley.com/blog/understanding-the-language-of-taxes/824 http://www.messnerandhadley.com/blog/understanding-the-language-of-taxes/824 Messner & Hadley LLP Part of our increasingly complicated Federal income tax structure is a myriad of acronyms and abbreviations. Understanding the meaning of the more frequently encountered terminology can lead to a better comprehension of the complex tax situations that a taxpayer might encounter. This section explains some common terminology and provides an overview of their application. Wed, 25 Feb 2015 19:00:00 GMT Will the Interest on Your Vehicle Loan be Deductible? http://www.messnerandhadley.com/blog/will-the-interest-on-your-vehicle-loan-be-deductible/40198 http://www.messnerandhadley.com/blog/will-the-interest-on-your-vehicle-loan-be-deductible/40198 Messner & Hadley LLP Article Highlights: Vehicle loan interest  Consumer loans secured by the vehicle  Using home equity loans to create deductibility  Exercising restraint when using home equity  Whether or not the interest you pay on a loan to acquire a vehicle is deductible for tax purposes depends how the vehicle is being used (for business or personal purposes), the tax form on which the expenses are being deducted, and the type of loan. If the loan were a consumer loan secured by the vehicle, then the following rules would apply: If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule, then the business portion of the interest will be deductible as business interest, but the personal portion will not.   If the vehicle is being used partially for business as an employee and the expenses are being deducted as an itemized deduction, then neither the business portion nor the personal portion of the interest will be deductible.   If the vehicle is entirely for personal use, then none of the interest will be deductible, because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.  As an alternative to a nondeductible consumer loan, you might consider acquiring that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest deductible. Before borrowing against the home, you should consider the following: Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.   When buying a car, you can sometimes get very favorable interest rates or a rebate.  To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount. It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.   If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.  If you need assistance in deciding on a course of action, please call our office.  Tue, 24 Feb 2015 19:00:00 GMT Above-the-Line Deduction http://www.messnerandhadley.com/blog/above-the-line-deduction/17 http://www.messnerandhadley.com/blog/above-the-line-deduction/17 Messner & Hadley LLP The “line” in this term refers to the line drawn when totaling the items that make up the taxpayer's adjusted gross income (AGI). The term “deduction” is usually associated with itemized deductions, but an above-the-line deduction is one that can be taken in addition to the standard deduction or itemized deductions, whichever is used. This type of deduction is taken before determining the taxpayer's AGI; hence, the term “above-the-line.” Mon, 23 Feb 2015 19:00:00 GMT Acquisition Indebtedness http://www.messnerandhadley.com/blog/acquisition-indebtedness/18 http://www.messnerandhadley.com/blog/acquisition-indebtedness/18 Messner & Hadley LLP This is the debt used to acquire, build, or substantially improve a taxpayer's principal residence or a second home, and it is debt that is secured by the principal residence or second home. The interest on up to $1 million of acquisition indebtedness is deductible as an itemized deduction. Sun, 22 Feb 2015 19:00:00 GMT Adjusted Gross Income (AGI) http://www.messnerandhadley.com/blog/adjusted-gross-income-agi/19 http://www.messnerandhadley.com/blog/adjusted-gross-income-agi/19 Messner & Hadley LLP This may be the most important tax term since the tax code uses the AGI to limit a vast number of tax benefits. AGI is basically a taxpayer's gross taxable income from all sources (gross income) reduced by certain allowable adjustments, sometimes referred to as above-the-line deductions, which are deductible whether or not the taxpayer itemizes their deductions. The more frequently encountered adjustments include deductions for deductible IRA contributions, moving, alimony payments, higher education interest, forfeited interest and deductions for health insurance premiums, pension plan contributions and 50% of SE tax for self-employed individuals. Sat, 21 Feb 2015 19:00:00 GMT Memorizing Transactions in QuickBooks: Why? How? http://www.messnerandhadley.com/blog/memorizing-transactions-in-quickbooks-why-how/40190 http://www.messnerandhadley.com/blog/memorizing-transactions-in-quickbooks-why-how/40190 Messner & Hadley LLP QuickBooks saves time in countless ways, one of which is its ability to memorize transactions. Are you taking advantage of this feature? One of the reasons you started using accounting software, among many others, was to save time. And QuickBooks has complied. Once you create a record for a customer, vendor, item, etc., you rarely – if ever – have to enter that information again; you simply choose it from a list. You no longer waste time searching through endless piles of papers to find the one you need; you just do a search. And when you need a report on your monthly sales or inventory purchases or your payroll liabilities, you don’t have to wrestle with Excel or locate the right paper records; you just click a few times. Memorized transactions can be another major time saver. You might use them when you, for example: Provide the same service for a customer on a regular basis, Charge a monthly fee for rentals, maintenance, membership, etc., Pay a bill to the same company regularly, or Have a standing order with a vendor for a similar set of items. It’s easy to create memorized transactions. QuickBooks provides an icon for them in the toolbar of every transaction form that’s supported, like invoices, bills, and purchase orders. Figure 1: When you see the Memorize icon in the toolbar of a transaction form, you know that you can create a template to use over and over. To get started, create a transaction that you know will be repeated – even if the amount will be different every time (you’ll still save time because you won’t have to fill in or select absolutely every detail). Let’s say you’re doing some social media consulting for a customer, and you’ve contracted for eight hours every month. Create the invoice for that billing. Then click the Memorize icon. This window opens: Figure 2: In the Memorize Transaction window, you’ll tell QuickBooks how often the transaction will be created, in addition to providing other information. Your customer will already appear in the Name field. You’ll have to choose from among three options so that QuickBooks knows how to handle this recurring form: Add to my Reminders List. If you choose this by clicking on the button in front of the option, QuickBooks will add this transaction to your existing Reminders List. Note: Confused about how you get QuickBooks to remind you about actions you have to take? We can walk you through the setup process. Do Not Remind Me. We don’t recommend this option unless you have an exceptionally good memory, few memorized transactions, or a tickler file in another application. Even then, reminders are a good idea. Automatic Transaction Entry. This absolutely saves the most time. It’s also the riskiest option. If you select this, QuickBooks will send the transaction through at the intervals you’ve defined. You’ll have to enter a number that indicates how many times you want the form sent and how many days in advance it should be entered. Please consult with us if you are planning to automate transactions. We don’t want you to have unhappy customers or vendors or an unpredictable cash flow. Next, you’ll tell QuickBooks how often this transaction needs to be created by clicking on the down arrow to the right of How Often. Click on the calendar icon in the Next Date field to select the exact day this should occur next (you’ll have an opportunity when you work with the Reminders List to specify how much advance warning you want). When you’re done, click OK. Once you start memorizing transactions, QuickBooks will store them in a list. When you get a reminder that one is due soon, open the Lists menu and select Memorized Transaction List. You'll see this screen, populated with your own work: Figure 3: You’ll open the Memorized Transaction List to enter one or to work with one you’ve already created. Highlight a transaction in the list and click the down arrow next to Memorized Transaction in the lower left corner to see your options here. You can also click Enter Transaction, and your original form will appear. If you’ve saved it with a permanent amount, you can just save and dispatch it. Otherwise, enter the correct amount before you proceed. If you’re fairly new to QuickBooks and don’t feel like you’re well acquainted with its time-saving features, give us a call and we’ll set up some training. Better to do that upbfront than to have to untangle a jumbled company file. We’re always happy to help. Sat, 21 Feb 2015 19:00:00 GMT Alternative Minimum Tax (AMT) http://www.messnerandhadley.com/blog/alternative-minimum-tax-amt/20 http://www.messnerandhadley.com/blog/alternative-minimum-tax-amt/20 Messner & Hadley LLP A different way of computing one’s tax liability; it MUST be used if the resulting tax is higher than the tax computed by the regular method. This alternate way of computing the tax was introduced over three decades ago to prevent higher income taxpayers from reducing or escaping income tax. The AMT is structured to ignore the use of certain tax breaks and deductions and to apply special rates - 26% and 28%. Inflation over the years has slowly increased the number of taxpayers who are subject to the AMT. Although the factors affecting the AMT are too numerous to delineate here, the ones most frequently encountered by the average taxpayer include: Taxes, including property taxes and state income tax, are not allowed as an AMT itemized deduction. Miscellaneous itemized deductions, including job-related and investment expenses, are not deductible for AMT purposes. The difference between the current market value and the exercise price of stock acquired through an Incentive Stock Option (ISOs) is added to income even though the stock has not been sold. Interest on home equity debt is not allowed as an AMT itemized deduction. Fri, 20 Feb 2015 19:00:00 GMT March 2015 Individual Due Dates http://www.messnerandhadley.com/blog/march-2015-individual-due-dates/30367 http://www.messnerandhadley.com/blog/march-2015-individual-due-dates/30367 Messner & Hadley LLP March 2 - Farmers and Fishermen File your 2014 income tax return (Form 1040) and pay any tax due. However, you have until April 15 to file if you paid your 2014 estimated tax by January 15, 2015. March 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.March 16 - Time to Call For Your Tax Appointment It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us. Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you. We look forward to hearing from you. Fri, 20 Feb 2015 19:00:00 GMT March 2015 Business Due Dates http://www.messnerandhadley.com/blog/march-2015-business-due-dates/30368 http://www.messnerandhadley.com/blog/march-2015-business-due-dates/30368 Messner & Hadley LLP March 2 - Payers of Gambling Winnings File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2014. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was February 2.March 2 - Informational Returns Filing Due File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2014. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others.March 2 - 2 All Employers File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2014. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was February 2.March 2 - Large Food and Beverage Establishment Employers File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31. March 16 - S-Corporation Election File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2015. If Form 2553 is filed late, S treatment will begin with calendar year 2016.March 16 - Electing Large Partnerships Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.March 16 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in February. March 16 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in February. March 16 - Corporations File a 2014 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004. March 31 - Electronic Filing of Forms 1098, 1099 and W-2G If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, March 2 was the due date. The due date for giving the recipient these forms was February 2.March 31 - Electronic Filing of Forms W-2 If you file forms W-2 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you electronically file. Otherwise, the due date was March 2. The due date for giving the recipient these forms was February 2.March 31 - Large Food and Beverage Establishment Employers If you file forms 8027 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, March 2 was the due date. Fri, 20 Feb 2015 19:00:00 GMT Basis http://www.messnerandhadley.com/blog/basis/21 http://www.messnerandhadley.com/blog/basis/21 Messner & Hadley LLP Basis is the dollar value from which a taxpayer measures any gain or loss from an asset for income tax purposes. Generally, your basis begins with what you paid for the asset, including purchase costs (cost basis) and then is adjusted up for improvement and sales costs and down for any depreciation or casualty losses claimed on the asset during the period of ownership. As an example, a rental property is purchased for $200,000. $50,000 is made in improvements to the property, $15,000 is deducted in depreciation during the period of ownership and $12,000 is incurred in sales expenses. The basis for that property, referred to as the adjusted basis, is $247,000 ($200,000 + $50,000 - $15,000 + $12,000). Special rules apply in determining a taxpayer's basis in property that is acquired by gift or inheritance. For gifts, the starting basis is generally the adjusted basis of the giver; for inherited assets, the basis generally begins with the value of the property on the date of the decedent's death. Please note that the word “generally” is frequently used in this explanation since it cannot be relied upon in all situations. Please contact this office for assistance. Thu, 19 Feb 2015 19:00:00 GMT Receive Your Refund Faster With Direct Deposit http://www.messnerandhadley.com/blog/receive-your-refund-faster-with-direct-deposit/40166 http://www.messnerandhadley.com/blog/receive-your-refund-faster-with-direct-deposit/40166 Messner & Hadley LLP Article Summary: Speed Security Convenience Options Funding an IRA Don’t wait around for a paper check. Have your federal (and state, if applicable) tax refund deposited directly into your bank account. Selecting Direct Deposit is a secure and convenient way to get your money into your pocket more rapidly. Speed - When combining e-file with direct deposit, the IRS will likely issue your refund in no more than 21 days. Security - Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail. Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen. Easy - Simply provide this office with your bank routing number and account number when we prepare your return and you’ll receive your refund far more quickly than you would by check. Convenience - The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself. Eligible Financial Accounts - You can direct your refund to any of your checking or savings accounts with a U.S. financial institution as long as your financial institution accepts direct deposits for that type of account and you provide valid routing and account numbers. Examples of savings accounts include: passbook savings, individual development accounts, individual retirement arrangements, health savings accounts, Archer MSAs, and Coverdell education savings accounts. Multiple Options - You can deposit your refund into up to three financial accounts that are in the your name or your spouse’s name if it is a joint account. You can’t have part of the refund paid by paper check and part by direct deposit. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Deposit Can’t Be to a Third Party’s Bank Account - To protect taxpayers from scammers, direct deposit tax refunds can only be deposited into an account or accounts owned by the taxpayer. Therefore, only provide your own account information and not account information belonging to a third party. Fund Your IRA - You can even direct a refund into your IRA account. To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have these numbers available at your appointment. For more information regarding direct deposit of your tax refund and the split refund option, we would be happy to discuss your options with you at your tax appointment. Thu, 19 Feb 2015 19:00:00 GMT Business Gifts http://www.messnerandhadley.com/blog/business-gifts/22 http://www.messnerandhadley.com/blog/business-gifts/22 Messner & Hadley LLP Gifts to customers, business contacts, clients, etc., are deductible if they are otherwise ordinary and necessary business expenses. However, business gifts are subject to a $25 limit to each donee per year. Wed, 18 Feb 2015 19:00:00 GMT Capital Gain http://www.messnerandhadley.com/blog/capital-gain/23 http://www.messnerandhadley.com/blog/capital-gain/23 Messner & Hadley LLP Gains from the sale of certain assets owned for more than one year and inherited assets such as stocks, bonds and real estate enjoy a special tax treatment referred to as a long-term capital gain. Gains from assets held for a shorter period are called short-term capital gains and are not eligible for special tax treatment. Long-term capital gains do benefit from special tax rates and are generally taxed at 0% to the extent a taxpayer is in the 15% or lower tax bracket and 15% for the balance through the 35% tax bracket. To the extent a taxpayer is in the 39.6% tax bracket, the capital gain rate is 20%. There are some exceptions; to the extent that gain results from depreciation on real property claimed since May 1997, the tax rate is 25%, except to the extent the taxpayer is in the 10% or 15% bracket, in which case those rates would then apply. Also, long-term capital gains from the sale of collectibles such as artwork, coins, stamps, etc., are taxed at 28%. Tue, 17 Feb 2015 19:00:00 GMT Don’t Overlook the Spousal IRA http://www.messnerandhadley.com/blog/don8217t-overlook-the-spousal-ira/38696 http://www.messnerandhadley.com/blog/don8217t-overlook-the-spousal-ira/38696 Messner & Hadley LLP Article Highlights: Spousal IRA Compensation requirements Maximum Contribution Traditional or Roth IRA One frequently overlooked tax benefit is the “spousal IRA.” Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes: wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation. The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $5,500 for years 2013 through 2015. If the non-working spouse is age 50 or older, the spouse can also make “catch-up” contributions (limited to $1,000 for 2013 through 2015), raising the overall contribution limit to $6,500. These limits apply provided the couple together has compensation equal to or greater than their combined IRA contributions. Example: Tony is employed and his W-2 for 2015 is $100,000. His wife, Rosa, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Rosa can contribute up to $5,500 to an IRA for 2015. The contributions for both spouses can be made either to a Traditional or Roth IRA, or split between them, as long as the combined contributions don't exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income: Traditional IRAs – There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple's adjusted gross income (AGI) doesn't exceed $183,000 in 2015 (up from $181,000 in 2014). This limit is phased out in 2015 for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $183,000 in 2015 (up from $181,000 in 2014). The contribution is ratably phased out for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $193,000. Example: Rosa, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $183,000. Had the couple’s AGI been $188,000, Rosa’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phaseout. The other $2,750 could have been contributed to a nondeductible Traditional IRA. Please give this office a call if you would like to discuss IRAs or need assistance with your retirement planning. Tue, 17 Feb 2015 19:00:00 GMT Capital Loss http://www.messnerandhadley.com/blog/capital-loss/24 http://www.messnerandhadley.com/blog/capital-loss/24 Messner & Hadley LLP This is generally a loss from the sale of investment property such as stocks, bonds and land. Losses must first offset other sales in the same year that resulted in capital gains. Then, up to $3,000 ($1,500 for married individuals filing separately) can be deducted against other types of income. Any excess (referred to as capital loss carryover) can be carried over to future years until used up. It should be noted that losses from the sale of personal use property are not allowed for tax purposes; although, gains must be reported. This rule would apply to the taxpayer's home, second home, cars, etc. Mon, 16 Feb 2015 19:00:00 GMT Constructive Receipt http://www.messnerandhadley.com/blog/constructive-receipt/25 http://www.messnerandhadley.com/blog/constructive-receipt/25 Messner & Hadley LLP Generally, most individual taxpayers are considered cash basis taxpayers. That means they pay taxes on income in the year they receive it. At the end and beginning of a tax year, questions sometimes arise as to when the income was received. The tax concept of constructive receipt treats the income as taxable in the year the taxpayer could have received it, even if it was not received until a later date. An example would be a check for an income item received in December of Year 1 that was not cashed until January of Year 2. Since the income was available when the check was received, the income would be reportable on Year 1's return and not on the return for Year 2 when the check was cashed. Another example would be if the taxpayer earned dividends on stocks but chose to reinvest them. Since the taxpayer has a right to the dividends but chooses to reinvest, it becomes income to the taxpayer on the date the dividends are credited to the account. Sun, 15 Feb 2015 19:00:00 GMT Consumer Debt http://www.messnerandhadley.com/blog/consumer-debt/26 http://www.messnerandhadley.com/blog/consumer-debt/26 Messner & Hadley LLP This term is used to describe debt incurred to purchase consumer products and includes debt such as motor vehicle loans and credit card debt. Interest paid on consumer debt is not deductible as an itemized deduction on a tax return. However, see the section on Home Equity Debt. Sat, 14 Feb 2015 19:00:00 GMT Dependent http://www.messnerandhadley.com/blog/dependent/27 http://www.messnerandhadley.com/blog/dependent/27 Messner & Hadley LLP Typically, an individual's minor child is thought of when the word dependent is used, but a dependent could be another relative, or in some cases, even an unrelated person. Generally, a dependent is someone who is reliant upon a taxpayer for support. Five specific qualifications must be met for an individual to be treated as a dependent for tax purposes: the relationship or member of the household test, gross income test, joint return test, citizenship or residence test and support test. For each dependent claimed in 2015, a taxpayer can deduct $4,000 (up from $3,950 in 2014) from their income. For higher income taxpayers, 2% of this deduction is disallowed for each $2,500 of AGI in excess of a threshold amount. The 2015 threshold amounts are $258,250 (up from $254,200 in 2014) for single taxpayers, $309,900 (up from $305,050 in 2014) for married taxpayers filing jointly, $284,050 (up from $279,650 in 2014) for taxpayers filing as Head of Household and one half the Joint amount for married taxpayers filing separately. The tax rules related to dependents can be complicated. Please call this office if you need assistance. Fri, 13 Feb 2015 19:00:00 GMT Depreciation http://www.messnerandhadley.com/blog/depreciation/28 http://www.messnerandhadley.com/blog/depreciation/28 Messner & Hadley LLP This is a tax deduction that is taken to reflect the wear and tear and gradual decline in value of an asset used in business. Although there are some options for depreciation, the tax law requires that the depreciation deduction be taken even if a taxpayer prefers not to (this is sometimes called the “allowed or allowable” rule). If a taxpayer fails to take the deduction, he/she will still be required to account for the depreciation as if it were taken when the property is sold and pay taxes on the depreciation to the extent of any gain. For purposes of the deduction, tax law assigns a life to various types of business assets and the asset is depreciated over that period of time. Generally, business assets placed in service would be depreciated over 3, 5, or 7 years, except for real estate which would be 27.5 or 39 years. Thu, 12 Feb 2015 19:00:00 GMT Important Times to Seek Assistance http://www.messnerandhadley.com/blog/important-times-to-seek-assistance/40159 http://www.messnerandhadley.com/blog/important-times-to-seek-assistance/40159 Messner & Hadley LLP Article Highlights When to seek professional assistance  Examples of times where tax saving moves can be made  Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse: Receive a large employee bonus or award  Become unemployed  Change employment  Take an unplanned withdrawal from an IRA or other pension plan  Retire or are contemplating retirement  Move or otherwise change your address  Exercise an employee stock option  Have significant stock gains or losses  Get married  Separate from or divorce your spouse  Sell or exchange a property or business  Experience the death of a spouse during the year  Turn 70½ during the year  Increase your family size through birth or adoption of a child  Start a business or acquire a rental property  Receive a substantial lawsuit settlement or award  Get lucky at a casino, lotto, or game show and receive a W-2G  Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity  Plan to gift more than $14,000 to any one individual during the year  In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with this office. Thu, 12 Feb 2015 19:00:00 GMT Direct Transfer http://www.messnerandhadley.com/blog/direct-transfer/29 http://www.messnerandhadley.com/blog/direct-transfer/29 Messner & Hadley LLP Is a method of moving retirement and IRA funds directly from one account to another without the taxpayer taking possession of the funds and avoiding the potential problems associated with a rollover. Another term for this type of transaction is trustee-to-trustee transfer. Wed, 11 Feb 2015 19:00:00 GMT Early Distributions http://www.messnerandhadley.com/blog/early-distributions/30 http://www.messnerandhadley.com/blog/early-distributions/30 Messner & Hadley LLP Generally, when a taxpayer withdraws funds from a qualified plan or Traditional IRA before reaching the age of 59-1/2, the withdrawal is considered an early distribution and is subject to a penalty equal to 10% of the taxable amount withdrawn. This penalty is in addition to any income tax due on the distribution. There are a number of exceptions that might avoid the penalty, depending upon if a distribution is from an IRA or a qualified plan. Taxpayers should consult with this office prior to taking a distribution before reaching age 59-1/2. Tue, 10 Feb 2015 19:00:00 GMT The Affordable Care Act Can Bring Surprises at Tax Time http://www.messnerandhadley.com/blog/the-affordable-care-act-can-bring-surprises-at-tax-time/40155 http://www.messnerandhadley.com/blog/the-affordable-care-act-can-bring-surprises-at-tax-time/40155 Messner & Hadley LLP Article Highlights: New Tax Return Complications  Shared Responsibility Payment  Premium Tax Credit  The Affordable Care Act, the federal health care law, will bring some surprises at tax time for many. This year there are two new issues that can complicate the preparation of almost anyone's tax return. First, there is the shared responsibility payment, a nice name the government gave to the penalty for not being insured. So everyone who is uninsured is subject to a monthly penalty, assessed on the individual 1040 tax return, unless they meet one or more of the many exceptions to the penalty. Many of the exceptions are complicated and difficult to understand by a layman. Second, there is a premium tax credit that helps low- to middle-income families pay for their health insurance if it is acquired through a government marketplace. Although it would seem quite simple to just give a family a credit on their 1040 tax return, the credit is generally paid in advance based on the family's projected income. If the advance credit that was used to pay part of the monthly health plan premiums is more than the family's actual income warrants, then some portion of the advance credit must be repaid on the 1040 of the responsible individual (or couple if married filing a joint return). On the other hand, if the advance credit is less than the actual credit, the difference is refundable on the individual's income tax return. But as with all things tax, determining the income upon which the credit is based is complicated, frequently requires adjustments and can even include the income of dependents. But that is just the tip of the iceberg. If you purchased your health insurance through the marketplace and your family circumstances changed during the year, such as through divorce, marriage, or separation, or you included someone on your marketplace policy who is not part of your tax family (filer, spouse and dependents), very complicated allocations can be required between the various individuals' tax returns. Please contact this office if you have questions related to the Affordable Care Act tax compliance rules or have family or friends who need assistance dealing with this tax complication. Tue, 10 Feb 2015 19:00:00 GMT Earned Income http://www.messnerandhadley.com/blog/earned-income/31 http://www.messnerandhadley.com/blog/earned-income/31 Messner & Hadley LLP This refers to income that is earned from providing your personal services as distinguished from unearned income such as interest, dividends, pensions, capital gains and passive income. Examples of earned income would include W-2 wage income, commissions, net self-employment income and tips. Generally, earned income is subject to FICA withholding or self-employment tax and is the type of income that is required to qualify for IRA and self-employment pension plan contributions and the earned income credit. Mon, 09 Feb 2015 19:00:00 GMT Estimated Tax http://www.messnerandhadley.com/blog/estimated-tax/32 http://www.messnerandhadley.com/blog/estimated-tax/32 Messner & Hadley LLP If a taxpayer does not have sufficient withholding from wages and pensions to cover the tax liability for the year, he/she could be subject to underpayment penalties. Self-employed taxpayers and those with substantial investment or other income frequently find themselves in this position. Quarterly estimated tax payments provide a means of prepaying the anticipated tax liability as a way to avoid the penalties. Generally, penalties can be assessed if a taxpayer fails to prepay a safe harbor (minimum) amount. Safe Harbor Payments - Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year's tax liability, you can escape a penalty.   The second safe harbor - and the one taxpayers rely on most often - is based on your tax in the immediately preceding tax year. If your current year's payments equal or exceed 100% of the amount of your prior year's tax, you can escape a penalty. However, if your prior year's adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year's tax to meet the safe harbor amount. Sun, 08 Feb 2015 19:00:00 GMT Exemptions http://www.messnerandhadley.com/blog/exemptions/33 http://www.messnerandhadley.com/blog/exemptions/33 Messner & Hadley LLP An exemption is an amount, $4,000 for 2015 (up from $3,950 for 2014) that can be deducted for the taxpayer and spouse (if applicable) and each dependent claimed on the tax return. The exemptions are phased out for higher income taxpayers. See the term “Dependent.” The exemption deduction is disallowed for an individual who files a return and is also claimed, or could be claimed, as a dependent by another taxpayer. Sat, 07 Feb 2015 19:00:00 GMT Fair Market Value http://www.messnerandhadley.com/blog/fair-market-value/34 http://www.messnerandhadley.com/blog/fair-market-value/34 Messner & Hadley LLP This is the price at which a property would change hands between a willing buyer and a willing seller, neither being compelled to buy or sell, and both having reasonable knowledge of all the necessary facts. Fri, 06 Feb 2015 19:00:00 GMT FICA http://www.messnerandhadley.com/blog/fica/35 http://www.messnerandhadley.com/blog/fica/35 Messner & Hadley LLP These initials stand for Federal Insurance Contributions Act, which is the law that covers Social Security and Medicare tax payroll withholding rules. Amounts are withheld from the wages of employees for their contribution to the Social Security and Medicare programs. The withholding rate for Social Security contributions is 6.2% and for Medicare 1.45%. The maximum wage amount on which Social Security tax is paid for 2015 is $118,500 (up from $117,000 in 2014); there is no maximum for the Medicare portion. The employer also pays an amount equal to the employee's contribution. If an employee works for 2 or more employers and has tax withheld for Social Security contributions on more than the annual wage maximum, the excess withholding is refundable as a tax credit on the employee's income tax return. Additional 0.9% Medicare Rate - If an individual's wages exceed $200,000 ($250,000 if filing a married joint return; $125,000 if filing a married separate return), the employee's Medicare rate on the excess earnings increases to 2.35%. The employer starts withholding the higher rate when wages exceed $200,000 regardless of marital or filing status. A taxpayer's additional Medicare tax that was withheld and his/her actual additional Medicare tax for the year is reconciled on his/her tax return, and if either too much or too little was withheld, the difference will be either a refundable credit or additional tax on the return. Fri, 06 Feb 2015 19:00:00 GMT Filing Status http://www.messnerandhadley.com/blog/filing-status/36 http://www.messnerandhadley.com/blog/filing-status/36 Messner & Hadley LLP A taxpayer's filing status (except Head of Household) is based on their marital status as of the last day of the year and in the case of married individuals whether they wish to file jointly or separately. Thus, if not married on the last day of the tax year, the taxpayer would generally file as “single” status. If married on the last day of the year, he/she would file as married filing jointly or as married filing separately. A taxpayer's filing status determines the amount of their standard deduction for the year and income levels where tax rates change. In addition to the filing statuses discussed above and the Head of Household discussed separately, there is one additional rarely used status called qualified widow(er) with a dependent child. It is for a surviving spouse who is allowed to use the married filing joint rates for the two years after the year of death of a spouse if certain requirements are met. Thu, 05 Feb 2015 19:00:00 GMT President's Budget Proposal http://www.messnerandhadley.com/blog/presidents-budget-proposal/40138 http://www.messnerandhadley.com/blog/presidents-budget-proposal/40138 Messner & Hadley LLP Article Highlights: Small Business Provisions  Individual Provisions  Gift & Inheritance Provisions  The President's Fiscal Year 2016 Budget Proposal was just released and includes a number of tax proposals that would increase the taxes on higher-income taxpayers and provide more tax breaks for low- to middle-income taxpayers. The following are some highlights of the budget proposal that would impact individuals and small businesses, but remember these are proposals only. Business Provisions Section 179 Expensing - Would make the Sec. 179 expense cap $500,000 for 2015 (it is currently at $25,000, down from $500,000 in 2014). Would raise the expense cap to $1 million in 2016 and make the $1 million permanent with inflation adjustment for future years.  Cash Basis Accounting - Would expand use of the cash method of accounting to small businesses with less than $25 million in average annual gross receipts, estimated to apply to 99% of all businesses.   Qualified Small Business Stock - Would permanently extend the 100% exclusion on capital gains from sales of tax-qualified small business stock held by individuals for more than five years, and would eliminate the inclusion of excluded gain from the Alternative Minimum Tax.   Start-Up & Organizational Expenses - Would increase and consolidate the deduction for start-up and organizational expenditures.   Small Employer Health Insurance Credit - Would expand the credit for small employers to provide health insurance to apply to up to 50 (rather than 25) full-time equivalent employees, with phaseout between 20 and 50 employees (rather than between 10 and 25).   Mandatory Employer IRA Payroll Deductions - Would require employers with 10 or more employees who don't have a 401(k) plan to automatically enroll full-time and part-time employees in an optional IRA payroll deduction plan.  Individual Provisions  Child Care - Would allow a credit of up to $3,000 (50% credit for up to $6,000 of expenses per child) for each child under the age of 5 to enable gainful employment of the parent(s) or other qualified taxpayer. The regular credit for those ages 5 through 12 would also begin to phase out at $120,000 (instead of $15,000 under current law). Flexible spending accounts for child care would be eliminated.   Second Earner Tax Credit - Would provide a new tax credit up to $500 (5% of the first $10,000 of earnings for the lower-earning spouse) for joint filers with two wage earners. The credit would begin to phase out at income of $120,000 and would be fully phased out when family income reaches $210,000. It is estimated that this new credit would benefit 24 million joint filers.  Earned Income Tax Credit (EITC) - Would double the EITC for workers without a child and increase the credit applicability for childless workers with earnings up to 150% of the federal poverty level (currently about 125%). Would expand the applicability of the EITC to workers age 21 to 66 (currently 24 to 64).   Education Tax Benefits - The American Opportunity Tax Credit (AOTC) would be expanded to cover five years of post-secondary education, and the current $2,500 tax credit would be adjusted for inflation. The refundable portion of the AOTC would be increased to $1,500. Part-time students would be eligible for a $1,250 AOTC (up to $750 refundable). Duplicative and less effective provisions, including the Lifetime Learning Credit, the tuition and fees deduction, the student loan interest deduction (for new borrowers), and Coverdell accounts (for new contributions) would be repealed or allowed to expire. The credit would also be better coordinated with Pell Grants.   Top Capital Gains Rate - Would raise the top effective capital gains and qualified dividends tax rate to 28% (24.2% plus the 3.8% net investment income tax). For couples, the 28% rate would apply where income is more than $500,000 annually.   Itemized Deductions - Would limit to 28% the value of itemized deductions and other tax preferences for married taxpayers with incomes over $250,000 and individual taxpayers with income over $200,000. The limit would apply to all itemized deductions as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.   Limit Retirement Account Contributions - Would prohibit contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, which is about enough to provide an annual income of $210,000 in retirement.   Buffett Rule - Would implement the “Buffett Rule.” This rule, which is a carryover from prior year budget proposals, would require the wealthy to pay at least a 30% effective tax rate.  Gift & Inheritance Tax Provisions Inheritances and Gifts - Would eliminate the current step-up in tax basis at death and require payment of capital gains tax on the increase in value of securities at the time they are inherited. Generally, a $100,000-per-person, portable-between-spouses exclusion would apply for inherited appreciated assets, along with exceptions for surviving spouses, small businesses, charities, and residences, among others. For couples, no tax would be due until the death of the second spouse. No tax would be due on inherited small, family-owned-and-operated businesses unless and until the business was sold, and any closely held business would have the option to pay tax on gains over 15 years. Couples would have an additional $500,000 exemption for personal residences ($250,000 per individual), with this exemption also automatically portable between spouses. Tangible personal property other than expensive art and similar collectibles - e.g., bequests or gifts of clothing, furniture, and small family heirlooms - would be tax-exempt.   Inheritance and Gift Tax - Would reinstate the prior, 2009, estate and gift tax rates with lower exclusions (generally at 45% at $3.5 million for estates and $1 million for gifts).  These are all proposals by the Obama administration and must be approved by Congress. The information is being passed along so you will have an idea of what might happen in the future. Thu, 05 Feb 2015 19:00:00 GMT Gift Tax http://www.messnerandhadley.com/blog/gift-tax/37 http://www.messnerandhadley.com/blog/gift-tax/37 Messner & Hadley LLP Many taxpayers believe they can deduct gifts they give to other individuals. That is not true! To prevent people from giving their assets away prior to their death and thereby avoid taxes on their estate, our tax system includes a gift tax, which is paid by the giver and must be reported on a gift tax return if the amount given to any one individual for the year exceeds the annual gift exemption ($14,000 for 2014 and 2015). Gifts of larger amounts are taxable but each individual giver can offset the gift tax with a tax credit that is based on a lifetime exemption of taxable gifts. Caution - credit used to offset gift tax will not be available to offset estate taxes when the giver passes away. Wed, 04 Feb 2015 19:00:00 GMT Head of Household http://www.messnerandhadley.com/blog/head-of-household/39784 http://www.messnerandhadley.com/blog/head-of-household/39784 Messner & Hadley LLP This is a special filing status for unmarried individuals, and, in certain special situations, married taxpayers, who pay more than half the cost of maintaining a home for themselves and a qualifying person, for more than half the tax year. The special filing status affords qualifying taxpayers with a higher standard deduction and more beneficial tax brackets than are available to taxpayers who file using the single status. Tue, 03 Feb 2015 19:00:00 GMT Retirement Savings: the Earlier, the Better http://www.messnerandhadley.com/blog/retirement-savings-the-earlier-the-better/40129 http://www.messnerandhadley.com/blog/retirement-savings-the-earlier-the-better/40129 Messner & Hadley LLP Article Summary: Teenagers and young adults  Tax-free accumulation  Earned income requirement  Roth IRA  Generally, teenagers and young adults do not consider the long-term benefits of retirement savings. Their priorities for their earnings are more for today than that distant and rarely considered retirement. Yet contributions to a retirement plan early in life can enjoy years of growth and provide a substantial nest egg at retirement. Due to its long-term benefits of tax-free accumulation, a nondeductible Roth IRA may be the best option. During most individuals' early working years, their income is usually at its lowest, allowing them to qualify for a Roth IRA at a time where the need for a tax deduction offered by other retirement plans is not important. Because retirement will not be their focus at that age, young adults may balk at having to give up their earnings. Parents, grandparents, or other individuals might consider funding all or part of the child's Roth contribution. It could even be in the form of a birthday or holiday gift. Take, for example, a 17-year-old who has a summer job and earns $1,500. Although the child is not likely to make the contribution from his or her earnings, a parent could contribute any amount up to $1,500 to a Roth IRA for the child.* But keep in mind that young adults, like anyone else, must have earned income to establish a Roth IRA. Generally, earned income is income received from working, not through an investment vehicle. It can include income from full-time employment, income from a part-time job while attending school, summer employment, or even babysitting or yard work. The amount that can be contributed annually to an IRA is limited to the lesser of earned income or the current maximum of $5,500. Parents or other individuals who contribute the funds need to keep in mind that once the funds are in the child's IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability. Consider what the value of a Roth IRA at age 65 would be for a 17-year-old who has funds contributed to his or her IRA every year through age 26 (a period of 10 years). The table below shows what the value will be at age 65 at various investment rates of return. Value of a Roth IRA—Annual Contributions of $1,000 for 10 years beginning at age 17  Investment Rate of Return 2% 4% 6% 8% Value at Age 65 $23,703 $55,449 $127,900 $291,401 What may seem insignificant now can mean a lot at retirement. Individuals who are financially able to do so should consider making a gift that will last a lifetime. It could mean a comfortable retirement for your child, grandchild, favorite niece or nephew, or even an unrelated person who deserves the kind gesture. *Amounts contributed to an IRA on behalf of another person are nondeductible gifts by the donor and are counted toward the donor's annual $14,000 (2014 and 2015 gift exclusion per done).If you would like more information about Roth IRAs or gifting contributions to a Roth on behalf of someone else, please contact this office. Tue, 03 Feb 2015 19:00:00 GMT Home Equity Debt http://www.messnerandhadley.com/blog/home-equity-debt/38 http://www.messnerandhadley.com/blog/home-equity-debt/38 Messner & Hadley LLP This term refers to debt incurred on a principal residence or second home that is not used to buy, build, or substantially improve that residence or home. An example is a home equity loan used to acquire consumer products or pay off consumer debt. The portion of refinanced debt that exceeds the acquisition debt is also considered home equity debt. Interest on the first $100,000 of home equity debt is deductible as an itemized deduction for regular tax purposes but not for alternative minimum tax (AMT). Mon, 02 Feb 2015 19:00:00 GMT Holding Period http://www.messnerandhadley.com/blog/holding-period/39 http://www.messnerandhadley.com/blog/holding-period/39 Messner & Hadley LLP Generally, the length of time an asset is owned will determine if it qualifies for long-term capital gains rates when it is sold. To qualify for long-term capital gains rates, an asset must be owned more than 12 months or be inherited property. The holding period of an asset usually begins the day after an asset is acquired and ends on the date of sale or other disposition. For stock, the trade dates, not the settlement dates, are the acquisition and disposition dates to use. Mon, 02 Feb 2015 19:00:00 GMT Independent Contractor http://www.messnerandhadley.com/blog/independent-contractor/40 http://www.messnerandhadley.com/blog/independent-contractor/40 Messner & Hadley LLP Is someone who performs services for others. The recipients of the services do not control the means or methods the independent contractor uses to accomplish the work. Independent contractors are self-employed. Sun, 01 Feb 2015 19:00:00 GMT Investment Interest http://www.messnerandhadley.com/blog/investment-interest/41 http://www.messnerandhadley.com/blog/investment-interest/41 Messner & Hadley LLP Is interest paid on debt used for investment purposes. Typical examples are interest paid on vacant land held for investment and margin account interest. Investment interest is deductible as an itemized deduction but only to the extent the taxpayer has net investment income and any excess is carried over to future years. Generally, net investment income means investment income less investment expenses. As an example, suppose a taxpayer's only investment income is $1,000 of taxable interest and dividend income. He also paid property taxes of $400 and interest of $1,300 on some vacant investment land. His net investment income is $600 ($1,000 - $400). Therefore, his investment interest deduction is limited to $600 and the excess $700 is carried over to future years. If the taxpayer had capital gains, he could elect to forgo the special capital gains rates and treat the capital gains as investment income and thereby increase the amount of investment interest he could deduct. Sat, 31 Jan 2015 19:00:00 GMT Itemized Deductions http://www.messnerandhadley.com/blog/itemized-deductions/42 http://www.messnerandhadley.com/blog/itemized-deductions/42 Messner & Hadley LLP Taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. Itemized deductions are in five basic categories: Medical expenses that exceed 10% (7.5% if age 65 or older through 2016) of the AGI.  Taxes - state income tax, property taxes, personal property taxes.  Interest - generally limited to home mortgage interest and investment interest.  Charitable contributions not exceeding an AGI limitation. That limitation is 50% for most contributions but there are contributions limited to 20% and 30% of the AGI.  Miscellaneous expenses - only miscellaneous expenses that exceed 2% of the AGI are generally allowed. However, there is a second category that includes gambling losses (cannot exceed reported gambling winnings) and several other rarely encountered deductions that are allowed without an AGI reduction.  In 2015, for higher income taxpayers, some of the itemized deductions may be further reduced by 3% of the amount that the AGI exceeds a phase-out threshold but not more than 80% of the total of those deductions affected by this limitation. The 2015 phase-out thresholds are $258,250 (up from $254,200 in 2014) for single taxpayers, $284,050 (up from $279,650 in 2014) for taxpayers filing as head of household, $309,900 (up from $305,050 in 2014) for married taxpayers filing jointly, and $154,950 (up from $152,525 in 2014) for married taxpayers filing separately. Fri, 30 Jan 2015 19:00:00 GMT Keogh Plans http://www.messnerandhadley.com/blog/keogh-plans/43 http://www.messnerandhadley.com/blog/keogh-plans/43 Messner & Hadley LLP Sole proprietors, partnerships (but not individual partners) and corporations may establish qualified retirement plans. A qualified retirement plan set up by a self-employed individual is frequently called a Keogh plan. The Keogh name comes from the Congressman who sponsored the legislation allowing these types of plans for individuals. They are also sometimes referred to as H.R. 10 plans (H.R. 10 was the number of the House bill enacting these plans). A Keogh plan can cover both the self-employed person who establishes the plan and his or her employees. Thu, 29 Jan 2015 19:00:00 GMT Tuition for School to Treat Learning Disabilities is Deductible http://www.messnerandhadley.com/blog/tuition-for-school-to-treat-learning-disabilities-is-deductible/40119 http://www.messnerandhadley.com/blog/tuition-for-school-to-treat-learning-disabilities-is-deductible/40119 Messner & Hadley LLP Article Highlights: Tuition To Treat Learning Disabilities is Deductible Medical Deduction Special Teaching Techniques IRS has privately ruled that for a child diagnosed with multiple learning disabilities, tuition paid to attend a school designed to assist students in overcoming their disabilities and developing appropriate social and educational skills was a deductible medical expense. Treating a child's learning disabilities can place a heavy financial burden on parents. As the ruling illustrates, the tax law may help by allowing a deduction for the cost of educating such a child. However, like other deductible medical expenses, this cost is deductible only to the extent that medical expenses for the year cumulatively exceed 10% (7.5% through 2016 if the taxpayer is age 65 or over) of the taxpayer's adjusted gross income. Medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living. This includes a school for the teaching of Braille or lip reading. The principal reason for attending must be the special resources for alleviating the handicap. The cost of tuition for ordinary education that is incidental to the special services provided at the school, and the cost of meals and lodging supplied by the school also is included as a medical expense. The distinguishing characteristic of a special school is the substantive content of its curriculum, which may include some ordinary education, but only if the ordinary education is incidental to the school's primary purpose of enabling students to compensate for or overcome a handicap. IRS ruled that where the school uses special teaching techniques to assist its students in overcoming their condition and that these techniques along with the care of other staff professionals are the principal reasons for the child’s enrollment at the school then the school is a “special school”. Thus the child’s tuition at the school in those years he is diagnosed as having a medical condition that handicaps his ability to learn are deductible. The Tax Court has also held and IRS has privately ruled that, where a school attended by a student with a medical problem doesn't qualify as a special school because the ordinary education isn't incidental to the special services provided, the costs of the special program or special treatment (but not the entire tuition) may still be a deductible medical expense. If you have questions related to this or other medical deductions please give this office a call. Thu, 29 Jan 2015 19:00:00 GMT Kiddie Tax http://www.messnerandhadley.com/blog/kiddie-tax/44 http://www.messnerandhadley.com/blog/kiddie-tax/44 Messner & Hadley LLP To prevent parents from using their children's tax return to avoid taxes on investment income, Congress established what is now referred to as the kiddie tax on the unearned income of children. This applies to children under the age of 18, those age 18 who did not provide over half of their own support from earned income, and full-time students over age 18 and under the age of 24. The child's age is determined as of the end of the tax year. Under the kiddie tax rules, a child's unearned income in excess of $2,100 for 2015 (up from $2,000 in 2014) is taxed at the parent's tax rate. The child's earned income continues to be taxed at the child's rate. Wed, 28 Jan 2015 19:00:00 GMT Life Insurance Dividends http://www.messnerandhadley.com/blog/life-insurance-dividends/45 http://www.messnerandhadley.com/blog/life-insurance-dividends/45 Messner & Hadley LLP Insurance policy dividends that the insurer keeps and uses to pay the taxpayer's premiums are not taxable. However, interest paid on dividends left to accumulate with the insurer is taxable as interest income. This term shouldn't be confused with dividends paid on stock owned in an insurance company, which are taxable. Tue, 27 Jan 2015 19:00:00 GMT It’s Tax Time! Are You Ready? http://www.messnerandhadley.com/blog/it8217s-tax-time-are-you-ready/38558 http://www.messnerandhadley.com/blog/it8217s-tax-time-are-you-ready/38558 Messner & Hadley LLP Article Highlights: It is time to gather your information for your tax appointment Choosing your alternatives Tips for pulling your information together If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Pulling together the records for your tax appointment is never easy, but the effort usually pays off in the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to: Consider every possible legal deduction; Evaluate which income reporting and deductions are best suited to your situation; Explore current law changes that affect your tax status; Talk about tax-planning alternatives that could reduce your future tax liability. Choosing Your Best Alternatives - The tax law allows a variety of methods of handling income and deductions on your return. Choices you make as you prepare your return often affect not only the current year, but future returns as well. Topics these choices relate to include: Sales of property - If you’re receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer. Depreciation - You’re able to deduct the cost of your investment in certain business properties. You can either depreciate the costs over a number of years; or, in certain cases, deduct them all in one year. Where to Begin? Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you’ll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include: Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully. By design, organizers remind you of transactions you may otherwise miss.) Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you have any special reporting requirements. The penalties for not making and submitting required reports can be severe. New this year is the Affordable Care Act reporting requirements. If you acquired your health insurance through a government Marketplace you will receive a new form, 1095-A, issued by the Marketplace that will include information needed to complete your return. In addition, all taxpayers will need to provide proof of insurance to avoid a penalty or qualify for one of the many exemptions from the penalty. If you received a hardship penalty exemption from the Marketplace you will have been issued an exemption certificate number (ECN). That number must be included on your tax return. The 1095-A and ECN documentation need to be included with the other material you bring to your appointment. If your insurance coverage was through an employer, and the employer issued Form 1095-B, 1095-C or a substitute form detailing your coverage, bring it to the appointment. Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s! Write down questions so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to your income in the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven’t yet received the current year’s 1099-DIV form. Make sure you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them. Compare deductions from last year with your records for this year. Did you forget anything? Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them. Accuracy Even for Details - To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s) and occupation(s) on last year’s return. Note any changes for this year. Although your telephone numbers and e-mail address aren’t required on your return, they are always helpful should questions occur during return preparation. Marital Status Change - If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review. Dependents - If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3 you will not need to supply them again): First and last name Social security number Birth date Number of months living in your home Their income amount (both taxable and nontaxable). If your dependent is your child over age 18, note how long the child was a full-time student during the year. For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren’t sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify a final decision. Some Transactions Deserve Special Treatment - Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions: Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction. Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment. Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the original owner’s death-date and the property’s value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor. Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gain, it is good practice to keep a record of them. The exclusion of gain applies only to a primary residence; so keeping a record of improvement to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the closing escrow statement). Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home. Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you. Home Energy-Related Expenditures: If you installed solar, geothermal or wind-power-generating systems, please bring the details of those purchases and manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit. Identity Theft: Identity theft is becoming more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen. Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires your total mileage, business miles, and commuting miles for each business use of your car to be reported on your return, so be prepared to have those numbers available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether it is included in your W-2. Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date and amount. Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements. If you have questions about assembling your tax data prior to your appointment, please give this office a call. Tue, 27 Jan 2015 19:00:00 GMT Listed Property http://www.messnerandhadley.com/blog/listed-property/46 http://www.messnerandhadley.com/blog/listed-property/46 Messner & Hadley LLP Certain assets such as cars, computers, cameras and video equipment, boats and airplanes purchased for business also may be used for personal purposes. To limit a taxpayer's ability to deduct the personal use of these items as business use, Congress established a list of these assets (thus the term “listed property”) for the IRS to monitor more closely and apply certain restrictions and recordkeeping requirements. Mon, 26 Jan 2015 19:00:00 GMT Like-Kind Exchange http://www.messnerandhadley.com/blog/like-kind-exchange/47 http://www.messnerandhadley.com/blog/like-kind-exchange/47 Messner & Hadley LLP Section 1031 of the tax code allows a taxpayer to exchange like-kind business and investment assets. This type of transaction is frequently referred to as a tax-free exchange, which is misleading since the tax is not “free” but instead is deferred to a later date when the replacement property is sold. Tax-free exchanges have special timing rules and this office should be consulted before proceeding with one. Sun, 25 Jan 2015 19:00:00 GMT Limited Partner http://www.messnerandhadley.com/blog/limited-partner/48 http://www.messnerandhadley.com/blog/limited-partner/48 Messner & Hadley LLP Is a partner whose participation in partnership activities is restricted, and whose personal liability for partnership debts is limited to the amount of money or other property that he or she contributed or may have to contribute. Sat, 24 Jan 2015 19:00:00 GMT Make Your Preferences Known in QuickBooks http://www.messnerandhadley.com/blog/make-your-preferences-known-in-quickbooks/40073 http://www.messnerandhadley.com/blog/make-your-preferences-known-in-quickbooks/40073 Messner & Hadley LLP QuickBooks is ready to use when you install it. But you can change its settings to make it work the way your company needs it to. There are some features that all small businesses need in their accounting software. Everyone needs a Chart of Accounts and a good set of report templates. There must be tools to bill customers and to document income and expenses. Some companies need payroll management, and some need the ability to create purchase orders. These days, many businesses want to accept payments online. But what does your company need? It’s unlikely that you would use absolutely every feature that QuickBooks offers, but you need to make sure that every tool you want to use is set up properly. If you’ve been using QuickBooks for a while, you may have been directed to the Preferences window already (accessible by clicking on Edit | Preferences). If you’re just starting out with the software, it’s a good idea to acquaint yourself with the most important elements contained there. Here are some of them. Figure 1: QuickBooks’ Preferences window. Some features are already turned on or off by default, but you can change their status. Accounting Click on the Accounting tab in the left vertical pane, then on the Company Preferences tab. Here, QuickBooks wants to know whether you plan to use account numbers. It also offers the option to turn on class tracking, which lets you define classes like company locations or divisions, or salespeople. Not sure what you should do here? Please ask us. Desktop View Options here involve usability and visibility issues. Getting them right can save you time and frustration. For example, under the My Preferences tab, you can choose between a VIEW that displays only One Window, or one that keeps Multiple Windows open. Click on the Company Preferences tab to turn specific features – like Payroll and Sales Tax -- on and off. Finance Charge Should you decide to apply Finance Charges to late payments, for example, please let us go over this feature with you. We’ll explain how it is set up and how it works in day-to-day accounting. Items & Inventory This is critical: you must visit this screen if you will be buying and selling products. First, you need to make sure that the box in front of Inventory and purchase orders are active has a check mark in it. If not, click in the box. Also important here: QuickBooks can maintain a real-time inventory level for each item you sell so that you neither run short nor waste money by stockpiling. Check the box in front of Quantity on Sales Orders if you want the software to include items that appear on sales orders in the count. Also, do you want a warning when you don’t have enough inventory to sell (as you’re filling out an invoice, for example)? We can explain the difference between Quantity on Hand and Quantity Available; it’s rather complex. Figure 2: Some inventory concepts may be unfamiliar to you. If you’ll be buying and selling items, let us walk you through this section. Payroll & Employees Payroll is integrated with QuickBooks, but it’s so complex that it almost acts as another application. If you’re planning to take this on yourself, some training will be necessary. Reminders Unless you have a very simple business or an extraordinarily good memory, you’ll probably want Quickbooks to remind you when you need to complete certain tasks. Click Reminders | Company Preferences to see the lengthy list of events that QuickBooks supports, like Paychecks to Print, Inventory to Reorder, and Bills to Pay. You can have the software display either a summary or a list of what needs to be done, and you can specify how many days in advance you want to be alerted. Sales & Customers, Sales Tax, and Time & Expenses If your accounting workflow includes tasks in any of these areas, you’ll need to visit them to turn features on and make other preferences known. You probably won’t need to have absolutely every feature turned on from the start. But as your business grows and changes – and we hope it does – you can always revisit the Preferences window to let QuickBooks know about your new needs. We hope you’ll let us know, too. Sat, 24 Jan 2015 19:00:00 GMT Marginal Tax Rate http://www.messnerandhadley.com/blog/marginal-tax-rate/49 http://www.messnerandhadley.com/blog/marginal-tax-rate/49 Messner & Hadley LLP Most think that marginal tax rate is synonymous with tax bracket. This may generally be true but as the tax brackets advance to higher rates so does the taxpayer's income; as incomes increase, tax breaks begin to be reduced, phased out and in some cases totally eliminated. This effectively increases the marginal tax rate above the tax bracket. Knowing your marginal rate tells how much of each additional dollar will go to taxes or how much each additional dollar of deductions will reduce taxes. Also see “tax bracket.” Fri, 23 Jan 2015 19:00:00 GMT Modified Adjusted Gross Income http://www.messnerandhadley.com/blog/modified-adjusted-gross-income/50 http://www.messnerandhadley.com/blog/modified-adjusted-gross-income/50 Messner & Hadley LLP Many tax deductions, adjustments and credits are phased out or disallowed once a taxpayer's adjusted gross income (AGI) reaches a certain level that varies depending on the particular tax benefit. However, the AGI for these purposes is usually not the regular AGI, but is instead AGI without certain other benefits being allowed and is called modified AGI. For example, when testing to see if the income phase-out threshold has been reached for claiming an education credit, the AGI must be figured without claiming the exclusions that are available for certain foreign earned income. Thu, 22 Jan 2015 19:00:00 GMT Municipal Bond Interest http://www.messnerandhadley.com/blog/municipal-bond-interest/51 http://www.messnerandhadley.com/blog/municipal-bond-interest/51 Messner & Hadley LLP A term used for interest received on an obligation issued by a state or local government. Generally, this type of interest is not taxable (but see Private Activity Bonds) for Federal tax purposes. Most states, on the other hand, will treat municipal bond interest from other states as taxable. Thu, 22 Jan 2015 19:00:00 GMT February 2015 Business Due Dates http://www.messnerandhadley.com/blog/february-2015-business-due-dates/36129 http://www.messnerandhadley.com/blog/february-2015-business-due-dates/36129 Messner & Hadley LLP February 2 - 1099s Due To Service Providers If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by February 2nd. "Services" can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by March 2, 2015 (March 31, 2015 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance. Payments that may be covered include the following: Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish Compensation for workers who are not considered employees (including fishing boat proceeds to crew members) Dividends and other corporate distributions Interest Amounts paid in real estate transactions Rent Royalties Amounts paid in broker and barter exchange transactions Payments to attorneys Payments of Indian gaming profits to tribal members Profit-sharing distributions Retirement plan distributions Original issue discount Prizes and awards Medical and health care payments Debt cancellation (treated as payment to debtor) Cash payments over $10, February 2 - W-2 Due to All Employees All employers need to give copies of the W-2 form for 2014 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.February 2 - File Form 941 and Deposit Any Undeposited Tax File Form 941 for the fourth quarter of 2014. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.February 2 - File Form 943 All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2014. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.February 2 - W-2G Due from Payers of Gambling Winnings If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2014.February 2 - File Form 940 - Federal Unemployment Tax File Form 940 (or 940-EZ) for 2014. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.February 2 - File Form 945 File Form 945 to report income tax withheld for 2014 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return. February 10 - Non-Payroll Taxes File Form 945 to report income tax withheld for 2014 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Social Security, Medicare and Withheld Income Tax File Form 941 for the fourth quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time. February 10 - Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2014. This due date applies only if you deposited the tax for the year in full and on time. February 10 - Federal Unemployment Tax File Form 940 for 2014. This due date applies only if you deposited the tax for the year in full and on time. February 17 - Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in January. February 17 - Non-Payroll Withholding If the monthly deposit rule applies, deposit the tax for payments in January.February 17 - All Employers Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2014, but did not give you a new Form W-4 to continue the exemption this year. Thu, 22 Jan 2015 19:00:00 GMT February 2015 Individual Due Dates http://www.messnerandhadley.com/blog/february-2015-individual-due-dates/36130 http://www.messnerandhadley.com/blog/february-2015-individual-due-dates/36130 Messner & Hadley LLP February 2 - Tax Appointment If you don’t already have an appointment scheduled with this office, you should call to make an appointment that is convenient for you. February 2 - File 2014 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar). February 10 - Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10.Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.February 17 - Last Date to Claim Exemption from Withholding If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year. Thu, 22 Jan 2015 19:00:00 GMT Are You Required to File 1099s? http://www.messnerandhadley.com/blog/are-you-required-to-file-1099s/38424 http://www.messnerandhadley.com/blog/are-you-required-to-file-1099s/38424 Messner & Hadley LLP Article Highlights: 1099-MISC Filing Requirements Independent Contractor Filing Threshold Form W-9 If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2014 must be provided to the independent contractor no later than February 2, 2015. It is not uncommon to, say, have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information, such as their complete name and tax identification number (TIN), needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. IRS Form W-9 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. This data includes the vendor’s name, address, type of business entity and TIN (usually a Social Security number or an Employer Identification Number), plus certifications as to the ID number and citizenship status, among others. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS. The W-9 was last revised by the IRS in December 2014, so if you previously printed out blank W-9s to give to your vendors, you may want to print copies of the latest version (including the instructions) and discard the older unused forms. To avoid a penalty, the government’s copies of the 1099s must to be sent to the IRS by March 2, 2015, along with transmittal Form 1096. They must be submitted on magnetic media or on optically scannable forms. This firm provides 1099 preparation services. Click here to download a form to list those for whom you must file a 1099. If you need assistance or have questions, please give this office a call. Thu, 22 Jan 2015 19:00:00 GMT Original Issue Discount (OID) http://www.messnerandhadley.com/blog/original-issue-discount-oid/52 http://www.messnerandhadley.com/blog/original-issue-discount-oid/52 Messner & Hadley LLP Sometimes bonds are issued (sold) at a discount (thus the term “original issue discount”) and then some years later mature at face value. The difference between the issue price and the face value represents the interest paid by the bond issuer. A portion of that interest, referred to as “OID,” must be reported annually even though the bond owner doesn't actually receive any of the interest until the bond matures. Information about the amount to report is provided to the bond owner on Form 1099-OID. Wed, 21 Jan 2015 19:00:00 GMT Passive Activity Loss http://www.messnerandhadley.com/blog/passive-activity-loss/53 http://www.messnerandhadley.com/blog/passive-activity-loss/53 Messner & Hadley LLP In order to limit the tax benefits of tax shelters, the tax code imposes loss limitations on entities that Congress defined as passive activities. Generally, passive activities are investments in which a taxpayer does not materially participate, and losses from such investments can be used only to offset income from other passive investments and cannot be deducted against other kinds of income such as wages, pensions, interest, dividends, capital gains, etc. Most real estate and limited partnership investments are classified as passive activities. There is an exception for rentals that taxpayers actively participate in and manage which allows up to $25,000 of loss to be deducted. However, this special exception phases out for AGIs between $100,000 and $150,000. Wed, 21 Jan 2015 19:00:00 GMT Points http://www.messnerandhadley.com/blog/points/54 http://www.messnerandhadley.com/blog/points/54 Messner & Hadley LLP In financing lingo, one point is equivalent to 1% of the loan value. Because they constitute prepaid interest, points are usually deducted ratably over the loan term. This rule would apply, for example, when a taxpayer purchases a rental real estate property--the points paid in such a transaction are amortized over the life of the loan. However, tax law provides a break for points paid on a mortgage to buy or improve a taxpayer's principal residence, allowing them to be deducted in full in the year paid. Tue, 20 Jan 2015 19:00:00 GMT Working Abroad Can Yield Tax-Free Income http://www.messnerandhadley.com/blog/working-abroad-can-yield-tax-free-income/40054 http://www.messnerandhadley.com/blog/working-abroad-can-yield-tax-free-income/40054 Messner & Hadley LLP Article Highlights: Tax-Free Income from Working Abroad Foreign Earned Income & Housing Exclusions  Foreign Self-Employment Income  Claiming or Revoking the Exclusion  U.S. citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside of the U.S. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs. To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must: o Have foreign earned income (income received for working in a foreign country); Have a tax home in a foreign country; and  Meet either the bona fide residence test or the physical presence test.  The foreign earned income exclusion amount is adjusted annually for inflation. For 2015, the maximum foreign earned income exclusion is up to $100,800 per qualifying person. If taxpayers are married and both spouses (1) work abroad and (2) meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $201,600 for the 2015 tax year, but if one spouse uses less than 100% of his or her exclusion, the unused amount cannot be transferred to the other spouse. In addition to the foreign earned income exclusion, qualifying individuals may also choose to exclude or deduct from their foreign earned income a foreign housing amount. The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is limited, generally, to 30% of the maximum foreign earned income exclusion. For 2015, the housing amount limitation is $30,240 for the tax year. However, the limit will vary depending on where the qualifying individual's foreign tax home is located and the number of qualifying days in the tax year. The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion. Before you become overly excited, foreign earned income does not include the following amounts: Pay received as a military or civilian employee of the U.S. Government or any of its agencies.  Pay for services conducted in international waters (not a foreign country).  Pay in specific combat zones, as designated by a Presidential Executive Order, that is excludable from income.  Payments received after the end of the tax year following the year in which the services that earned the income were performed.  The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer.  Pension or annuity payments, including social security benefits.  A qualifying individual may also claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce his regular income tax, but will not reduce his self-employment tax. Also, the foreign housing deduction - instead of a foreign housing exclusion - may be claimed. A qualifying individual claiming the foreign earned income exclusion, the housing exclusion, or both, must figure the tax on the remaining non-excluded income using the tax rates that would have applied had the individual not claimed the exclusions. In other words, the exclusion is off-the-bottom, not off-the-top. Once the foreign earned income exclusion is chosen, a foreign tax credit, or deduction for taxes, cannot be claimed on the income that can be excluded. If a foreign tax credit or tax deduction is claimed for any of the foreign taxes on the excluded income, the foreign earned income exclusion may be considered revoked. Other issues: Earned income credit - Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year. Timing of election - Generally, a qualifying individual's initial choice of the foreign earned income exclusion must be made with one of the following income tax returns: A return filed by the due date (including any extensions);  A return amending a timely-filed return;  Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid; or  A return filed within 1 year from the original due date of the return (determined without regard to any extensions).  A qualifying individual can revoke an election to claim the foreign earned income exclusion for any year. This is done by attaching a statement to the tax return revoking one or more previously made choices. The statement must specify which choice(s) are being revoked, as the election to exclude foreign earned income and the election to exclude foreign housing amounts must be revoked separately. If an election is revoked, and within 5 years the qualifying individual wishes to again choose the same exclusion, he must apply for approval by requesting a ruling from the IRS. Are you looking for foreign employment or has an opportunity already presented itself to you? Before you make your final decision, please call our office to learn more about the foreign earned income and housing allowance exclusions, or how to meet the bona fide residence or physical presence tests. Tue, 20 Jan 2015 19:00:00 GMT Principal Residence http://www.messnerandhadley.com/blog/principal-residence/55 http://www.messnerandhadley.com/blog/principal-residence/55 Messner & Hadley LLP A taxpayer can exclude up to $250,000 ($500,000 for married taxpayers) of gain from the sale of the taxpayers' principal residence if they meet the ownership and residence tests. If a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year is ordinarily considered the taxpayer's principal residence. Mon, 19 Jan 2015 19:00:00 GMT Private Activity Bond http://www.messnerandhadley.com/blog/private-activity-bond/56 http://www.messnerandhadley.com/blog/private-activity-bond/56 Messner & Hadley LLP Generally, interest from municipal bonds issued by a state or local government is federally tax-exempt for both regular and alternative minimum tax (AMT) purposes. However, some municipal bonds whose proceeds are used to support private businesses are classified as private activity bonds and the interest from them - whether paid directly to the bondholder or through a mutual fund - is taxable for AMT purposes. Taxpayers subject to the AMT may wish to utilize alternate investment vehicles. Sun, 18 Jan 2015 19:00:00 GMT Qualified Plan http://www.messnerandhadley.com/blog/qualified-plan/57 http://www.messnerandhadley.com/blog/qualified-plan/57 Messner & Hadley LLP This term refers to retirement and employment benefit plans that conform to IRS requirements and are designed to protect the interests of employees or retirees. Sat, 17 Jan 2015 19:00:00 GMT Recapture http://www.messnerandhadley.com/blog/recapture/58 http://www.messnerandhadley.com/blog/recapture/58 Messner & Hadley LLP Is to include as income or as additional tax in the return an amount allowed or allowable as a deduction or a credit in a prior year. In some cases, the tax law requires that a tax benefit taken in an earlier year be paid back if the property on which the benefit was claimed isn't held for a specific time period. This payback is termed “recapture”. Fri, 16 Jan 2015 19:00:00 GMT Rollover http://www.messnerandhadley.com/blog/rollover/59 http://www.messnerandhadley.com/blog/rollover/59 Messner & Hadley LLP A rollover is a tax-free withdrawal of cash or other assets from one retirement plan and its reinvestment in another retirement program. The amount rolled over is excluded from gross income in the year of the transfer. Generally, a rollover must be completed within 60 days after a distribution is received in order to ensure non-taxability. The 60-day rule can be waived by the IRS if a delay is caused by a financial institution and certain conditions are met or caused by an event out of the control of the taxpayer and the IRS issues a waiver. Only one rollover from a Traditional IRA to another Traditional IRA is permitted within a 12-month period. However, there is no limit on the number of direct transfers from one financial institution to another. If a distribution is taken from an employee pension plan, the company will withhold 20% of the distribution even if the taxpayer plans a rollover. In that case, the taxpayer would need to make up the difference from other funds in order to have a fully tax-free rollover. This problem can be avoided by having the funds transferred directly to other retirement programs. Thu, 15 Jan 2015 19:00:00 GMT Take Advantage of Education Tax Benefits http://www.messnerandhadley.com/blog/take-advantage-of-education-tax-benefits/40040 http://www.messnerandhadley.com/blog/take-advantage-of-education-tax-benefits/40040 Messner & Hadley LLP Article Highlights: Student loans   Gifting low basis assets  Education credits  Education savings programs  Educational savings bond interest  The tax code includes a number of incentives that, with proper planning, can provide tax benefits while you, your spouse, or children are being educated. Which of these options will provide the greatest tax benefit depends on each individual's particular circumstances. The following is an overview of the various possibilities. Student Loans - A major planning issue is how to finance your children's education. Those with substantial savings simply pay the expenses as they go while others begin setting aside money far in advance of the education need, perhaps utilizing a Coverdell account or Sec. 529 plan. Others will need to borrow the funds, obtain financial aid, or be lucky enough to qualify for a scholarship. Although student loans provide one ready source of financing, the interest rates are generally higher than a home equity debt loan, which can also provide a longer repayment term and lower payments. When choosing between a home equity loan or student loan, keep in mind the following limitations: (1) Interest on home equity debt is deductible only if you itemize, and then only on the first $100,000 of debt, and not at all to the extent that you are taxed by the alternative minimum tax; and (2) student loans must be single-purpose loans—the interest deduction is available even if you do not itemize but is limited to $2,500 per year, and the deduction phases out for joint filers with income (AGI) between $130,000 and $160,000 ($65,000 to $80,000 for unmarried taxpayers). Gifting Low Basis Assets - Another frequently used tax strategy to finance education is to gift appreciated assets (typically stock) to a child and then allow the child to sell the stock to pay for the education. This results in transferring any gain on the stock to the child at a time when the child has little or no other income; tax on the gain is avoided or is at the child's low rate. With the lowest of the long-term capital gains rates currently being zero, Congress curtailed income shifting to children by making most full-time students under the age of 24 subject to the “kiddie tax.” This effectively taxes their unearned income at their parents' tax rates and makes the gifting of appreciated assets to a child less appealing as a way to finance college expenses. Education Credits - The tax code provides tax credits for post-secondary education tuition paid during the year for the taxpayer and dependents. Currently, there are two types of credits: the American Opportunity Credit, which is limited to any four tax years for the first four years of post-secondary education and provides up to $2,500 of credit for each student (some of which may be refundable), and the Lifetime Learning Credit, which provides up to $2,000 of credit for each family each year. The American Opportunity Credit is phased out for joint filers with incomes between $160,000 and $180,000 ($80,000 to $90,000 for single filers). The 2015 phaseout ranges for the Lifetime Learning Credit are $110,000-$130,000 for married joint and $55,000-$65,000 for others. Neither credit is allowed for married individuals who file separately. Careful planning for the timing of tuition payments can provide substantial tax benefits. Education Savings Programs - For those who wish to establish a formalized long-term savings program to educate their children, the tax code provides two plans. The first is a Coverdell Education Savings Account, which allows the taxpayer to make $2,000 annual nondeductible contributions to the plan. The second plan is the Qualified Tuition Plan, more frequently referred to as a Sec. 529 plan, with annual nondeductible contributions generally limited to the gift tax exemption for the year ($14,000 in 2015). Both plans provide tax-free earnings if used for qualified education expenses. When choosing between a Coverdell or Sec. 529 plan, keep the following in mind: (1) Coverdell accounts can be used for kindergarten through post-secondary education and become the property of the child at age of majority, and contributions are phased out for joint filers between $190,000 and $220,000 ($95,000 and $110,000 for others) of income (AGI); and (2) Sec. 529 plans are only for post-secondary education, but the contributor retains control of the funds and there is no phase out of the contribution based on income. Educational Savings Bond Interest - There is also an exclusion of savings bond interest for Series EE or I Bonds that were issued after 1989 and purchased by an individual over the age of 24. All or part of the interest on these bonds is exempt from tax if qualified higher education expenses are paid in the same year that the bonds are redeemed. As with other benefits, this one also has a phase-out limitation for joint filers with income between $115,750 and $145,750 ($77,200 and $92,200 for unmarried taxpayers, but those using the married filing separately status do not qualify for the exclusion). The exclusion is computed on IRS Form 8815, Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued After 1989. If you would like to learn more about these benefits, or to work out a comprehensive plan to take advantage of them, please give this office a call.  Thu, 15 Jan 2015 19:00:00 GMT Section 179 Deduction http://www.messnerandhadley.com/blog/section-179-deduction/60 http://www.messnerandhadley.com/blog/section-179-deduction/60 Messner & Hadley LLP This refers to a section of the Internal Revenue Code that permits taxpayers to expense (write off in one year) up to $25,000 (2014, adjusted for inflation annually) of business equipment expenditures that would normally have to be depreciated over their useful lives. The $25,000 allowance is gradually reduced for businesses that place into service more than $200,000 (2014, adjusted for inflation annually) of business equipment during the year. Caution: at the time this article was updated Congress was still considering reinstating previous higher limits for 2014. Wed, 14 Jan 2015 19:00:00 GMT Section 529 Plan http://www.messnerandhadley.com/blog/section-529-plan/61 http://www.messnerandhadley.com/blog/section-529-plan/61 Messner & Hadley LLP Qualified Tuition Plans (also known as Section 529 Plans) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These plans, also known as qualified tuition programs, allow taxpayers to gift large sums of money for a family member's college education, while continuing to maintain control of the funds. The earnings from these accounts grow tax-deferred and distributions are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate planning tool as well, providing a means to transfer large amounts of money without gift tax. Tue, 13 Jan 2015 19:00:00 GMT Beware Of the One-per-12-Month IRA Rollover Limitation Beginning In 2015 http://www.messnerandhadley.com/blog/beware-of-the-one-per-12-month-ira-rollover-limitation-beginning-in-2015/40030 http://www.messnerandhadley.com/blog/beware-of-the-one-per-12-month-ira-rollover-limitation-beginning-in-2015/40030 Messner & Hadley LLP Article Highlights: 60-Day limit  New interpretation  New one-per-12-month-period rollover rule  Types of plans included  The tax code allows an individual to take a distribution from his or her IRA account and avoid the tax and early distribution penalties if the distribution is redeposited to an IRA account owned by the taxpayer within 60 days of receiving the distribution. Early in 2014, in a tax court case, the court ruled that taxpayers could only have one IRA rollover per 12-month period. This was contrary to the IRS's long-standing one rollover per every IRA account every 12 months. This far more liberal position was also included in published IRS guidance. However, contrary to general public opinion, guidance provided by the IRS in their publications is not citable, carries no weight in audit or court, and only represents the IRS' interpretation of tax law. As a result, the IRS has adopted the Court's more restrictive position, but will not apply the new interpretation until 2015, giving taxpayers time to become aware of the new restrictions. The IRS is modifying its published 2015 guidance to reflect this new position. The IRS announced in November that the one-per-12-month-period rollover rule also applies to Simplified Employer Pension Plans (SEPs) and SIMPLE plans. Included in the November announcement, the IRS indicated it would not count a distribution taken in 2014 and rolled over in 2015 (within the 60-day limit) as a 2015 rollover. Not counted towards the one-per-12-month rule are traditional to Roth IRA conversions or trustee-to-trustee IRA transfers where the funds are directly transferred from one IRA trustee to another. Please call this office if you are planning an IRA distribution and subsequent rollover and are not positive it falls within the one-per-12-month limit.  Tue, 13 Jan 2015 19:00:00 GMT Self-Employment Tax http://www.messnerandhadley.com/blog/self-employment-tax/62 http://www.messnerandhadley.com/blog/self-employment-tax/62 Messner & Hadley LLP Employees pay Social Security and Medicare taxes (collectively often referred to as FICA tax) through payroll withholding and the employer contributes a like amount for the employee. Since self-employed taxpayers do not have withholding, they pay an equivalent through what is called self-employment tax (SE tax). The tax is based upon the net profits from self-employment. For 2015, the rate is 15.3% of the first $118,500 (up from $117,000 in 2014) of earnings and 2.9% on all earnings over that amount. The SE tax is included as “other” tax on Form 1040 and can be paid as part of the estimated tax installments the taxpayer makes. An additional 0.9% rate applies to the Medicare portion of the SE tax when earned income exceeds certain thresholds - see the tax term “FICA.” Mon, 12 Jan 2015 19:00:00 GMT Shared Equity Arrangement http://www.messnerandhadley.com/blog/shared-equity-arrangement/63 http://www.messnerandhadley.com/blog/shared-equity-arrangement/63 Messner & Hadley LLP A shared equity arrangement is a method of financing the purchase of a residence where two or more individuals acquire an ownership interest in a dwelling unit and one or more of the co-owners occupies the property and pays fair rent to the non-occupying co-owner(s). The agreement must be in writing. Before entering into this type of arrangement, be sure to contact this office. Sun, 11 Jan 2015 19:00:00 GMT Standard Deduction http://www.messnerandhadley.com/blog/standard-deduction/64 http://www.messnerandhadley.com/blog/standard-deduction/64 Messner & Hadley LLP Most taxpayers are permitted to deduct either a standard deduction or itemized deductions in determining their taxable income. The standard deductions are based on filing status. For 2015, the amounts are: Single and Married Taxpayers Filing Separately $6,300 (up from $6,200 in 2014), Head of Household $9,250 (up from $9,100 in 2014), Married Filing Jointly and Surviving Spouse $12,600 (up from $12,400 in 2014), In addition, elderly and blind taxpayers are allowed an “add-on” to the standard deduction for their filing status. The add-on amount in 2015 for single taxpayers is $1,550 (same as in 2014) and $1,250 (up from $1,200 in 2014) for married taxpayers. As an example, in 2015, a married couple filing jointly and both over age 65 would have a standard deduction of $15,100 ($12,600+ $1,250 + $1,250). For 2015, the standard deduction of an individual who is, or could be, a dependent of someone else is limited to the greater of $1,050 or the individual's earned income plus $350 (but not exceeding $6,300). Note: When filing using the married separate status, both spouses either must itemize their deductions or use the standard deduction. Sat, 10 Jan 2015 19:00:00 GMT Standard Mileage Rate http://www.messnerandhadley.com/blog/standard-mileage-rate/65 http://www.messnerandhadley.com/blog/standard-mileage-rate/65 Messner & Hadley LLP This is the per mile rate that can be used in lieu of actual expenses when using a vehicle for a deductible purpose. For 2014, the cents per mile rates are: 56.0 for business use and 23.5 for moving and medical use. For charity travel the cents per mile rate is 14.0. Parking expenses can be taken in addition to the standard mileage rate. Self-employed individuals can also add the business portion of the interest expense to acquire the vehicle. The standard rate can be used for up to four vehicles being used simultaneously. At the time this article was updated, the 2015 mileage rates had not been published, but will be similar to the 2014 rates. Fri, 09 Jan 2015 19:00:00 GMT Stepped-Up Basis http://www.messnerandhadley.com/blog/stepped-up-basis/66 http://www.messnerandhadley.com/blog/stepped-up-basis/66 Messner & Hadley LLP When property is inherited, the basis for the beneficiaries is the value assigned to that property in the estate. Generally, that basis is the value of the property on the date of death of the decedent or on an alternate date selected by the executor of the estate. Thus, any appreciation up to the date of death is forgiven for regular tax purposes and the beneficiary starts with a stepped-up basis. This also applies to property inherited from a spouse. Caution - though infrequent, there is a potential for a step-down in basis as well. Thu, 08 Jan 2015 19:00:00 GMT Don’t Forget Those Nominee 1099s http://www.messnerandhadley.com/blog/don8217t-forget-those-nominee-1099s/36087 http://www.messnerandhadley.com/blog/don8217t-forget-those-nominee-1099s/36087 Messner & Hadley LLP Article Highlights: Who is a nominee? What a nominee must do Allocating reported income Series 1099 forms For tax purposes, if you receive, in your name, income that actually belongs to someone else, you are also a nominee. Being a nominee means you must file with the IRS a 1099 form appropriate to the type of income you received that reports the other individual’s share of the income and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required. The most commonly encountered nominee situations include when you have a joint bank account or brokerage account with someone other than your spouse and all the income from those accounts is reported under your Social Security number (SSN). You will need to issue the IRS and your joint account owner a 1099 reporting the co-owner’s share of the income under his or her SSN. Then, when you file your return, you show all of the income but back out the co-owner’s share as “nominee amount.” Thus only your portion of the income is included in your taxable income. The type of 1099 depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends and 1099-B for the proceeds from selling stocks and bonds. Forms 1099-INT and 1099-DIV that you issue as a nominee are supposed to be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. (When these due dates are a Saturday, Sunday or legal holiday, as they are in 2015, the forms become due on the next business day.) The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. If you have questions about filing 1099s, please call this office. Thu, 08 Jan 2015 19:00:00 GMT Tax Credits http://www.messnerandhadley.com/blog/tax-credits/67 http://www.messnerandhadley.com/blog/tax-credits/67 Messner & Hadley LLP A tax credit is a tax benefit that offsets the tax dollar for dollar. Most credits are nonrefundable and can only be used to reduce the tax to zero. A refundable credit, like the earned income credit, offsets the tax and any balance not used to offset the tax is refundable and included in the year's refund. Unused credit from some nonrefundable credits can be carried over and some cannot. Wed, 07 Jan 2015 19:00:00 GMT Tax Identification (ID) Number http://www.messnerandhadley.com/blog/tax-identification-id-number/68 http://www.messnerandhadley.com/blog/tax-identification-id-number/68 Messner & Hadley LLP For most individuals, their tax identification number is their Social Security number (SSN). It is used when filing tax returns and must be given to financial institutions, employers and other income payers so that appropriate information reporting forms can be completed. Failing to do so can result in a penalty or mandatory back-up withholding. A SSN is also required for a dependent, regardless of age, in order to claim the dependent's exemption allowance and certain tax credits, such as the earned income credit. Nonresident or resident aliens may apply to the IRS for an “individual taxpayer identification number” (ITIN) if they are not eligible for a SSN. A special “adoption taxpayer identification number” (ATIN) may be obtained when a taxpayer is in the process of adopting a U.S. citizen or resident child and a SSN cannot be obtained; the ATIN cannot be used once the adoption is final - a SSN must be obtained for the child. Individuals who have household employees or who are self-employed with employees are required to obtain and use a Federal employer identification number (FEIN) as well. A self-employed taxpayer who has a Keogh plan must have an FEIN, even if no other person is employed in the business. Tue, 06 Jan 2015 19:00:00 GMT 2015 Standard Mileage Rates Announced http://www.messnerandhadley.com/blog/2015-standard-mileage-rates-announced/40012 http://www.messnerandhadley.com/blog/2015-standard-mileage-rates-announced/40012 Messner & Hadley LLP Article Highlights: 2015 standard mileage rates Business, charitable, medical and moving rates Possible mid-year adjustments The Internal Revenue Service recently issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be: 57.5 cents per mile for business miles driven (includes a 24 cent per mile allocation for depreciation) 23 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations. CAUTION: With the recent substantial drop in gas prices there is a very good chance the IRS will adjust the standard mileage rates mid-year to reflect the lower gas prices as they have done in prior years when gas prices spiked during the year. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set and has been 14 cents for over 15 years. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. If you have questions related to best methods of deducting the business use of your vehicle or the documentation required, please give this office a call. Tue, 06 Jan 2015 19:00:00 GMT Taxable Income http://www.messnerandhadley.com/blog/taxable-income/69 http://www.messnerandhadley.com/blog/taxable-income/69 Messner & Hadley LLP This can mean income that is taxable as opposed to income that is not, such as tax-exempt interest from municipal bonds. Or, it can refer to taxable income on a tax return, which is income less adjustments, deductions and exemptions (the final income upon which tax is computed). Mon, 05 Jan 2015 19:00:00 GMT Tax Bracket http://www.messnerandhadley.com/blog/tax-bracket/70 http://www.messnerandhadley.com/blog/tax-bracket/70 Messner & Hadley LLP Try to envision income that is included on a tax return as blocks of income stacked one upon the other. The first block represents the taxpayer's standard or itemized deductions on which there is no tax. Following that is another block representing the total of the return's personal exemptions, which is also tax-free. The next block of income would represent the income subject to a 10% rate. If there were additional income, each subsequent block of income is taxed at progressively higher rates. Currently, the rates are 10%, 15%, 25%, 28%, 33%, 35% and the maximum at 39.6%. The tax rate on the last block of a taxpayer's income represents the taxpayer's tax bracket. The reasoning is that generally any increase or decrease in income would be affected at the top tax rate, also known as the tax bracket. Sun, 04 Jan 2015 19:00:00 GMT Unearned Income http://www.messnerandhadley.com/blog/unearned-income/71 http://www.messnerandhadley.com/blog/unearned-income/71 Messner & Hadley LLP Is income not earned from personal services. Examples are income from investments, pensions, capital gains and passive activities. Sat, 03 Jan 2015 19:00:00 GMT Wash Sale http://www.messnerandhadley.com/blog/wash-sale/72 http://www.messnerandhadley.com/blog/wash-sale/72 Messner & Hadley LLP The wash sale rules prevent taxpayers from realizing a loss from the sale of a security and then in a short period of time reacquiring that security. This rule only applies to sales resulting in a loss. A wash sale is defined as a sale that results in a loss and substantially the same security is purchased within 30 days before or after the date of the sale. When a loss is limited by the wash sale rule, the basis of the acquired shares is adjusted (increased) by the loss that wasn't allowed. The wash sale rule also applies to mutual funds. For example, if a mutual fund is sold at a loss and within the test period dividends from the fund were reinvested to buy more shares of the same fund, some or all of the loss may not be allowed. Fri, 02 Jan 2015 19:00:00 GMT Withholding http://www.messnerandhadley.com/blog/withholding/73 http://www.messnerandhadley.com/blog/withholding/73 Messner & Hadley LLP This term is applied to amounts that are withheld from income for Federal and State taxes, Social Security and Medicare taxes. Withholding is most commonly associated with wages but can also occur on social security income, pension income, gambling income, unemployment payments, and in some cases, backup withholding on interest and dividend income where the taxpayer has failed to provide a Tax ID number to the payer. Fri, 02 Jan 2015 19:00:00 GMT Occupation Brochures http://www.messnerandhadley.com/blog/occupation-brochures/455 http://www.messnerandhadley.com/blog/occupation-brochures/455 Messner & Hadley LLP Virtually all taxpayers incur deductible expenses related to their occupations. Although certain expenses may be deductible to a variety of occupations, most occupations will have a combination of expenses that are unique to that occupation alone. The following is information pertaining to deductible expenses as they apply to a variety of occupations. This includes both text discussions of key expenses and a deduction organizer for each occupation. Both the text discussions and the organizers are in pdf format for viewing and printing. Wed, 31 Dec 2014 19:00:00 GMT Family, Income, and Residence Changes Can Affect Your Premium Tax Credit http://www.messnerandhadley.com/blog/family-income-and-residence-changes-can-affect-your-premium-tax-credit/39987 http://www.messnerandhadley.com/blog/family-income-and-residence-changes-can-affect-your-premium-tax-credit/39987 Messner & Hadley LLP Article Highlights: Advance premium tax credit (APTC)  Repayment avoidance  Things you should report  Special enrollment period  If you get health insurance coverage through a government Health Insurance Marketplace, it is very important that you keep the Marketplace aware of any changes in household income, marital status, and family size. If you are receiving advance payments of the premium tax credit, it is particularly important that you report changes in circumstances, including moving, to the Marketplace. There's a simple reason: reporting these income and life changes lets the Marketplace update the information used to determine your eligibility for a Marketplace plan, which may affect the appropriate amount of advance payments of the premium tax credit that the government sends to your health insurer on your behalf. Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. On the other hand, getting too little premium assistance could mean missing out on monthly premium assistance that you deserve. Changes in circumstances that you should report to the Marketplace include, but are not limited to: An increase or decrease in your estimated household income  Marriage or divorce  The birth or adoption of a child Moving  Starting a job that offers health insurance  Gaining or losing your eligibility for other health care coverage  Many of these changes in circumstances - including moving out of the area served by your current Marketplace plan - qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances. If you have questions about the premium tax credit or the advance payment of the credit, please give this office a call. Wed, 31 Dec 2014 19:00:00 GMT What to Do if You Receive a Dreaded IRS Letter http://www.messnerandhadley.com/blog/what-to-do-if-you-receive-a-dreaded-irs-letter/39975 http://www.messnerandhadley.com/blog/what-to-do-if-you-receive-a-dreaded-irs-letter/39975 Messner & Hadley LLP Article Highlights: CP2000 Series Notices  Automated  Frequently Issued In Error  What You Should Do  When the IRS thinks it has found an issue with your tax return, it will contact you via mail with a CP series notice (most commonly CP2000). Please note that the IRS will never call or e-mail you initially about a tax delinquency. This is a trick used by scammers that has become quite prevalent. Most commonly, these notices will include a proposed tax due and any interest or penalties. The notice will include an explanation of the examination process and how you can respond. These automated notices are sent out year-round and are quite common. As the IRS tries to close the tax gap, it has become more aggressive in its collection efforts. In addition, with some taxpayers using low-quality tax mills or do-it-yourself software, there has been an increase in the number of notices sent over the years because of preparer error. A missed check box here, a misunderstanding of a credit there, overlooked income—it all adds up. One of the largest tax software providers for self-preparers even needed to hire a huge new workforce to help its users deal with the increase in notices caused by novice taxpayers trying to do their own tax returns. This automated process starts when the IRS matches what you reported on your tax return to data reported by third parties. When this information does not agree, the automated collection effort begins. But don't panic - These notices often include errors. But you do need to realize that not responding by the 30-day deadline can have significant repercussions. The first thing to determine is which type of notice you have received. A CP2000 notice is quite different than many of the other CP notices that deal with identify theft, audit correspondence, earned income credit and much more. Also realize that a CP2000 notice includes a proposed, and almost always unfavorable, change to your tax return, and it is giving you an opportunity to dispute the proposed change. Procrastinating or ignoring the notice will only cause the IRS to ratchet up its collection efforts and make it increasingly difficult to dispute the proposed adjustment. Sometimes the IRS will be correct. You may have overlooked a capital gain, income from a second job, etc. Quite frequently, the IRS is incorrect simply because its software isn't sophisticated enough to pick up all the information on your attached schedules. The first thing you should do is contact this office as quickly as possible so we can review the notice to determine whether it is correct and quickly respond to it.   Mon, 29 Dec 2014 19:00:00 GMT Only 8 Days Left For 2014 Tax Deductions http://www.messnerandhadley.com/blog/only-8-days-left-for-2014-tax-deductions/39944 http://www.messnerandhadley.com/blog/only-8-days-left-for-2014-tax-deductions/39944 Messner & Hadley LLP Article Highlights: Actions you can still take to reduce your 2014 tax bite  Actions must be completed before the end of 2014  Deductible expenses paid by credit card are deductible in the year charged  We would like to remind you that the last day you may make a tax deductible purchase, pay a tax deductible expense, or make tax deductible charitable contributions for 2014, is Wednesday, Dec. 31. That is only 8 days away. However, you still have time to make charitable contributions, to pay deductible taxes, and to make business acquisitions before year-end. If you are making last minute purchases of business equipment, you also must place that equipment into service before year's end. Thus do not expect a deduction on your 2014 return if you take delivery after the end of the year, even if you paid for the item in 2014. A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution. If you are short of cash, keep in mind that purchases or contributions charged to your credit card are deemed purchased when the charge is made. Wishing you a happy New Year and looking forward to assisting you with your tax preparation needs during the coming tax season. Tue, 23 Dec 2014 19:00:00 GMT Creating Item Records in QuickBooks http://www.messnerandhadley.com/blog/creating-item-records-in-quickbooks/39953 http://www.messnerandhadley.com/blog/creating-item-records-in-quickbooks/39953 Messner & Hadley LLP Accurate, thorough item records inform your customers and help you track inventory levels correctly. Whether you're selling one-of-a-kind items or stocking dozens of the same kinds of products, you need to create records for each. When it comes time to create invoices or sales receipts, your careful work defining each type of item will: Ensure that your customers receive correct descriptions and pricing,  Provide the information you must know about your inventory levels, and,  Help you make smart decisions about reordering.  You'll start this process by making sure that your QuickBooks file is set up to track inventory. Open the Edit menu and select Preferences, then Items & Inventory. Click the Company Preferences tab and click in the box in front of Inventory and purchase orders are activated if there isn't a check in the box already. Here, too, you can ask that QuickBooks warn you when there isn't enough inventory to sell. Click OK when you're finished. Figure 1: You need to be sure that QuickBooks knows you'll be tracking inventory before you start making sales. To create your first item, open the Lists menu and select Item List. Click the down arrow next to Item in the lower left corner of the window that opens and select New. The New Item window opens. Warning: You must be very precise when you're creating item records in order to avoid confusing your customers and creating problems with your accounting down the road. Please call us if you want us to walk you through the first few items. QuickBooks should display the list of options below TYPE. Since you're going to be tracking inventory that you buy and sell, select Inventory Part. Enter a name and/or item number in the next field. This is not the text that will appear on transactions; it's simply for you to be able to recognize each item in your own bookkeeping. Figure 2: Let us work with you if you have any doubts about the data that needs to be entered in the New Item window. It must be 100 percent accurate. In the example above, the box next to Subitem of has a check mark in it because “Light Pine” is only one of the cabinet types you sell (you can check this box and select Add New> if you want to create a new “parent” item on the fly). Leave the next field blank if your item doesn't have a Part Number, and disregard UNIT OF MEASURE unless you're using QuickBooks Premier or above. Fill in the PURCHASE INFORMATION and SALES INFORMATION fields (or select from the lists of options). Keep in mind that the descriptive text you enter here will appear on transaction forms, though customers will never see what you've actually paid for items, of course (your Cost, as opposed to the Sales Price). QuickBooks should have automatically selected the COGS Account (Cost of Goods Sold), but you'll need to specify an Income Account. Please ask us if you're not sure, as this is a critical designation. The Preferred Vendor and Tax Code fields will display lists if you've already set these up. QuickBooks should have pre-selected your Asset Account. If you want to be alerted when your inventory level for this item has fallen to a specific number (Min) so you can reorder up to the point you specify in the Max field, enter those numbers there (the Inventory to Reorder option must be turned on in Edit | Preferences | Reminders). If you already have this item in stock, enter the number under On Hand. QuickBooks will automatically calculate Average Cost and On P.O. (Purchase Order). Click OK when you've completed all of the fields. This item will now appear in your Item List, and will be available to use in transactions. When you want to create, edit, delete, etc. any of your items, simply open the same menu you opened in the first step here (Lists | Item List | Item). Figure 3: The Item menu, found in the lower left corner of the Item List. Precisely created Inventory Part records are critical to accurate sales and purchase transactions. So use exceptional care in building them. Tue, 23 Dec 2014 19:00:00 GMT January 2015 Individual Due Dates http://www.messnerandhadley.com/blog/january-2015-individual-due-dates/35713 http://www.messnerandhadley.com/blog/january-2015-individual-due-dates/35713 Messner & Hadley LLP January 2 - Time to Call For Your Tax Appointment - January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded. January 12 - Report Tips to Employer - If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 12.January 15 - Individual Estimated Tax Payment Due - It’s time to make your fourth quarter estimated tax installment payment for the 2014 tax year.January 15 - Farmers & Fishermen Estimated Tax Payment Due - If you are a farmer or fisherman whose gross income for 2013 or 2014 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2014 using Form 1040-ES. You have until April 15, 2015 to file your 2014 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2014 return and pay any tax due by March 2, 2015 to avoid an estimated tax penalty. Mon, 22 Dec 2014 19:00:00 GMT January 2015 Business Due Dates http://www.messnerandhadley.com/blog/january-2015-business-due-dates/35714 http://www.messnerandhadley.com/blog/january-2015-business-due-dates/35714 Messner & Hadley LLP January 15 - Employer’s Monthly Deposit Due - If you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2014. This is also the due date for the nonpayroll withholding deposit for December 2014 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return. Mon, 22 Dec 2014 19:00:00 GMT Last-Minute Congressional Action May Require Some Year-End Tax Moves http://www.messnerandhadley.com/blog/last-minute-congressional-action-may-require-some-year-end-tax-moves/39941 http://www.messnerandhadley.com/blog/last-minute-congressional-action-may-require-some-year-end-tax-moves/39941 Messner & Hadley LLP Article Highlights: Congress passes extender bill  IRA to Charity Transfers for Older Taxpayers  Bonus Depreciation for Businesses  Sales Tax Deduction  Above-the-Line Tuition Deduction  Home Energy Saving Improvements  Recent legislation passed just before adjournment by Congress provides some last-minute opportunities for taxpayers. These include tax provisions that had expired in 2013 but because of this bill have been extended through 2014. However, to take advantage of these extended laws you must qualify for them based on actions taken earlier in the year or you will need to take action before the end of the year, which does not give you a lot of time. The following are five extender provisions for which there is enough time to take last-minute action that could produce substantial tax benefits for 2014. IRA to Charity Transfers for Older Taxpayers - This is the provision of the law that allows taxpayers who are age 70.5 and older during the tax year to have up to $100,000 of IRA funds transferred directly to a qualified charity. The distribution is non-taxable up to the $100,000 limit for each spouse and can be counted as the required minimum distribution for the year. No charitable deduction is allowed for the transfer, but since the distribution is non-taxable, it reduces the taxpayer's AGI. Many tax benefits are phased out or totally eliminated when AGI-based thresholds are exceeded. Thus, a lower AGI may protect some or all of those benefits. Also keep in mind that Social Security income is tax-free for lower-income retirees but becomes taxable as income increases, and by having the IRA distribution be non-taxable, the tax on the Social Security income may be reduced or eliminated. However, to benefit from any of the foregoing, the transfer of the IRA funds to a qualifying charity must be completed by December 31. Please contact the office if you need assistance in planning or if you previously made a transfer and have additional questions.   Bonus Depreciation for Businesses - The extender bill also extended the 50 percent first-year bonus depreciation deduction for personal tangible equipment purchased during 2014. This allows businesses to write off 50 percent of the cost of new business assets purchased during the year. Although it is probably too late to acquire and place into service very large items, this extender also increased the first-year deprecation limit on cars from $3,160 to $11,160 ($3,460 to $11,460 for trucks and vans). These amounts must be factored by the percentage of business use, which must be more than 50 percent to qualify for the bonus depreciation. There is still time to purchase and place into service a business vehicle, should that be a prudent business acquisition.   Sales Tax Deduction - Another extended item is the sales tax deduction, in lieu of deducting state income tax for those who itemize their deductions. This is especially beneficial for taxpayers in states with no state income tax. It can also benefit those in states with state income tax where the sales tax for the year exceeds the state income tax they've paid. If you are contemplating purchasing a big-ticket item such as a new car, purchasing it before year's end may be beneficial.   Above-the-Line Tuition Deductions - Among the extenders was the ability to deduct, above-the-line (without itemizing), tuition paid for higher education, subject to reductions for higher income taxpayers. The tuition that can be deducted is the tuition paid during 2014, including the tuition for an academic period beginning in the first three months of 2015. But to take the deduction the tuition must be paid before the close of the year. It is recommended that you contact this office prior to taking action since the deduction is limited to $2,000 or $4,000 depending on income, and it may be better to take an education credit if otherwise qualified to do so.   Home Energy Saving Improvements - Also extended was the provision to take a tax credit, up to a lifetime limit of $500, for making certain home improvements that conserve energy. Although it would be hard to get such an improvement initiated and completed before year's end, if you have qualifying improvements in progress, you might be able to complete them by December 31. To qualify, the improvements must reasonably be expected to have a useful life of at least 5 years. Improvements that qualify include energy efficient exterior windows and skylights, exterior doors, certain metal roofs, certain asphalt roofing, heating systems, air conditioning systems and certain insulation materials or systems designed to reduce heat loss or gain.  Please call this office if you have questions about how any of the above items might benefit you.  Mon, 22 Dec 2014 19:00:00 GMT Deducting Auto Expenses & Luxury Auto Limits http://www.messnerandhadley.com/blog/deducting-auto-expenses--luxury-auto-limits/123 http://www.messnerandhadley.com/blog/deducting-auto-expenses--luxury-auto-limits/123 Messner & Hadley LLP When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses as a business expense. If you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways, the standard mileage rate method or the actual expense method.Standard Mileage Rate Method: The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance and depreciation (or lease) expenses. The rate varies from year to year and for 2014, the standard mileage rate is 56.0 cents per mile (down from 56.5 in 2013). In addition, the cost of business-related parking and tolls is deductible. At the time this article was updated (12/14) the IRS had not yet released the 2015 rate.Caution: If you don’t use the standard mileage rate in the first year the vehicle is placed in service, you cannot use it in future years for that vehicle. If, in a subsequent year, you switch to the actual method, you must use the straight-line method for depreciation. If the car is leased, you must continue to use the standard mileage rate in future years.Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible. Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.”The depreciation deduction for luxury vehicles has an annual limit, which is $3,160 for 2014. Caution: At the time this article was updated, Congress was considering extending certain tax breaks, and if they choose to extend the bonus depreciation, the first year luxury vehicle limit will increase to $11,160. The first-year limit is $300 more for vans and trucks purchased in 2014. At the time this article was updated (12/14) the IRS had not yet released the 2015 rate. In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver’s seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. The following is a representative example of a heavy SUV write-off (assuming 100% business use) using the maximum Sec 179 exclusion. Heavy SUV Total Cost $50,000 Sec 179 Deduction Balance $25,000 Regular 1st Year Depreciation (20%) $5,000Total First Year Write-Off $30,000 If you are planning to buy an SUV based on this big write-off, be sure to call first to find out the status of any current legislation on this issue and how the tax benefits apply to your particular situation. Sat, 20 Dec 2014 19:00:00 GMT Looking for Business Tax Deductions? Look No Further Than Your Business Vehicle! http://www.messnerandhadley.com/blog/looking-for-business-tax-deductions-look-no-further-than-your-business-vehicle/337 http://www.messnerandhadley.com/blog/looking-for-business-tax-deductions-look-no-further-than-your-business-vehicle/337 Messner & Hadley LLP The options for deducting the business use of a vehicle are both numerous and generous. In fact, there are so many options that some can easily be overlooked. Note: When a vehicle is used both for personal and business use, the expenses must be prorated based on miles driven for each purpose.Listed below are some of the current options: Lease or Purchase – Your first option deals with the manner in which you acquire the vehicle. Whether you decide to lease the vehicle or purchase it, you may choose to deduct the business use of the vehicle using either the actual expense method or the standard cents-per-mile method. Note: If you choose the actual expense method the first year, then the standard cents-per-mile method cannot be used in any future year for that vehicle. Trade-In or Sell Old Vehicle – If you are replacing an existing vehicle, you have the option either to trade in the old vehicle or to sell it. Without considering other economic factors, if the sale of the old vehicle would result in a gain, then you may wish to consider trading it in and avoid the need of reporting the gain and instead reduce the cost basis of the replacement vehicle. On the other hand, if the sale will result in a loss, then it would probably be better to sell the vehicle and take the loss on your return. Cents-Per-Mile Method – This method requires the least amount of bookkeeping. You need only record the business miles and total miles driven on the vehicle each year, and the business deduction is the business miles multiplied by the rate for the year. Note: This method cannot be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously, such as in fleet operations. Actual Expense Method – As the name implies, this method involves deducting the actual expenses of operating the vehicle. This requires keeping track of the operating costs, including fuel, oil, maintenance, repairs and insurance. In addition, either the annual lease expense or, depending on the class of vehicle, an allowance for wear and tear on the vehicle is added to the annual expenses. A record of the business and total miles must also be maintained to determine the business portion of the expenses. Class of Vehicle – The class of vehicle affects the limitations that are applied to the allowances for wear and tear available for a particular vehicle. A. Vehicles With No Limitations: The following vehicles qualify for the Sec 179 deduction, regular depreciation and for years when permitted by law, first-year bonus depreciation. Depending on the methods selected, virtually any amount of the cost of this type of vehicle can be deducted in the year of purchase. - Heavy Vehicle – A vehicle exceeding 6,000 pounds gross unladen weight such as many of today’s sport-utility vehicles. - Qualifying Nonpersonal Use Vehicle – A vehicle that has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes. - Exempt Vehicles – A vehicle used directly in a taxpayer’s trade or business of transporting persons or property for compensation or hire, such as an ambulance, hearse, taxi, clean fuel vehicles, bus or commuter highway vehicles. B. Those With Limitations: The following vehicles are limited by the luxury auto rules:- Luxury Vehicle – Generally, a vehicle costing more than an annually inflation-adjusted threshold ($15,800 to $17,300 for 2014) and not falling into one of the other previous categories. This threshold and the annual limits are not determined until part way through the year. - Special Trucks & Vans – Defined as passenger autos that are built on a truck chassis, including minivans and sport-utility vehicles (SUVs). These vehicles are subject to the annual luxury vehicle limitations, but are allowed an additional amount (usually $200 or $300, depending on the year purchased) added on to those limitations.C. Vehicles with Other Limitations: In addition to those described above, there are certain other seldom encountered vehicles, such as electric vehicles and certified clean fuel vehicles, with other special allowances. Interest and Taxes – In addition to the other deductions discussed above, the business portion of personal property taxes, license and interest on the debt to purchase the vehicle are also deductible when the vehicle expenses are being deducted on a business schedule. NOTE: Limitation for Employees - An employee who uses a personal vehicle for business and who qualifies to claim unreimbursed vehicle-related costs must include those expenses as part of the miscellaneous itemized deductions category on Schedule A, and that entire category of expenses is deductible only to the extent the total exceeds 2% of the taxpayer’s adjusted gross income. However, employees are allowed to claim all of the personal property tax portion of their vehicle registration fees as a Schedule A tax expense rather than as part of their employee business expenses. Sat, 20 Dec 2014 19:00:00 GMT Divorce Issues http://www.messnerandhadley.com/blog/divorce-issues/5441 http://www.messnerandhadley.com/blog/divorce-issues/5441 Messner & Hadley LLP Divorce can be one of life’s most traumatic events and is seldom amicable. A couple must divide up their assets and establish separate households which, except for the wealthy, will bring about financial hardship and stress. Added to this financial burden are the legal costs and, where children are involved, custody and visitation issues. Not to be overlooked are the long-term financial issues of alimony and child support. Substantial tax laws have evolved to deal with these issues and are detailed below.• Attorney Fees & Court Costs• Property Settlements • Children • Primary Residence• Filing Status • AlimonyAttorney Fees & Court Costs – The general rule for legal expenses (including attorney fees, court costs, etc.) is that they are tax deductible if incurred in the production or collection of taxable income and there must be a reasonably close connection between the legal expense and the production or collection of taxable income.Thus, the legal costs connected with divorce, separation or support is considered nondeductible personal expenses.Nondeductibility extends to legal fees incurred in disputes over money claims. An exception to the nondeductibility rule is that the part of legal fees attributable to producing taxable alimony is deductible by the recipient of the alimony. The attorney should stipulate what part of the fee relates to alimony to ensure a deduction for the alimony recipient.When related to the production of taxable alimony, the legal fees are deducted as a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) limits, which means the taxpayer deducting the expense must itemize his or her deductions and can only deduct the amount of total miscellaneous expenses that exceeds 2% of his or her income (AGI). These expenses are not deductible at all for the alternative minimum tax (AMT) computation.Children – The tax code provides a number of tax benefits related to children. When couples with children become divorced, the tax code specifies who benefits from those tax advantages.Child Support - The financial responsibility to support their children lies with divorced parents in the same manner as when the child’s parents were married. Thus, if one parent is required to make child support payments to the other parent, those payments are not deductible by the parent making the payments, nor are they taxable income to the parent receiving the payments.Tax Exemption – Each qualified child (generally those under the age of 19 or full-time students under the age of 24) represents a tax deduction in the form of a personal exemption to the parent with custody of the child. The exemption amount for 2015 is $4,000 (up from $3,950 in 2014) and, for example, creates a tax savings of $600 ($4,000 x .15) for taxpayers in the 15% tax bracket.Custodial Parent – Often, divorcing parents will be awarded joint custody. However, tax law generally does not allow the tax benefits to be shared by both parents and instead allows only one parent to qualify for the benefits; that parent is the one with physical custody more than 50% of the year. For years, this was a difficult area with some parents who were literally clocking the amount of time day and night the child was with them in order to claim the exemption for the year.This, in many cases, got so far out of hand that the IRS adopted regulations to deal with the issue. The IRS defines a “custodial parent” to be the parent with whom the child resides for the greater number of nights during the year. A child resides with a parent for a night if the child sleeps at the residence of that parent (whether or not the parent is present) or in the company of the parent when the child doesn’t sleep at the parent’s residence, such as when the parent and child are on vacation together. The time that the child goes to sleep is irrelevant. Provisions for special circumstances include:• Absences of Child - If a child is temporarily absent from a parent’s home for a night, the child is treated as residing with the parent with whom the child would have resided for the night. A night is not counted for either parent if the child would not have resided with either parent for the night (for example, because a court awarded custody of the child to a third party for the period of absence) or it cannot be determined with which parent the child would have resided for the night.• Equal Number of Nights - If a child resides with each parent for the same number of nights, then the parent with the higher AGI for the year is treated as the custodial parent.• Night Spans Two Years – A night that extends over two tax years is allocated to the tax year in which the night begins. Thus, for example, a night that begins on December 31, 2014 is counted for taxable year 2014.• Parent Works at Night – If, due to a parent’s nighttime work schedule, a child resides for a great number of days but not nights with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as residing at the primary residence registered with the school.Divorce Agreements & Decrees Don’t Trump Federal Tax Law – It is not uncommon for divorce attorneys, and sometimes the divorce courts, to specify in the divorce agreement or decree who is to claim a child’s exemption. It is important to understand that “exemption” is part of Federal tax law, and a divorce proceeding cannot trump Federal tax laws. Thus, regardless of what the divorce agreement reads, the exemption can only be claimed by the parent with custody the greater part of the year unless the custodial parent releases (in writing) the exemption to the other parent. The release can be for a single or multiple years and a custodial parent should exercise caution in executing a release, especially for more than one year. The release must be a written declaration and it must be unconditional (no strings attached such as requiring the non-custodial parent to meet support payment obligations). It must name the non-custodial parent and specify the year or years for which it is effective. If it specifies “all future years,” it is treated as specifying the first taxable year after the year in which it is executed and all subsequent years.If the release is not made on the official IRS form, it must conform to the substance of that form, and it must be executed for the sole purpose of serving as a written declaration under this section. A court order or decree or separation agreement may not serve as a written declaration (because it has other purposes than releasing the exemption to the non-custodial parent). The IRS also will not accept a state court’s allocation of exemptions because the Internal Revenue Code, not state law, determines who may claim a child’s exemption for federal income tax purposes.The non-custodial parent must attach a copy of the written declaration to his or her return for each year in which the child is claimed as a dependent. Dependents and the Affordable Care Act (ACA) – The ACA imposes a penalty on a taxpayer if anyone in the taxpayer’s tax family does not have health insurance. A taxpayer’s tax family includes the taxpayer, the taxpayer’s spouse, if married and filing jointly, and anyone for whom the taxpayer claims, or could claim, a dependency exemption. Thus, in the case of divorced parents, the parent that claims the dependency exemption for their child is the one subject to the penalty. The penalty for 2015 is the greater of $325 for each uninsured adult plus $162.50 per uninsured child under 18 (not to exceed $975) or 2.0% of the family’s household income. In 2016 these amounts increase to the greater of $695 for each uninsured adult plus $347.50 per uninsured child (not to exceed $2,085) or 2.5% of the family’s household income. The parent who claims the dependent exemption is also the one who would be able to claim the premium tax credit for the the dependent’s health care coverage, if otherwise eligible, even if the other parent pays the premiums.Last to File – Occasionally, both parents will attempt to claim the same child. This will not go unnoticed by the IRS, since they match tax ID numbers and will always discover when both parents have claimed the same child and issue a notice of tax change to the parent that filed last. Although not necessarily fair, the IRS will deny the child’s exemption for the parent who filed last and require that parent to prove entitlement to the exemption before reversing their decision.Effect on Filing Status – For income tax purposes, a taxpayer’s marital status for the entire year is determined on the last day of the tax year. Thus, unless remarried, a divorced couple will be treated as unmarried individuals beginning in the year their divorce is final. Where there are no children or other qualified dependents, this means that starting with the year the divorce is final, the former spouses will each file a return using the “Single” status. However, if the couple has a child or children, the custodial parent, if not remarried, will qualify and benefit from the Head of Household filing status. Eligible Head of Household filers are allowed increased tax benefits. For example, the 2015 federal standard deduction, which is claimed in lieu of itemizing deductions, is $9,250 (up from $9,100 in 2014) for Head of Household vs. $6,300 (up from $6,200 in 2014) for Single status. Many phase-outs of various deductions and credits have higher-income thresholds for Head of Household filers than Single filers, which could result in the Head of Household filer claiming a bigger deduction or credit than a Single filer with the same income. Additionally, the ranges of income are wider for most federal tax rates for Heads of Households than for Singles. Education Credits – Tax regulations provide that solely for education credit purposes, if a third party makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Thus, in the case of divorced parents, the custodial parent will be able to claim the education credit even if the non-custodial parent is the one that actually pays the expense.Example: If one divorced parent pays qualified tuition to a college for a child, but the other parent has custody of the child (and is eligible to claim the child as a dependent), the custodial parent is treated as having paid the tuition directly to the college and would be the one to claim the credit.The regulations also provide that if a taxpayer is eligible to but does not claim a student as a dependent, only the student can claim the education credit for the student’s qualified tuition and related expenses.Medical Expenses – Solely for the purpose of deducting medical expenses, a child of divorced parents is considered to be a dependent of both parents (so that each parent may deduct the medical expenses he or she pays for the child.)Example – Bob and Jan are divorced and have two minor children. Jan claims the children as dependents and Bob pays their medical insurance and other medical expenses. Under the exception, because Jan claims them as dependents, Bob can claim the medical expenses that he pays.Kiddie Tax - To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress many years back created what is referred to as the “Kiddie Tax.” Under the Kiddie Tax, a child’s investment income in excess of an annual floor amount, $2,100 in 2015 (up from $2,000 in 2014), ($1,900 for 2011) is taxed at the parent’s tax rate rather than the child’s. These rules generally apply to children under the age of 19 or those that are full-time students under the age of 24. For divorced or separated parents, the tax code provides the following rules to determine which parent’s return will be used to determine the tax rates used:• Parents are married: If the child's parents file separate returns, the return of the parent with the greater taxable income is used.• Parents not living together: If a child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried (i.e.; lived apart for the last 6 months of the tax year and qualifies for the head of household filing status), the custodial parent’s return is used. If the custodial parent is not considered unmarried, the return of the parent with the greater taxable income is used.• Parents divorced: If a child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, the return of the custodial parent is used.• Custodial parent remarried: If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Therefore, if the custodial parent and the stepparent file a joint return, that joint return – and not the return of the noncustodial parent – is used.Filing Status – The marital status of a husband and wife is terminated when the couple is legally separated under a decree of divorce or of separate maintenance. An interlocutory (temporary) decree of divorce doesn't end a marriage until the decree becomes final. A couple living under a legal separation agreement but without any court decree isn't legally separated for tax purposes, because such an agreement could be terminated by the parties upon reconciliation and resumption of cohabitation.The following are filing options for the various stages of divorce:Divorce is Final - Once divorced and assuming that they do not remarry, taxpayers will file their returns individually. That generally means they will file as single taxpayers, or if they are the custodial parent of a child, they may qualify to file as Head of Household (see below).Separated but Divorce Not Final - Taxpayers who are in the process of a divorce but the divorce is not final by the end of the year have the following filing options:• File Jointly – When taxpayers file jointly, they become jointly and separately liable for the tax on the return. This may not be an appropriate filing status where there is an adversarial divorce action, since the refund or tax liability will be a joint one. The IRS will issue a refund check in the joint names and will generally go after the taxpayer with the ability to pay where there is an unpaid tax liability on the original return or a subsequent audit or adjustment. In addition, once the joint return is filed, it cannot be amended to another filing status after the due date of the original return.• File Separately – Taxpayers have the option to file individually using the Married Separate filing status (or possibly the Head of Household status – see below), in which case they would file using their own separate income and deductions. However, determining one’s separate income and deductions can quickly become complicated for a number of reasons, such as the couple has children where one only parent can claim the deduction or the taxpayers reside in a community property state and they must split their income earned prior to separation and include their own income after separation. If one spouse itemizes, both must itemize, possibly creating a hardship for the one who would otherwise benefit from using the standard deduction. Unlike filing a joint return, where the taxpayers generally are locked into the married joint status, they can later change their filing status by amending the two married separate status returns to one return filing as Married Joint, if the change is made within three years from the unextended due date of the original return.A number of tax benefits and provisions are not allowed to be claimed when the Married Separate status is used and the spouses have lived together at any time during the year. These unavailable items include education credits, deducting student loan interest, the adoption credit and exclusion of employer-provided adoption benefits, and deducting qualified higher education expenses (if available for that tax year). Certain income floors and calculations of phase-outs also discriminate against Married Separate filers, including the computation of the amount of Social Security benefits that are taxable.• Head of Household – Generally, only unmarried individuals may qualify to use the Head of Household filing status. However, a married taxpayer is considered to be unmarried and may use the more beneficial Head of Household status as an alternative to filing Married Separate. To qualify, the taxpayer must live apart from their spouse at least the last six months of the year and pay more than one-half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one-half the year of a child, stepchild or eligible foster child for whom the taxpayer may claim a dependency exemption. A nondependent child will qualify a taxpayer for Head of Household only if the taxpayer gave written consent to allow the dependency to the non-custodial parent.Marriage Annulled – If a marriage is legally annulled, taxpayers will file as if never married. Returns that were jointly filed prior to the annulment and still open by the statute of limitations should be amended.Allocation of Jointly Paid Estimated Tax Payments – When filing separate tax returns after making joint estimated tax payments the IRS provides the following rules:• Spouses Agree Upon Allocation of Payments: One spouse can claim all of the estimated tax paid and the other none, or they can divide it in any other way they agree on.• Spouses Cannot Agree Upon Allocation of payments: They must divide the payments in proportion to each spouse's individual tax as shown on their separate returns for the year.Example - James and Evelyn Brown made joint estimated tax payments totaling $3,000. They file separate returns and cannot agree on how to divide estimates. James' tax is $4,000 and Evelyn's is $1,000.James’ share = 4,000/5,000 x 3,000 = $2,400Evelyn’s share = 1,000/5000 x 3,000 =$ 600Property Settlements – When married couples divorce, they must divide up their property between themselves. Many mistakenly think that this results in a sale or purchase of jointly-owned property, which is not the case. No gain or loss is recognized when property is transferred between spouses during marriage. This rule applies also to transfers between former spouses if “incident to a divorce.” A transfer is considered incident to a divorce if it occurs within one year after a marriage ends, or is related to the ending of a marriage (i.e., occurs within 6 years after a marriage ends and the transfer is made under a divorce or separation agreement). A transfer which occurs later than 6 years after a marriage ends can be considered incident to a divorce if the taxpayer can show that legal factors prevented earlier transfer of the property.Tax Basis of Transferred Property – Knowing the basis of assets such as stock and real estate is necessary to determine gain or loss when the property is sold, as well as for other tax issues, such as computing depreciation of business property. In its simplest form, basis is the price paid to acquire the property, but it can be more complicated when events have occurred that may have increased or decreased the basis. Examples of such events are stock splits or mergers and improvements made to real property. This modified basis is termed the adjusted basis. The basis of the property received in a transfer between spouses or former spouses is the adjusted basis the transferring spouse had in the property. In effect, the recipient spouse has received a gift of the transferred property. The bottom line is that the spouse who retains an item of property in a divorce assumes the same tax basis as the couple had when the property was jointly or separately owned, and therefore assumes the responsibility for any subsequent taxable gain or loss associated with the property when it is later disposed of. This can best be understood by the following example:Example: Incident to a divorce, Don and Shirley are dividing up their property which consists of a home in which they have $300,000 of equity (value of $550,000 less a $250,000 mortgage). They originally paid $170,000 with $20,000 down and a $150,000 mortgage. After the home appreciated in value, they subsequently took a $100,000 equity loan on the home to purchase a car, pay off credit card debt and go on vacation. They also have a bank account worth $350,000. Shirley wants to keep the home and Don agrees. They decide that Shirley, will take the home ($300,000 equity) along with $25,000 of the cash. Don will take the remaining $325,000 of the bank account cash. On the surface, this would seem like an even division of jointly-owned property. However, two important issues have been overlooked.(1) If the home was to be sold and the couple was to split the proceeds, both would have shared in the expense of the sale. Assuming a conservative sales expense of 6%, the cost of selling the home would be $33,000 ($550,000 x .06). Thus, by taking the title to the home, Shirley is assuming Don’s $16,500 (50% of $33,000) share of the sales cost based upon the value of the home at the time of the divorce.(2) When Shirley assumes the ownership of the home, she is also assuming the tax liability for the built-in gain on the property attributed to the period of joint ownership. At the time of the divorce, the property that the couple had originally purchased for $170,000 was worth $550,000. This equates to a built-in gain, after an assumed sales cost of $33,000 of $347,000 ($550,000 - $170,000 – $33,000). Thus, even if Shirley subsequently qualifies for the home gain exclusion, she would be single and only allowed to exclude $250,000 and would end up with a $97,000 ($347,000 -$250,000) taxable gain if she sold the home.Thus, where Don would have $325,000 of tax-free cash, Shirley’s after-tax and sales cost value of the home is significantly less.The foregoing example demonstrates the need to consider the tax ramifications carefully to determine an equitable division of property. This can be far more complicated where the taxpayers own businesses, investments, second homes, rental property, etc. Divorce counsel will sometimes overlook the tax issues related to splitting up assets, so taxpayers should consult with a tax professional before proceeding with the allocation of jointly-owned assets.Qualified Domestic Relations Order (QDRO) – A qualified domestic relations order is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child or other dependent. The order has to contain certain specific information like the amount of the participant’s benefits to be paid to each alternate payee.If a spouse or former spouse receives retirement benefits from a participant’s plan under a QDRO, the former spouse must report the payments just as though he/she were the plan participant. If the distribution is from a qualified plan (not including an IRA) the early distribution penalty does not apply, regardless of the alternate payee’s age. The taxability is computed by allocating the spouse/former spouse a share of the investment in the contract and figuring the taxable portion accordingly.If the QDRO distribution is in the form of a lump sum from a pension plan, the alternate spouse payee recipient has the option of immediately paying the tax (but no 10% early withdrawal penalty if it is a qualified plan) on the distribution or deferring the tax into the future by rolling that distribution into his or her IRA or qualified plan. CAUTION: If the distribution is rolled over, then any subsequent distribution will be treated as if they were distributions from the spouse’s own IRA or qualified plan and will be subject to the pre-age 59-½ 10% early withdrawal penalty, unless other exceptions apply. Thus, the recipient of a QDRO distribution who is under age 59-½ and considering rolling the distribution over should carefully consider their pre-59-½ cash needs before executing a rollover. Under such circumstances, you are strongly urged to contact this office to determine in advance the tax implications of both options; also keep in mind that rollovers must be executed within 60 days of receiving the distribution.If one spouse’s IRA is transferred to the other spouse under the terms of a divorce or separation agreement (not a QDRO), the transfer is not taxable to either spouse. Since the transfer isn’t taxable, the 10% early distribution penalty won’t apply. However, when the receiving spouse takes a distribution from the transferred IRA, it will be taxable and may be subject to the 10% early withdrawal penalty, depending on that spouse’s age and whether any exceptions to the early distribution penalty apply.Primary Residence – Although the taxpayers’ primary residence will generally be included as part of the divorce property settlement discussed above, there are a number of special tax issues relating to a home:Home Gain Exclusion – The tax code permits a taxpayer to exclude up to $250,000 of gain from the sale of the taxpayer’s primary residence provided the taxpayer owned and used the home as their primary residence for two of the prior five years, counting back from the sale date. Married taxpayers can exclude up to $500,000 if either meets the two-out-of-five year ownership requirement and both meet the two-out-of-five year use requirement. Under current rules, the gain that is excludable may be less than $250,000/$500,000 if the home has been used after 2008 as other than a principal residence, such as a vacation home, rental or for other non-qualified use. The exclusion will be limited to the amount of gain not allocated to the non-qualified use period. If your home falls into this category, please contact this office for additional information.Sold After Division of Property - Divorcing taxpayers should take caution; since their marital status is determined on the last day of the tax year and the home has been transferred to single ownership, the $500,000 exclusion would no longer apply and the exclusion would be limited to $250,000 if sold by a spouse after the division of property. If the home is used as other than a personal residence, the reduced exclusion available to the seller should be taken into account when property divisions are negotiated.Sold After Divorce But Still Owned By Both - If the home continues to be jointly owned and is sold after the divorce each spouse, provided that spouse separately meets the two-out-of-five year use and ownership requirement, would be qualified for the $250,000 gain exclusion. Thus, if both met the ownership and use requirement, they could exclude up to $500,000 of gain. But see above if the residence has not always been used solely as a principal residence since 2009.Sold Before Meeting the Two-Out-of-Five Year Requirements – Tax law provides that taxpayers may qualify for prorated gain exclusion where they do not meet the two-out-of-five year use and ownership requirements and the sale was the result of “unforeseen” circumstances. As an example of a prorated exclusion, a taxpayer has a qualified unforeseen circumstance and only owned and used the home for 18 months. The single taxpayer would be qualified for a gain exclusion of $187,500 (18/24 x $250,000). The tax regulations include a number of safe harbor events that qualify as unforeseen circumstances and among them is a qualified individual's divorce or legal separation under a decree of divorce or separate maintenance.Transfers Related to Divorce – Where an individual holds property transferred between spouses incident to divorce, the period the individual owns the property includes the period the transferor owned the property. However, the period that the transferor spouse or former spouse used the property is not included in the period that the individual used the property. Thus, a transferee spouse would still have to satisfy the use requirement in order to qualify for the exclusion.Sale After Ex-spouse Retains Property for Some Period of Time – Frequently, as part of the divorce, a wife or husband (we’ll call them the “in-spouse”) will be granted the use of the home for a specific period of time, usually until children reach maturity. Under these circumstances, the other spouse (we’ll call them the out-spouse) is denied the ability to sell the home and avail themselves of the home gain exclusion. When the home is finally sold, usually some years later, the “out-spouse” would no longer meet the two-out-of-the-last-five years use requirement. A special provision of the tax regulations allows the “out-spouse” to treat the in-spouse’s use of the home as their own, making the home sale exclusion available to the “out-spouse” when the “in-spouse” finally sells the home, provided the “out-spouse” has not taken an exclusion on another home in the prior two years.First-Time Homebuyer Credit Repayment – For a home purchased after April 8, 2008 and before January 1, 2009 by a qualified first-time homebuyer, the homebuyer may have claimed a refundable tax credit of the lesser of 10% of the purchase price or $7,500. This credit was, in reality, an interest-free loan that had to be paid back to the federal government over 15 years. Taxpayers who took the credit should be aware that in the case of a transfer of the residence to a spouse or to a former spouse incident to a divorce, the credit is not paid back at the time of transfer. Instead, the liability to repay the credit accompanies the home and the transferee spouse (and not the transferor spouse) will be responsible for any future repayments. This future liability should be taken into consideration when the couple’s property division is being negotiated.Spousal Buy-Out Debt – Generally a taxpayer can only deduct the interest paid on up to $1,000,000 of home acquisition debt and $100,000 of equity debt. To the extent a taxpayer is subject to the alternative minimum tax (AMT) the equity debt interest provides no tax benefit. Generally taxpayers gain the most tax advantage from having acquisition debt interest. Acquisition debt is defined as debt used to acquire or substantially improve the taxpayer’s primary or second residence. There is a special rule that allows the spouse who retains the couple’s home, and incurs debt secured by the home to buy out the former spouse’s interest in the home, to treat that debt as acquisition debt (up to the $1 million limit) and retain the tax benefits of acquisition debt.Alimony - Alimony is the term used for payments to a separated or ex-spouse as part of a divorce or separation agreement. The payments are generally taxable to the recipient and tax-deductible by the payer, but are not treated as alimony if the spouses file a joint return with each other. However, because of taxpayer attempts to disguise property settlements and child support as alimony, the tax code includes a stringent definition of alimony. There is one set of rules for defining alimony under decrees and agreements made before 1985 and another set of rules currently in effect. Since this article is dealing with current divorce issues only, the current rules are discussed. For information regarding pre-1985 alimony, please call this office.Definition of Alimony – To be classified as alimony, payments must meet six conditions. Thus, the payments:1. Must be in cash, paid to the spouse, ex-spouse or a third party on behalf of a spouse or ex-spouse.2. Must be required by a decree or instrument incident to divorce, a written separation agreement, or a support decree. Thus, voluntary payments are not treated as alimony.3. Cannot be designated as child support.4. Are valid alimony only if the taxpayers live apart after the decree. Spouses who share the same household can’t qualify for alimony deductions. This is true even if the spouses live separately within a dwelling unit.5. Must end on the death of the payee.6. Cannot be contingent on the status of a child (that is, any amount that is discontinued when a child reaches 18, moves away, etc., is not alimony).Payments May Be Designated as Not Alimony - Divorcing spouses can designate that otherwise qualifying payments are not alimony. This is done by including a provision in the divorce or separation instrument that states the payments are not deductible as alimony by the payer and are excludable from the recipient spouse's income. Both spouses must sign the written statement that makes this designation, and the spouse who receives the alimony and excludes it from income must attach a copy of the instrument designating the payments as not alimony to his or her return. The copy must be attached each year the designation applies.Alimony Recapture- To further prevent property settlements from being disguised as alimony, the tax code also includes what is referred to as alimony recapture, which prevents excess front-loading of alimony payments. Under these rules, which are in effect for the first three post-separation years, alimony recapture may apply when the payments made in the first two post-separation years exceed $15,000. The excess amounts are determined in the third post-separation year, and any excess becomes taxable to the payer. The computation of the excess amount is rather complicated and this office should be contacted if front-loading of alimony is being considered. The recapture rules do not apply if: either spouse dies, the alimony recipient remarries within certain time limits, the payments made are “temporary support payments,” or the payments fluctuate due to conditions beyond the payer’s control because of a continuing liability to pay, for at least 3 years, a fixed part of business income. Both spouses should exercise care in reporting the correct amounts of alimony received and the amounts of alimony paid. The IRS requires the payer to include both the amount paid and the recipient’s taxpayer ID number on his or her tax return and will match that to the alimony reported as income by the recipient. This matching generally occurs one or two years after the tax returns are filed and, in addition to underpaid tax, substantial penalties and interest can accrue where incorrect amounts are reported.Alimony & IRA Contributions – Contributions to IRA accounts is limited to the extent a taxpayer has received compensation. Most consider compensation to only include wages, commissions and income from personal services. However, in addition to those, alimony is treated as compensation for purposes of making an IRA contribution (either Traditional or Roth) if the taxpayer otherwise qualifies for an IRA contribution.Child Support – Child support is not alimony and is not a deductible expense. To keep taxpayers from disguising child support payments as alimony, the definition of alimony specifically states that alimony cannot be designated as child support and cannot be contingent on the status of a child (that is, any amount that is discontinued when a child reaches 18, moves away, etc., is not alimony). Sat, 20 Dec 2014 19:00:00 GMT Large Employers Must Offer Affordable Health Coverage Beginning In 2015 http://www.messnerandhadley.com/blog/large-employers-must-offer-affordable-health-coverage-beginning-in-2015/39928 http://www.messnerandhadley.com/blog/large-employers-must-offer-affordable-health-coverage-beginning-in-2015/39928 Messner & Hadley LLP Article Highlights: Employers subject to the insurance mandate  Full-time employees  Seasonal employees  Part-time employees  Minimum essential coverage  Employers with 50 but fewer than 100 full-time employees  In general, beginning January 1, 2015, employers with at least 100 full-time and full-time-equivalent employees must offer affordable health coverage that provides minimum value to at least 95% of their full-time employees and their dependents or they may be subject to an employer shared responsibility payment. This payment applies only if at least one of the employer's full-time employees qualifies for a premium tax credit through enrollment in a government Health Insurance Marketplace. Generally, an employer is subject to the requirement to provide affordable health coverage in 2015 if the employer has 100 or more full-time employees. When determining the number of full-time employees, there are certain classes of employees that are excluded from the count—the most notable being certain seasonal employees. Although an employee is considered full-time if he or she works 30 or more hours per week, to determine if the employer has reached the 100 full-time employee threshold, part-time employee hours for a month are totaled and divided by 120, and the result is added to the full-time count. Thus, an employer with fewer than 100 full-time employees may be required to provide an insurance plan to the employer's full-time employees if the combination of full-time employees and the hours of part-time employees equal the equivalent of 100 full-time employees. Each year, employers will determine, based on their current number of employees, whether they will be considered an applicable large employer for the next year. For example, if an employer has at least 100 full-time employees (including full-time equivalents) for 2014, it will be considered an applicable large employer for 2015. Employers average their number of employees across the months of the year to see whether they will be an applicable large employer for the next year. This averaging can take into account fluctuations that many employers may experience in their work force across the year. Even though an employer determines whether it is subject to the mandate based upon the number of employees during the prior year, the penalty is based upon the current year's employees and is determined on a monthly basis. Example: John has 90 full-time employees, plus he has 40 part-time employees. His part-time employees for the month of January worked 1,920 hours. That is the equivalent of 16 (1,920 / 120) full-time employees. Thus, the number of John's full-time employees for the month of January is 106 (90 + 16). As a result, John will have to provide his 90 full-time employees and their dependents with affordable health coverage for January or be subject to the shared responsibility payment (penalty) for that month, but only if at least one full-time employee receives a premium tax credit. The penalty is determined on a monthly basis. Affordable health care coverage is minimum essential coverage where the employee's share of the cost is no more than 9.5% of the employee's household income. Employers with 50 or more full-time employees are also subject to the shared responsibility payment (penalty), but not until 2016, and again only if one or more full-time employees claim a premium tax credit. The foregoing is an abbreviated overview of the employer insurance mandate. The rules are complex. If you are unsure whether or not your business is subject to the penalty for 2015, please give this office a call. Don't delay: the penalties are substantial and in some cases may be higher than the cost of the insurance. Thu, 18 Dec 2014 19:00:00 GMT When Business Property Must Be Depreciated http://www.messnerandhadley.com/blog/when-business-property-must-be-depreciated/308 http://www.messnerandhadley.com/blog/when-business-property-must-be-depreciated/308 Messner & Hadley LLP Generally when property is purchased for use in a business and that property has a useful life of more than one year, its cost must be deducted over its useful life. This accounting procedure is referred to as depreciation. The number of years the property must be depreciated is largely dependent upon the type of property it is, although sometimes the type of business in which it is used also determines its assigned life. However, there are exceptions to the depreciation requirement: Materials and Supplies - The cost of acquiring or producing materials and supplies is deductible in the tax year in which the materials and supplies are used or consumed in the taxpayer's operations. “Materials and supplies” means tangible property that is used or consumed in the taxpayer's operations that is not inventory, and that (any one applies; applicable after 12/31/13): 1. Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property; 2. Consists of fuel, lubricants, water, and similar items that is reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer's operations; 3. Is a unit of property with an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer's operations; 4. Is a unit of property that has a cost or production cost of $200 or less; or5. Is identified in guidance published by the IRS as materials and supplies. Sec 179 Expensing - The tax code contains a special provision that allows certain types of property to be expensed (deducted in year of purchase) rather than being depreciated. This provision is commonly referred to as Section 179 expensing and is limited to a maximum annual amount.  The Section 179 deduction only applies to tangible personal property such as tools, office equipment, machinery, etc., and does not apply to real estate. There are some other restrictions as well, so be sure to contact this office for additional details.The following are the historical annual limits for the Sec. 179 expense deduction: 2010 - 2013: $500,0002014: $25,000 (CAUTION: Congress may retroactively extend a higher rate.2015: $25,000 (estimated) Caution: The Sec 179 deduction is limited to the taxable income from any active trade or business of the taxpayer(s) including wages. It is also limited if the total cost of property placed into service during the year is over $2 million in 2010 through 2013, or over $200,000 in 2014. NOTE: the 2014 limit may be retroactively increased by Congress. If married taxpayers file separate tax returns, special rules apply. Deducting the Cost of Business Assets- Most business assets are depreciated over a specified life. This is how their cost is deducted. For some assets, the depreciation is straight-line, while for others accelerated methods that front load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated  by their business use.  SAMPLE DEPRECIABLE LIVES Agricultural Equipment 7 YrsAutomobiles (1) 5 YrsCommercial Real Estate 39 Yrs Land Not DepreciableLand Improvements 15 YrsOffice Equipment 5 YrsOffice Furnishings 7 Yrs Residential Real Estate 27.5 YrsTrucks 5 Yrs   (1) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions.   Normal 0 false false false EN-US X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Calibri","sans-serif"; mso-bidi-font-family:"Times New Roman";} Tue, 16 Dec 2014 19:00:00 GMT Is a 1031 Exchange Right for You? http://www.messnerandhadley.com/blog/is-a-1031-exchange-right-for-you/39922 http://www.messnerandhadley.com/blog/is-a-1031-exchange-right-for-you/39922 Messner & Hadley LLP Article Summary: Basic rules of 1031 exchanges Advantages of exchanges o Tax deferral o Leveraging the tax savings o Asset accumulation o Potential management relief  Disadvantages of exchanges o Added complexity and expense o Low tax basis o No property flipping o Unknown future law changes  If you own real property that you could sell for a substantial profit, you may have wondered whether there's a way to avoid or minimize the taxes that would result from such a sale. The answer is yes, if the property is business or investment related. Normally, the gain from a sale of a capital asset is taxable income, but Section 1031 of the Internal Revenue Code provides a way to postpone the tax on the gain if the property is exchanged for a like-kind property that is also used in business or held for investment. These transactions are often referred to as 1031 exchanges and may apply to other types of property besides real estate, but the information in this article is geared toward real property. It is important to note that these exchanges are not “tax-free” but are “tax deferred.” The gain that would otherwise be currently taxable will eventually be paid when the replacement property is sold in the future in a regular sale. As with all things tax, there are rules and regulations to be followed to ensure that the transaction qualifies, such as: The property must be given up and its replacement must be actively used in a trade or business or held for investment, so a personal residence or a vacation home won't qualify. However, under some circumstances a vacation home that has been rented out may qualify.   The properties must be of like kind. For instance, this means you can't exchange real estate for an airplane. But the definition is quite broad for real property - for example, it is OK to exchange raw land for an office building, a single-family residential rental for an apartment building, or land in the city for farmland. Typically, the owner of a residential rental who participates in an exchange will trade for another residential rental. Both real estate properties must be located in the United States. Caution: Stocks, bonds, inventory, partnership interests and business goodwill are excluded from Sec 1031 exchanges.   It is unusual for two taxpayers to each have a property that the other wants where they can enter into a simultaneous exchange. Most likely, if you wanted to exchange your property, you may need to do a “deferred exchange,” which means you effectively sell your property and then find a suitable replacement property. In this case, the law is very strict. You must identify, in writing, the replacement property within 45 days of the date your property was transferred and complete the acquisition of the replacement property within 180 days of the transfer or, if earlier, by the due date, including extensions, of your tax return for the tax year in which your property was transferred. During this period you aren't allowed to receive the proceeds from the sale of your property.   The property acquired in an exchange must be of equal or greater value to the one you gave up, and all of the net proceeds from the disposition of the relinquished property must be used to acquire the replacement property. Otherwise, any unused proceeds are taxable.  With this basic information about 1031 exchanges, you may still be wondering whether an exchange is right in your situation. So let's consider some of the advantages and disadvantages of exchanges. ADVANTAGES: Tax deferral - The main reason most people choose to do a 1031 exchange is so taxes don't have to be paid currently on the gain that would result from selling the property. The maximum federal tax rate paid on capital gains for most taxpayers is 15% (20% if you would otherwise be in the highest tax bracket of 39.6%). However, the part of the gain that is equal to the depreciation deduction you've claimed while you've owned the property is taxable at a maximum of 25%. Leveraging the tax savings - When an exchange is used, the money that doesn't have to be spent to pay the taxes that would have been owed on the gain from a sale can be used to acquire other property or higher-value property. Asset accumulation - The money saved from not paying tax on the sale gain can be retained as part of your estate to be passed to your heirs, who would also get a new basis on the replacement property that is equal to its fair market value at your date of death. In this case, none of the postponed gain from the original property is ever subject to income tax. However, depending on the overall size of your estate, there could be estate tax considerations. Potential management relief - Taxpayers sometimes decide to sell their property to get out from under the burden of managing and maintaining the property. An exchange may still accomplish this without an outright sale by allowing the taxpayer to acquire replacement property that has fewer maintenance requirements and associated costs or has on-site management. DISADVANTAGES: Added complexity and expense - An exchange transaction involves more complexity than a straight sale. The timing requirements noted above must be strictly met or the transaction will be taxable. To avoid tainting the transaction when there's a deferred exchange, the proceeds from the original property must not be received by the seller, and a qualified intermediary, also called an accommodator, must be hired to handle the money and acquire the replacement property. The intermediary's fees will be in addition to the usual selling and purchase expenses incurred. Low tax basis - The tax basis on the property acquired reflects the deferred gain, so the basis for depreciation will be low. Thus, the annual depreciation deduction will often be much less than it would be if the property were purchased outright. Upon sale of the property, the accumulated tax deferrals will catch up, and the result will then be a large tax bill. No property flipping - The intent of the law permitting exchanges is for the taxpayer to continue to use the replacement property in his trade or business or as an investment. An immediate sale of the replacement property would not satisfy that requirement. How long must the replacement property be held? In most situations there is no specific guideline, but generally 2 years would probably suffice. “Intent” at the time of the exchange plays a major role according to the IRS. Unknown future law changes - When weighing whether to do a 1031 exchange, consider the known tax liability if you sold your property versus the unknown tax that will be owed on the deferred gain when you eventually sell the replacement property in the future. If you think tax rates may be higher in the future, you may decide to pay the tax when you sell your original property and be done with it. Recent proposals by various members of Congress and President Obama would severely curtail or even eliminate 1031 exchanges and increase the depreciation period of real property from 27.5 years for residential property and 39 years for commercial property to 43 years for both. These proposals may never pass, but they are an indicator of how 1031 exchanges are currently viewed in Washington, D.C. 1031 exchanges are very complex transactions, and the information provided is very basic. Before you commit to an exchange, please call this office so that we can review your particular situation with you. Tue, 16 Dec 2014 19:00:00 GMT Tax Deductions for Waiters & Waitresses http://www.messnerandhadley.com/blog/tax-deductions-for-waiters--waitresses/401 http://www.messnerandhadley.com/blog/tax-deductions-for-waiters--waitresses/401 Messner & Hadley LLP Keeping A Good Tip Record:If you are a waiter or waitress, the IRS requires you to keep a record of your tips. The record needs to include tips you receive from: your customers in cash; other tipped employees because of a "tip-sharing" arrangement; and your customers who pay by credit card. When you receive a tip but pay part of it to someone else (for example, a bartender), you should note the name of that person in your tip record along with the amount you paid him/her. You should keep your record updated on a day-to-day basis to make sure of its accuracy.Reporting Tips To Your Employer: In order to comply with IRS rules, you need to let your employer know the total amount of tips you receive. This reporting should be done in writing within the 10-day period following the end of the month in which you receive the tips (sometimes the due date is extended a day or so if the last day of the 10-day period is on a weekend or legal holiday).Once you make the report to your employer, he/she adds the amount to your regular wages and uses the total to figure how much income tax, Social Security tax and Medicare tax to withhold from your regular paycheck.Tips Not Reported To Your Employer:Special rules apply to tips you received but didn't, for one reason or another, report to your employer. If such tips total $20 or more in any given month while working for one employer, you will need to figure your own Social Security and Medicare taxes for them. These taxes are computed and paid with your tax return. Keep in mind that the IRS can also charge a penalty for tips that aren't reported to an employer. Keeping Tip Records:According to the rules, your tip records need to clearly establish the tips you received. That's why a timely, day-to-day record is so important. The form (click on the link) contains all the information you will need and has room for an entire month's entries. You may make as many copies of the form as you need so that you will have a permanent record of your tips for the entire year.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Tax Deductions for Airline Flight Crew Personnel http://www.messnerandhadley.com/blog/tax-deductions-for-airline-flight-crew-personnel/402 http://www.messnerandhadley.com/blog/tax-deductions-for-airline-flight-crew-personnel/402 Messner & Hadley LLP Professional Fees & Dues:Dues paid to professional societies related to your occupation are deductible. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include dues, but not those that go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible.Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your job skills. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Uniforms & Upkeep Expenses:Generally, the costs of your uniforms are fully deductible. IRS rules specify that work clothing cost and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related or continuing-education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Equipment, Supplies & Repair:Generally, to be deductible, items must be ordinary and necessary to your job as airline flight crew personnel and not reimbursable by your employer. Record separately from other supplies, the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Miscellaneous Expenses:Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Tax Deductions for Telecommuting Employees http://www.messnerandhadley.com/blog/tax-deductions-for-telecommuting-employees/403 http://www.messnerandhadley.com/blog/tax-deductions-for-telecommuting-employees/403 Messner & Hadley LLP Equipment Purchases:Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies etc.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Professional Fees & Dues:Dues paid to professional societies related to your profession are deductible. Supplies & Expenses:Generally, to be deductible, items must be ordinary and necessary costs in your profession and not reimbursable by your employer.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in your profession. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Auto Travel:Your auto expense is based on the number of qualified business miles you drive. If you qualify for the home office deduction, your home becomes your primary business location, and you will not have any nondeductible commuting travel. Therefore, generally all of your business travel from home to other business locations and meetings will be deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Home Office Deduction:A home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. Generally, telecommuting employees would meet the “principal place of business” test, i.e., the location where you spend the majority of your time performing your work activities. Additionally, telecommuting employees must meet the “convenience of the employer” test. That test is met if your employer asks you to work out of your home.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely diary. You must keep track of the full amount of meal and entertainment expenses, even though only a portion of the amount may be deductible.CLICK HERE FOR THE FORM Sun, 14 Dec 2014 19:00:00 GMT Caring for an Elderly or Incapacitated Individual http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 http://www.messnerandhadley.com/blog/caring-for-an-elderly-or-incapacitated-individual/181 Messner & Hadley LLP With people generally living longer, we frequently find ourselves in the position of a caregiver for elderly or incapacitated individuals. Whether the individual is an incapacitated or elderly spouse, an elderly parent or even a child, there are tax implications that need to be considered that can relieve some of the financial burden associated with being a caregiver. The following are some tax aspects of taking on the care of an elderly or incapacitated individual. Dependency exemption - You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify: o You individually or through a multiple support agreement must provide more than 50% of the individual's support costs, o The individual must either live with you for the entire year or be related, o For 2015, the individual must not have gross income in excess of the exemption amount of $4,000 (up from $3,950 in 2014, call for exemption rates for other years), o The individual must not himself file a joint return for the year, and o The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico.    Medical expenses - If the cared-for individual qualifies as your dependent or medical dependent, you can include any medical expenses you incur for the individual along with your own when determining your medical deduction for itemized deduction purposes. Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined below), all of the individual's qualified long-term care services, including maintenance or personal care services, are counted as medical expenses. A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living).   Reverse mortgage as alternative to nursing home - It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative to a nursing home. If this approach is taken, don't forget the household help is deductible in the same manner as the nursing home. In addition, household employees must be paid by payroll.   Filing status - If you aren't married, you may qualify for “head of household” status by virtue of the cared-for individual. If the cared-for individual: (a) lives in your household for over half the year, (b) you pay more than half the household costs, (c) the individual qualifies as your dependent, and (d) is a relative, you can claim head of household filing status. If the person you're caring for is your parent, he or she does not need to live with you, as long as you provide more than half of the household costs and he or she qualifies as your dependent. For example, if a parent is confined to a nursing home and you pay more than half the cost, you are considered as maintaining a principal home for your parent.   Dependent care credit - If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of themselves, you may qualify for the dependent care credit for costs you incur for their care to enable you (and your spouse, if married and filing a joint return) to go to work.   Exclusion for payments under life insurance contracts - Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.  If you are a caregiver and would like to discuss your situation further, please call this office. Thu, 11 Dec 2014 19:00:00 GMT Care for the Elderly http://www.messnerandhadley.com/blog/care-for-the-elderly/182 http://www.messnerandhadley.com/blog/care-for-the-elderly/182 Messner & Hadley LLP When the elderly reach the point that they can no longer care for themselves, there are generally two courses of action available to the caregiver: (1) Provide for in-home care, or (2) place the individual in a care facility. Each has its own distinct tax ramifications: In-home Care - If the elderly person has the option to remain in their home and provide in-home care, that care is deductible as a medical deduction, provided the expenses are directly related to the individual's medical care. If the individual or individuals providing that care also provide household services, the cost must be allocated between deductible medical expenses and nondeductible personal expenses. The care provider need not be a nurse, even though they are providing services normally administered by a nurse. In-home care is subject to the rules for household employees that require the employer (the elderly individual) to withhold FICA and Medicare taxes and issue a W-2 at the end of the year. There are generally state filing requirements as well, so please call this office for assistance in setting up a household payroll. Care Facility - If the option is to place the elderly individual in a care facility such as a convalescent hospital, nursing home or a home for the elderly, then the cost of that care is deductible, provided the primary reason for being there is to receive medical care. If medical care is the primary reason, then the deduction will include the cost of lodging and meals (at 100%). In either case, the care-related expenses are added to the cost of other medical expenses for the year and the total is reduced by 10% (7.5% through 2016 for a taxpayer, or spouses if married filing jointly, age 65 or older) of adjusted gross income to determine the medical deduction allowed as part of itemized deductions. Thu, 11 Dec 2014 19:00:00 GMT Getting the Most Out of Employee Business Expense Deductions http://www.messnerandhadley.com/blog/getting-the-most-out-of-employee-business-expense-deductions/39910 http://www.messnerandhadley.com/blog/getting-the-most-out-of-employee-business-expense-deductions/39910 Messner & Hadley LLP Article Highlights: 2% of income deduction floor Alternative minimum tax Employer accountable plan Bunch deductions Educational assistance plan Sec 179 Expensing Individuals can deduct as miscellaneous itemized deductions certain expenses that they incur in the course of their employment. Generally, qualified business expenses are un-reimbursed expenses that are both ordinary (common and accepted in your industry) and necessary and do not include personal expenses. There are two major barriers to deducting employee business expenses. The most commonly encountered is the 2%-of-income (AGI) deduction floor that applies to most (Tier II) miscellaneous deductions, which besides employee business expenses also includes investment expenses, certain legal expenses, home office and other expenses. The amount deductible as miscellaneous expenses is the total of those expenses reduced by 2% of the taxpayer’s adjusted gross income for the year. Depending upon the taxpayer’s income, this reduction can substantially lessen or eliminate the deductible amount. The second major barrier is the alternative minimum tax (AMT), in which the Tier II miscellaneous expenses are not deductible at all. Thus, to the extent that the taxpayer is affected by the AMT, there is no benefit derived from these deductions. There are, however, some planning strategies that can be applied to overcome these barriers, such as the following: Employer Accountable Plan – This is a plan under which your employer reimburses you for your employment-related expenses, but requires you to “adequately account” for the expenses. Expenses reimbursed by the employer under an “accountable plan” are excluded from income, thus essentially allowing 100% of the expenses to be deducted, while avoiding the 2%-of-income and AMT limitations. If the employer does not wish to add a reimbursement plan on top of the employee’s existing income, a salary reduction replaced with an accountable plan might be negotiated. Bunch Deductions – With proper planning, employee business expenses for more than one year can be deferred or accelerated into one year, thus producing a larger deduction in that one year to overcome the 2% floor for miscellaneous deductions. Education Expenses – Although certain employment-related education expenses can be taken as an employee business expense, there are other ways to gain a tax benefit and avoid the 2%-of-AGI and AMT limitations. These include income-limited education tax credits, and if your employer has an educational assistance plan, your employer can reimburse you up to $5,250 for most education expenses other than those associated with education travel. Utilize the Section 179 Deduction – Generally, business assets with a useful life of more than one year must be deducted (depreciated) over several years. However, most business assets, other than real estate, qualify for the Code Section 179 expense deduction that allows the entire cost (up to $25,000 for 2015) to be deducted in one year. While vehicles used for business are eligible for Section 179 expensing, other limitations cap the deduction at lower amounts. The depreciation or Section 179 deduction of an employee’s business assets is part of employee business expenses subject to the 2%-of-AGI floor. However, by claiming the Section 179 deduction in the year the asset is purchased rather than deducting a lower depreciation amount over several years, there is a greater chance that the total miscellaneous deductions will be more than the 2%-of-AGI floor, thus allowing part of the expense to be deducted. If you would like to explore any of these techniques, please give this office a call. Thu, 11 Dec 2014 19:00:00 GMT Eldercare Can Be a Medical Deduction http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/186 http://www.messnerandhadley.com/blog/eldercare-can-be-a-medical-deduction/186 Messner & Hadley LLP With people living longer, many find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care. Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible and the meals and lodging would not be a deductible medical expense. As an alternative to nursing homes, many elderly individuals or their care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the cost of services provided by the employees must be allocated between non-deductible household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee's pay attributable to household chores would not be a deductible medical expense. Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee's share of these taxes and to pay the employer's payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the Federal payroll taxes to be paid annually in conjunction with the employer's individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax. However, the employer is still required to issue a W-2 to the employee and file the form with the Federal government. A Federal Employer ID Number and a state ID number must be obtained for reporting purposes. Most states have special provisions for reporting and paying state payroll taxes on an annual basis that are similar to the Federal reporting requirements. If you need assistance in setting up a household payroll, please contact this office for additional details and filing requirements.  Wed, 10 Dec 2014 19:00:00 GMT How Does the Affordable Care Act Affect You and Your Taxes? http://www.messnerandhadley.com/blog/how-does-the-affordable-care-act-affect-you-and-your-taxes/15045 http://www.messnerandhadley.com/blog/how-does-the-affordable-care-act-affect-you-and-your-taxes/15045 Messner & Hadley LLP The health care legislation, the Affordable Care Act (aka Obamacare), signed into law in 2010 affects virtually every individual in one way or another and significantly impacts the preparation of tax returns. The provisions take effect over a period of years and are categorized in this article by the year they became or will become effective. Some of the provisions include additional taxes to offset the cost of the health care benefits included in the legislation for lower-income individuals. The following is an overview of the provisions that apply to individual taxpayers and small businesses. 2009 Student Loan Forgiveness for Health Professionals – Excludes student loan debt forgiveness from income for certain medical professionals who work in health professional shortage areas. 2010 Tanning Services Excise Tax – A 10% excise tax is imposed on the amount paid for any indoor tanning service. Excludable Medical Reimbursements for Older Children – An income exclusion for reimbursements of medical care expenses by an employer-provided accident or health plan is extended to any child of an employee who hasn't attained age 27. Self-Employed Health Insurance Deduction – Self-employed individuals may include children who have not attained age 27 in their tax-deductible health insurance. Tax Credits for Small Employers Offering Health Coverage – Provides a tax credit for an eligible small employer for non-elective contributions to purchase health insurance for its employees. 2011 Increased Tax on Nonqualifying HSA or Archer MSA Distributions – The additional tax for making non-medical withdrawals from Health Savings Plans and Archer MSA plans is increased to 20%. Over-the-Counter Medication Restriction for Employer Plans – Over-the-counter medications no longer qualify for reimbursement. Small Employer Simple Cafeteria Plans – Small employers may provide employees with a "simple cafeteria plan." 2012 Employer W-2 Reporting Responsibilities – Employers are required to disclose the aggregate cost of employer-sponsored health coverage to their employees on Form W-2 (for information purposes only). An exception applies for employers who were required to file fewer than 250 Forms W-2 for the preceding calendar year. 2013 Additional Medicare (Hospital Insurance) Tax for High-Income Taxpayers – The Medicare (Hospital Insurance) tax rate (currently at 1.45%) is increased by 0.9 percentage points on incomes over a threshold. Applies to employees and self-employed individuals. Surtax on Net Investment Income for High-Income Taxpayers – A 3.8% surtax is imposed on net investment income of high-income individuals, estates, and trusts if their modified adjusted gross income exceeds a threshold amount. Employer Health FLEX-Spending Plan Contributions Limited – Contributions to health flexible spending plans is limited to $2,500 (adjusted annually for inflation). Medical Itemized Deductions Limited – The AGI threshold percentage for claiming itemized medical expenses is increased from 7.5% to 10%, except remains 7.5% through 2016 for taxpayers age 65 or older. Compensation Deduction Limit for Health Insurance Issuers – Limits companies' deduction for certain employees' compensation. Fee on Self-Insured Health Plans (Patient-Centered Outcomes Research Fee) – a fee equal to $2 ($1 for plan years ending during physical year 2013) multiplied by the average number of lives covered under the plan. The fee amount is adjusted annually based on the percentage increase in the projected per capita amount of the National Health Expenditures published by Health and Human Services. Employee Notices – Beginning January 1, 2014 (October 1, 2013 for existing employees), certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace (insurance exchanges). 2014 Mandatory Heath Insurance Overview – Many of the provisions of the health care legislation are linked to the mandate that everyone becomes insured. The chart provides an overview of how these provisions interact to achieve that goal. American Health Benefit Exchanges – By 2014, each state was to establish an exchange (Marketplace) to help individuals and small employers obtain coverage. Because many states chose not to do so, the federal government established a federal Marketplace for these individuals to use. Penalty For Not Being Insured – Non-exempt U.S. citizens and legal resident taxpayers will be penalized for failing to maintain at the least the minimum essential health coverage, unless the individual qualifies for an exemption specified in the law or meets the criterion for a hardship exemption. Premium Tax Credit – Tax credits will be available for low-income individuals who obtain health insurance coverage with a qualified health plan (QHP) through an “Exchange.” The credit may be taken on the individual’s income tax return or in advance as a subsidy to help pay for the insurance premiums with the actual credit and any advances reconciled on the individual’s Form 1040. 2015 Large Employer Health Coverage Excise Tax – This penalty was originally scheduled to become effective in 2014 but was delayed until 2015. Large employers (50 employees or more) would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy. (Penalty is delayed until 2016 for employers with 50 to 99 employees who meet certain conditions.) Mandatory Insurer and Employer Reporting - Health insurers are required to file information returns reporting each individual for whom minimum essential coverage is provided. In addition, each employer is also required to provide information related to each employee covered under the employer’s plan. 2018 Excise Tax on High-Cost Employer-Sponsored Health Coverage – There will be a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed certain limits. Wed, 10 Dec 2014 19:00:00 GMT Additional Medicare (Hospital Insurance) Tax - High-Income Taxpayers http://www.messnerandhadley.com/blog/additional-medicare-hospital-insurance-tax-high-income-taxpayers/15108 http://www.messnerandhadley.com/blog/additional-medicare-hospital-insurance-tax-high-income-taxpayers/15108 Messner & Hadley LLP The Medicare (aka Hospital Insurance (HI)), tax rate (currently at 1.45%) would be increased by 0.9 percentage points on individual taxpayer earnings (wage withholding and SE tax) in excess of compensation thresholds for the taxpayer’s filing status; see table below. These amounts are not adjusted for inflation, so will remain as shown until changed by Congress.Wage Withholding – Thus, the wage withholding Medicare rate would be 1.45% up to the income threshold and would be 2.35% (1.45 + 0.9) on amounts in excess of the threshold.SE Tax – The SE tax rate would be 2.9% up to the income threshold and would be 3.8% (2.9 + 0.9) on amounts in excess of the threshold. All Income Combined for Purposes of the Threshold For purposes of determining the additional Medicare tax, all wage and self-employment income is combined. For married taxpayers, the spouses’ wages and self-employment incomes are combined. Wages – The following details pertain to wage withholding:o An employer must withhold the additional Medicare tax based upon the wages the employee receives from the employer. o If the spouse works for the same employer, the employer may disregard the amount of wages received by the employee's spouse when computing the withholding for either spouse. o Where a taxpayer has multiple employment, or self-employment and/or the spouse also works, the taxpayer is responsible for the additional 0.9% tax to the extent it is not withheld by an employer and will pay the additional amount on their 1040. o The employer will not be liable for any additional 0.9% Medicare tax that it fails to withhold and that the employee later pays, but will be liable for any penalties resulting from its failure to withhold. No Additional Tax Imposed on Employers The entire 0.9% additional Medicare tax is the responsibility of the individual taxpayer and the employer is not required to make a matching contribution. Self-Employment Income – The following details pertain to payment of the additional Medicare SE tax:o The self-employed taxpayer will be responsible for the additional 0.9% Medicare tax. And like an employer will not be liable for the matching amount. o The SE tax computation deduction continues to be computed using half the sum of the OASDI (Social Security) tax rate and only the regular Medicare tax rate (i.e., 7.65%), without regard to the additional 0.9% Medicare tax. Reporting Mechanics (Form) – As part of the taxpayer’s Form 1040 filing, the additional Medicare tax is computed on Form 8959 and then that tax and the additional withholding are reconciled to see if the taxpayer owes more tax or is eligible for a credit of excess withholding.Example – Multiple Employers – Hal has two employers, one of which pays him an annual salary and bonus of $175,000 and the other pays him $75,000. Hal’s wife, Patricia, has wages of $50,000. Their combined wage total is $300,000 but no one employer paid them more than $250,000. Thus, none of their employers withheld any additional Medicare tax, so Hal and Patricia will be responsible for the additional $450 (0.9% of ($300,000 - $250,000)) of Medicare tax when they file their 1040. Wed, 10 Dec 2014 19:00:00 GMT Shared Responsibility Payment - Penalty for Being Uninsured http://www.messnerandhadley.com/blog/shared-responsibility-payment--penalty-for-being-uninsured/40723 http://www.messnerandhadley.com/blog/shared-responsibility-payment--penalty-for-being-uninsured/40723 Messner & Hadley LLP Penalty Calculation - Beginning in 2014, there is a penalty for not having health insurance unless one of several exemptions is met. The penalty is being phased in over three years. The monthly penalty for 2014 is the greater of $7.92 per uninsured adult plus $3.96 for each uninsured child (under age 18), but not to exceed $23.75 per month for a family, OR 1% of household income in excess of the individual's income tax filing threshold divided by 12. In 2015 the flat dollar amounts are $27.08 per uninsured adult, $13.54 per uninsured child, and $81.25 maximum per family; the percent of income rate is 2%. In 2016, when the penalty is fully phased in, the monthly adult penalty will be $57.92, the child penalty $28.96, and the monthly family maximum $173.75, OR 2.5% of household income over the income tax filing threshold divided by 12. (Filing threshold is the sum of the standard deduction and personal exemption amounts for the filer and spouse, if any.) The penalty can never be greater than the national average premium for a minimum essential coverage plan purchased through a government Marketplace. Example: A married couple without insurance in 2014 has one dependent child and a household income of $50,000. The couple's standard deduction is $12,400 and with two exemptions at $3,950 each, their filing threshold for 2014 is $20,300. Their monthly penalty is the greater of $19.80 (2 x $7.92 plus $3.96) or $24.75 (.01 x ($50,000 - $20,300)/12). Thus their monthly penalty would be $24.75. Penalty Exemptions - Certain individuals are exempt from the health insurance mandate and are therefore not subject to the penalty. Included are: Those unlawfully present in the US.  Those whose income is below the federal tax filing requirement (the sum of the standard deduction and exemption amounts for the filer and spouse, if any).  Those who cannot afford coverage based on formulas contained in the law (generally when the cost of the insurance coverage exceeds 8% of the individual's household income).  Members of American Indian tribes.  Incarcerated individuals and certain religious objectors.  In addition, there is no penalty when the first lapse in coverage during a year is less than three months. Also, a number of hardship exemptions may be available. Some of the exemptions require completing and filing an application for approval with the Marketplace (Exchange). If approved for one of the exemptions requiring specific approval, the applicant will be issued an exemption certificate number (ECN) that must be included on his or her tax return to claim the exemption. Wed, 10 Dec 2014 19:00:00 GMT Tax Deductions for Educators http://www.messnerandhadley.com/blog/tax-deductions-for-educators/390 http://www.messnerandhadley.com/blog/tax-deductions-for-educators/390 Messner & Hadley LLP Professional Fees and Dues: Dues paid to professional societies related to your educational profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs. Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include regular dues, but not those that go toward defraying expenses of a personal nature. The portion of union dues that goes into a strike fund is deductible, however. Continuing Education: Educational expenses are deductible under either two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in the education profession. The cost of courses that are taken to meet the minimum requirements of a job or that qualify you for a new trade or business are not deductible. NOTE: Education undertaken to qualify a classroom teacher as a school administrator or guidance counselor generally meets the criteria for educational expense deductions. Communication Expenses: The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business related. The costs of a second line (basic service and toll calls) in your home are also deductible if that line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls. Auto Travel: Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day or between home and one or more regular places of work are COMMUTING expenses and are NOT deductible. Document business miles in a record book by the following: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses. Out-of-Town Travel: Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc. Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible. If you travel away from home primarily to obtain education (for example, to attend a university extension course overseas) that is related to your job and is an allowed education expense, your expenses for travel, meals and lodging while away from home are deductible. But traveling away from home is not itself a form of education, and therefore is not deductible. For example, if you are a French teacher, taking a tour of France to help improve your command of the French language would not be deductible. Classroom Supplies: Generally to be deductible, items must be ordinary and necessary to your profession as an educator and not reimbursable by your employer. Record separately from other supplies items costing more than $200 and having a useful life of more than one year. The cost of these items must be recovered differently on your tax return than other recurring, everyday business expenses like photocopies or books. Miscellaneous Expenses: Expenses of looking for new employment in the same line of work in which you are already working are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities. CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Firefighters http://www.messnerandhadley.com/blog/tax-deductions-for-firefighters/391 http://www.messnerandhadley.com/blog/tax-deductions-for-firefighters/391 Messner & Hadley LLP Professional Fees and Dues: Dues paid to professional societies related to your profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs.Uniforms and Upkeep Expenses:Generally, the costs of your firefighter uniforms are fully deductible if they aren’t provided to you without charge by your employer. IRS rules specify that work clothing costs and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g. safety shoes or goggles) is also deductible.Telephone Expenses:The basic local telephone service costs of the first telephone line in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills as a firefighter. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Miscellaneous:House dues and meal expenses may be deductible. Firefighters are often required to eat their meals at the station house. One court case (Sibla) said that the costs of such meals are nondeductible unless the firefighters: (1) are required to make payments to a common mess fund as a condition of employment, and (2) must pay whether or not they are at the station house to eat the meals. Contact this office for further details on this deduction.Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.Equipment & Repairs:Generally, to be deductible, items must be ordinary and necessary to your job as a firefighter and not reimbursable by your employer. Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses - gas, oil, repairs, insurance etc. - and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job-related and continuing education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Peace Officers http://www.messnerandhadley.com/blog/tax-deductions-for-peace-officers/392 http://www.messnerandhadley.com/blog/tax-deductions-for-peace-officers/392 Messner & Hadley LLP Professional Fees and Dues:Dues paid to professional societies related to your profession are deductible. These could include professional organizations, business leagues, trade associations, chambers of commerce, boards of trade and civic organizations. However, dues paid for memberships in clubs organized for business, pleasure, recreation or other social purpose are not deductible. These could include country clubs, golf and athletic clubs, airline clubs, hotel clubs and luncheon clubs.Uniforms and Upkeep Expenses:Generally, the costs of your uniforms are fully deductible if they aren’t provided to you without charge by your employer. IRS rules specify that work clothing costs and the cost of its maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g., safety shoes or goggles) is also deductible.Auto Travel:Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses incurred when traveling away from “home” overnight on job related and continuing-education trips that were not reimbursed or reimbursable by your employer are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information timely in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Equipment & Repairs:Generally, to be deductible, items must be ordinary and necessary to your job as a peace officer and not reimbursable by your employer. Record separately from other supplies the cost of business assets that are expected to last longer than one year and cost more than $200. Normally, the cost of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.Communication Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated to deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills as a peace officer. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Miscellaneous Expenses:Generally, meals consumed during hours of duty by peace officers are nondeductible. Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Business Professionals http://www.messnerandhadley.com/blog/tax-deductions-for-business-professionals/393 http://www.messnerandhadley.com/blog/tax-deductions-for-business-professionals/393 Messner & Hadley LLP Professional Fees and Dues:Dues paid to professional societies related to your profession are deductible. However, the cost of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in your profession. The costs of courses that are taken to meet the minimumrequirements of a job, or that qualify you for a new trade or business, are NOT deductible.Communication Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs of a second line (basic service and toll calls) in your home are also deductible if that line is used exclusively for business.When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Supplies and Expenses:Generally, to be deductible, items must be ordinary and necessary costs in your profession and not reimbursable by your employer.Equipment Purchases:Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as business cards or office supplies.Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight on job-related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Miscellaneous Expenses:Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town, job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Medical Professionals http://www.messnerandhadley.com/blog/tax-deductions-for-medical-professionals/394 http://www.messnerandhadley.com/blog/tax-deductions-for-medical-professionals/394 Messner & Hadley LLP Supplies & Expenses:Generally, to be deductible, items must be ordinary and necessary to your medical profession and not reimbursable by your employer. Record separately from other supplies the cost of business assets that are expected to last longer than one year and cost more than $200. Normally, the cost of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as business cards or medical supplies.Other Expenses:Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town, job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.Communication Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Uniforms and Upkeep Expenses:If you are required to wear a uniform in your medical profession, the cost and upkeep may be deductible. IRS rules specify that work clothing cost and the cost of its maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear. The cost of protective clothing (e.g., safety shoes or goggles) is also deductible.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) The education maintains or improves skills as a medical professional. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between work locations or daily transportation expenses between your residence and temporary work sites are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight on job-related and continuing-education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Professional Fees and Dues:Dues paid to professional societies related to your medical profession are deductible. However, the cost of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include regular dues but not those which go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Realtors http://www.messnerandhadley.com/blog/tax-deductions-for-realtors/395 http://www.messnerandhadley.com/blog/tax-deductions-for-realtors/395 Messner & Hadley LLP Auto Travel:Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight on job-related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses includetransportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Professional Fees and Dues:Dues paid to professional societies related to your profession are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills in your profession. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Equipment Purchases:Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies etc.Supplies & Expenses:Generally, to be deductible, items must be ordinary and necessary to your real estate profession and not reimbursable by your employer.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Sales Representatives http://www.messnerandhadley.com/blog/tax-deductions-for-sales-representatives/396 http://www.messnerandhadley.com/blog/tax-deductions-for-sales-representatives/396 Messner & Hadley LLP Auto Travel:Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight on job related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses includetransportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Professional Fees & Dues:Dues paid to professional societies related to your profession are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills as a sales representative. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Equipment Purchases:Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses such as business cards or office supplies.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs (basic fee and toll calls) of a second line in your home are also deductible, if the line is used exclusively for business.When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Supplies & Expenses:Generally, to be deductible, items must be ordinary and necessary to your business profession and not reimbursable by your employer.Miscellaneous Expenses:Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Clergy http://www.messnerandhadley.com/blog/tax-deductions-for-clergy/397 http://www.messnerandhadley.com/blog/tax-deductions-for-clergy/397 Messner & Hadley LLP Parsonage Allowance:Many members of the clergy are paid a cash “housing allowance,” which they use to pay the expenses related to their homes (e.g. interest, real property taxes, utilities, etc.). Alternatively, some may live in a parsonage owned by the church. Neither a cash allowance (to the extent it is used to pay for home expenses) nor the estimated rental value of the parsonage is included in income for the purpose of computing your income tax. However, those amounts ARE INCLUDED in your income for the purpose of computing your self-employment (Social Security) tax, if any. Use this section to record your home expenses and the total annual amount of housing allowance or parsonage value you receive. Because of IRS regulations, it is very important that the governing body of your church designate the portion of your salary that is your housing allowance. NOTE: If you have made an election for exemption from self-employment taxes, other rules may apply. In such case, consult with your tax advisor.Communication Expenses:Toll calls made from your home related to church business are deductible if the expenses aren’t reimbursable to you. To be assured of a deduction, clearly mark your monthly phone bill to show the business calls. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls. Auto Travel:Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your home and temporary work locations (e.g., from home to a hospital call to an ill parishioner) are deductible; include these trips in figuring business miles. However, expenses for your trips between home and the office each day, or between home and one or more regular places of work, are COMMUTING expenses and aren’t deductible.Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and the end of the year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance, etc. – and any reimbursement you received for your expenses.Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight on job-related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to your out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You should keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills as a member of the clergy. The costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are not deductible.Equipment Purchases:Equipment purchases such as pagers or telephone answering machines are shown differently on your tax return than are general job-related supplies. Keep documentation for these items separate from everyday expenses so that they may be easily identified when your return is prepared.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Day Care Providers http://www.messnerandhadley.com/blog/tax-deductions-for-day-care-providers/398 http://www.messnerandhadley.com/blog/tax-deductions-for-day-care-providers/398 Messner & Hadley LLP Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Auto expenses for you as a day care provider could include your transportation: to and from a class taken to enhance your day care skills; on field trips with those for whom you are providing care; for errands related to day care business (e.g. going to the bank to make a deposit of day care receipts); to the store to shop for day care supplies; or when chauffeuring day care attendees. Capital Purchases:Certain purchases for day care use may be so-called “capital items.” These items must be deducted on your tax return using different rules than are used for supplies and expenses. Capital items are those that normally last more than one year and cost more than $200 – typical examples would be cribs, playground equipment etc. Be sure to keep receipts for these items separate from receipts for general supplies.Supplies and Expenses:Generally, to be deductible, items must be ordinary and necessary to the operation of your day care business. Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $200. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses like small toys or books. Try to get separate store receipts for the items you use for day care. For example, if you buy food for the day care attendees, don’t combine this purchase with the food purchases for personal use.Business Use of Home:Normally, the expenses you incur (other than home mortgage interest, taxes or casualty losses) related to your personal home are not deductible. However, when you regularly use your home for licensed day care, a portion of the cost of your home upkeep can be deductible – the deductible amount depends on both the number of square feet you use for day care AND the amount of time you routinely use various rooms of your home in the day care business.Your day care records don’t need to detail the specific hours a room in your home is used for business. It’s enough to show that you regularly use a room for day care. For instance, say your home has one bedroom that is regularly used for afternoon naps for day care recipients – about two hours each day. Your day care center is open from 7:00 a.m. to 6:00 p.m. Even though nap time uses only two of the 11 hours your center is open, the bedroom is considered used for business for the entire 11-hour business day.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Overnight Drivers http://www.messnerandhadley.com/blog/tax-deductions-for-overnight-drivers/399 http://www.messnerandhadley.com/blog/tax-deductions-for-overnight-drivers/399 Messner & Hadley LLP Out-of-Town Travel:Expenses accrued when traveling away from “home” overnight for job related reasons are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.Document your away-from-home expenses by noting the date, destination and business purpose of your trip. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your record. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. Keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Office Expenses:Use this section to record miscellaneous expenses of supplies and services you are responsible for when you are on the road. For example, you may be required to fax or mail an important document back to your home office; such expenses are deductible if they are not reimbursed by your employer.Supplies:Generally, to be deductible, items must be ordinary and necessary to your job. If you are an employee, only amounts not reimbursable by your employer are deductible. Record separately from other supplies items costing more than $200 and having a useful life of more than one year. These items must be reported differently on your tax return than recurring everyday business expenses such as maps.If you are required to wear a uniform, the cost and upkeep may be deductible. IRS rules specify that expenses for work clothing and its maintenance are deductible if: (1) the uniforms are required by your employer (if you are an employee); and (2) the clothes are not adaptable to ordinary street wear.Communication Equipment:When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Fees & Dues:Union or other professional dues are deductible. Amounts paid to a union that are meant to go toward defraying your personal expenses are not deductible. However, any portion of the union payments that goes into a strike fund is deductible.Miscellaneous Expenses:Use this section to record expenses that don’t easily fit in other categories. For example, if you look for a job in the same line of work, you may deduct the expenses. Such expenses could include mileage to interviews, resume preparation etc.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT Tax Deductions for Entertainers http://www.messnerandhadley.com/blog/tax-deductions-for-entertainers/400 http://www.messnerandhadley.com/blog/tax-deductions-for-entertainers/400 Messner & Hadley LLP Continuing Education:Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves your skills in the entertainment profession. The costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.Promotional Expenses & Supplies:Generally, to be deductible, items must be ordinary and necessary to your profession as an entertainer. Record separately from other supplies items costing more than $200 and having a useful life of more than one year. These items must be reported differently on your tax return than other recurring, everyday business expenses.If you incur expenses while looking for a job in your entertainment field, they may be deductible. You do not actually have to obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the main purpose of the trip is to job search, not pursue personal activities.Telephone Expenses:The basic local telephone service costs of the first telephone line provided in your home are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business. When communication equipment, such as a cell phone, is used part for business and part personally the cost of the equipment must be allocated deductible business use and non-deductible personal use. Keep your bills for cellular phone use and mark all business calls.Auto Travel:Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations are deductible; include them as business miles. Expenses for your trips between home and a permanent work location, or between one or more regular places of work, are COMMUTING expenses and are NOT deductible.Document business miles in a record book by the following: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.Out-of-Town Travel:Unreimbursed expenses accrued when traveling away from “home” overnight on job-related trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet, etc.Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.Equipment Purchases:Equipment purchases such as musical instruments or telephone answering machines are shown differently on your tax return than are general job-related supplies. Keep documentation for these items separate from everyday expenses so that they may be easily identified when your return is prepared.CLICK HERE FOR THE FORM Tue, 09 Dec 2014 19:00:00 GMT $500,000 Compensation Deduction Limit for Health Insurance Issuers http://www.messnerandhadley.com/blog/500000-compensation-deduction-limit-for-health-insurance-issuers/15112 http://www.messnerandhadley.com/blog/500000-compensation-deduction-limit-for-health-insurance-issuers/15112 Messner & Hadley LLP For services performed during that year, a covered health insurance provider isn't allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. Tue, 09 Dec 2014 19:00:00 GMT No Health Insurance? Qualify for Hardship Waiver? http://www.messnerandhadley.com/blog/no-health-insurance-qualify-for-hardship-waiver/39908 http://www.messnerandhadley.com/blog/no-health-insurance-qualify-for-hardship-waiver/39908 Messner & Hadley LLP Article Summary Uninsured penalty exemptions Applications for penalty exemptions Figuring the penalty Marketplace open enrollment starts November 15 If you didn’t get health insurance coverage this year, you may be subject to a penalty unless you qualify for one of the many general or hardship exemptions. There are in excess of 30 possible exemptions from the penalty and some of the exemptions require you to complete and file an application for approval. If approved for an exemption that requires specific approval, you will be issued an exemption certificate number (ECN) that must be included on your tax return to claim the exemption. The approval form instructions cover several types of exemptions, will take some time to complete; and, once the application is submitted, the approval/denial process presently takes more than two weeks. Once others realize they need approval for certain hardship exemptions, however, you can expect the approval process to take considerably longer. While application forms are available online, each application must be printed, filled out manually, and then snail-mailed to the government for processing. With tax season just around the corner, you don’t want your refund held up while you are applying for an exemption; so, start the process early. Not all exemptions require approval, so make sure your reason for an exemption requires advance approval before going to the trouble of completing and submitting the form. If you qualify for an exemption that doesn’t require prior approval, you can claim it on a new IRS form that will need to be included with your 2014 tax return. If you didn’t have insurance for some period of time during the year (the penalty is computed by the month) and you don’t qualify for one or more of the exemptions, then you will be subject to the penalty for not being insured (the official name for the penalty is the “shared responsibility payment”). The penalty is generally the larger of a flat dollar amount per individual or a percentage of your income, whichever is greater. For 2014, the full-year penalty, based upon the flat dollar amount, is $95 per adult and $47.50 per child, capped at $285 regardless of family size. The full-year penalty determined by income is 1% of the amount that your household income exceeds your tax filing income threshold. Example: For 2014, Kevin and Brenda are married filing jointly with two minor children. Their household income is $55,000 and their filing threshold is $20,300 (their standard deduction of $12,400 plus the exemption amount of $3,950 each for both of them). So, their flat dollar amount for a full year would be $285, and their percentage of income amount would be $347.00 (($55,000 - $20,300) x 1%). Thus their penalty would be $347.00 for a full year without insurance or $28.92 per month for the family. For the first year of the shared responsibility payment, 2014, the penalties are low. In 2015, the flat dollar amounts jump to $325 per adult and $162.50 per child (capped at $975), while the percentage of income jumps to 2%. Then, in 2016, the per-adult flat dollar amount goes to $695 and the child amount to $347.50 (maximum $2,085), while the percentage of income increases to 2.5%. If our prior example had taken place in 2016, Kevin’s and Brenda’s penalty would be $2,085 (2 x $695 plus 2 x $347.50) since the flat dollar amount is larger than their percentage of income amount. Kevin and Brenda, based upon their income, would qualify for some amount of premium assistance credit that will help them pay the cost of their health insurance if they purchase coverage through a government marketplace. With the severe increase in penalties over the next two years, Kevin and Brenda will need to consider whether the cost of health insurance (and the benefits that come with coverage) is a better option than paying the penalty. Open enrollment for 2015 marketplace insurance begins November 15, 2014. If you have questions about the shared responsibility payment or penalty exemptions you may qualify for, please give this office a call. Tue, 09 Dec 2014 19:00:00 GMT Impairment-Related Medical Expenses http://www.messnerandhadley.com/blog/impairment-related-medical-expenses/183 http://www.messnerandhadley.com/blog/impairment-related-medical-expenses/183 Messner & Hadley LLP Amounts paid for special equipment installed in the home or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.Certain improvements made to accommodate a home to a taxpayer's disabled condition, or that of the spouse or dependents who live with the taxpayer, do not usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but are not limited to, the following items: Constructing entrance or exit ramps for the home, Widening doorways at entrances or exits to the home, Widening or otherwise modifying hallways and interior doorways, Installing railings, support bars, or other modifications, Lowering or modifying kitchen cabinets and equipment, Moving or modifying electrical outlets and fixtures, Installing porch lifts and other forms of lifts but generally not elevators, Modifying fire alarms, smoke detectors, and other warning systems, Modifying stairways, Adding handrails or grab bars anywhere (whether or not in bathrooms), Modifying hardware on doors, Modifying areas in front of entrance and exit doorways, and Grading the ground to provide access to the residence. Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. Keep in mind that taxpayers can only deduct medical expenses if they itemize their deductions. Medical expenses are only deductible if they exceed 10% (was 7.5% prior to 2013) of a taxpayer’s income (AGI), and then only the amount that exceeds that income limit is actually deductible. For seniors (age 65 or older and their spouses) the limitation remains at 7.5% through 2016. The table below reflects the AGI limitation for various years: 2012 & Before 2013-2016 After '16 Individuals Under the age of 65 7.5% 10% 10% Individuals (and their spouses)age 65 before close of year 7.5% 7.5% 10% Alternative Minimum Tax Threshold 10% 10% 10% Mon, 08 Dec 2014 19:00:00 GMT Household Employee Wage Reporting – Are You Liable? http://www.messnerandhadley.com/blog/household-employee-wage-reporting-8211-are-you-liable/190 http://www.messnerandhadley.com/blog/household-employee-wage-reporting-8211-are-you-liable/190 Messner & Hadley LLP If you employ someone who works in your home, you may be subject to household employment taxes. This tax is sometimes referred to as the “Nanny Tax,” which is misleading because it also applies to a nurse, caregiver, maid, gardener, etc. This is the same tax that you may have read about where some politicians and people in high places have been brought to task for avoiding. Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and other residents in the neighborhood. The gardener supplies all the tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee, and the person hiring him/her isn’t responsible for paying employment taxes. Another example of a worker who is not considered a taxpayer’s employee is one who comes from an agency (if the agency is responsible for the work and how it is done). It depends greatly on the circumstances, and the amount of control that the hiring person has over the job and the hired person, on whether or not a household worker is considered an employee. Ordinarily, when someone has the authority to tell a worker what needs to be done and how the job should be done, that worker is considered an employee. Having a right to discharge the worker, supplying tools and providing the place to perform a job are primary factors that show control. Contrast the following example to the self-employed gardener described earlier. The Smith family hired Lynn to clean their home and care for their three-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done and how to do the various tasks; she, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her. It would not matter whether Lynn worked full- or part-time, nor whether the job was paid on an hourly, daily, weekly or per-job basis. Lynn would still be the Smiths’ employee. You are not required to withhold federal income taxes if you employ someone who is subject to the “Nanny Tax.” However, income taxes can be withheld if your employee asks you to do so and you are willing to do the additional paperwork and make the required payroll deposits. You are required to withhold and pay FICA (social security and Medicare) taxes if your household worker earns cash wages of $1,900 or more (excluding the value of food and lodging) during the calendar year (amount is for 2015; call for threshold amount for other years). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. However, if your employee is under age 18 and the services are not the employee’s principal occupation, you don't have to withhold FICA taxes. For example, there is no FICA tax liability for the services of an employee, who is a student younger than 18 years old and babysits or mows the lawn on a part-time basis. On the other hand, if the employee is under age 18, and the job is the employee’s principal occupation, you must withhold and pay FICA taxes when the threshold is exceeded. If there is some uncertainty as to whether your household employee’s earnings will be under the withholding threshold, you should withhold the FICA from the beginning of the employment. If it turns out that the threshold is not met, then the withholding can later be refunded to the employee. On the other hand, if you did not withhold initially and the employee’s wages do reach the threshold, make up amounts can be withheld from the pay later on. This may create a problem in that the employee won’t appreciate large unexpected withholding amounts from his or her subsequent pay. You have the option of paying the FICA withholding yourself, but it must be imputed as part of the employee’s payroll. In addition to withholding the employee’s share of the FICA, you, as an employer, are responsible for paying a matching amount. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2%, and the Medicare tax rate is 1.45%. These rates apply to both the employee and employer for a total tax rate of 15.3%. Example for 2015: You pay your employee $500 a week and do not withhold income tax. You must withhold a total of $38.25 ($500 x 6.2% plus $500 x 1.45%) for your employee’s share of FICA. Thus, your employee’s net paycheck would be $461.75 ($500 - $38.25). In addition, you must match the $38.25 for a total FICA tax of $76.50. While unlikely that the annual compensation of any one of your household employees would exceed $200,000, you should be aware that in the event that it does, the employee’s share of the Medicare tax rate increases to 2.35% of the income over $200,000 for that year. The employer’s Medicare tax rate is not increased. As an employer, you are also required to pay FUTA (federal unemployment) taxes if a total of $1,000 or more in cash wages (excluding the value of food and lodging) is paid to your employees in any calendar quarter of the year. This tax (maximum rate is 6.2%) applies to the first $7,000 of wages paid. As a household employer, you generally are not required to file any of the usual employment tax returns that a business must file. Instead, obtain an employer identification number (EIN) from the IRS and include payment with your individual tax return (1040) using a Schedule H. However, if you own a business as a sole proprietor in which you have employees, you may include the taxes for your household worker(s) on the FICA and FUTA forms (Forms 940 and 941) that are filed for your business. In that case, the EIN from your sole proprietorship is used to report the taxes for your household employee(s). You are also required to provide your employee with a Form W-2, if the employee’s wages are subject to FICA or income tax withholding, and file the W-2 with the Social Security Administration. It is also your responsibility to file the appropriate employment-related forms for your state of residence. And while not a tax matter, those individuals hiring a household worker must verify that the employee can legally work in the U.S., and then complete and retain the U.S. Citizenship and Immigration Services’ Form I-9. Generally, a deduction is not allowed on your income tax return for the household employment taxes paid. However, if the wages paid to a household worker are for qualifying medical care of yourself, your spouse or dependents, or if the payments are eligible for the credit for child and dependent care expenses, you may include your portion of the employment taxes (in addition to the wages) when figuring the medical deduction or child/dependent care credit. The reporting requirements for the “Nanny Tax” can be complicated. Please contact us if you need assistance or have questions. Mon, 08 Dec 2014 19:00:00 GMT Long-Term Care http://www.messnerandhadley.com/blog/long-term-care/184 http://www.messnerandhadley.com/blog/long-term-care/184 Messner & Hadley LLP Amounts paid for long-term care services and certain premiums paid on long-term care insurance are deductible as medical expenses on Schedule A. Costs of care provided by a relative who is not a licensed professional or by a related corporation or partnership don't qualify. The maximum amount of long-term care premiums treated as medical depends on the insured's age and is inflation-indexed annually. The following are the deductible amounts for the past few years. If the taxpayer paid long-term care premiums and qualifies for a medical deduction on Schedule A of their tax return, and did not include the long-term care premiums in their medical deduction, the return can be amended to include the deduction. Please call this office to see if the deduction will make a difference and to have us prepare the amended returns. Deduction Limitations Age 2012 2013 2014 2015 40 or less 350 360 370 380 41 to 50 660 680 700 710 51 to 60 1,310 1,360 1,400 1,430 61 to 70 3,500 3,640 3,720 3,800 71 & older 4,370 4,550 4,660 4750 Per Diem  310 320 330 330 Employees generally won't be taxed on the value of coverage under employer-provided long-term care plans. However, the exclusion doesn't apply if coverage is provided through a cafeteria plan. In addition, long-term care services can't be reimbursed tax-free under a flexible spending account. The "long-term care contract" is an insurance contract that provides only coverage of long-term care and meets certain other requirements. Some long-term care riders to life insurance will also qualify. Benefits under a long-term care policy (other than dividends or premium refunds) are generally tax-free. For per-diem contracts that pay a flat-rate benefit without regard to actual long-term care expenses incurred, the inflation adjusted exclusion is limited to $330 a day in 2015 ( the same as in 2014), except when long-term care costs incurred are more than the flat rate and are not otherwise compensated by some other means.A contract isn't treated as a qualified long-term care contract unless the determination of being chronically ill takes into account at least five activities of daily living: eating,, toileting, transferring, bathing, dressing and continence."Long-term care services" include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, maintenance or personal care services prescribed by a licensed practitioner for the chronically ill.A "Chronically ill person" is one who has been certified by a licensed healthcare practitioner within the previous 12 months as: (1) unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, continence) without substantial assistance for a period of 90 days due to loss of functional capacity, (2) having a similar level of disability as determined in regulations, or (3) requiring substantial supervision to protect from threats to health and safety due to severe cognitive impairment. The requirement that a qualified long-term care insurance contract must base its determination of whether an individual is chronically ill by taking into account five activities of daily living applies only to (1) above (being unable to perform at least two activities of daily living).  Sat, 06 Dec 2014 19:00:00 GMT Medicaid and Eldercare http://www.messnerandhadley.com/blog/medicaid-and-eldercare/185 http://www.messnerandhadley.com/blog/medicaid-and-eldercare/185 Messner & Hadley LLP Generally, after an individual has used up all of their resources, Medicaid will step in to provide the ongoing care of the individual. Medicaid is usually a combined Federal and state program that pays for health and long-term care for eligible low-income citizens and legal residents of the United States. It is not practical to explain all of the various states' programs. However, since they are generally combined Federal and state programs, there are similarities among the various programs. This article provides a brief overview of one state's program. A Directory of State sites allows you to review the rules for any particular state. California's version of Medicaid is referred to as Medi-Cal and the following is an overview of the program's qualifications: QUALIFYING FOR NURSING HOME STAY - In order for Medi-Cal to pay for a nursing home stay, the patient: Must be admitted on a doctor's order, The stay must be medically necessary, and With incomes from any source are allowed to keep only $35 per month for personal needs. Patients with no income receive an SSI grant of $40 per month for their Personal Needs Allowance (PNA). Patients who own their own home - Medi-Cal recipients in nursing homes who own their own homes (which may be multiple dwelling units) remain eligible for Medi-Cal as long as: a. They intend to return home; or b. The residence is used by a spouse and/or dependent relatives; or c. The residence is used by a sibling or adult child who lived there at least one year before the owner entered the nursing home; or d. They make a good faith effort to sell the home. Persons not capable of making a good faith effort to sell (for instance, those who need conservatorships) remain eligible for Medi-Cal. In that case, bona fide steps have to be taken so that someone else can sell the home. Married Couples - Couples do not have to spend all their resources in order for one spouse to be eligible for Medi-Cal coverage in a nursing facility. The person going into the nursing facility can transfer his or her interest in the home to the spouse remaining at home without affecting Medi-Cal eligibility. A couple also may divide its non-exempt property, so that the spouse at home may keep up to $2,931* a month of the couple's income and up to $117,240* of the other assets for his/her needs. The spouse at home may also keep any independent income. A couple may divide their property however they wish. In determining eligibility under the spousal impoverishment provisions, Medi-Cal counts the property held in the name of either or both spouses. As soon as the countable non-exempt property is below $117,240* ($2,000 which can be retained by the institutionalized spouse), the county can establish initial eligibility. The couple then has at least 90 days to transfer everything but $2,000 into the name of the non-institutionalized spouse. The non-institutionalized spouse may retain all of the income that he or she receives in his or her own name. Consult legal services or a private attorney familiar with Medi-Cal law if either you or your spouse may need nursing facility care. FINANCING NURSING HOME CARE - Generally, a nursing facility's administration will help determine if the patient is eligible for Medi-Cal to pay the costs of the nursing home. If not, they can explain under what conditions the patient may become eligible in the future. The law requires that nursing home residents receive identical treatment regarding transfer, discharge, and provision of services regardless of the source of payment. A Medi-Cal resident can stay in any bed in a nursing facility. Spousal Impoverishment Provision - Couples looking at nursing home placement for a spouse need to be aware of the special laws enacted that allow the spouse remaining at home to keep a certain amount of income and resources when the other spouse enters a nursing home. This is intended to prevent impoverishment of the spouse at home. Community spouse's monthly maintenance needs allowance: The spouse at home may keep all of the couple's income up to $2,931* per month. This is called the community spouse's "monthly maintenance needs allowance". Note: This amount is adjusted annually by a cost of living increase. The spouse at home may obtain additional income or resources through a "fair hearing", or by court order. If the spouse at home receives income above the limit in his/her name only, he/she can keep it all (this is called the "name on the instrument rule"); however, he/she will not be allowed to keep any of the nursing facility spouse's income. Income received by the nursing facility spouse will go to his/her share of cost. The spouse in the nursing home is allowed to keep $35 monthly for personal needs ("personal needs allowance"). Resources: The spouse at home can keep up to $117,240* in resources, and the institutionalized spouse may keep up to $2,000. (Different laws apply to spouses who entered a nursing facility before September 30, 1989. If this is the case, the individual should contact a lawyer/advocate knowledgeable about this area of the law.) Both separate property (i.e., from a previous marriage or inheritance) and community property that is not exempt are combined and counted at the time of application for Medi-Cal. Once the resource limit has been reached, all ownership interest should be transferred to the spouse at home. The institutionalized spouse's $2,000 resource limit should be kept separately and accounted for separately. *The values are periodically adjusted for inflation. The amounts listed were effective 1/1/2014. TRANSFER OF ASSETS - Institutionalized Medi-Cal recipients or applicants who transfer non-exempt assets for less than fair market value during a 30-month "look back" period may be subject to a period of ineligibility. The length of the ineligibility period depends on the value of the transferred asset or resource and date of transfer period. The period of ineligibility begins on the date the transfer was made. The 30-month "look back" period begins when an institutionalized person applies for Medi-Cal or when a Medi-Cal recipient is admitted to a nursing facility. A 60-month "look back" period for assets from certain trusts is also required. Federal law amended trust regulations makes it more difficult to set up a Medicaid qualifying trust for eligibility and estate claims purposes. For a trust already established, it is recommended that an attorney review it. Sat, 06 Dec 2014 19:00:00 GMT Life-Care Facilities Fee http://www.messnerandhadley.com/blog/life-care-facilities-fee/192 http://www.messnerandhadley.com/blog/life-care-facilities-fee/192 Messner & Hadley LLP Some retirement homes and care facilities require the payment of an up front life-care fee, sometimes referred to as a “founder’s fee.” The question arises whether or not that fee might be deductible as a medical expense.Taxpayers can deduct, in the year paid, the portion of a life-care fee or “founder's fee” paid to a retirement home that is properly allocable to medical care if the payment is made in return for the home's promise to provide lifetime care, including medical care. The same applies to monthly fees paid under a life-care contract. Generally, payments to a private institution for lifetime care, supervision, treatment, and training of a physically or mentally impaired child upon the parents' death or inability to provide care are deductible medical expenses if the payments are a condition for the institution's future acceptance of the child and aren't refundable as deductible medical expenses.For elderly patients, in which only the medical care costs themselves were deductible, the IRS and Tax Court have determined the portion of the life-care fee allocable to medical care as a fraction of the total fee paid to the facility is deductible regardless of the actual costs of the medical care provided. The fraction is determined on the basis of the facility's own experience or that of a comparable facility. Generally, the IRS allows the facility to use one of two methods in determining the portion of the total fee that is deductible as a medical expense, either: (a) All of the facility's direct medical expenses divided by its total expenses, or (b) The portion of fees that the facility historically used to provide medical care divided by the entire fee.The same allocation methods can be applied to the monthly service fees paid to a facility. The facility should provide the allocation of the fee for the medical deduction at the time the fee is paid or annually if part of the monthly fees paid is deductible. Sat, 06 Dec 2014 19:00:00 GMT Tax Topic Brochures http://www.messnerandhadley.com/blog/tax-topic-brochures/454 http://www.messnerandhadley.com/blog/tax-topic-brochures/454 Messner & Hadley LLP This section is a compilation of our client information brochures. These brochures cover frequently encountered tax and financial issues. There are many topics to choose from, and you will find valuable and useful information for under each one. Whether you're looking for tax planning tips, planning out your child's education, or in the process of selling your home, you can find all the answers here. Sat, 06 Dec 2014 19:00:00 GMT American Health Benefit Exchanges http://www.messnerandhadley.com/blog/american-health-benefit-exchanges/15115 http://www.messnerandhadley.com/blog/american-health-benefit-exchanges/15115 Messner & Hadley LLP Each state may establish an Insurance Exchange (more often termed the Marketplace) to help individuals and small employers that reside in their state obtain coverage. If a state fails to establish a Marketplace, its residents must use the Marketplace established by the federal government. The primary purpose of the Marketplace is to provide a source for insurance meeting the requirements of the Affordable Care Act. Insurance can only be purchased through the Marketplaces during open enrollment periods, except certain life events and status changes (examples: marriage, birth or adoption of a child, divorce) can make people eligible for a Special Enrollment Period to enroll in or adjust health coverage through a Marketplace. For coverage in 2015, the open enrollment period is November 15, 2014 through February 15, 2015.Benefit options will be in a standard format and a single enrollment form used for all policies. Plans offered through the Marketplace must provide essential health benefits, limit cost sharing, and provide specified accrual benefits (i.e., the percentage amount paid the insurer). Plans in the individual and small group markets use a metallic designation for the accrual benefits provided: Bronze 60% Silver 70% Gold 80% Platinum 90% Individuals who purchase health care policies through a Marketplace may be eligible for low-income premium subsidies, and/or a “premium tax credit.” The amount of the premium assistance is based on the taxpayer’s income as a percentage of the federal poverty guidelines. The credit phases out between 100 and 400 percent of the poverty level based on family size. Individuals should be sure to notify their Marketplace if their household income or family size changes during the year so that any advance premium tax credit can be adjusted accordingly. This will prevent an unexpected tax surprise when their income tax return for the year is completed. Sat, 06 Dec 2014 19:00:00 GMT Small Business Guide http://www.messnerandhadley.com/blog/small-business-guide/405 http://www.messnerandhadley.com/blog/small-business-guide/405 Messner & Hadley LLP Keep Your Small Business AdvantageWhile your know-how is certain to make an important difference in your business' success, you're no doubt well aware that producing a winning combination for a smooth-running operation depends on many other factors as well. High on the list of considerations for your business should be creating the ability to meet criteria imposed by Uncle Sam and the Internal Revenue Service. To help you avoid headaches that can go with trying to meet tax law requirements, this brochure highlights pitfalls to be aware of and provides some tips on how to overcome them. "Material Participation" in Your Business: "Material participation" has become a major issue for business people since Congress passed rules regarding "passive activities" in the late '80s. To show material participation, you as the owner must demonstrate that your activity in your business is continuous and substantial. The IRS has established several "tests" for measuring material participation. An owner who can't pass any one of the tests will most likely be considered just a passive investor in a company. Since deductible losses from passive activities can be limited to the amount of income from such activities, showing material participation in your business becomes doubly important. If you work full-time in your business, you will have no trouble showing you materially participate. However, if you're an employee at another job and operate your business on a part-time basis, you need to make sure you pass one of the material participation tests. One way you can do this is to show that you spend 500 or more hours during the year running your business. You can establish material participation in other ways too-e.g., based on your past years' involvement or how your work time compares with others working in the business (including employees). Your Profit Motive: The IRS sometimes questions profit motive of a business owner if an activity consistently shows tax losses. This is common with activities that lend themselves to personal enjoyment or hobby such as horse/dog breeding, arts and crafts, etc. You should be prepared to show that you entered your business with the intent to make a profit and that you are taking measures to realize that intent. How do you show profit motive? At least in part by establishing that you have expertise in your field and you are using businesslike practices in carrying on operations.Your Recordkeeping RoutineThe Recordkeeping System:Give priority to establishing good recordkeeping practices for your business. Recordkeeping goes much farther than actual check writing, depositing income, keeping receipts, etc. Also involved are the choices you must make about accounting methods, dealing with inventory (if any) and other assets, complying with regulatory and tax requirements, and computerization. You will probably find taking care of all these details time-consuming and frustrating to say the least; many of the choices you have to make may require help from a financial or accounting professional. When keeping your business records, though, try to follow a few basic "rules": Don't Commingle Business and Personal Bank Transactions. From the very outset have a separate bank account for your business in which you deposit only business gross receipts and from which you write checks for business expenses. Keep Backup For Your Bank Deposits And Expenses. Keep bank statements and supporting documents so you can trace your bank deposits, including those that aren't income (e.g., loan documents for loan proceeds deposited, insurance reimbursement, etc.) If possible, pay all expenses by check or a business credit card. The payments should be supported with sales slips, invoices and any other available documents of explanation. The income and expenses should be recorded in an orderly manner (either by hand or on computer) so that the backup can be readily available if and when needed.  Sometimes you can log your expenses in a timely manner so you don't have to keep receipts. Before you adopt a logging system though, it's best to check with your tax advisor because the rules for logs are quite strict. Be Sure To Keep All Reports Filed With Government Agencies. This includes personal income tax returns, sales tax returns, payroll returns, W-2s and 1099s filed for employees and other hired labor, etc. Length of Time to Keep Records:From a federal tax standpoint (some states may be different), you should retain books and records of your business for three years after the due date of your income tax return. There are some sections of the tax law where the statute of limitations is longer than three years, however. Because of these, it's wise to keep records at least six years. When it comes to the records that support cost basis of property, equipment or any item that you are depreciating, keep records for at least three years beyond the life shown on the depreciation schedule in your tax return. Capital Expenses vs. Other Costs:Costs of assets that will be used in your business for more than a year and the costs of improvements that add to the value of assets are "capital" expenditures. For tax purposes, these expenses are usually deducted over a number of years. Operating expenses, i.e., advertising, office supplies, etc., are currently deductible, as are the costs of getting started in your business (within limits). Try to keep records for capital expenses separate from those for the general operating expenses. Expensing Normally Depreciable Costs:Under some circumstances, the costs of depreciable business assets can be deducted all in one year on your tax return (up to a yearly maximum). While this can be a real advantage tax-wise, it also has a negative side - if you dispose of the assets before the end of their normal depreciable life, you may have to "recapture" (i.e., report additional income for) some of the costs you expensed. Be sure to check with your tax advisor before you dispose of assets you previously expensed. Automobile Expenses: Many business people are uncertain about what car expenses they can deduct. Those expenses you have for traveling between business locations are deductible. However, COMMUTING expenses, i.e., the car costs of going between your home and your office each day, aren't deductible. But when you travel to TEMPORARY locations away from your regular business location, you can deduct the costs of those trips regardless of the distance. Be sure to keep good records of your business driving by logging for each trip: where you went, your business purpose for going there, who you met with, and the number of business miles you traveled. You will only be able to deduct expenses for the business portion of your car expense. However, you can choose one of two ways to do this: (1) You can deduct your expenses using actual cost of gas, oil, insurance, repairs, depreciation, etc., or (2) You can multiply your business miles by a standard mileage rate to figure your expense (this rate varies from year-to-year). "Ordinary and Necessary Expenses":The tax law only allows you to deduct expenses that are "ordinary" and "necessary" for your business. Taxpayers and IRS auditors often dispute over the meaning of these two terms. The IRS' definitions are somewhat general: An "ordinary" expense is one which is common and accepted in your type of business. On the other hand, a "necessary" expense is one that is helpful and appropriate in your business; it does not have to be indispensable. By doing all you can to make certain that your expenses are ordinary, necessary, not overly lavish and are backed up with a good paper trail, you will have a head start on every year's tax return! Other IssuesIndependents vs. Employees:If you hire workers in your business, they will either be classed as independent contractors or employees. The employee-independent contractor issue has been a touchy one between business owners and the IRS for years, so think about this issue carefully when you classify workers. The amount of control you have over the job done determines worker status - the more control you have the more likely it is that a worker is an employee. Then you have to deal with employment taxes, withholding, payroll tax returns and W-2 filing. However, someone who performs services for you should not be classified as an independent contractor just so you can avoid the administrative hassles and costs of treating the individual as an employee; doing so can lead to monetary penalties and cause you and your business serious problems. A Pension Plan:Maintaining a pension plan offers you an excellent way to defer income from your business and plan for your retirement. One good option is a Keogh plan. Different plans have different rules about contributions, reporting, coverage, etc. Be sure to consult with your plan administrator so that you meet the specific requirements and limitations. Estimated Tax Payments:If your business is unincorporated, the income you earn from it is reported on your individual tax return and is subject to income and self-employment tax. Since no withholding is usually taken from self-employed income, you may need to pay estimated taxes to avoid getting hit with a penalty. Your tax advisor should be able to help you compute the amount you need to pay to ensure that no penalty is assessed. The usual due dates for estimates are April 15, June 15, September 15, and January 15.  However, if a due date falls on a Saturday, Sunday or holiday, the due date will be the next business day. DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation.   Fri, 05 Dec 2014 19:00:00 GMT Planning Your IRA Strategy http://www.messnerandhadley.com/blog/planning-your-ira-strategy/413 http://www.messnerandhadley.com/blog/planning-your-ira-strategy/413 Messner & Hadley LLP Your IRA Contribution OptionsFor over 40 years, individuals have been able to set up personal retirement plans called individual retirement accounts (IRAs). Nearly everyone who receives “compensation,” either as an employee or as a self-employed individual, can contribute to an IRA. You can choose from a variety of different types; some give you a tax deduction, while others don’t. This brochure highlights in general terms the IRA options available under current law and points out some of the advantages of each. For more details about which IRAs fit best with your specific situation, please call this office.Setting up an IRA: To select the best type of IRA to meet your current income level and your long-term investment goals generally requires the advice of a professional. You are strongly advised to seek the advice of this office before selecting a specific type of IRA and the investment vehicle for your IRA. Although others, not fully cognizant of your current tax planning objectives or your long-range financial and estate planning needs, will be eager to assist you, prudent planning may be more appropriate. Types of Investments: Examples of typical IRA investment vehicles include insurance annuities, stocks, bonds, mutual funds and cash (in savings institutions or brokerage accounts). Definition of Compensation: You can open an IRA only if you receive “compensation.” Compensation includes wages, salaries, tips, professional fees, commissions, self-employment income and alimony. Compensation does not include rental income, interest or dividend income, pensions or annuities, deferred compensation, or amounts you exclude from income. IRA PenaltiesRemember that various penalties can apply to most IRAs. When you contribute more than the IRA limits allow, withdraw from the account too early, or don’t take sufficient distributions when required, penalties can apply. Under certain circumstances, penalties can be avoided for premature IRA withdrawals. Exceptions apply, for example, when withdrawal is due to disability, for paying certain first-time home purchase expenses, and for paying educational costs. Be sure to check with this office concerning the exact rules on penalties to ensure against receiving unwelcome “ surprises” when you file your tax return. Traditional IRAsWith a Traditional IRA , if you’re under age 70-1/2, you can contribute up to the annual limit to your IRA account. However, if your taxable compensation is less than the annual limit in a given year, your contribution will be limited to the amount of your compensation. Traditional IRA contributions are generally deductible on your tax return. However, one can designate that they be nondeductible. If this choice is made, you build up a basis in your IRA so that when you begin to withdraw from the account, part of each withdrawal is nontaxable. However, the choice not to deduct an IRA contribution should be made with caution in light of your particular tax situation. If you’re married, file jointly, and your spouse has little or no compensation, a Traditional IRA may be set up as a spousal IRA, allowing your spouse to make IRA contributions based upon your compensation. However, neither spouse can deposit more than the annual limit to his/her individual account. Participation in Other Plans: One complication of Traditional IRAs affects taxpayers who actively participate in other pension plans - e.g., an employer plan, a Keogh or SEP, etc. When you are covered by another pension plan, your IRA deduction “phases out” (i.e., gradually reduces to zero) depending on your filing status and your income level. Phase out begins at income levels according to the following schedule: Threshold Level Tax Year 20152016 &Subsequent Years Single*61,000InflationAdjusted Joint98,000InflationAdjusted Call for amounts applicable to other years. *The Single threshold applies to taxpayers other than those filing joint, except Married Separate taxpayers who have a threshold of $ -0- . If a taxpayer's income exceeds the above thresholds by less than $10,000 ($20,000 for joint filers), his or her IRA deduction will be limited; if it exceeds the threshold by $10,000 ($20,000 for joint filers), there is no IRA deduction. Break for Spouse of an Active Participant: The limits on deductible IRA contributions do not apply to the spouse of an active participant. Instead, the maximum deductible IRA contributions for an individual who is not an active participant but whose spouse is an active participant, is phased out for the nonactive individual if the couple’s combined AGI is within the phase-out range for the year. Nonactive Participant Spouse Year Phase-Out Range 2015 183,000 - 193,000 2016 and later years Inflation adjusted Call for amounts applicable to other years.Example: In 2015, the wife is an active participant in a retirement plan, but her husband is not. The couple’s combined AGI is $200,000. Neither spouse can take an IRA deduction, because their AGI is over $193,000. But assume the couple’s combined AGI was only $125,000. Since the husband isn’t an active participant in another plan, he can make a deductible IRA contribution. However, his wife can’t make one, because their combined AGI is over the threshold for joint filers (see chart for annual threshold amount). Due Date for Making Traditional IRA Contributions: Traditional IRA contributions (whether deductible or nondeductible) must be made by the due date (without extensions) of the return for the year to which they apply.Roth IRAs You may be able to open a Roth IRA, a type of IRA that allows only nondeductible contributions. Distributions from these IRAs, including earnings on them, are tax-free if a holding period and other requirements are met. Like the Traditional IRA, annual contributions are limited to the smaller of your compensation or the annual limit. However, if you have other IRAs - for example, a Traditional IRA - your combined annual contributions to all of them (including the Roth IRAs) can’t be more than the annual contribution limit. Roth IRAs allow contributions even after you turn age 70-1/2, and spousal Roth IRAs are also allowed. The due date for making your contributions to a Roth IRA is the same as for Traditional IRAs. Contributions to Roth IRAs phase out if income is within the phase-out range for the year (may differ from the traditional IRA phase-out range). The phase out applies regardless of whether the taxpayer (or spouse, if married) is an active participant in another plan. AGI Phase-Out Range - Roth IRA Year Joint MS(Living with Spouse) All Others 2015 183,000 - 193,000 0 - 9,999 116,000 - 131,000 2016 and future years - Inflation adjusted Rollovers: There is no AGI limitation for making Traditional IRA to Roth IRA conversions. When you roll over or convert to a Roth IRA, you must pay tax on the income from the Traditional IRA that would have been taxed if you had not converted it to a Roth IRA. Comparing Results of Traditional and Roth IRAs: Determining whether a Traditional IRA or a Roth IRA best suits you depends upon your unique circumstances, both now and in the future. You are encouraged to seek assistance from your tax or financial advisor to assist you with this decision. Qualified Roth Contribution Plans Some employer-qualified retirement plans offer employees the option of contributing their elective 401(k) or 403(b) plan contributions to a separate designated Roth account. These are commonly referred to as Roth 401(k) or Roth 403(b) plans. Do not confuse these accounts with a Roth IRA. These accounts are governed by the qualified pension plan rules and allow contributions up to the “elective deferral” limit for the year (the employer’s matching contribution cannot be made to the designated Roth portion of the account). For 2015, the “elective deferral” limit is $18,000 ($24,000 if age 50 or over), up from 2014’s limit of $17,500 ($23,000 if age 50 or over). The limit is adjusted periodically for inflation. Do not confuse these limits with Traditional and Roth IRA contributions limits which are determined separately. Unlike IRAs, distributions from a Qualified Roth Contribution Plan str generally only permitted when the participant terminates employment, dies, becomes disabled or reaches age 59 1/2. These accounts are subject to a separate 5-yearaging rule and can be rolled over into a Roth IRA. They are also subject to required minimum distributions at age 70-1/2 unless rolled into a Roth IRA prior to reaching age 70-1/2.Annual Contribution LimitsThe IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make "catch-up" contributions allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age for Traditional and Roth IRAs. Contribution Limits Year2013 - 20152016 and after Under Age 505,500Inflation Adjusted Age 50 and Over6,500Inflation Adjusted Call for amounts applicable to other years.Saver’s Credit: The Retirement Savings Contribution Credit, frequently referred to as the Saver’s Credit, was established to encourage low to moderate income taxpayers to put funds away for their retirement. Up to $2,000 per taxpayer of contributions to an IRA (Traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer’s income. The maximum credit per person is $1,000. The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If modified AGI exceeds $30,500(1) (single and married separate), $61,000(1) (married joint) or $45,750(1) (head of household), no credit is allowed. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions.(1) These rates are inflation adjusted annually and the rates shown are for 2015. "Coverdell Education Savings Accounts": Originally referred to as Education IRAs, a Coverdell Education Savings Account (CESA) are actually nondeductible education savings accounts, not IRAs. The investment earnings from these accounts accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. The allowable nondeductible contribution increased to $2,000 per year per beneficiary. The annual contribution limit is gradually reduced if the contributing taxpayer’s “modified AGI ” is within the phase-out range and eliminated for taxpayers above the range. The phase-out limits for married taxpayers are $190,000 - $220,000 and at $95,000 - $110,000 for single taxpayers. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI limited, even the beneficiary. DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Fri, 05 Dec 2014 19:00:00 GMT Tax Breaks for Higher Education http://www.messnerandhadley.com/blog/tax-breaks-for-higher-education/414 http://www.messnerandhadley.com/blog/tax-breaks-for-higher-education/414 Messner & Hadley LLP Over the years, Congress has continued to enhance tax breaks for students and their parents. These tax benefits provide taxpayers with a large number of options for tax-favored financing of their education and the education of their family members. This brochure highlights the various education benefits included within the U.S. income tax system. Coverdell Education Savings Account Qualified State Tuition Program American Opportunity Credit Lifetime Learning Credit Penalty-Free IRA Withdrawals for Education Purposes Deduction for Education Loan Interest Tax-Free Savings Bond Interest Student aid is available from the Department of Education for students of limited means. The aid can include educational grants such as a “Pell” grant or various types of student and parent educational loans. Planning and saving for future education can limit or eliminate potential student aid, because these resources will be taken into consideration at the time the need for student aid is determined. Understanding the tax terms: You will encounter several tax terms in this brochure that may be unfamiliar to you. Understanding their full meaning will help give you a better picture of the limits, qualifications and restrictions that apply to the benefits for education. Phase Out: Instead of just eliminating certain deductions and credits, the tax law often decreases them gradually to zero (“phases them out”) over a specific income range. For example, say a hypothetical $1,000 deduction is allowed, but “phases out” when a taxpayer’s “modified adjusted gross income (AGI)” is between $40,000 and $60,000. A taxpayer with a modified AGI of $40,000 or less will be allowed the full $1,000 deduction, while the taxpayer with a modified AGI of $60,000 or more would get no deduction. For modified AGIs between $40,000 and $60,000, the taxpayer would be allowed a pro-rated deduction amount. Regular AGI and Modified AGI: AGI is the abbreviation for “adjusted gross income.” “Regular AGI” is the total of all income, allowable losses and adjustments before subtracting itemized or standard deductions and personal exemptions. However, several tax benefits described in this brochure are limited or not available to taxpayers whose so-called “modified AGI ” is too high. Generally, the modified AGI for educational benefits adds back certain amounts from foreign, U.S. Possession and Puerto Rican sources that are excluded from income. Qualified Educational Institutions: These institutions are generally accredited, post-secondary educational institutions that offer credit toward a bachelor’s degree, an associate’s degree, or some other recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also qualify if they are eligible to participate in Department of Education student aid programs. Coverdell Education Savings AccountOriginally referred to as an Education IRA, the Coverdell Education Savings Account is actually a nondeductible education savings account. The investment earnings from this account accrue and are withdrawn tax-free if the proceeds are used to pay qualified education expenses of the account beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. The allowable nondeductible contribution is $2,000 per year per beneficiary. The annual contribution limit is gradually reduced if the contributing taxpayer’s “modified AGI” is within the phase-out range and eliminated for taxpayers above the range which for married taxpayers filing jointly is $190,000 - $220,000 and $95,000 - $110,000 for single taxpayers. Unlike phase-outs for many other tax benefits, these amounts are not adjusted annually for inflation and have not changed since 2002. Anyone is allowed to make the contribution, provided the total contribution for the under 18 beneficiary does not exceed the annual contribution limit and the contributing taxpayer’s AGI is within limits. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI-limited, even the beneficiary. Distributions from the Coverdell Education Savings Account are tax- and penalty-free (including interest on the account) if they are used to pay for qualified education expenses of the designated beneficiary or a member of the beneficiary’s family. The definition of qualified education expenses includes elementary or secondary education, kindergarten through grade 12, as well as post-secondary education. Because of the phase-out provision for contributions, taxpayers cannot always be sure they can contribute to the accounts. Recognizing this problem, the tax law permits Coverdell contributions to be made after the close of the tax year for which the contribution is being made and before the April 15 filing due date for that year. (Note: if the April 15 due date falls on a Saturday, Sunday or holiday, the due date is the next business day.) Additional rules apply for dealing with rollovers, changes in designated beneficiaries, death of taxpayer or beneficiary, excess contributions, special needs beneficiaries and unauthorized use of distributions.Qualified State Tuition Programs A qualified state tuition program is one generally set up by a state or state instrumentality that lets individuals make contributions to an account established for a designated beneficiary’s higher education. Unlike the Coverdell Education Savings Account, there is no limit on the annual contributions to Qualified State Tuition programs. However, contributions to these plans are considered gifts to the beneficiary, making the annual gift exclusion amount the practical annual limit per contributor. The annual gift exclusion amount is inflation-adjusted periodically and is $14,000 for 2014 and 2015; please call this office for the limit for other years. A special rule allows a donor who makes total contributions exceeding the annual gift limit to elect to take the contributions into account ratably over a five-year period, starting with the year of the contribution. This allows a donor to contribute as much as $70,000 (2014 or 2015) in one year, while avoiding the gift tax implications. The donor must file a gift tax return for the year of the contribution, and a five-year election must be made on the return. Care should be exercised in determining the total contributed to any individual’s account to avoid nonqualified distributions if the amount exceeds the educational needs. Virtually all of the high population states now have these programs, which are professionally managed and tailor the investments and risk potential to the potential student’s current age. Individuals are not restricted to using the program established in their home state but instead can pick and choose among the programs of any of the states that have established programs. A major benefit of these programs is that the distributions of earnings from the programs can be excluded from income if used for qualified education expenses. This puts the Qualified State Tuition Programs on par with Coverdell Education Savings Accounts, but without the annual contribution limit. However, unlike Coverdell plans that allow tax-free distributions to pay for grades K-12 expenses, distributions from QSTPs may only be used for post-secondary educational expenses. Additional rules apply for designated beneficiaries, death of taxpayer or beneficiary, and unauthorized use of distributions.Penalty-Free IRA WithdrawalsGenerally when funds are withdrawn from an IRA before a taxpayer reaches age 59-1/2, a 10% early withdrawal penalty applies to the distribution. However, penalty-free IRA withdrawals are permitted if the funds are used to pay qualified higher education expenses. The withdrawals will still be subject to regular income tax. Qualified “higher education expenses” include tuition at a qualified educational institution, as well as related room, board, fees, books, supplies, and equipment. The expenses can be for the taxpayer, his or her spouse, or taxpayer’s or spouse’s children and grandchildren.Deduction for InterestGenerally, taxpayers can only deduct home mortgage interest, investment interest, and business interest. However, interest paid on student loans used to pay tuition, room and board and related expenses for qualified higher education is deductible even if the taxpayer uses the standard deduction. The amount annually deductible is limited to $2,500. Note: Student loan interest is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses.The annual deduction begins to phase out when modified AGI reaches the threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. The phase-out ranges are inflation adjusted in $5,000 increments. For example, the 2014 and 2015 ranges are between $65,000 and $80,000 for single taxpayers and between $130,000 and $160,000 for joint return filers. Please call this office for other years' phase-out levels.Education Tax CreditsThe law provides for two nonrefundable tax credits, the American Opportunity Tax Credit and the Lifetime Learning Credit. Both credits will reduce a taxpayer’s tax liability dollar for dollar until the tax reaches zero. Any credit in excess of the tax liability is lost. The credit is not allowed for taxpayers who file married separate returns. The credits are elective, and the taxpayer must choose between the two credits for each student. In general, most taxpayers will find the American Opportunity Credit to be more beneficial in the initial years of college and then the Lifetime Credit for subsequent education. The American Opportunity and Lifetime credits phase out when a taxpayer’s modified AGI reaches a threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. These phase-out levels are annually adjusted for inflation. The phase-out amounts for 2015 for the Lifetime Credit are between $55,000 and $65,000 for unmarried taxpayers and $110,000 and $130,000 for jointly filing couples (up from $54,000 - $64,000 and $108,000 - $128,000 for 2014). The phase-out ranges for the American Opportunity Credit are fixed at $80,000 to $90,000 ($160,000 - $180,000 for a joint return). Please call this office for the Lifetime Learning Credit phase-out levels after 2015. American Opportunity Tax CreditThe American Opportunity Tax Credit is available through 2017. It provides a credit for four years of college expenses, and the maximum credit per student is $2,500 per year. The credit is based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year. 40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and not self-supporting. As noted above, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). This credit can be used to offset the alternative minimum tax.Lifetime Learning Credit The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying educational expenses for: (1) undergraduate, graduate, or certificate level courses for a student attending classes on at least a halftime basis; or (2) any course at an eligible institution to acquire or improve job skills of the student (no attendance time requirements). Example: A taxpayer has two children attending college on a full-time basis. The taxpayer pays qualified tuition expenses for the two children in the amount of $12,000, and there is no reimbursement or other tax benefit claimed for the tuition expense. Under the Lifetime Learning Credit rules, the taxpayer is entitled to a tax credit of $2,000 (20% of the first $10,000) for the tax year.Qualifying expenses...for these credits include tuition and fees but not expenses for room, board, books and nonacademic fees such as student activity, athletic, insurance, etc. Also excluded are expenses for courses that involve sports, games, or hobbies that are not part of a degree program. Expenses qualifying for the credit must be reduced by tax-free scholarships or fellowships and other tax-free educational benefits.Qualifying students...must attend a qualified educational institution (one that is eligible to participate in U.S. Dept. of Education student aid programs). The student must be the taxpayer, his or her spouse, or someone who is a dependent of the taxpayer. In addition, in the case of the American Opportunity Credit, the student must have no federal or state felony drug convictions for the academic period to which the credit would apply.Savings Bond Interest Exclusion Interest earned on U.S. savings bonds is, by Federal law, excludable from taxation for state income tax purposes but taxable on the federal return. However, for certain savings bonds, an individual can even exclude the interest on the Federal return. To qualify for this Federal exclusion, the bonds must be Series EE U.S. savings bonds issued after 1989, or Series I Bonds, and the bond proceeds must be used to pay higher education expenses. Other qualifications... The bond purchaser must be age 24 or over and must be the sole owner of the bond (or, if married, joint owner with a spouse). Bonds purchased by others (except the spouse) or purchased by the taxpayer and placed in another’s name do not qualify for the exclusion. Redemption of bonds... When the bonds are redeemed, the interest earned is excludable from income to the extent the proceeds are used to pay qualified higher education expenses for the taxpayer, spouse, or any dependent of the taxpayer. Such expenses include tuition and fees but not room and board or courses involving sports, etc., that aren’t part of a degree program. Phase out... Like so many of the other education benefits described earlier in this brochure, the interest exclusion phases out when modified AGI is between certain inflation-adjusted limits. For 2015, the phase out occurs between $77,200 and $92,200 for single taxpayers and between $115,750 and $145,750 for married taxpayers filing joint returns. The 2014 phase-out ranges are $76,000 - $91,000 and $113,950 - $143,950. For phase-out levels for other years, please call this office.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Fri, 05 Dec 2014 19:00:00 GMT Alternative Minimum Tax (AMT) Strategies http://www.messnerandhadley.com/blog/alternative-minimum-tax-amt-strategies/428 http://www.messnerandhadley.com/blog/alternative-minimum-tax-amt-strategies/428 Messner & Hadley LLP The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. To accomplish this, Congress created a second (alternative) tax computation that adds back to income certain tax preferences and eliminates some deductions. Taxpayers then compute their tax both ways and pay the higher of the two taxes. When it originated back in the '70s, the AMT impacted just a few, very wealthy, individuals. However, unlike the regular tax computation, the AMT is not fully adjusted for inflation and years of inflation have driven everyone's income up to where the number of taxpayers being affected by the AMT is increasing.Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. Although it is not always possible to avoid the AMT, it is sometimes possible to minimize this punitive tax by taking certain steps. Therefore, it is important for a taxpayer to have a basic understanding of the circumstances that can create an AMT.The AMT includes a myriad of adjustments and preference items and full or partial disallowances of certain deductions that are otherwise perfectly legal and allowed in figuring the regular income tax. There are far too many to discuss, especially those that are rarely encountered by the average taxpayer. There are, however, certain AMT issues that frequently affect taxpayers. They are listed below with comparisons to the regular tax computation, along with actions that might be taken to mitigate the effects of the AMT. Personal Exemptions Every taxpayer, spouse and dependent included on a taxpayer's tax return generates an exemption deduction for regular tax purposes. For AMT purposes, the personal exemption deduction is not allowed at all. When two individuals can possibly claim the exemption, such as in the case of a multiple support agreement between children supporting elderly parents, care should be taken to ensure the exemption is not claimed by one who is subject to the AMT. Standard DeductionFor regular tax purposes, a taxpayer can choose between using the standard deduction or itemizing deductions. For AMT purposes, this creates sort of a dilemma for those who don't have enough to itemize for regular tax purposes but do have substantial itemized deductions that can be used to offset the AMT. However, taxpayers can elect to itemize even if the deductions are less than the standard deduction. Itemized Deductions The itemized deductions allowed for the AMT are far more restrictive than those allowed for regular tax purposes. The following is a comparison of the two: Medical Deductions - For both regular tax and AMT purposes, the medical expenses are first reduced by 10% of the taxpayer's Adjusted Gross Income (AGI), and only the excess can be included in the itemized deductions. Exception: Through 2016 taxpayers age 65 and over need only reduce their medical expenses by 7.5% of their AGI for regular tax. Taxes - For regular tax purposes and as part of the itemized deductions, taxpayers are allowed to deduct certain taxes they pay, including home and investment real estate taxes, state income tax, personal property tax, foreign taxes, etc. For AMT purposes, none of these taxes are deductible. When the AMT is anticipated, it might be beneficial to accelerate tax payments in the prior year or defer them to the subsequent year. This would include paying the fourth quarter state estimated tax installment after the end of the year. Taking a credit for foreign income taxes is generally more beneficial than taking it as an itemized deduction anyway, and if being taxed by the AMT, taking the credit is the only way to achieve any benefit. Taxpayers can annually elect to capitalize rather than deduct property taxes on unimproved and non-productive real estate. Home Mortgage Interest - Generally, for regular tax purposes, a deduction is allowed for interest paid on home acquisition debt and home equity debt within certain debt limits. For AMT purposes, however, only home acquisition debt interest is deductible. Many taxpayers have incurred equity debt on their homes to pay off credit cards, purchase cars, etc., in the belief that the equity debt interest is deductible. If the taxpayer is subject to the AMT, the equity debt interest is not deductible. When borrowing money against a home for business, investment, or higher education expenses, it is generally good practice to take out single purpose second loans or lines of credit. This allows the loan to be treated as unsecured by the home and then to trace the interest to a deductible purpose unaffected by the AMT. Home mortgage interest and the AMT is a complex issue. Please call this office for assistance. Nonconventional Home Mortgage - For AMT purposes, interest from debt to acquire a nonconventional home such as a motor home, boat, etc., is not deductible for AMT purposes. The only recourse is to avoid or minimize this type of debt. Charitable Contributions - The deduction for charitable contributions is the same for regular tax and for AMT. Miscellaneous Itemized Deductions - For regular tax purposes, miscellaneous deductions are broken down into two categories. The first category includes such items as gambling losses to the extent of gambling winnings and some other infrequently encountered deductions. This category is allowed as a deduction for both regular and AMT purposes. The other category includes expenses such as investment expenses, union dues, employment-related expenses, certain legal fees, etc., which are allowed for regular tax purposes after being reduced by 2% of the taxpayer's AGI. For AMT purposes, the deductions in this category are not allowed at all. If one anticipates being taxed by the AMT, attempt to defer payment of expenses in this category to another year. If a significant amount of expense is incurred for a taxpayer's employment, if possible, have the employer reimburse the expenses, even if it requires a pay reduction. Nontaxable Interest from Private Activity BondsGenerally, for both regular tax and AMT purposes, income from municipal bonds are tax-free. However, interest from certain municipal bonds used to support private enterprises (referred to as Private Activity Bonds) is taxable for AMT purposes. If subject to the AMT, consider not investing in Private Activity Bonds* if it makes investment sense. *Certain Private Activity Bonds issued in 2009 and 2010 are not subject to AMT tax. Statutory Stock Options (Incentive Stock Options) also referred to as ISOsWhen this type of option is exercised, there is no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) produces preference income for AMT purposes in the year the option is exercised. The tax benefit of ISOs for regular tax purposes results when the stock acquired by exercising the option has been held the requisite time before it is sold, allowing gains to be taxed at the more favorable long-term capital gains rates. However, if one is being taxed by the AMT, the bargain element is taxable in the year of exercise which generally mitigates the regular tax benefits. If possible and when the investment considerations allow it, exercising ISOs in small blocks of stock may allow a taxpayer to avoid the AMT and take advantage of the long-term capital gains benefit. Otherwise, it may be better strategy to avoid the AMT preference issues altogether by selling the stock in the year of exercise. This is a complex area of tax law; please call this office for further details. Depletion AllowanceFor both regular tax and AMT purposes, the tax law allows taxpayers to deduct an allowance for depleting (using up) an asset such as interest in an oil well. However, once the total depletion on the asset exceeds a taxpayer's investment in the property (basis), the depletion allowance is only allowed for regular tax purposes and not for AMT, thus creating AMT preference income. Excess DepreciationGenerally, for regular tax purposes, equipment that a taxpayer acquires for use in business is depreciated (deducted over several years) using the 200% declining balance method. For AMT tax purposes, the equipment cannot be depreciated faster than the 150% declining balance method. The difference between these two methods of depreciation creates the AMT preference income. If a taxpayer is habitually taxed by the AMT method, it might be appropriate to always use the 150% declining balance method and thereby avoid the preference income. In addition, the Sec. 179 expense deduction is allowable in full for both the regular tax and the AMT. It might be appropriate to utilize the Sec. 179 deduction rather than depreciating the asset at all if other considerations will allow it. Other AMT AdjustmentsThere are several additional AMT issues, including adjustments in the gain or loss from the sale of assets due to differences in regular tax and AMT basis created by different depreciation rates and preference income, intangible drilling costs, sale of small business stock, passive losses, passive farm losses, research and experimental expenditures, circulation costs and mining development and exploration costs, that are rarely encountered by taxpayers and are not discussed in this brochure. Please call this office for further details if such issues are encountered. Computing the AMTIn computing the Alternative Minimum Tax, a substantial exemption amount is allowed against the AMT taxable amount based upon filing status. The exemption amounts have been subject to temporary adjustments by Congress, but with the passage of the American Taxpayer Relief Act of 2012, the exemption amounts will be adjusted for inflation, starting after 2013, without having to get Congress’ annual approval. In addition, the exemption amount phases out as the taxpayer's AMT taxable income increases. Illustrated are the exemption amounts for 2015. Please call this office for amounts applicable to any other year. AMT EXEMPTION & PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $83,400 $492,500 Married Filing Separate $41,700 $246,250 Unmarried $53,600 $333,600 Where the rates for regular tax currently are in six tiers (10%, 15%, 25%, 28%, 33%, 35% and 39.6%), the AMT rates only have two tiers (26% and 28%). The following example illustrates the impact from typically encountered regular tax and AMT tax computations. In this example, Joe and Susan have three children and are filing a joint return. For the year, they have wages, some interest income, and deductions consisting of taxes, home acquisition debt interest, home equity debt interest and charitable contributions. Joe also exercised an ISO option which gave him a preference income for the year of $54,300. Regular AMT WagesISO Preference IncomeInterest IncomeTaxesAcquisition Debt InterestEquity Debt InterestContributionsExemptions(1)TaxableTax 142,0000500-17,475-9,105-6,145-800-20,00088,97513,831 142,00054,3005000-9,1050-800-86,401110,49428,728 Increases due to AMT 14,897 (1) Exemption amounts used are for 2015. These amounts are subject to inflation adjustments and phase-outs. Call for amounts applicable to other years. Other AMT Issues Taxation of Net Long-Term Capital Gains - Net long-term capital gains are generally taxed at the same rate for AMT as they are for regular tax. AMT Tax Credit - When certain preferences create an Alternative Minimum Tax (like the incentive stock option did in our example above), an AMT Tax Credit is also created. It can be used in subsequent years to reduce the regular tax. This credit is equal to the difference of the AMT computed with and without the preference income. Since this credit reduces the regular tax in future years, it will be of no use in years where the taxpayer is subject to the AMT. State Tax Refund - If a taxpayer is taxed by the AMT and then in a subsequent year has a state tax refund, that refund is not taxable for regular tax purposes to the extent it provided no tax benefit in the computation year. Call For Assistance The issues relating to the AMT are complex. Although this brochure provides a general understanding of the adjustments and preferences that create the AMT, please call this office for assistance before taking steps that may possibly create AMT issues. This includes the refinancing of a home mortgage, which often creates equity debt interest not deductible for AMT, exercising incentive stock options, prepaying taxes, or taking other AMT-sensitive actions discussed here.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Fri, 05 Dec 2014 19:00:00 GMT Medical Dependents http://www.messnerandhadley.com/blog/medical-dependents/187 http://www.messnerandhadley.com/blog/medical-dependents/187 Messner & Hadley LLP Medical expenses paid for dependents may be deducted. To claim these expenses, the person must have been a dependent either at the time the medical services were provided or at the time the expenses were paid. The qualifications for a medical dependent are less stringent than those for a regular dependent.A person generally qualifies as a dependent for purposes of the medical expense deduction if:1. That person lived with the taxpayer for the entire year as a member of the household or is related,2. That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and3. The taxpayer provided over half of that person's total support for the calendar year. Medical expenses of any person who is a dependent may be included, even if an exemption for him or her cannot be claimed on the return.Medical Expenses Under a Multiple Support Agreement - Under the provisions of a multiple support agreement, only the one who is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid, but only the medical expenses actually paid by that individual count. Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone. Thu, 04 Dec 2014 19:00:00 GMT Support Claimed Under a Multiple Support Agreement http://www.messnerandhadley.com/blog/support-claimed-under-a-multiple-support-agreement/188 http://www.messnerandhadley.com/blog/support-claimed-under-a-multiple-support-agreement/188 Messner & Hadley LLP A multiple support agreement is used when two or more people provide more than half of a person's support, but no one alone provides more than half. Whoever is considered to have provided more than half of a person's support under such an agreement can deduct medical expenses paid.Any medical expenses paid by others who joined in the agreement cannot be included as medical expenses by anyone. Thu, 04 Dec 2014 19:00:00 GMT Nursing Services http://www.messnerandhadley.com/blog/nursing-services/189 http://www.messnerandhadley.com/blog/nursing-services/189 Messner & Hadley LLP Wages and other amounts paid for nursing services can be included in medical expenses. Services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, the total expense amount must be divided between the times spent performing household and personal services and the time spent for nursing services. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. Part of the amounts paid for that attendant's meals are also included in medical expenses. Divide the food expense among the household members to find the cost of the attendant's food. If additional amounts for household upkeep were paid because of the attendant, include the extra amounts with the medical expenses. This includes extra rent or utilities paid because a larger apartment was needed to provide space for the attendant. Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow the taxpayer to work may qualify for the child and dependent care credit. But the same expenses can’t be used as both medical expenses and for the dependent care credit. The employer’s share of payroll taxes related to the wages for nursing services are includible as a medical expense or for the dependent care credit, whichever is claimed. Thu, 04 Dec 2014 19:00:00 GMT Tax-Free Resources for the Cash-Strapped Elderly http://www.messnerandhadley.com/blog/tax-free-resources-for-the-cash-strapped-elderly/191 http://www.messnerandhadley.com/blog/tax-free-resources-for-the-cash-strapped-elderly/191 Messner & Hadley LLP Inflation, inadequate retirement planning, medical costs, retiring too early and financial casualties can all strain the financial resources of elderly individuals. When looking for financial resources to supplement their existing retirement income, one might consider one or both of the following options.Home Equity - Home equity is often a large asset that can be tapped. However, selling the home is not always a good option since elderly individuals generally wish to remain in their home. Refinancing through conventional loans will provide temporary funds. Unfortunately, the loans come with a repayment requirement that increases the monthly cash needs and may be counter-productive.However, “reverse mortgages” allow homeowners to remain in their homes while borrowing against the equity they have built up in their dwellings without any current mortgage payments.If the homeowner dies, the heirs can pay off the debt by selling the house and any remaining equity goes to them. If, at that time, the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home's worth.In order to be eligible for this type of loan, the borrower must be at least 62 years of age and have equity in the home. The loan amount will depend on factors such as the borrower's age, the value of the home, interest rates and the amount of equity built up. The borrower has the option of taking the loan as a lump sum, a line of credit, or as fixed monthly payments. In addition, the money can be used for any purpose, without restrictions imposed. Life Insurance Contracts - If a taxpayer is terminally or chronically ill(1) and is insured under a life insurance contract, he or she might consider tapping their insurance death benefits while still living. This type of transaction is called a “viatical” settlement and is generally tax-free if an individual is certified to have a life expectancy of two years or less.Here is how it works. The policy owner sells the policy to a third-party buyer. The buyer is responsible for future premium payments and will receive the proceeds of the insurance policy when the insured dies. In some cases and under certain conditions, an accelerated death benefit may be available directly from the insurance company itself. The payments will be less than the face value of the policy, usually between 60% and 80% of the face value, depending upon the insured's life expectancy, annual premium, etc. Lifetime payments received under a life insurance contract of a terminally or chronically ill individual are excludable from taxable income.Viatical settlements are also possible for individuals who are not terminally or chronically ill, but the settlement is treated as a sale of the policy, and the gain on the sale is taxable, which may or may not be an issue based on the taxpayer's other income and the amount of the settlement. (1) For chronically-ill individuals, payments are tax-free only if the individual is certified by a licensed health care practitioner as unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.)  Thu, 04 Dec 2014 19:00:00 GMT Keeping Your Tax Records http://www.messnerandhadley.com/blog/keeping-your-tax-records/406 http://www.messnerandhadley.com/blog/keeping-your-tax-records/406 Messner & Hadley LLP When it comes to your taxes, good records are the best protection you can have if the government decides to audit your returns. But just as important as your effective recordkeeping are the measures you take to make certain that your records are kept safe. While it may cause a chuckle to picture a mythical taxpayer confessing to an IRS auditor that tax records were destroyed by the family pet, it probably wouldn’t be nearly as funny to give a similar response in a real audit of your own.The Advantage of Good Records: A good set of records can help you cut your taxes. Detailed records reduce the chance that you will overlook deductible expenses when your tax return is prepared. After all, how many people remember the exact details of their expenditures months after the fact? Nothing is more frustrating than knowing you incurred deductions yet not being able to prove them. The ultimate consequence of poor recordkeeping is enforced payment of more tax than the law requires. Explicit records provide the best assurance of a favorable outcome if you are audited. Oral testimony alone is seldom enough to prove the deductions you claim on your tax return—auditors want to see a paper trail of receipts, logs, etc. When you’re missing adequate backup records, it can cost a great deal in time and effort to get duplicates. The unfortunate fact is that many businesses balk at hunting down receipts for past sales (you can’t really blame them since it raises their expenses). Your ongoing recordkeeping effort is your best remedy to counteract this problem. Good records help others who might have to handle your financial affairs in an emergency — e.g., an illness. The better your records are, the easier it could be for someone else to temporarily “step into your shoes” to handle your monetary transactions. Tracking IncomeHow you track your income is largely dependent on the type of income you are receiving. For certain kinds of income, you will receive statements from the income payers to tell you the amount. These statements are called “information returns” by the IRS. Examples include: Type of Income Type of Information Return WagesPensions/IRAsInterest DividendsStock SalesReal Property SalesMiscellaneous Income(e.g., rent, prizes, non-employee payments) Gambling Winnings Unemployment Comp Tax RefundCanceled Debts Form W-2Form 1099-RForm 1099-INTForm 1099-DIVForm 1099-BForm 1099-SForm 1099-MISC Form W-2G Form 1099-GForm 1099-GForms 1099-A, -C When you receive an information return, you should compare it to your own records, and if there is a discrepancy in the amount of income reported, you should determine whether your records or the payer’s are in error. If you find your records are accurate, contact the payer to issue a corrected information return or explain to you how they determined the amount they have reported. Be sure to keep information returns you receive in a safe place so that the amounts reported on them can be shown accurately on your tax return. Payers must submit the data to the government as well as to you. The IRS will compare what they have received with your return to see that your reporting and their data match. If there’s a mismatch, you will get a letter asking ‘Why?’ or assessing additional tax. Since the IRS may misinterpret return reporting, check carefully before paying any extra tax they try to assess!Income from Other SourcesIncome not traceable to information returns also needs to be reported on your tax return. It could include such items as: Receipts from a self-employed business, Rental income, Interest income on a personal loan. Taxpayers who receive income from sources like these have a more complicated job in tracking it. It’s recommended that you record it in a separate ledger or through a computer spreadsheet program. In addition, you may want to deposit the funds in a separate bank account earmarked for that income alone.Getting OrganizedNo one method is the only way to maintain your records. What’s important is to develop a system that is the most convenient and comprehensive for your situation, and then to stick to it. The IRS estimates that a non-business taxpayer who files a 1040 return will spend about eight hours doing recordkeeping. For a more complex return, such as one with rental properties or self-employment income, add at least another five hours. The following suggestions may help you organize your records, and also reduce the time you spend doing so.Decide first if you will maintain your records manually or by computer. Bookkeeping software - Some taxpayers, even though they aren’t operating a business, choose computerized “bookkeeping” software that uses their check register data to track their income and expenses by category. Monthly and yearly reports conveniently recap the income and expenses, especially if the accounts (income and expense categories) are consistent with how the information is reported for tax purposes. Spreadsheet method - In lieu of purchasing bookkeeping software, a spreadsheet file (for example, in Excel) may be set up where you record your yearly income and expenses by tax return category. If you normally itemize your deductions, set up a separate sheet for each of the major deduction categories – medical, taxes, contributions, etc. – as found on Schedule A . For medical expenses, for example, record each expense by provider’s name, type, date, amount paid, and payment method. Note medically related auto mileage at the same time. At year’s end, sort income and expenses of the same type together to get a yearly total. For income items, a cross-check from the spreadsheet to the 1099 forms for all bank interest or other income sources is an accurate way to verify that all needed 1099s have been received. If your tax advisor gives you a “tax organizer” to help you prepare for your appointment, you can quickly transfer the totals from your spreadsheet to the organizer, or, instead, you can provide your advisor with a copy of the spreadsheet. Manual lists - If you keep track of your records manually, the same type of system applies as for a spreadsheet, except you’ll set up a paper sheet for each category of income and expense that you normally have on your tax return. Write each payment you receive or expense you incur on the applicable list. At the end of the year, each list is ready to be totaled. If you make your entries no less frequently than monthly, you’ll find that the overall time you spend will be less, and the accuracy of the information will be greater, than if you wait until just before your tax appointment to put together the year’s lists. Methods for retaining source documents - In addition to your lists of income and expenses, the receipts, canceled checks, credit card slips, income statements, etc., that back up the amounts need to be retained in case your tax return is audited. This is true whether you computerize or manually summarize your data. Choose from the following methods the one, or combination of methods, that suits you best: Envelopes – Using several blank envelopes, write the tax year and names of the income and expense categories that correspond to your spreadsheet or manual list of accounts. After you’ve recorded an item on your list, insert the corresponding receipt, canceled check, etc., into the envelope. By storing the source documents by category throughout the year, instead of throwing all of them in a box to get to “later,” you’ll not only save time but considerable frustration if you must search for a particular item. There is also less likelihood that a receipt or other document will be lost. Store the envelopes in a larger master envelope or box. File folders – Some taxpayers prefer to use file folders labeled by income and expense categories. These work well for manually maintained records, as the lists can go right in the folders along with the substantiating receipts, checks, credit card slips, etc. Small-sized receipts should be taped or stapled to a letter-sized sheet of paper to prevent them from falling out of the folder. Binders – A binder, set up with dividers labeled by income and expense categories, is also useful for keeping your lists and paper records. Three-hole plastic sheet protectors are convenient for keeping source documents together by category in the binder(s). Binders are especially useful for filing monthly or quarterly brokerage or bank account statements. Start now – If you aren’t already in the habit of keeping your records organized and maintaining them contemporaneously, start now! The effort will be worth it in time saved when you prepare for your next tax return preparation appointment. And most likely your records will be more accurate than they’ve ever been before.Knowing When to Discard RecordsTaxpayers often question how long records must be kept and how long the IRS has to audit a return after it is filed. ANSWER: It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year rule has a number of exceptions: The assessment period is extended to six years instead of three if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax, or (c) deliberately tries to evade tax in any other manner. The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return. If no exception applies to you, for Federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute. Examples:Sue filed her 2012 tax return before the due date of April 15, 2013. She will be able to safely dispose of most of her records after April 15, 2016. On the other hand, Don filed his 2012 return on June 2, 2013. He needs to keep his records at least until June 2, 2016. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday the due date becomes the next business day. Important note:Even if you discard backup records, never throw away your file copy of any tax return (including W- 2 s ). Often, the return itself provides data that can be used in future return calculations or to prove amounts related to property transactions, social security benefits, etc.Records to Keep Longer than Three YearsYou should keep certain records for longer than three years. These records include: Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least four years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale. Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale. Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold. DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Charitable Giving & Your Taxes http://www.messnerandhadley.com/blog/charitable-giving--your-taxes/410 http://www.messnerandhadley.com/blog/charitable-giving--your-taxes/410 Messner & Hadley LLP Your Charitable Gifts Make a Difference for Others and for Your TaxesWhen you give away cash or goods to qualified nonprofit organizations, you will probably be able to take a tax deduction as partial reward for your generosity. However, the IRS rules for deducting charitable contributions aren't as simple as many people might think. For example, deduction limits can apply, and certain gifts require timely written acknowledgment from the recipient organizations. Qualified Charitable OrganizationsIn order for a donation to be deductible, it must be given to a “qualified U.S. organization.” Not all nonprofit organizations qualify, but the IRS regularly publishes a list of the ones that do. In general, the qualifying groups can be categorized as: governmental bodies; nonprofit groups organized for religious, educational, scientific, or literary purposes; war veterans' groups; fraternal societies and lodges; and certain nonprofit cemetery companies. Examples of typical qualified organizations include churches, nonprofit hospitals, colleges and universities, school booster clubs, libraries, public parks and recreation facilities, etc.When gifts are made to fraternal organizations and lodges, only the part of the gift that those organizations give away to other qualified charities is deductible. In addition, gifts to a cemetery company can't be deducted if they are earmarked for the care of a specific cemetery lot. Limits on Charitable DeductionsIn general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. And if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.Gifts That Return a Benefit to YouIf a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child's tuition or to a church for a family wedding give the taxpayer a benefit and don't qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren't deductible - with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc. In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church. The church determines that the value of the dinner and program is $15. Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.Giving Your TimeAlthough you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity's location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well. Travel Away From Home for CharityA charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction: 1 . You must perform services for the organization in an official capacity while you're away from home. 2 . No “significant element of personal pleasure” must be connected with the travel. Does this mean your trip can't be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.Non-Cash DonationsDonations don't always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).Condition of Contributed Items:The condition of the contributed item is important, because except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in "good used condition" or "better." They also do not allow a deduction for items with minimal monetary value, such as used socks or undergarments.There is a provision that permits a deduction for clothing and household goods that are not in good used condition or better.  Under this provision, a deduction can be taken if (1) the amount claimed as a deduction is greater than $500, and (2) the taxpayer includes with the taxpayer's return a qualified appraisal with respect to the property.Household items include furniture, furnishings, electronics, appliances, linens, and other similar items.  Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items for this purpose.Large Donations:There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc.  Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.Valuing Your Donation: Perhaps the most difficult part of making noncash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there aren't any cast-in-concrete formulas to give you the “right” answer. Here are a few general guidelines that may help: Consider the condition of each item being given away. Compare the style of your donation with current styles. Outdated and/or damaged property may have little or no market value. Categorize each item being given by its condition (e.g., poor, good, excellent, new, etc.) Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours. If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property's value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See paragraph on "Donating Vehicles to Charity."Your research will probably show that most used merchandise has a value that is considerably less than your property's original cost!However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form. Donating Used Vehicles to Charity:Congress has imposed some tough rules that substantially limit the deduction for a car donation.  If the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity's sale of the vehicle.  In addition, a written acknowledgment from the charity is required and must contain the name of the donor, donor's tax ID number and the vehicle identification number (or similar number) of the vehicle.  The IRS provides Form 1098-C for this purpose.  There is an exception to these rules for donated vehicles that the charity retains for its own use "to substantially further the organization's regularly conducted activities."  Please call this office for more information. Record of Noncash Donations: Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser's report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address.If the value of donated items is $250 more, in addition to the information noted above, a written acknowledgment from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided.  You must have written acknowledgment by the date you file your return or the extended due date of the return, whichever date is earlier. Recordkeeping for Cash DonationsFor monetary (cash, check) gifts, regardless of the amount, you should have a canceled check (bank record) or a written communication from the donee showing: The name of the donee organization, The date of the contribution, and The amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records.  This means that unless the charitable organization provides a written communication, cash donations put into a "Christmas kettle," church collection plate, and pass-the-hat collections at youth sporting events will not be deductible.  Donations by debit or credit card can be substantiated by bank records.While many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction of $250 or more to request (and maintain in their records) substantiation from the charity.” The charity's acknowledgment must contain the following: The amount of money and a description of the value of other property, if any, contributed. Whether the charity provided any goods or services in return for the gift. A description and reasonable estimate of the value of the goods or services provided. DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Keep More of What You Make http://www.messnerandhadley.com/blog/keep-more-of-what-you-make/411 http://www.messnerandhadley.com/blog/keep-more-of-what-you-make/411 Messner & Hadley LLP Saving Money to Ensure Your FutureThe Smiths are college graduates with two healthy children, good jobs, a home worth about $160,000 and two relatively new cars. To the casual observer, they’re doing well. Yet anyone taking a close-up view would find a few flaws in their situation, especially when it comes to their finances . . . You see, the Smiths have: Virtually no savings; Retirement plans available through employers but with contributions at a bare minimum; A portfolio of several hundred shares of stock bought as a result of a tip from a friend - the investment has gone sour; and Large debts on their home, cars and credit cards. Obviously, Mr. and Mrs. Smith could benefit from a course in financial fitness. Their greatest need is to take a long, objective look at their financial picture AND make some rather radical adjustments! Unfortunately, the hypothetical Smiths aren’t a lot different from many Americans today. Statistics indicate that a large number are saving about 4 percent of their disposable household income, far less than citizens in other countries. For example, Australians and Germans save about 10 percent.* In addition, American workers (similar to the Smiths) aren’t taking full advantage of their employer’s retirement plans, most making pension contributions of only about $2,900 each year. Perhaps most ominous, however, is the amount of personal debt Americans have been incurring. Household debt (including mortgages, credit cards, auto loans and student loans) increased $129 billion between January and March of 2014 to $11.65 trillion, according to a Wall Street Journal report on statistics from the Federal Reserve Bank of New York. Improve Your Own Financial FutureThe Smith scenario and previously cited statistics paint a gloomy picture, but there are steps you and your family can take to prevent similar results. Achievement of financial security comes from adjusting your current financial picture in light of future goals. Far from being easy, the whole process requires a good amount of self sacrifice and more than a few trade-offs along the way. Check Your Spending Habits The only way to objectively view your finances is to set down on paper what you’re currently spending. No one enjoys this job, but it’s necessary if you’re serious about a plan to ensure financial well-being. Keep a log of what you spend your money on for a while (account for every cent, including all cash, check and credit purchases). Write down everything from house payments to dinners out, grocery purchases, haircuts, parking fees, entertainment expenses, doctor visits, etc. Try to list each item by category - e.g., amounts spent on movies out, internet downloads, and cable TV could all be listed under a category called Entertainment Costs. At the end of the period, total each expense category and get ready for a huge surprise - you’ll probably find that those “ little” extra miscellaneous items have made a sizable dent in your pocketbook. After you examine the totals carefully, you’ll begin to see a trend. It’s then that you need to ask yourself, “Where can I cut down?” Once you have a feel for the expense side of the ledger, concentrate on your income - salaries, pensions and annuities, interest, dividends,etc. Total everything you received for a given period (e.g., a month, a quarter, or a year) and subtract from it the grand total of all your expenditures for that same period. If your answer is positive, you’ve done all right - there’s a profit. If your answer is negative, you could be faced with a problem. Debt Could Be the CulpritOne reason many people can’t seem to get ahead financially is that they have a lot of debt - mortgages, student loans, credit cards, etc. And it’s difficult to reduce debt unless spending habits change. Probably the best place to start cutting back is with the credit cards. Most people have a huge pile of them (the average is nine for most Americans). Credit card spending is expensive. Assume, for example, that the balance on your Megabank card is $1,000 on which you’re charged an annual interest rate of 20 percent. If you pay the minimum $20 per month on your account, your total yearly payments will be $240 ($20 x 12). Yet by the end of one year, you will have only reduced your debt balance by $44, as shown in the following chart: Month Interest Principal Balance 123456789101112 $16.6716.6116.5516.5016.4416.3816.3216.2616.2016.1316.0716.00 $3.33 3.393.453.503.563.623.683.743.803.873.934.00 $996.67993.28989.83986.33982.77979.15975.47971.72967.92964.05960.12956.12 And what if you have eight other credit cards with balances similar to the Megabank card? You see how easy it is for debt to escalate? To get and keep the upper hand on all that plastic, you may need to: 1. Quit making purchases by credit card. If the cash isn’t available, don’t make the purchase. 2. Carry only one card for emergencies and get rid of those with the highest balances. 3. Begin the search for a credit card with a low interest rate - there are some available, but it may take a little detective work to find them. Also try to avoid cards with annual fees. 4. See if you can consolidate your credit card debt into the card carrying the lowest interest rate. 5. Start making the largest payment you can each month to pay off the debt. Once you’ve established an amount, keep at it EVERY month. You will be able to get it paid off faster than you think if you work at it consistently! Home Equity - Savior or Trap?Your home equity is a tempting source for money. Just keep in mind that you will never own the home if you continuously tap into that equity. Your reasons for using the equity may be legitimate, but were they necessary and paid back in a timely manner? Using home equity loans is an often touted means of avoiding higher interest rates on consumer loans for automobiles, major appliances, etc. It also provides a way to convert nondeductible consumer interest to deductible interest, since the interest on home equity debt (up to $100,000) is deductible as home mortgage interest. This is a good strategy if you plan to pay off the equity debt in the same period of time the consumer debt would have been paid off. Trap#1: People tend to roll their equity debt into their long-term home debt and end up paying on that consumer purchase for years, long after the car or appliance has been carried off to the recycle yard. Trap#2: Interest on equity debt is not deductible for Alternative Minimum Tax (AMT) purposes. Thus, if you are being taxed by the AMT, your benefit from the equity debt interest deduction will be reduced or eliminated. Savior: If used wisely, a home equity loan can provide you with a fresh start. If you are heavily burdened with consumer debt and have sufficient equity in your home, you can consolidate your debts into a new home loan and substantially reduce your monthly outlay. With the extra monthly cash from the reduced debt, begin saving for future cash purchases, children’s education and retirement. Trap: After restructuring your debt, you continue to run up additional consumer debt and could potentially overextend yourself again. The cycle repeats itself and leaves you with no equity in your home and a heavy mortgage debt at retirement or “under water” if the loan balance exceeds the market value when you decide to sell. Saving For the FutureAfter you’ve taken stock of your inflow and outgo and instituted measures to reduce debts, the next step is to begin developing a savings plan. Here again, consistency is the key. For instance, look at what happens when you put away $25 a week at an annual compounded interest rate of only 5 percent: Term10 years20 years30 years Ending Balance$16,76844,08188,571 In addition to regular savings, if you participate in a retirement plan, either through an employer or your own self-employed plan, begin using it to the fullest. Contribute as much as you can! After all, most pension plans allow you to build savings and defer paying taxes on income until you begin making withdrawals. It’s hard to find a better deal than this anywhere. Review Your Strategy and Adjust For Changes Remember, you need to continually review the savings strategy you establish in light of your overall goals - someday you will retire, in 20 years the children will be going to college, eventually you may want a bigger house, etc. Your strategy shouldn’t simply take into account those KNOWNs; your plan must create a cushion to handle the UNKNOWNs as well. Change is a certainty, and because of this, no plan for meeting financial objectives can remain static. As you go along, you’ll no doubt have to do a little “adjusting” here and there. Events like marriage, divorce, birth, death, retirement, job relocation, etc., can all complicate and force reevaluation of your original plan. Because of all the technicalities involved, you’ll probably want some outside help. It’s advisable to consult professional tax, legal and financial advisors before embarking on or changing your course of action. * According to statistics from the Organization for Economic Cooperation and Development DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Planning, The Key To Your Financial Future http://www.messnerandhadley.com/blog/planning-the-key-to-your-financial-future/412 http://www.messnerandhadley.com/blog/planning-the-key-to-your-financial-future/412 Messner & Hadley LLP Planning Ahead for Your FinancesWith the number of savings strategies being publicized these days, you'd think that planning ahead for retirement would be a fairly simple job. To the contrary; many investors are finding themselves uncertain that they will be able to find a strategy that will allow them to build a retirement nest egg adequately to meet long-term financial goals.In the “good old days” the picture seemed simpler - people ended their 30-year career with assurance that a pension and social security benefits were waiting to provide them with a fairly comfortable retirement. Contrast this with today, when people are faced with reports of a wobbly future for the social security system and pessimistic stories about the stability of retirement plans (both privately funded and employer-sponsored plans). Planning for your financial future doesn't have to be surrounded by mystery and perplexity. Accepting the planning challenge with realistic expectations and taking an overall long-term approach to finding investment solutions can help you immensely as you move toward attaining financial goals. This brochure highlights a few of the general principles and strategies which have traditionally been the foundation of sound financial planning; they are designed to help you weather the ups and downs of a changing economic climate.Building Blocks of Financial PlanningStart Saving -- the Sooner the Better! Start investing and earning interest on your money as early in life as possible - the results are amazing. The classic example is the 25-year old who invests $250 a month in an account at 3%, compounded monthly. By the time that 25-year old reaches age 65, savings have mounted up to a $232,344! The key to that savings success was “regularity,” investment of a specific amount on a specific schedule. Such discipline was rewarded with a good-sized nest egg! But don't make the mistake of not beginning a savings program just because you're already over age 25. Start one no matter what your stage is in life, and you'll be pleasantly surprised to see how your efforts can pay off after just a few years of compound interest. It's never too late to start saving! Watch Your Investment Mix Planning involves finding the right blend of investment choices - a concept called “asset allocation.” Your blend should depend not only on the financial goals you have chosen but on your stage of life and your tolerance for risk. For example, a young person just starting out may consider investing a large portion of funds aggressively to get a higher return. As that person reaches retirement age, however, he/she would probably want to shift a bigger portion to something that offers greater security, like bonds or government-insured savings. Always Diversify Diversification can help keep your portfolio on an even keel. It means spreading your investments over a broad range of investment media. Diversifying is wise no matter how much you invest - it adds balance to a portfolio by opening up the opportunity for stability for a gain in one market to counteract a downturn in another. Remember Inflation Will Take a Toll Plan your investment strategy with inflation in mind. Even when the inflation rate is low, it causes savings to lose purchasing power over a period of time.When you factor inflation into some so-called “safe” investments (which are usually low-yield), you may find that, over the long haul, the ones you thought were doing all right are really costing you more than you're gaining on them. Consider Taxes Don't forget tax planning as you look at investment strategies. Most invested funds will eventually lead to payment of taxes - e.g., those tax-deferred annuities, IRAs, etc., will eventually be withdrawn and become taxable. But even a small amount of planning can help you find every legal way possible to lower Uncle Sam's bite from your hard-earned money! What's Your Risk Tolerance?It's a fact of life that some investments are much more risky than others. When you begin your financial planning, you need to come to terms with your risk comfort level. Naturally, you don't want your investments to keep you awake nights while you worry about what's going to happen to them tomorrow. If you're worried about risk, your goal should be finding that “comfort zone” that will allow growth without a high degree of volatility. Some people, for example, aren't comfortable with stock funds where values can fluctuate quite widely in the short-term - yet these funds may offer a good deal of potential for growth over time.The Plan Should Be AdjustableChanging circumstances are also a certainty! Your financial plan may need to be adjusted somewhat when your situation is changed by events like: Marriage; Divorce; A birth or death in the family; A job change; Entry into a new business; A home purchase or sale; or Retirement. Beware of locking up funds permanently - leave room in any plan for some flexibility that allows you to maneuver and switch investment vehicles if necessary. Long-Range Planning Can Help Meet Future NeedsThere are certain areas in tax and financial planning where long-term planning can make a significant contribution to your future financial well-being. Consider the following areas: College Educational Funds for Your Children - There are tax-favored plans that allow you to fund a child's future education. Keep in mind that the benefits are greatest for those who plan early in the child's life. Planning for Your Retirement - With a variety of different retirement plans available, it is important to find the right one for you. There are many factors to consider. Will the plan give you a tax deduction? Will distributions be tax-free or will they impact other income when you reach retirement? Early planning can maximize your tax benefits now and minimize your taxable income at retirement. Gift and Estate Planning - Passing your wealth on to your heirs while minimizing the government's take is an important long-range planning issue for everyone. Selling Real Estate - To minimize your tax liability when selling real estate, pre-planning can employ a variety of strategies such as tax deferred exchanges, installment sales and home gain exclusion. Business Exit Strategies - Whether you are retiring, passing a business on to family members, or just moving on to other ventures, long-range planning is needed to ensure the transition is smooth, orderly and meets your financial expectations. Give Your Plan a Regular Tune-UpFor a financial plan to accomplish what you intend, it needs attention and care. Checking up on investment performance goes hand-in-hand with the flexibility issue raised by changing circumstances. Regardless of whether circumstances have changed, the plan needs regular “health” check-ups every few months to make sure it's on track. Getting Help with Financial PlanningWith all the intricacies of financial markets, you may want to consider getting advice from a professional before launching out on a plan. The professionals in our office are well-qualified to help. We're trained to help find answers to questions like: Is there a best way to look for high returns on your investments? How can you manage risk? How should you divide your portfolio between stocks, bonds, and cash savings? What are the best ways to handle inflation? Is there any way to reduce taxes on investment income? How long should you stick with a particular investment? Please don't hesitate to call with your own questions and to find out about the many services we offer!DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation.   Thu, 04 Dec 2014 19:00:00 GMT Tax-Advantaged College Savings http://www.messnerandhadley.com/blog/tax-advantaged-college-savings/416 http://www.messnerandhadley.com/blog/tax-advantaged-college-savings/416 Messner & Hadley LLP Overview Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member ’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are an excellent vehicle for college funding.Types of PlansSection 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities.College Savings Plans – These allow you to contribute after-tax dollars that are invested in some sort of savings vehicle. Many of these plans offer more aggressive investments when a child is quite young, which will then be transferred to more conservative investments as the child gets closer to college age. As with any investment, there are no guarantees of growth, and the plans are subject to the normal investment risks, even though state governments sponsor them. A big plus for these plans is that they are not geared towards in-state schools but are meant to be applied to whichever school your child chooses to attend.Prepaid Tuition Plans – As the name implies, a Prepaid Tuition Plan allows parents to pay for college education at today’s tuition rates. By locking in your tuition payments, worries about the increase of tuition costs in the future can be set aside. This gives the assurance that the child will have the money to attend college when that time comes. These plans sound very attractive; however, most of these plans guarantee that you will be covered only if your child chooses to go to a public in-state college or university. Therefore, if your child decides to attend an out-of-state school, you won’t be fully covered, simply because these plans are not meant to fund the higher costs of private or out-of-state education. However, prepaid tuition programs may be set up and maintained by private institutions, and distributions from private tuition plans are eligible for tax-free treatment. Control If you make sacrifices to save for a child’s college education, you certainly want to make sure those savings end up being used for college and not some other purpose. 529 Plans allow you to keep control of the account. If you save money for college in a UGMA or UTMA (the name depends on the state in which you live and are essentially custodial accounts, set up for minors), the account becomes the child's property once he or she reaches the age of maturity - usually 18 or 21 and you lose control. Unlike UGMA/UTMAs, Section 529 plans are not irrevocable gifts and you retain control. Control stays in the hands of the adult responsible for the account. Generally, this is the same person who contributed the money, but it doesn't have to be the case. Someone else, for example a grandparent, could make the donation but name the child’s parent as the account owner. Money does not come out of the account without permission from the account owner. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family.Tax BenefitsThere is no federal tax deduction for making contributions, but taxes on the earnings within a 529 plan are tax-deferred while they are held in the account, and are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can in an account where you had to pay tax on the investment gains and earnings. In the graph below, compare the growth of $10,000 accumulating tax-free (the green line) to the same $10,000 after taxes (the black line). To be tax-free when withdrawn, the funds must be used to pay for qualified college expenses such as tuition, room and board, books, supplies, and equipment. The more time you have until your child needs the money for college, the more significant this tax-free compounding becomes. How Much Can Be Contributed?Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Sec 529 Plans allow you to put away larger amounts of money. There are no income or age limitations for the Sec 529 Plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. As of 2014, the limits for most states ranged from $235,000 to just over $452,000. Generally, once an account reaches the state-designated maximum, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow. Contributions to a 529 college savings plan must, by Federal law, be made in cash and always consist of after-tax money. Most programs also have a minimum contribution that is within everyone’s budget. Many have payroll or automatic withdrawal programs. PenaltiesIf the earnings from the 529 Plan are withdrawn and not used for higher-education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. Before you become concerned, refer back to Figure #1. Had you not utilized the tax deferral benefits of the Sec 529 Plan, you would have accumulated significantly less in the account, which will generally more than offset the 10% penalty. You can avoid penalties by making a tax and penalty-free rollover from one 529 Plan to another, and remember that you are able to change beneficiaries to a 529 Plan without penalty. Impact on Financial Aid Predicting financial aid eligibility is no easy task, since it’s based on a myriad of factors, including income, the age of the parents, and the methodology used. A question that always arises when discussing the benefits of saving for college is the impact those savings will have on future financial aid. Investing in a college savings plan could affect your financial aid eligibility but are typically viewed as a parental asset, rather than a child’s , and that means that a financial aid officer would count only a small portion of the assets toward the financial aid eligibility. However, don't let the fear of hurting your child's eligibility for financial aid deter you from developing a sound savings strategy. Keep in mind that a lot of financial aid comes in the form of student loans, which means you'll save yourself (or your child) some money by planning ahead. Gift and Estate Considerations Contributions to Section 529 Plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) up to the annual limit to another individual (double for a married couple) without triggering gift taxes or reducing their lifetime gift and inheritance exclusion. The annual gift exclusion amount is $14,000 in 2014 and 2015, and is inflation-adjusted. Please call this office for the limit for a year after 2015. In addition, individuals are allowed to make five years’ worth of gifts to a Section 529 Plan in one year. For example, that means an individual could contribute $70,000, or a couple $140,000, in 2014 or 2015. However, no additional gift could be given to the beneficiary of the Section 529 Plan for that entire five-year period. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exemptions would revert back to the donor’s estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion claiming this special exemption. Section 529 Plans are increasingly being promoted as an estate-planning device for wealthy grandparents, since making a large contribution to a 529 Plan reduces your taxable estate much quicker than the current annual gift exclusion. But while the assets leave your estate, they don't leave your control. Please Note: Transfers and change of beneficiaries can trigger gift and generation-skipping taxes if not planned correctly. If you are contemplating a change in beneficiary or transferring an account to another beneficiary, you are cautioned to call this office in advance.We can plan the change or transfer in such a way to avoid or minimize any potential gift or generation-skipping taxes. Plan Sponsors Section 529 Plans are state-sponsored programs. You are actually investing in a program authorized by the Federal government and run by the various states. To attract their own residents, some states offer tax deductions for contributions, while others will disregard the account balances when calculating state financial aid. It is important to understand that you are not limited to establishing a plan with your resident state. You should investigate the various state plans available and evaluate their performance, expenses, and investment options before making your selection. Getting Started Evaluating the various plans available, selecting one that meets your needs, and deciding on the amount of money to contribute to the fund can be time-consuming and complex. If you need professional assistance, please call this office. Frequently Asked QuestionsQ – Must the student attend a college in the state that sponsors the selected plan? A – No, you can utilize the plan of any state regardless of your state residency, and the student can attend virtually any college, graduate school, and even certain vocational schools anywhere in the country. Q – I am used to selecting my own investments. Can I direct the investments for the plan? A – No, Section 529 Plans do not allow you to self-direct the investments. Each plan has its own investment strategy generally based upon the child’s age. Some allow you to select certain investment options. Q – If I wish to move the funds to a different plan, may I do so? A – Yes , you are allowed a penalty-free rollover once a year from one plan to another. However, some states will penalize you if you move the plan to another state.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Selling Your Home http://www.messnerandhadley.com/blog/selling-your-home/417 http://www.messnerandhadley.com/blog/selling-your-home/417 Messner & Hadley LLP Federal tax laws allow each individual taxpayer to exclude up to $250,000 of gain from the sale of his/her main home, if he/she meets certain ownership and occupancy requirements. (A married couple that meets the qualifications can exclude up to $500,000.) If an individual/ couple is unable to exclude all or part of the gain, then the gain is taxable as a capital gain in the year of sale.Exclusion QualificationsUnless they meet the reduced exclusion qualifications,taxpayers must meet the ownership and use tests in order to qualify for exclusion of gain.This means that during the five-year period ending on the date of the sale, taxpayers must have: 1) Owned the home for at least two years (if a joint return only one spouse need meet the ownership test), and 2) Except for short temporary absences, lived in (used) the home as their main home for at least two years. The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. Taxpayers meet the tests if they can show that they owned and lived in the property as their main home for either 24 full months or 730 days during the five-year period ending on the date of sale. Also see ownership-use exceptions elsewhere in this brochure. Temporary Absence: Generally, a temporary absence would be for illness, education, business, vacation, military service, etc., for less than one year, and the taxpayer intends to return to the home, and continues to maintain the home in anticipation of such return. Land: Generally, if a taxpayer sells the land on which his/her main home is located, but not the house itself, the taxpayer cannot exclude any gain from the sale of the land. However, the home sale exclusion will apply to vacant land sold or exchanged if the taxpayer owned or used the land as part of the principal residence, provided the disposition of the dwelling unit occurs within two years before or after the disposition of the vacant land, the land was adjacent to land containing the dwelling unit and the land sale or exchange otherwise satisfies the home gain exclusion requirements. Only one maximum exclusion amount applies to the combined sales/exchanges of both the home and the vacant land.Ownership and Use ExceptionsUse Test After Divorce – In divorce situations,the terms of the divorce or separation document often allow one spouse to use the jointly-owned home for an extended period of time,then to sell the home and split the proceeds with the former spouse.When this happens,the spouse who does not occupy the home will no longer meet the use test and would be barred from excluding the gain except for a special rule for divorced couples.Under this special exemption,that spouse is considered to have used the property as his or her main home during any period they owned it. Disability – Individuals who have become physically or mentally unable to care for themselves are considered to have used their home during any period that they own the home and live in a licensed facility, including a nursing home that cares for individuals with the taxpayer’s condition.However, to qualify for this exception, the individual must have owned and lived in his or her home for at least one year. This exception does not apply to the ownership test. Irrevocable Trust Is Owner – Some taxpayers use revocable (living) trusts as an alternative to having their property transferred by will. A home owned in the name of a revocable trust is treated as being owned by the taxpayer for purposes of the ownership test, and such ownership does not jeopardize the ownership test for claiming the exclusion. However, when the first spouse of a married couple with a revocable trust dies, two things generally occur. The decedent’s trust becomes irrevocable and the portion of the home inherited receives a new basis (an exception may apply for decedents dying in 2010). If all or part of the home is placed in the decedent’s (bypass) trust, the IRS has ruled that to the extent a home is owned by an irrevocable trust, it is not owned by the surviving spouse, even if the surviving spouse continues to reside in the home. As a result, the portion of the home owned by the irrevocable trust would not qualify for the exclusion. Death of Spouse Before Sale – If your spouse died before the date of sale and you do not meet the ownership and use tests yourself, you are considered to have owned and lived in the property as your main home during any period of time when your deceased spouse owned and lived in it as a main home. Home Transferred in Divorce – If the home was transferred to you by your spouse,or former spouse, incident to divorce, and you do not meet the ownership test, you are considered to have owned it during any period of time when your spouse,or former spouse, owned it. Home Destroyed or Condemned – If you were able to defer gain from a prior home to your current home because it was destroyed or condemned, you can add the time you owned and lived in that previous home when figuring the ownership and use tests for the current home. Maximum ExclusionA taxpayer who meets the ownership and occupancy tests can exclude the entire gain on the sale of his/her main home up to $250,000,provided gain has not been excluded on a sale of another home within two years of the sale of the current home.The maximum exclusion amount is $500,000 if all the following are true:a) The taxpayers are married and file a joint return for the year.b) Either the taxpayer or the taxpayer’s spouse meets the ownership test.c) Both the taxpayer and taxpayer’s spouse meet the use test.d) During the two-year period ending on the date of the sale,neither the taxpayer nor the taxpayer’s spouse excluded gain from the sale of another home.Two-Year Period Between SalesUnless taxpayers qualify for the reduced exclusion, they can only exercise the exclusion once every two years. Therefore, taxpayers cannot exclude the gain on the sale of their home, if during the two-year period ending on the date of the sale, they sold another home at a gain and excluded all or part of that gain. Home Acquired by Tax-Deferred ExchangeIf the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the 2-year use test. Reduced Exclusion A taxpayer who does not qualify for the full exclusion may still qualify to exclude a reduced amount if the taxpayer(s) did not meet the ownership and use tests, or the exclusion was disallowed because of the once every two-year rule, but sold the home due to:a) A change in place of employment;b) Health; orc) Unforeseen circumstances,to the extent provided in IRS regulations.Amount of Reduced Exclusion – If qualified, the reduced exclusion is determined on an individual basis, and in the case of married taxpayers, the individually computed amounts are combined for the joint exclusion. To determine the reduced exclusion,multiply $250,000 (maximum exclusion amount) by a fraction whose denominator is 730 and numerator is the shorter of: (1) The number of days during the five-year period just prior to the current sale that the property was owned and used by the taxpayer as his/her principal residence;or (2) The number of days between that sale and the current sale, if a home was sold just prior to the current sale and the exclusion applied to that sale. More Than One HomeIf a taxpayer has more than one home, only the gain from the sale of the taxpayer’s main home can be excluded,even if the other home meets the two-out-of-five-year ownership and use test. Main Home: The property that the taxpayer uses the majority of the time during a year will ordinarily be considered the taxpayer’s main home or principal residence.A taxpayer’s main home can be a house, houseboat, mobile home, cooperative apartment, or condominium. In addition to the taxpayer’s use of the property, the home sale regulations list relevant factors in determining a taxpayer's principal residence which include, but are not limited to: the taxpayer's place of employment; the principal place of abode of the taxpayer's family members; the address listed on the taxpayer's Federal and state tax returns, driver's license, automobile registration and voter registration card; the taxpayer's mailing address for bills and correspondence; the location of the taxpayer's banks; and the location of religious organizations and recreational clubs with which the taxpayer is affiliated. Example: Figure #1 illustrates a situation where a taxpayer has two homes,both of which meet the ownership test.The taxpayer also meets the occupancy test,since the taxpayer has lived in both homes more than two years of the prior five-year period. However, only the New York home qualifies, since the taxpayer lived in the New York home the majority of the time in all five preceding years, thus qualifying it as the taxpayer’s main home. Gain or Loss on SaleA taxpayer's main home and other homes are considered personal-use property. Gains from personal-use property are generally taxable, but losses from personal-use property are not deductible. Therefore, if you sell your home at a loss,the loss is not deductible. On the other hand, if you sell a home for a gain and the gain is more than your allowable exclusion, or you do not qualify for the main home exclusion, then the gain from the home sale becomes taxable as a capital gain in the year of sale. Determining Gain or LossThe gain or loss from the sale of a home is the sales price less the sum of (1) the costs of selling the home and (2) the basis. Basis is a technical term used in taxes that generally represents the original cost plus the costs of improvements to the home. That is why it is so important to maintain records and keep track of your home’s cost and subsequent improvements. In the tax business, this is referred to as tracking your basis. The exclusion amount may seem like a lot right now, but after a few years of inflation, you may discover it is not enough to offset the potential gain. Other Factors Affecting Basis – There are numerous tax situations that can affect a home’s basis.The following are those most frequently encountered: Deferred Gain – Prior to May 7, 1997, home sale rules allowed taxpayers to avoid paying on home sale gains by deferring the gain into their replacement home. If you deferred gain under those rules,the deferred gain reduces the replacement home’s basis. Casualty Loss – Usually, a casualty loss resulting from damages to a home taken as a tax deduction will reduce a home’s basis. Depreciation – Generally, depreciation resulting from the business use of a home may also reduce the basis (see “Business Use of Your Home” below). Inherited Home – If a home is inherited, the portion inherited will have a new basis that is usually the fair market value of the home on the date of the decedent’s death. This is frequently referred to as a step-up (or step-down) in basis. If you inherited the home you are about to sell, please call this office for further details and clarification. Business Use of the Home Depreciation – The tax law assumes business assets will decline in value due to obsolescence and wear and tear. Therefore, taxpayers are allowed to take an annual deduction called depreciation, which represents the decline in value. If the value increases instead, then upon its sale, any gain attributable to the depreciation is generally taxed at rates higher than the gain would otherwise be taxed. In addition, the home sale exclusion does not apply to any depreciation taken on the home after May 6, 1997. This means that even if the gain is less than the allowable exclusion, the portion that represents depreciation after May 6, 1997 will still be taxable and generally at a higher rate than the other portion. Mixed-Use or Separate Property? - When a home that was used entirely or partially for business is sold, the home gain exclusion may be limited, and some portion of the business deduction for depreciation may be taxable. How much of the gain is taxable, and the amount of gain that is subject to the gain exclusion, depends if the business portion was part of the dwelling unit (mixed-use property) or whether it was a separate structure. Mixed-Use Property: When the business use was within the same dwelling unit, no allocation of home gain is required between the business portion and the personal use portions. Except for depreciation claimed for the business use of the home, the entire gain may be excluded up to the maximum allowed. However if the result is a loss, the loss is not allowed. Example: Jake, a single taxpayer, sells his home for $300,000. He had originally purchased the home for $65,000 and added a room, which cost $20,000, giving him a cost basis of $85,000. He also had a business office in the home for which the allowable annual depreciation totaled $5,500. The cost of selling the home was $27,000. He meets all of the qualifications for a home sale gain exclusion of up to $250,000.Sale Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000Less Sales Expenses . . . . . . . . . . . . . . . . . . . . . . .< 27,000>Cost Basis . . . . . . . . . . . . . . . . . . . . .85,000Allowable Depreciation (1) . . . . . . . . . 5,500Tax Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,500Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,500Home Sale Exclusion . . . . . . . . . . . . . . . . . . . . . . . Net Gain (Before Taxable Depreciation Recapture). . . 0Taxable Amount (the Lesser of Gain or Allowable Depreciation) . .. . .5,500(1) Please note, special rules apply if any of the allowable depreciation occurred prior to May 7, 1997. Please call for additional information. Separate Property: If the business use was within a separate structure, such as a guesthouse or detached garage, the tax treatment will depend upon whether the separate structure itself meets the exclusion qualification requirements. Generally, if a home office in a separate structure does not meet the ownership and use tests, the home gain exclusion will not apply to the gain attributable to the office portion. Please call this office for assistance. Rental Converted to a HomeThe sale of residential rental property is governed by an entirely different set of tax rules than those applying to an individual’s main home. However, had the home also been used as the taxpayer’s main home either before or after being used as a rental, then it can still qualify for the home sale exclusion if it meets the ownership and use tests.This can provide a significant tax benefit for individuals who carefully plan their sales. As with the home office, the rental’s depreciation is not subject to exclusion, and all or part may be taxable to the extent of the sale profit (gain). However, if the home was previously used as other than a taxpayer’s main home (non-qualified use), for example, as a second home or a rental, and converted to a personal residence after December 31, 2008, the portion of the pro-rated gain attributable to the non-qualified use will not qualify for the home gain exclusion.Taxpayers contemplating such tax strategy should consult with this office in advance to verify qualifications and determine the tax implications including depreciation recapture. Special ConsiderationsSeparate Returns – If you and your spouse sell a jointly-owned home and file separate returns, each of you should figure your own gain or loss according to your ownership interest in the home.Joint Owners Not Married – If you own a home jointly with other joint owner(s), other than your spouse, each of you would apply the rules discussed in this brochure to your individual ownership.Credit Recapture – If you claimed a First-Time Homebuyer Credit and in a later year ceased using it as your residence, you may be required to repay some or all of the credit, depending on when you purchased the home and when it stopped being your residence or was sold. Other Dispositions – Foreclosures, repossessions, and exchanges of your home are generally treated as sales. Net Investment Income Tax – Gain from the sale of your home in excess of the amount excludable may be subject to this 3.8% surtax. Please call this office for additional information.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Required Minimum IRA Distributions http://www.messnerandhadley.com/blog/required-minimum-ira-distributions/419 http://www.messnerandhadley.com/blog/required-minimum-ira-distributions/419 Messner & Hadley LLP Overview The most recent IRS regulations substantially simplify rules for required minimum distributions (RMD) from IRAs. There are life expectancy tables that allow smaller distributions to be taken over a longer period. The calculation of the RMD has been simplified by eliminating certain variables. Rules regarding separate accounts with different beneficiaries have been clarified. Some flexibility is now available to change beneficiaries and split accounts, allowing the heirs to retain more of the tax-deferred income for a longer period of time. Beginning Date RequirementsIRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70 1/2. If a taxpayer fails to take a distribution in the year they reach 70 1/2, they can avoid a penalty by taking that distribution no later than April 1 of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70 1/2 and one for the current year. If an IRA owner dies after reaching age 70 1/2, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.Multiple IRA AccountsFor purposes of determining which account the minimum distribution is to be withdrawn from, all Traditional IRA accounts owned by an individual are treated as one, and the minimum distribution can be taken from one or any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts. Determining the Distribution The minimum amount that must be withdrawn in a particular year is the value of the IRA account divided by the number of years the IRA owner is expected to live. If there are multiple IRA accounts, this calculation is done for each one and then the results are totaled to determine the RMD for the year. VALUE__________________ DISTRIBUTION PERIOD = MINIMUMDISTRIBUTION Determining Value: The value is what the account was worth at the end of the business day on Dec. 31 of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498. Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as "distribution period" by the IRS). Generally, IRA owners will use the "Uniform Lifetime Table" to determine their "distribution period." If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the "Uniform Lifetime Table," the owner’s life expectancy is 22.9 years. Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age is 74, but later in November, he turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable. Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The value of the IRA account at the end of the prior year is $87,000. The minimum distribution is $3,799 ($87,000 / 22.9).Timing of the DistributionThe minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment. Maximum Distribution There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. Underdistribution Penalty Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000). If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. Not Required to FileEven though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the underdistribution penalty even if no income tax would have been due on the underdistribution. Death of the IRA OwnerIf the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary. Beneficiary DistributionsWhen an IRA owner dies after beginning the required distributions, and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows: Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary, the spouse has the following options: Convert the IRA to his/her own account, thereby delaying additional distributions until he/she reaches age 70-1/2. Or, if already age 70-1/2, convert the IRA to his/her own account and begin taking RMD based on his/her attained age using the Uniform Distribution Table. Treat the IRA as if it were his/her own, frequently referred to as recharacterizing the IRA to a "Beneficial IRA" and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner’s death based on his/her life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after no longer being subject to the premature distribution penalty, the spouse can convert the IRA to his/her own and then choose to stop taking distributions until age 70-1/2. The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning. Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust. Life Expectancy Tables The following tables are taken from the IRS regulations and are used to determine life expectancy for purposes of determining the Required Minimum Distribution from Traditional IRA accounts (Reg 1.401(a)(9)-5). All of the tables illustrated have been abbreviated to fit this brochure. For ages not shown, please consult this office. Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longer of: 1.The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each subsequent year after the date of death. 2.The remaining life expectancy of the IRA beneficiary using the beneficiaries’ attained age in the year of death and subtracting one for each subsequent year after the date of death. The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death OR for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by Sept. 30 instead of year-end to take advantage of the spouse sole beneficiary provisions. Five-Year Option: A beneficiary who is an individual may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year. The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for nonindividual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.Planning Can Minimize the TaxAdvance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Making Estimated Tax Payments http://www.messnerandhadley.com/blog/making-estimated-tax-payments/420 http://www.messnerandhadley.com/blog/making-estimated-tax-payments/420 Messner & Hadley LLP Why Pay Estimates? The tax system is intended to be a “pay-as-you-go” system, and the only way to prepay taxes is through withholding and estimated taxes. Generally, payroll comes to mind when we think about withholding, but withholding is also available through a variety of other means, including pension income and Social Security payments. However, there are a multitude of income sources that generally do not have withholding, such as self-employment income, interest, dividends, rents, gains from stock sales, alimony etc. Estimated tax payments provide a means of prepaying one's taxes on these kinds of income. However, the use of estimated tax vouchers is not limited to taxpayers with income not subject to withholding. A variety of situations might arise that warrant the use of estimated taxes, such as taxpayers who are paid by commissions or who receive bonuses that distort their income. Frequently, a married couple with substantial income may also rely on estimated taxes to supplement its wage withholding.Are Estimates Mandatory? No, it is not mandatory for you to make estimated tax payments. However, if you end up owing money when you file your tax return, then you might be subject to the underpayment of estimated tax penalty. Unless you meet one of the exceptions explained later, this penalty could apply even if all of your income sources are subject to withholding. What is the Penalty?It is a nondeductible interest penalty computed on a quarterly basis. The interest rate varies from quarter to quarter based on the prevailing interest rates. Over the past 8 to 10 years, the rates have been as high as 8%, but most recently have been 3%. Estimate Due DatesPayments are due on the 15th day after the end of the quarter, giving a taxpayer 15 days to compute their tax liability for the prior period. The tax quarters are not all the same duration. - The first quarter is three months (Jan-Mar),- the second quarter is two months (Apr-May),- the third quarter is three months (June-Aug), and- the final quarter is four months (Sep-Dec). The due dates are: If paid all at once, the due date is April 15. If paid in installments, the due dates are: - First payment: April 15 of the tax year- Second payment: June 15 of the tax year- Third payment: Sept. 15 of the tax year- Fourth payment: Jan. 15 of the following year; or if the tax return is filed by Jan. 31 of the following year and the entire balance is paid with the return, the Jan. 15 payment may be skipped.Note: If a due date falls on a Saturday, Sunday, or federal legal holiday, the due date will be the next business day.  The payment in January of the following year confuses some taxpayers who attempt to take credit for payment in the following year since that was the year in which it was paid. If you miss a payment due date, you should make the payment as soon as possible! Farmers and Fishermen Exception - With at least two thirds of their gross income for the prior year or the current year from farming or fishing, they may: - Pay all of their estimated tax by Jan. 15 (fourth quarter due date); or- File their tax return on or before March 1 and pay the total tax due. How to Avoid the PenaltyThere are a number of exceptions to the underpayment of estimated tax penalty, which can help you plan your estimated payments, avoid the penalty and minimize the advance payments. No Tax Liability In Prior Year - A taxpayer is exempt from the underpayment of estimated tax penalty if they had no tax liability in the prior year and they were a U.S. citizen or resident for the whole year. For this rule to apply, the tax year must have included all 12 months of the year. De Minimis Exception -Taxpayers can owe up to $1,000 on their tax return without penalty. Current Year Exception - If a taxpayer's withholding and estimated tax payments are equal to 90% or more of the current year's tax liability, then there is no penalty. Prior Year Exception - The underpayment can also be avoided by prepaying through withholding and estimated tax payments an amount equal to 100% or more of the prior year's tax liability. Caution: See High Income Taxpayers below. Prior Year Exception for High Income Taxpayers - For taxpayers with gross incomes (AGI) in excess of $150,000 ($75,000 for married taxpayers filing separately), the prepayments must total 110% of the prior year's tax. This penalty exception is frequently used by taxpayers as means of determining a safe harbor estimate for the current tax year. Annualized Income Exception - A complicated exception can help you avoid the underpayment of estimated tax penalty if you have large changes in income, deductions, additional taxes, or credits that require you to start making or adjusting estimated tax payments. The payment amounts will vary based on your income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow you to skip or lower the amount due for one or more payments. Farmers and Fishermen Exception - If at least two thirds of the taxpayer's gross income for the prior year or the current year is from farming or fishing, the taxpayer's required annual payment is the smaller of: - 66 2/3 % (.6667) of the total tax for the year, or- 100% of the total tax shown on the prior year, provided the prior year was for a full 12 months. Determining the Amount to PayIndividuals generally pay estimates in even quarterly amounts utilizing one of the underpayment exceptions or by projecting their taxes for the year. However, payments can be adjusted quarterly, allowing payments to be skipped or stopped if there are fluctuations in income significant enough to warrant the adjustment. How the payments are made is dependent upon a number of factors: Increasing Income - When a taxpayer's income is increasing and their tax liability will be greater than the year before, the estimates can be based on one of the “Prior Year Exception” methods (either 100% or 110% of the prior year's tax), thereby minimizing the payments and ensuring the underpayment of estimated tax penalty will not apply. Using this approach will require the taxpayer to pay any balance by the April filing due date. This method is especially attractive to taxpayers with substantial increases in income and allows them to delay paying a substantial portion of the increase in tax until the filing due date. Decreasing Income - When a taxpayer's income decreases and their tax liability will be less, they probably will not want to make payments based on the “Prior Year Exceptions” since that would require them to overpay their estimated taxes. To avoid penalties, they will need to prepay 90% of their liability (current year exception) for the year or have a balance due not exceeding $1,000 (de minimis exception). Fluctuating Income - Where a taxpayer's income fluctuates significantly in different quarters of the year, they may not have the cash available to make even payments and will need to base their estimates on the income received during each quarter. These individuals may avoid a penalty by using the “Annualized Income Exception.” This requires the taxpayer to project their annual income and resulting tax based upon the income they have received through the current quarter. They prorate the annual tax through the current quarter and pay the prorated amount less the amount previously paid for the year. Withholding Plus Estimates - Frequently, prepayments consist of both withholding and estimated payments. While estimated tax payments are in the control of the taxpayer, withholding is not and may fluctuate during the year. As a result, the withholding may be less than the amount needed to meet one of the exceptions. The exceptions to the penalty provide no latitude for unforeseen withholding changes. Allocating Estimates Between Spouses and Ex-Spouses If you and your spouse are married on the last day of the tax year but file separate returns, the following rules are used to determine who gets credit for the estimated tax payments: Separate payments - If you and your spouse made separate estimated tax payments for the tax year, you can only take credit for your own payments. If you made joint estimated tax payments: Can Agree - If you and your spouse (or ex-spouse) can agree upon an allocation of the payments, then you may allocate them in any manner you wish, provided that the allocated total is the same as the jointly paid amounts for the year. Cannot Agree - If you and your spouse (or ex-spouse) cannot agree upon an allocation, then you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for the tax year. Example: You and your spouse (or ex-spouse) made joint estimated tax payments totaling $3,000. You file separate returns and cannot agree on how to divide estimates. Your separate tax liability is $4,000, and your spouse's is $1,000. Your share = 4,000/5,000 x 3,000 = $2,400Spouse's share = 1,000/5000 x 3,000 = $ 600 Divorced Taxpayers—If the taxpayers made joint estimated tax payments for the year and were divorced during the year, either spouse can claim all the payments or they each can claim part of them. If the taxpayers cannot agree on how to divide the payments, they must divide them in proportion to each spouse's individual tax as shown on their separate returns for the year. How and Where to Make PaymentsPayments should be accompanied by an IRS payment voucher (IRS Form 1040-ES). There is a separate voucher for each quarterly payment. Each voucher includes the payment due date and areas for the taxpayers' name, SSN, address, and the amount of the payment. The voucher and your check payment should be mailed to the address for your specified geographical area. The addresses change frequently and are included on the voucher instructions. The payments are actually being sent to what is referred to as a lockbox. The lockboxes are generally operated by bank personnel who credit your account by Social Security Number and deposit the funds into the U.S. Treasury. When making out your check payment, be sure to write the words “Estimated Tax,” the tax year, and your SSN in the notation area of your check. This way if your check and the payment voucher become separated, the funds can still be properly credited to your account.In lieu of mailing a paper check and voucher, options are available to pay electronically or by using a credit card. The procedures for these methods are explained on the IRS web site; a “convenience fee” applies if paying by credit card. Name Change If you had a name change and made estimated tax payments using your old name, attach a brief statement to the front of your tax return indicating: When you made the payments; The amount of each payment; The IRS address to which you sent the payments; Your name when you made the payments; and Your social security number. The statement should cover payments you made jointly with your spouse as well as any you made separately.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation.  Thu, 04 Dec 2014 19:00:00 GMT Tips On Filing Your Tax Return http://www.messnerandhadley.com/blog/tips-on-filing-your-tax-return/421 http://www.messnerandhadley.com/blog/tips-on-filing-your-tax-return/421 Messner & Hadley LLP Deadline for Filing Your ReturnGenerally, individual tax returns are due on the 15th day of the fourth month after the close of your tax year. Since virtually all individual taxpayers file on a calendar year, the due date for most individual taxpayers is April 15. That is the due date for both filing your return and paying any balance-due taxes. If the April 15 due date falls on a Saturday, Sunday or federal legal holiday, the due date is delayed until the next business day. Most states have the same due date, although some give additional time. U.S. citizen and U.S. resident taxpayers who are out of the country on the April due date may qualify for an automatic two-month extension to file their return and pay any federal income tax that is due.This applies if they are living outside of the United States and Puerto Rico and their main place of business or post of duty is outside the United States and Puerto Rico, or they are in military or naval service on duty outside the United States and Puerto Rico. The deadlines for filing and paying, if there is a tax due, is extended for 180 days after the latter of the last day a military taxpayer was in a combat zone/qualified hazardous duty area, or the last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area. In addition to the 180 days,the deadline is also extended by the number of days that were left for the individual to take action with the IRS when they entered a combat zone/qualified hazardous duty area. Proof of FilingIf a paper return is being filed, it is considered filed on time if it is properly addressed, has sufficient postage and is postmarked by the due date. It may be appropriate to obtain a proof of mailing if there is a balance due on the return, since both the late filing penalty and the late payment penalty are based on the amount of the balance due. This is especially important if the amount of balance due is sizable and the returns are mailed close to the due date. If the return is sent by registered mail, the date of the registration is the postmark date.The registration is evidence that the return was delivered. If sent by certified mail and the receipt is postmarked by a postal employee, the date on the receipt is the postmark date. The postmarked certified mail receipt is evidence that the return was delivered. Note:A private postage meter date is not considered to be valid proof of mailing. In addition to filing paper returns through the U.S. Postal Service, the IRS has designated several private delivery services that taxpayers can use to send their returns to the IRS. The postmark date for these services is generally the date the private delivery service records the date in its database or marks on the mailing label. The private delivery service will explain how to get written proof of this date.For e-filed returns, the date of an electronic postmark given by an authorized electronic return transmitter is considered to be the filing date if the electronic postmark’s date is on or before the filing due date.Reasons for ExtensionsThere are valid reasons for not filing a tax return on time, and there is no stigma associated with doing so. The following are typical reasons that taxpayers file an extension: Waiting for a K-1 Distribution Form from a partnership or estate. Need additional time to fund certain self-employed retirement plans. Taxpayer suffered a casualty and the tax documents were lost. Taxpayer or spouse is ill. Taxpayer or spouse is deceased. These are by no means the only valid reasons for an extension, but are shown as examples.If You Need Additional TimeIf you need additional time to file your return, the IRS provides two forms of extensions. The extension used by most taxpayers is Form 4868; the other one, Form 2350, is used by taxpayers living and working overseas and is not discussed here. CAUTION: It is important to note that these are extensions of time to file your return, not an extension to pay your tax liability. Even if you file for and are granted an extension of time to file, interest and late payment penalties (discussed later) will apply to any balance due on the return from the original April due date. Automatic Six-Month Extension – This extension gives you until October 15 to file your return. If you expect to owe, estimate how much and include an extension payment. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. If the October 15 due date falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Most states have the same due date, although some give additional time.While the extension may be automatic, it is still necessary to submit a request for the extension. This is done on IRS Form 4868, which can be filed electronically or on paper. If you aren’t able to file on time, the request should be submitted by the regular due date of the return, even if you owe no tax or will be entitled to a refund once you file the return.It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be substantial. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 60 months. Interest on the Balance Due An extension does not extend the time taxpayers have to pay their tax liability. Therefore, if money is owed on a return that is filed after the original April due date, the taxpayer will be liable for interest on any unpaid balance. The interest charge continues to run until the tax is paid. Even if there is a good reason for not paying on time, the interest will still be assessed. The extension request includes the ability to include a payment toward the estimated tax liability. Late PenaltiesIn addition to interest, a taxpayer can also be liable for a late filing penalty and a late payment penalty. Having a valid extension will avoid the late filing penalty, but not the late payment penalty. Late Filing Penalty – A penalty is usually charged if the tax return is filed after the due date and the taxpayer has not filed a valid extension or the extension due date has passed.The penalty is 5% of the balance-due tax for each month (or part of a month) the return is late.– Maximum Penalty – The maximum penalty imposed is 25%.– Minimum Penalty – If your return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller. This penalty can be avoided by filing the appropriate extension and then filing the return by the extended due date. Late Payment Penalty – The penalty is generally 1/2% of the balance-due tax not paid by the regular due date. It is charged for each month or part of a month the tax is unpaid.The maximum penalty is 25%. Taxpayers are considered to have "reasonable cause" for the period covered by an automatic extension if at least 90% of their actual tax liability is paid before the regular due date of their return through withholding or estimated tax payments, or with the automatic extension. Reasonable Cause – The IRS will not assess the late filing penalty or late payment penalty if you can show reasonable cause for not paying on time. To demonstrate reasonable cause, a taxpayer must show they used ordinary business care and prudence in preparing and filing their returns and nevertheless were unable to meet the due date. To request the penalties be abated, a statement is attached to the finished tax return fully explaining the reason. What If You Can't Pay the Balance Due? If a taxpayer is unable to pay the balance due, the IRS offers two possible solutions: pay by credit card or establish a payment plan. Pay by Credit Card – Taxpayers can generally pay part or all of their tax liability by using a credit card. The payment is not made through the government directly, but rather through a third party service designated by the IRS.Unlike merchants, the IRS will not pay the discount to the credit card companies. Instead, the taxpayer is charged a fee that is roughly 2% to 2.5% of the tax due (minimum fee about $4.00). Establish an Installment Payment Plan – Generally, if the amount owed does not exceed $25,000 and the taxpayer is able to pay it within a five-year period, the taxpayer will qualify for an installment agreement. The IRS charges a small fee for setting up the agreement and will continue to charge interest on the unpaid balance. The late payment penalty will also apply, but will be reduced to half the regular amount if the taxpayer qualifies. To be approved for an installment plan, a taxpayer must agree to make full and timely payments, file all future tax returns on time, and pay all future tax balances when due. Any refund from future years will be applied to the outstanding balance. If a taxpayer defaults on the terms of the agreement, the IRS has the option of taking enforcement actions to collect the entire amount owed. Who Can File an Extension?In addition to the taxpayer, Attorneys, CPAs, and Enrolled Agents can file an extension for a taxpayer without a power of attorney. Also,anyone with a valid power of attorney, who is in a close personal or business relationship with the taxpayer, can file an extension for the taxpayer.Options for Receiving RefundsIf you are entitled to a refund and do not have other outstanding liabilities for prior year taxes, past due child support or student loan payments, you have the following options for payment of your refund amount:Direct Deposit - The refund is deposited into your specified savings or checking account. This process is much faster than having your refund issued by check. Taxpayers who use direct deposit for their federal refunds will be able to divide their refunds and make deposits into a maximum of three different financial accounts.Issued a Check - If a direct deposit is not specified, then the refund amount will be paid by check.Applied to Subsequent Year - Any portion of your refund can be applied to next year's estimated taxes and the balance paid to you by check or direct deposit.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT E-filing Your Tax Returns http://www.messnerandhadley.com/blog/e-filing-your-tax-returns/423 http://www.messnerandhadley.com/blog/e-filing-your-tax-returns/423 Messner & Hadley LLP Basics of E-filingWhen e-filing (electronic filing) was first introduced, only the less complicated tax returns qualified. This led to the general public’s perception that e-filing was for short forms with refunds. Since then, e-filing has matured to the point that even the most complicated returns can be electronically filed. It also offers the following advantages to taxpayers: A refund can be received much faster. The risk of a check being lost or stolen is minimized. The IRS (and state, if applicable) no longer needs to keypunch your tax return data, avoiding input errors and some costs at the government return processing centers. Proof of filing is provided. There is no longer the expense of mailing returns. If money is owed, a taxpayer can still file early and delay payment until the last minute. A complete paper copy of your tax return is still provided. In short, e-filing simply replaces the paper-filed return with a return that is electronically filed. There is no sacrifice on your part in quality or service provided by this firm.Authorizing TransmittalBefore your return(s) can be electronically transmitted, you must first provide our firm with written authorization. You will need to sign one of two authorization forms, which will be provided to you after your return has been completed and reviewed and is ready to be filed. Form 8879 – Except in unusual circumstances, Form 8879 will be used. It is used when all forms and schedules on your tax return are acceptable for electronic transmission and provides for an electronic signature (as explained below). To use Form 8879, the taxpayer must be at least 16 years of age. Form 8453 – Occasionally, your return will include a form or schedule that is not acceptable for electronic filing and that particular form must be paper filed. This is usually encountered when one or more of the forms being transmitted requires an original manual signature. When this is the case, Form 8453 is used to provide the authorization. Once the acceptable forms of your return have been electronically filed, the forms that must be paper filed are mailed by your tax professional to the IRS with Form 8453 within three business days of receiving IRS acknowledgment that the return has been accepted. Your Electronic Signature Paper-filed tax returns must be signed by the taxpayer or both taxpayers in the case of a joint return. When all forms and schedules of your return are electronically transmitted (see Form 8879 above), a physical signature is not possible. Instead, your Personal Identification Number (PIN) is used as your electronic signature. You and your spouse, if filing a joint return, establish your individual PIN at the time you sign the authorization for your return to be electronically transmitted. The PIN can be any randomly selected five digit number without zeros and is only used to tie your physical signature on the authorization to the transmitted return. There is no need on your part to record or remember the number and you can use a different number each time you file. Options for Receiving RefundsIf you are entitled to a refund and do not have other outstanding liabilities for prior year taxes, past due child support or student loan payments, you have the following options for payment of your refund amount: Direct Deposit – The refund is generally deposited into your specified savings or checking account within 21 days after the return has been electronically received, and the time is often less than 21 days. Taxpayers who use direct deposit for their federal refunds are able to divide their refunds and make deposits into a maximum of three different financial accounts. Issued a Check – If a direct deposit account is not specified, then the refund amount will be paid by a check. This is generally issued within 21 days after e-filing is completed, compared to the 6 to 8 weeks it usually takes to issue a refund when a paper return is filed. Applied to Subsequent Year – Any portion of your refund can be applied to next year’s estimated taxes and the balance paid to you by check or direct deposit. Options for Paying a Balance DueIf a balance is due on your return, the return can be electronically filed and the balance due on your tax liability can be paid using the following options: Check Payment – A payment voucher will be provided with which you can make a payment at any time up to the unextended due date of the return (generally April 15) without incurring late payment penalties. Direct Debit (Electronic Withdrawal) – You can pay by direct debit at the time the return is filed or specify any date up to and including the last day for filing returns (generally April 15) for an electronic withdrawal from your bank account.Example: Your return could be e-filed in March and you can specify that the debit be made on April 10 (or any other day on or before the return due date). You do not have to remember to do anything at a later time.CAUTION! Taxpayers should first check with their financial institutions to verify that such payments can be made.In addition to your tax return balance due, direct debit can be used to make extension payments and certain estimated payments. Electronic Federal Tax Payment System (EFTPS) – If enrolled in this system, you can pay your federal taxes on the Internet or by phone 24/7. If you make more than one tax payment per year, such as estimated taxes or payments on an installment plan, you may find this system especially convenient. Enrollment can be initiated via the Internet at EFTPS.gov, but because initial enrollment confirmations are sent by mail, you’ll need to plan ahead to get set up in the system if you want to use it to make a payment on April 15. Direct Pay – If you haven’t used the direct debit feature when you e-filed, you can use the IRS’ Direct Pay service to pay your tax bill or make an estimated tax payment directly from your checking or savings account at no cost to you. You do not have to sign up in advance, but you can’t pre-schedule multiple payments as you can with EFTPS. Go to the IRS web site to use this feature: http://www.irs.gov/Payments/Direct-Pay. Lack of Funds – Even if you do not have the funds available to pay what you owe, you must still file your return on time to avoid certain late penalties. Should this be your situation, we can file an application for an installment payment plan. Selecting a Bank Account Are you hesitant about utilizing the automatic deposit, Direct Pay or debit option because you are concerned about providing the IRS with your account numbers? Keep in mind, the IRS already has most of that information except for non-interest bearing accounts, provided to them from the banks via the annual filing of 1099s. Generally, deposits and debits can be made to National and State Banks, Savings and Loan Associations, Mutual Savings Banks, and Credit Unions within the United States. Account types include savings, checking, share draft, money market accounts, etc. Refunds may not be direct deposited to credit card accounts. CAUTION! Some financial institutions do not permit the deposit of joint refunds into individual accounts. The following bank or financial institution account information is required to utilize the direct deposit or debit: (1) Bank’s Nine Digit Routing Number (RTN)(2) Account Number(3) Type of Account (Checking or Savings)Proof of FilingWhen your e-filed return has been accepted, the IRS provides your tax professional with a confirmation of filing on Form 9325 which includes the date accepted and the Declaration Control Number (DCN) assigned to your return. Extensions for Additional Time to FileIf you need additional time to file your return, the IRS provides two forms of extensions, both of which can be filed electronically. The extension used by most taxpayers is Form 4868; the other one, Form 2350, is used by taxpayers living and working overseas and is not discussed here. Use Form 8878 to provide your tax professional with authorization to e-file these extensions. This form functions much like Form 8879 which authorizes the e-filing of your tax return and utilizes electronic (PIN) signatures. CAUTI0N! It is important to understand that these are extensions of time to file your return, not an extension to pay your tax liability. Even if you file for and are granted an extension of time to file, interest and late payment penalties will apply to any balance due on the return from the original April due date. Automatic Six-Month Extension – This extension gives you until October 15 to file your return. If you expect to owe, estimate how much and include an extension payment. If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date. If the October 15 due date falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Most states have the same due date, although some give additional time.While the extension may be automatic, it is still necessary to submit a request for the extension. This is done on IRS Form 4868, which can be filed electronically or on paper. If you aren’t able to file on time, the request should be submitted by the regular due date of the return, even if you owe no tax or will be entitled to a refund once you file the return.It is not a good idea to delay filing your return because you owe taxes. The late filing penalty is 5% per month (maximum 25%) and can be substantial. It is generally better practice to file the return without payment and avoid the late filing penalty. We can also establish an installment agreement which allows you to pay your taxes over a period of up to 60 months. Interest on the Balance DueAn extension does not extend the time taxpayers have to pay their tax liabilities. Therefore, if money is owed on a return that is filed after the original April due date, the taxpayer will be liable for interest on any unpaid balance. The interest charge continues to run until the tax is paid. Even if there is a good reason for not paying on time, the interest will still be assessed. The extension request includes the ability to include a payment toward the estimated tax liability. Late PenaltiesIn addition to interest, a taxpayer may also be liable for a late filing penalty and a late payment penalty. Having a valid extension will avoid the late filing penalty, but not the late payment penalty. Late Filing Penalty – A penalty is usually charged if the tax return is filed after the due date and the taxpayer has not filed a valid extension or the extension due date has passed. The penalty is 5% of the balance-due tax for each month (or part of a month) the return is late.– Maximum Penalty – The maximum penalty imposed is 25%.– Minimum Penalty – If your return is more than 60 days late, the minimum penalty is $135 or the balance of the tax due on your return, whichever is smaller.This penalty can be avoided by filing the appropriate extension and then filing the return by the extended due date. Late Payment Penalty – The penalty is generally 1/2% of the balance-due tax not paid by the regular due date. It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%. Taxpayers are considered to have "reasonable cause" for the period covered by an automatic extension if at least 90% of their actual tax liability is paid before the regular due date of their return through withholding or estimated tax payments, or with the automatic extension. Reasonable CauseThe IRS will not assess the late filing penalty or late payment penalty if you can show reasonable cause for not paying on time. To demonstrate reasonable cause, taxpayers must show they used ordinary business care and prudence in preparing and filing their returns and nevertheless were unable to meet the due date. To request the penalties be abated, a statement is attached to the finished tax return fully explaining the reason.What If You Can't Pay the Balance Due? If a taxpayer is unable to pay the balance due, the IRS offers two possible solutions: Pay by Credit Card – Taxpayers can generally pay part or all of their tax liability by using a credit card. The payment is not made through the government directly, but rather through a third party service designated by the IRS. Unlike merchants, the IRS will not pay the discount to the credit card companies. Instead, the taxpayer is charged a fee that is roughly 2% to 2.5% of the tax due (minimum fee about $4.00). Establish an Installment Payment Plan – Generally, if the amount owed does not exceed $25,000 and the taxpayer is able to pay it within a five-year period, the taxpayer will qualify for an installment agreement. The IRS charges a small fee for setting up the agreement and will continue to charge interest on the unpaid balance. The late payment penalty will also apply, but will be reduced to half the regular amount if the taxpayer qualifies. To be approved for an installment plan, a taxpayer must agree to make full and timely payments, file all future tax returns on time, and pay all future tax balances when due. Any refund from future years will be applied to the outstanding balance. If a taxpayer defaults on the terms of the agreement, the IRS has the option of taking enforcement actions to collect the entire amount owed. State E-fileVirtually all states now offer e-filing in a cooperative tax filing program with the IRS. If acceptable for filing, the state return will also be e-filed.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Disaster Casualty Losses http://www.messnerandhadley.com/blog/disaster-casualty-losses/424 http://www.messnerandhadley.com/blog/disaster-casualty-losses/424 Messner & Hadley LLP A disaster loss is actually a casualty loss that occurs in a geographic area that the President of the United States declares eligible for Federal disaster assistance. Disaster losses are also eligible for special tax benefits, which are discussed in this brochure. What is a Casualty Loss?A casualty loss occurs when there is property damage from a sudden, unanticipated event. Some examples of qualifying events are: hurricanes, earthquakes, tornadoes, floods, storms, fire and volcanic eruptions. Why are Disaster Losses Different?Taxpayers within a federally declared disaster area may elect to claim their loss: In the year it occurs, or On the preceding year’s return. Example: A taxpayer in a federally declared disaster area can claim a casualty loss either on their return for the year of the loss or on their return for the previous year. If the previous year’s return has already been filed, as is generally the case, it can be amended by filing a Form 1040X. In contrast, someone who suffered an individual casualty (a car accident, a house fire caused by a cooking mishap, etc.) who is eligible to claim a casualty loss may only do so on the return for the year that the casualty occurred. The return on which to claim a disaster loss deduction depends upon a number of factors and should be carefully analyzed to determine which year is the most beneficial for the taxpayer. The tax brackets for each year – Each year should be carefully examined as to which will provide the greatest overall tax advantage without wasting other tax benefits. The need for immediate cash – The primary purpose of the special rules allowing the casualty loss to be claimed on the prior year’s return is to provide taxpayer access to a tax refund without the need to wait – often many months - to file their return for the year of the loss. Self-employment tax – Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss can offset self-employment tax as well as income taxes. Whether the loss will be used up – If the casualty loss is not fully used up in the year it is first deducted, it can create what is called a net operating loss (NOL). An NOL can be taken back to prior years or carried forward to future years and used as a deduction on the carryback or carryforward returns. Care should be taken to analyze the benefit from the potential loss carryback versus carrying the loss forward. Values the Loss is Based UponGenerally, for each item lost in the casualty the deductible loss is the lesser of: The cost or adjusted basis(1) or The decrease in fair market value(2) (FMV) Once the loss is determined for each individual item, then those amounts are added together to determine the total loss for the casualty event. For real property, the loss is figured on the whole property (buildings, plants, trees, etc.), not item-by-item. (1) Generally, the measure of a taxpayer’s basis in a property is its cost. When property is inherited, received as a gift, or acquired in a nontaxable exchange, the basis will be determined in some other manner. Certain events can take place after acquiring the property that can increase or decrease the basis; thus the term “adjusted basis”. Examples would be improvements to the property, depreciation and casualty loss deductions. (2) Fair market value (FMV) is the price that a willing seller would accept from a willing buyer when the seller does not need to sell nor must the buyer purchase and both are aware of all the relevant facts.Business or Personal Casualty Those that are business casualty losses are fully deductible without limitations. Personal casualty losses, on the other hand, are first reduced: by $100 for each event, and then the total of all events for the year is reduced by 10% of the taxpayer’s annual income (Adjusted Gross Income). In addition, for personal casualty losses, deductions must be itemized in order to take advantage of the loss. Example: Claiming a Personal Loss – The taxpayer’s principal residence was damaged in a flood. The damage amounted to $12,000 and the taxpayer had no flood insurance. His AGI for the year was $57,000. His casualty loss for the year is determined as follows: Casualty loss $ 12,000 “Per-event” amount < 100> 10% of AGI < 5,700> Casualty loss $ 6,200 Had the flooded area been a federally declared disaster, the taxpayer could elect to take the casualty in the prior tax year. Figuring a LossTo determine the deduction for a casualty or theft loss, figure out the loss first. Amount of loss: Figure the amount of the loss using the following steps. 1) Determine the adjusted basis in the property before the casualty or theft. 2) Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. 3) Subtract any insurance proceeds or other reimbursement received (or expected to be received) from the smaller of the amounts determined in (1) and (2). If the property is covered by insurance, the taxpayer must file a timely insurance claim for reimbursement of the loss. Otherwise, a casualty or theft loss deduction cannot be claimed for that property. However, the part of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. Gain From ReimbursementIt is possible to incur a gain from a casualty event. If a taxpayer’s reimbursement is more than the adjusted basis in the property, there is a gain. This is true even if the decrease in the FMV of the property is smaller than the adjusted basis. If there is a gain, taxes may have to be paid on it, or reporting the gain may be postponed (as discussed later). If the gain is from a taxpayer’s primary residence and the taxpayer(s) have owned and used the residence as the main home for 2 out of the prior 5 years, the taxpayer can exclude $250,000 ($500,000 on a joint return) of gain. Example: Assume an individual purchased his home for $50,000 fifteen years ago and the home is destroyed by a hurricane. The insurance company decides the home is a total loss and pays the single homeowner $200,000 as the settlement for the loss. He decides not to rebuild and sells the lot where the house once stood for $40,000. If the taxpayer elects to use his $250,000 home gain exclusion to offset the gain from the casualty, he would have no taxable gain. Insurance proceeds $200,000 Lot sale proceeds 40,000 Total sale proceeds $240,000 Home cost (basis) < 50,000> Home gain $190,000 Home sale exclusion <190,000> Taxable Gain -0- If the taxpayer in this example decides to rebuild or replace his home, he could postpone the gain as outlined below.Replacement Period for Postponed Gains Generally - To postpone reporting gain, a taxpayer must buy replacement property within a specified period of time. The replacement period begins on the date the property was damaged, destroyed, or stolen. The replacement period ends 2 years after the close of the first tax year in which any part of the gain is realized. Main Home - For a main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which any part of the gain is realized. When to Report Gains and LossesIf a taxpayer receives insurance proceeds or other reimbursement that is more than the adjusted basis in the destroyed or stolen property, there is a gain from the casualty. This gain must be included in income in the year the reimbursement is received, unless the taxpayer buys replacement property and chooses to postpone reporting the gain. To postpone the entire gain, the cost of the replacement property must be at least as much as the reimbursement received. Generally, a casualty loss that is not reimbursable is deductible only on the return of the year that the casualty occurred, but for losses in federally declared disasters, taxpayers can choose to claim the loss either on the return for the year of the loss or on the prior year’s return.Home Destroyed is Still Treated as a Home A taxpayer may be able to continue treating their home as a qualified home even after it is destroyed in a casualty. This means the taxpayer can continue to deduct the mortgage interest subject to the normal limits. However, the taxpayer must do one of the following within a reasonable period of time after the home is destroyed: 1) Rebuild the destroyed home and move into it, or 2) Sell the land on which the home was located. This rule applies whether the home is the main home or a second home that the taxpayer treats as a qualified home.Reimbursement for Living ExpensesAn exclusion from income is allowed for insurance proceeds received for a temporary increase in living expenses due to a casualty loss of a principal home. The exclusion amount is limited to the increased “actual” reasonable and necessary living expenses as compared to the “normal” living expenses that would be incurred by the taxpayer. Living expenses include temporary housing, utilities, meals, transportation and miscellaneous items like laundry, etc. For this purpose, mortgage interest is not considered a living expense. Example – Reimbursement of Living Expenses - When fire damaged their home, the taxpayers moved to a motel for a short time and then moved to a rented house. They stayed at the rental for about one month while they were having their home repaired. They incurred the following expenses during this period, compared to their normal household expenditures: Description ofExpense ActualExpenses Normal LivingExpenses Increase or Decrease Due to Casualty Rent Motel costsFoodLaundry and cleaningUtilities Transportation costs $ 9001,000800500240 $005002075420 $ 9001,00030030-75-180 Total $2,990 $1,015 $1,975 The taxpayers were reimbursed for the actual living expenses ($2,990) from the insurance company. Of that amount, $1,975 (the increase in living expenses) is excludable from their income. Proving Casualty LossesTaxpayers will need to show evidence of the cost of the lost property and evidence of the amount of the loss. It is helpful to have photos of the property before and after, notes describing the property that was damaged, appraisals and news clips describing the event. Blue Book values can be helpful in casualties that involve cars. A qualified appraiser should be used to determine FMV of real property and scheduled personal property.Insurance Proceeds in a Disaster AreaA taxpayer whose principal residence (or its contents) is damaged in a disaster can qualify for special tax treatment regarding certain insurance proceeds received as a result of the casualty. To qualify, the locale of the residence must be in a Presidential-declared disaster area. The rules stipulate that no gain is recognized on the receipt of insurance proceeds for personal property that was part of the residence contents, if such property was not scheduled under the insurance policy (property such as jewelry which is covered by a rider under the insurance policy). Other insurance proceeds received for the residence or its contents may be treated as a common pool of funds. If those funds are used to purchase property similar to the property lost, a taxpayer will need to recognize the gain only to the extent that the pool is more than the cost of the replacement property. The replacement period for the damaged or lost property in a disaster area is four years after the close of the first taxable year in which any part of the gain on the involuntary conversion is realized. These rules are extended to renters as well. Renters who receive insurance proceeds related to disaster damage to their property in a rented principal residence also qualify for the disaster loss relief. Other “reimbursement”: Although insurance is the most common form of reimbursement for casualties, other types of “reimbursement” also can reduce the amount of loss. These include: Federal disaster loan forgiveness. Repairs made to rental property by a lessee. Damages received in court settlement (after legal fees and expenses). Repairs, etc., by relief agencies. Grants, gifts, or other payments designated to repair or replace property. However, if there are no conditions attached to the funds, they are not considered reimbursement. Filing Extensions & Penalty Waivers The IRS will extend the due date for filing and paying taxes and waive related penalties (late filing and payment) for a taxpayer in a Presidential-declared disaster zone. The IRS must also abate assessment of underpayment interest for the period of the extension. Generally, the IRS will issue a news release shortly after the disaster designation has been issued outlining the extension and waiver periods.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Rental Real Estate as an Investment http://www.messnerandhadley.com/blog/rental-real-estate-as-an-investment/425 http://www.messnerandhadley.com/blog/rental-real-estate-as-an-investment/425 Messner & Hadley LLP A popular form of long-term investment is real estate rentals. Rentals can fall into several varieties, of which real estate rentals is the most common. This material will explain some of the tax ramifications of renting real estate, both residential and commercial.One of the biggest benefits of owning rental property is that the tenants, over time, buy the property for you. In addition, if structured properly, the allowable depreciation deduction will shelter the rental income. Another historical benefit of real estate rentals is capital appreciation. Before acquiring a rental property, consider the following: After-tax cash flow, Potential for long- or short-term appreciation, Property condition (with an eye on when you might get stuck with a large repair bill), Debt reduction, Type of tenants, Potential for rent increases or re-zoning, and Whether there is community rent control, etc. Although most of the considerations are subjective, the after-tax cash flow can be estimated fairly easily. Operating Expenses For tax purposes, you will figure your profit or loss each year from operating the rental property. Generally, you can deduct all expenses incurred to operate the rental. The following are potential operating expenses that are deductible: Advertising Cleaning & maintenance Bank charges - if a separate account is maintained. Insurance - fire, casualty and liability Utilities - gas, electricity, water, cable, etc. Services - yard care, pool service, pest control, etc. Rental commissions Property management fees Mortgage interest - on debt to acquire or improve the rental. Property taxes Repairs - see repairs vs. improvements below. Local transportation expenses Homeowner's or association dues Tax return preparation fees Depreciation allowance - see depreciation below. Repairs vs. Improvements When figuring your profit or loss from operating the rental property each year, you can deduct the cost of repairs to the rental property. However, any improvements that were made must be depreciated over the improvement's useful life. How do you distinguish a repair from an improvement? Repairs - A repair keeps your property in good operating condition and does not materially add to the value of your property or substantially prolong its life. Improvements - An improvement will add to the value of the property, prolong its useful life, or adapt it to new uses. If you make an improvement to a property, the cost of the improvement must be capitalized.  Safe Harbor Election - IRS regulations permits a taxpayer with $10 million or less in average annual gross receipts in the three preceding years, and whose building has an unadjusted basis of $1 million or less, to make an irrevocable election to immediately deduct rather than depreciate improvements. To qualify, the total amount paid during the year for repairs, maintenance, improvements and similar activities made to the building may not exceed the lesser of 2% of the building's unadjusted basis or $10,000. The election is made on a building-by-building basis and generally can only be made on an original return. Special rules apply if the taxpayer leases rather than owns the building. Depreciating Rental Property“Depreciation” is an accounting term for writing off the wear and tear on an asset that has a useful life of more than one year and costs over $500. Generally, rental real estate improvements must be depreciated over a period of 39 years. However, there are exceptions for residential rental real estate, which is depreciated over 27.5 years and most personal property such as furniture, equipment, etc., which is depreciable over 5 or 7 years. There are additional special rules applying to land rentals, leasehold improvements and restaurants. Passive Loss LimitationsAs an investment (not a business), rental real estate income is not subject to Social Security taxes. However, as with business activities, real estate rentals are considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. However, there are two exceptions to that rule:(1) Active Participation - If you “actively participate” in the residential rental activity, you may be able to deduct a loss of up to $25,000 ($12,500 if you're married, file separately, and live apart from your spouse for the entire year—but if you're married, file separately and don't live apart from your spouse for the entire year, you're not eligible for this break at all) against ordinary (nonpassive) income, such as your wages or investment income. You actively participate in the rental activity if you make key management decisions or arrange for others to provide services. Active participation does not require regular, continuous and substantial involvement with the property. But in order to satisfy the active participation test, you (together with your spouse) must own at least 10% of the rental property. Ownership as a limited partner does not count. If your adjusted gross income (AGI) is above $100,000, the $25,000 allowance amount is reduced by one-half the excess over $100,000. (If you're married, file separately and are eligible for the break, the $12,500 allowance amount is reduced by one-half the excess over $50,000.) Under this rule, if the AGI is $150,000 or more ($75,000 or more for eligible married taxpayers who file separately), the allowance is reduced to zero. For these purposes, AGI is modified to some extent, e.g., you ignore taxable Social Security income and the Individual Retirement Account (IRA) deduction.(2) Real Estate Professional Exception - If you qualify as a “real estate professional” (which requires the performance of substantial services in real property trades or businesses), your rental real estate activities are not automatically treated as passive, and so losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate in the activities. Any losses not allowed under these two exceptions are not lost but suspended, and carried forward indefinitely to tax years in which your passive activities generate enough income to absorb the losses. Special Situations There are a number of special circumstances involving the rental of real estate. First, Last and Security Deposits - Generally, landlords require a new tenant to pay the first and last month's rent in advance along with a security deposit. The IRS says that advance rent payments are income in the year received. However, security deposits you plan to return to your tenant at the end of the lease are not income. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, then the amount kept is income for that year. Renting Part of Property - If you rent part of your property, you must divide certain expenses between the part used for rental purposes and the part used for personal purposes, as though you actually had two separate pieces of property. You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses. You can also deduct as a rental expense other expenses that are normally nondeductible personal expenses, such as utilities and home repairs. You do not have to divide the expenses that belong only to the rental part of your property.Generally, the most frequently-used methods of allocating expenses between personal and rental use are: (1) based on the number of rooms in the home, and (2) based on the square footage of the home. You can use any reasonable method for dividing the expense. Separating Improvements from Land - Not all of the cost of acquiring real estate is depreciable. Specifically, the cost of the land is not depreciable and must be separated from the improvements. Renting to a Relative - Special rules may apply when renting a home or apartment to a relative. If you rent a home to a relative who: (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it is rented at a fair rental value (not at a discount), then no limitations apply. You simply treat it like any other rental property. However, if it is rented to a relative below fair rental value, all of the expenses, except mortgage interest and property taxes, are considered personal expenses and therefore not deductible. Vacation Home Rental - There are special tax consequences when you rent out your vacation home for part of the year. The tax treatment depends on how many days it is rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by non-relatives if a market rate rent is not charged. When determining the personal-use days, do not include days when you are performing repairs or fixing up the property. Selling, Exchanging or Converting the RentalBuying, operating and selling a rental property can have profound tax ramifications.  Rental property, if owned for longer than a year or if inherited(1), will qualify for long-term capital gains when sold. This means any gain is taxed at a maximum of 20% with one exception. The exception is recaptured depreciation which, depending upon your tax bracket, can be taxed up to 25%. When it comes time to cash in on a rental investment, there are a number of options available to the owner: Outright Sale - When a rental property is sold outright, the entire gain will be taxable in the year of sale. Installment Sale - If the seller carries back a note (mortgage) for all or part of the buyer's purchase price, the seller qualifies for installment sale treatment, which in effect spreads the taxation of the gain over the life of the note.(2) Convert to Personal Use - The rental can be converted to personal use of the taxpayer and any gain deferred until the property is ultimately sold.  Tax-Deferred Exchange - A tax-deferred exchange can be used as a means of avoiding immediate taxation on the gain from a rental property by deferring the gain into a replacement property.(2) Business or Investment Use Requirement - To qualify for a Sec 1031 exchange, the properties exchanged must both be held for business or investment use. Like-Kind Requirement - The properties exchanged must be like-kind (similar in nature, but not necessarily of the same quality). Real estate must be exchanged for real estate (improved or unimproved qualifies).Caution: Sometimes real estate is held in a partnership or other entity. Generally, an entity ownership does not qualify as like-kind. Although, tenant-in-common interests (sometimes referred to as TICS), if structured properly, can. Property Acquired with Intent to Exchange - If a taxpayer acquires (or constructs) property solely for the purpose of exchanging it for like-kind property, the IRS says that the taxpayer doesn't hold the property for productive use in a trade or business or for investment, and as to the taxpayer, the exchange doesn't qualify for non-recognition treatment under Code Sec. 1031. Simultaneous or Delayed - The exchange can be simultaneous or delayed. If delayed, the property received in the exchange must be identified within 45 days after the property given is transferred. No matter how many properties are given up in an exchange, a taxpayer is allowed to designate a maximum of either:(a) Three replacement properties regardless of FMV (fair market value), or(b) Any number of properties, as long as the total FMV isn't more than 200% of the total FMV of all properties given up.If a taxpayer identifies replacement properties over these limits, he/she is treated as if none were identified. A taxpayer can, however, revoke an identification at any time before the end of the 45-day time period.The receipt of the new property must be completed before the EARLIER of:(1) 180 days after the transfer of the property given, OR(2) The due date (including extensions) of the return for the year in which the property given was transferred.Qualified Intermediary - Generally, to qualify for a delayed Sec 1031 exchange, a qualified intermediary is engaged to hold the funds from the sale until the replacement purchase is made. It is important to understand that the taxpayer cannot take possession of the proceeds from the sale and then buy another property. If that happens, the event does not qualify for exchange and is immediately taxable.Reverse Exchanges - It is possible to structure a reverse exchange that complies with the Section 1031 delayed exchange requirements. However, it requires that the replacement property be purchased first, by the intermediary, without the benefits of the proceeds from the property given up in the exchange. Thus, only taxpayers with the cash financial resources can accomplish reverse exchanges.Tax-deferred exchanges can be very tricky and should not be entered into without first analyzing the tax aspects. (1)Some property inherited from individuals who died in 2010 may be subject to other rules.(2)This option is not available if the sale results in a loss. Net Investment Income TaxRental income is generally considered to be passive income, as opposed to a trade or business and as such, for higher income taxpayers, is subject to a 3.8% net investment income tax (NIIT). There are exceptions, but those exceptions require the rental activity to rise to the level of a trade or business-a very difficult standard to meet for residential rental property. Thus you can expect this 3.8% NIIT to apply to both net rental profits and to any profits from the sale of the rental if your income exceeds the income threshold for the NIIT.  DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations thatmight apply to your situation.   Thu, 04 Dec 2014 19:00:00 GMT It's Tax Time! Plan Ahead For Your Appointment http://www.messnerandhadley.com/blog/its-tax-time-plan-ahead-for-your-appointment/449 http://www.messnerandhadley.com/blog/its-tax-time-plan-ahead-for-your-appointment/449 Messner & Hadley LLP If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment and are fully prepared, you’ll have more time to: Consider every possible legal deduction; Better evaluate your options for reporting income and deductions to choose those that are best suited to your situation; Explore current law changes that affect your tax status; Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability. Choosing Your Best Alternatives The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but future returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax. For example, the law allows choices in transactions like: Sales of property. . . . If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer. Depreciation. . . . You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the costs over a number of years; or, in certain cases, you can deduct them all in one year. Where to Begin? Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around. Other general suggestions to consider for your appointment preparation include: Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.) Be sure to call our attention to any foreign bank account, foreign financial account or foreign trust in which you have an ownership interest, signature authority or control over. We also need to know about foreign inheritances and ownership of foreign assets. Generally any foreign financial dealings should be brought to our attention so we can determine if you have any special reporting requirements. The penalties for not making and submitting the required reports can be draconian. Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s! Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale or that you haven’t yet received the 1099-DIV form for the current year. Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them. Compare deductions from last year with your records for this year. Did you forget anything? Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them. Accuracy Even for Details To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s) and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation. Marital Status Change If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review. Dependents If you have qualifying dependents, you will need to provide the following for each: First and last name Social security number Birth date Number of months living in your home Their income amount (both taxable and nontaxable) If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction. Some Transactions Deserve Special Treatment Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions: Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction. Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment. Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents. Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember, too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment. Purchase of a Home: Be sure to bring a copy of the closing escrow statement if you purchased a home. Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you. Home Energy-Related Expenditures: If you installed solar, geothermal or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit. Identity Theft: Identity theft is becoming more and more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing returns of taxpayers who have had their identity stolen. Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2. Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution. Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements. If you have questions about assembling your tax data prior to your appointment, please give this office a call.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Coverdell Education Savings Accounts - Planning Your Child's Education http://www.messnerandhadley.com/blog/coverdell-education-savings-accounts-planning-your-childs-education/450 http://www.messnerandhadley.com/blog/coverdell-education-savings-accounts-planning-your-childs-education/450 Messner & Hadley LLP Overview of Coverdell Education Savings AccountsThese accounts, originally referred to as Education IRAs, have been available for over 15 years. These accounts are nondeductible education savings accounts. The investment earnings from a Coverdell account accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the account beneficiary.Annual ContributionsThe allowable nondeductible contribution is $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. ContributionsContributions that CANNOT be made: Those that aren’t made in cash; Those that are made after the accountholder reaches age 18 (special needs students discussed later), or Those that exceed the annual contribution limit (except for rollovers) Timing of the Contributions Contributions to these accounts must be made by April 15 of the subsequent tax year. If April 15 falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Projecting the Account GrowthThe table below allows you to predict the growth of an account over various periods and at selected investment rates. ACCOUNT GROWTH FACTORS BASED ON THE SAME CONTRIBUTION EVERYYEAR AT VARIOUS INTEREST RATES YEAR 123456789101112131415161718 4%1.0002.0403.1224.2465.4166.6337.8989.21410.58312.00613.48615.02616.62718.29220.02421.82523.69825.645 6%1.0002.0603.1844.3755.6376.9758.3949.89711.49113.18114.97216.87018.88221.01523.27625.67328.21330.906 8%1.0002.0803.2464.5065.8677.3368.92310.63712.48814.48716.64518.97721.49524.21527.15230.32433.75037.450 10%1.0002.1003.3104.6416.1057.7169.48711.43613.57915.93718.53121.38424.52327.97531.77235.95040.54545.599 Example of how to use the table: Assume contributions of $1,500 are made each year for 14 years to the account and the account is earning 8%. From the table, the growth factor for 14 years at 8% is 24.215. To determine the value of the account at the end of the 14-year period, multiply the factor times the annual contribution of $1,500. In this example, the account value would be $36,322.50.Who Can Make Contributions? Contributions to Coverdell Education Savings Accounts can be made by any individual, including the beneficiary, if the “modified adjusted gross income (AGI)” of the contributor is less than the statutory phase out limit. The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below a certain phase out limit. Corporations and other entities (including tax-exempt organizations) are permitted to make contributions to these accounts, regardless of the amount of the income of the corporation or entity during the year of the contribution. Phase Out LimitsThe annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below the phase out limits. PHASE OUT LIMITS – MODIFIED AGI Filing Status Modified AGI Married Taxpayers Filing Jointly $190,000– $220,000 All Others $95,000 – $110,000 “Modified AGI” is figured by adding back to regular AGI any income the contributor excluded under the foreign provisions (e.g., foreign earned income or income from U.S. possessions). The contribution limit is phased out ratably for contributors with modified AGIs between the lower and top modified AGI levels. No contributions are allowed once the Coverdell account beneficiary reaches age 18. If you think you will be limited in making contributions because of your AGI level, one option might be gifting the funds for the contribution to either the beneficiary or someone else whose modified AGI is low enough to allow the contribution on behalf of the beneficiary. A 6% excise tax applies to excess contributions - i.e., any contribution over the annual limit. Contributions may be made to both a Coverdell Savings Account and a Qualified Tuition Plan for the same beneficiary without penalty. The excise tax also isn’t charged if: The contribution is withdrawn before the due date (including extensions) of the contributor’s income tax return; or The contribution is a rollover. Qualified Education ExpensesIf a beneficiary’s “qualified education expenses” in a year equal or exceed total Coverdell account distributions for the year, the distributions are 100% excluded from the beneficiary’s gross income. “Qualified education expenses” are limited to expenses for school or higher education and generally include tuition, fees, books, supplies, equipment and certain room and board expenses. The term “school” for this definition includes any school that provides elementary or secondary education (kindergarten through 12th grade, as determined under state law). “Qualified elementary and secondary education expenses” are defined as follows: (a) Expenses for tuition, fees, academic tutoring, special needs services in the case of a “special needs beneficiary,” books, supplies, and other equipment, which are incurred in connection with the enrollment or attendance of the designated beneficiary of a Coverdell account as an elementary or secondary school student at a public, private, or religious school. (b) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs), which are required or provided by a public, private, or religious school in connection with the enrollment or attendance of the designated beneficiary at the school. (c) Expenses for the purchase of any computer technology or equipment or for Internet access and related services if the technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years that the beneficiary is in school. This will not include expenses for computer software designed for sports, games, or hobbies unless the software is educational in nature. Distributions Used to Pay Qualified ExpensesDistributions are generally taxed under rules similar to those for annuities. They are made up of principal (under all circumstances excludable from gross income) and earnings (which may or may not be excludable from income). If the beneficiary uses the entire distributions to pay qualified expenses, the distribution is completely tax-exempt. However, when all or part of the distribution is used for other than qualified expenses, then a portion of the earnings is taxable. Example: The Coverdell account for Will Jones contains $10,508, of which $7,000 is from contributions to the account and $3,508 is due to earnings. Will withdraws $6,000 from the account and uses $5,000 for qualified educational expenses and $1,000 for a down payment on a car. Under the annuity rules, 66.62% ($7,000/$10,508) of the distribution is treated as principal. This equals $3,997 ($6,000 x .6662), which is the amount Will can exclude from his taxable income. The balance, $ 2,003, must be allocated to earnings, and it is potentially taxable to Will depending on his use of the funds. In this case, he used 16.67% ($1,000/$6,000) of the distribution for unqualified purposes (the car purchase). Therefore, Will must pay tax on 16.67% of the earnings, $334 ($2,003 x .1667). Delayed DistributionEven though contributions to the account are not permitted past the age of 18, the funds can remain in the account and continue to accrue investment earnings up to the mandatory distribution age (prior to age 30). The longer the income accrues tax-free in the account, the greater the benefit derived by the recipient. To maximize the tax-free income, one would want to delay the distribution as long as possible and still be able to utilize all of the funds to pay qualified education expenses. Use the table below to predict growth after the education account beneficiary turns 18. Investment Rate of Return (Annually) YRS1234567891011 AGE1920212223242526272829 2%1.0201.0401.0611.0821.1041.1261.1491.1721.1951.2191.243 4%1.0401.0821.1251.1701.2171.2651.316 1.3691.4231.4801.539 6%1.0601.1241.1911.2621.3381.4191.5041.5941.6891.7911.898 8%1.0801.1661.2601.3601.4691.5871.7141.8511.9992.1592.332 10%1.1001.2101.3311.4641.6111.7721.9492.144 2.3582.5942.853 12%1.1201.2541.4051.5741.7621.9742.2112.4762.7733.1063.479 The table assumes the Coverdell Education Savings Account is not immediately utilized and allowed to continue to accumulate during the period in which no contributions are allowed and up to the age at which mandatory distribution or qualified rollover is required. Distributions at Death of BeneficiaryIf the designated beneficiary of an account dies, the account balance must be distributed within 30 days after the death to his/her estate. Distribution Requirements When Beneficiary Reaches Age 30 Account funds must be withdrawn or rolled over to another qualified Coverdell account before the beneficiary reaches age 30. Distributions that aren’t withdrawn or rolled over are taxable and subject to penalties. Like IRA accounts, the Coverdell Education Savings Accounts can be rolled over once a year, and they can be transferred at will for the benefit of the same beneficiary. The rollover must be within 60 days of the original distribution. The accounts can also be rolled over or transferred to another qualified member of the taxpayer's family who meets the age requirement. Penalties For Distributions When Not Used For EducationA 10% withdrawal penalty applies to the taxable portion of all distributions unless they are: Made after the death of the designated beneficiary; Due to the beneficiary’s disability; Made on account of a tax-free scholarship or other payment to the extent the amount of the distribution isn’t more than the amount of the tax-free payment; or Excess contributions (over the annual maximum) and the excess is returned, along with income attributable to it, by the due date of the contributor’s income tax return. The net income is included in the distributee’s income in the year of the contribution. Other Requirements Can’t invest in life insurance contracts. The Coverdell account assets can’t be commingled except in common trust or investment funds. The trustee must be a bank or another person who will administer the trust as required (to the IRS’ satisfaction). DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Roth IRA - Is It For You? http://www.messnerandhadley.com/blog/roth-ira-is-it-for-you/452 http://www.messnerandhadley.com/blog/roth-ira-is-it-for-you/452 Messner & Hadley LLP Traditional IRAs are familiar to most taxpayers, providing a relatively simple method of saving for retirement AND deferring taxes in the process. But one drawback of the Traditional IRA is that once withdrawals from them begin, distributed earnings and contributions that were tax-deductible get taxed. In contrast, a Roth IRA allows no tax deduction of contributions. However, it does allow tax-free accumulation on the account so that at retirement ALL distributions from a Roth IRA are tax-free, both contributions and earnings. Naturally, to get this tax-free treatment, certain conditions must be met.Lump Sum Accumulation $1 Rolled Over “X” Years INVESTMENT RATE OF RETURN (ANNUALLY) YRS510152025303540 2%1.10411.21901.34591.48591.64061.81141.99992.2080 4%1.21671.48021.80092.19112.66583.24343.94614.8010 6%1.33821.79082.39663.20714.29195.74357.686110.2857 8%1.46932.15893.17224.66106.848510.062714.785321.7245 10%1.61052.59374.17726.727510.834717.449428.102445.2593 12%1.7623 3.10585.47369.646317.000129.959952.799693.0510 Example: A rollover contribution of $30,000 left to accumulate for 25 years at 6% will be worth $128,757 ($30,000 x 4.2919) at the end of the period.IRA Growth with $1,000 Annual ContributionFor larger contributions, extrapolate the results. Example:contribute $3,000 annually, simply triple the table results. INVESTMENT RATE OF RETURN (ANNUALLY) YRS5 101520253035404550 2%5,20410,95017,29424,29832,03140,56849,99560,40271,89384,580 4%5,41712,00620,02429,77841,64656,08573,65295,026 121,030152,667 6%5,63713,18123,27636,78654,86579,058111,435154,762 212,744290,336 8%5,86714,48727,15245,76273,106113,283172,317259,057 386,506573,770 10%6,10515,93831,77357,27598,347164,494271,025442,593 718,9051,163,909 12%6,35317,54937,28072,053133,334241,333431,664767,092 1,358,2302,400,018 Example: $2,000 annually contributed to an IRA earning 6% per annum would have a value of $109,730 (54,865 x 2) after 25 years. Based on the two examples above, a taxpayer who rolled $30,000 into an IRA and then continued to contribute $2,000 a year to that IRA would have $238,487 in the IRA account at the end of 25 years.How Much Can You Contribute?As with a Traditional IRA, to be eligible for a contribution to a Roth IRA, you (or your spouse, if you aren’t employed or self-employed) must have taxable compensation like wages, earnings from a self-employed business, or alimony. The IRA contribution annual limit slowly rose over the years as a result of specified increases in the law, but has leveled off recently because of low inflation rates. In addition to normal contributions, taxpayers age 50 and older are allowed to make "catch-up" contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age. Contribution Limits Year2013 - 20152016 and after Under Age 505,500Inflation Adjusted Age 50 and Over6,500Inflation Adjusted Call for amounts applicable to other years. The annual limit applies to all of your IRA contributions in a given year. So, you can contribute to a Traditional IRA and a Roth IRA as long as the combined total does not exceed the annual IRA limits and you meet all of the other requirements. Your income level can limit your Roth contributions. Contributions are gradually reduced (i.e., phased out) for married joint taxpayers with adjusted gross income (AGI) between $183,000 and $193,000 and for other taxpayers when the AGI is between $116,000 and $131,000. The contributions of married separate taxpayers who lived together at anytime during the year are reduced when the AGI is between $0 and $10,000. The phase out applies regardless of whether you (or spouse, if married) are an active participant in another plan. The amounts indicated are for 2015 and are an increase of $2,000 for each range from 2014. Call this office for the rates for other years.Note: the income limitations for making Roth contributions can be circumvented by first making a traditional IRA contribution and then subsequently converting it to a Roth IRA. Please call this office for additional information. With Traditional IRAs, contributions cannot be made once you turn age 70-1/2. However, there is no such age limit for making contributions to Roth accounts. Handling Roth IRA DistributionsGenerally, distributions from a Roth IRA (unless due to a conversion from a Traditional IRA) are treated as coming first from contributions (principal) on which you have already paid the tax. Therefore, any distribution to the extent of the principal is tax-free. Distributions of earnings are also tax-free (qualified distributions) if: They are not made within the five-year tax period beginning with the first tax year in which you contributed to the Roth account, AND They meet one of the following conditions: They are made after you reach age 59-1/2; OR They are made after your death; OR They are made on account of you becoming disabled; OR They are made so that you can pay up to $10,000 in expenses as a first-time homebuyer. Another big advantage of Roth IRAs over Traditional IRAs is that the former is not subject to the minimum required distribution rules at age 70-1/2. This means that if you don’t need to utilize your Roth IRA for retirement, you can leave it untapped for heirs (who would also get deferral on withdrawals, but would be subject to certain required distribution rules that apply to beneficiaries). Conversions of Traditional IRAs to Roth AccountsBecause of the tax-free nature of Roth accounts, Congress has provided taxable rollover provisions that allow you to convert your Traditional IRAs to Roth accounts. Once you convert, all future earnings in the new Roth account accumulate tax-free. The catch is that the tax on the Traditional IRA must be paid in the year the conversion is made to the Roth. Whether it is beneficial to elect this taxable rollover depends on a number of variables.A Traditional-to-Roth IRA conversion can be made by anyone regardless of filing status or income. Paying the Tax on ConversionThe taxability of a Traditional IRA to Roth IRA conversion depends on whether or not you made nondeductible contributions to your Traditional IRA. If you did, your Traditional IRA includes amounts that have already been taxed. These post-tax contributions don’t get taxed again when converting to the Roth. However, you must pay the tax on any interest the Traditional IRA earned on contributions deducted prior to conversion.Effects of Paying the Tax on a Roth Conversion from IRA Funds The tax on a Roth conversion may be paid either from other funds or from the IRA funds being converted. However, if you choose to pay from the IRA funds, those funds will not be considered part of the rollover. Therefore, they will be subject to early withdrawal penalties if you are under 59-1/2 at the time of the withdrawal.Payment of the tax from the IRA funds can severely limit the benefit of a conversion to a Roth by eroding the capital that can be invested. For example, in a conversion of a $50,000 Traditional IRA to a Roth and paying the tax from the withdrawal, only $29,429 (amount left in the IRA after paying taxes and penalties) actually would get invested in the Roth account. The result, shown below in after-tax dollars, assumes a 6% interest rate and an accumulation period of 25 years. Years Of Accumulation Roth(Tax-Free) Traditonal(After Tax) Rollover Amount5 10 152025 29,42968,00091,900122,980164,580220,240 50,00074,66099,920133,720178,960239,460 Time Limits on Holding Converted Roth AccountsWhen a Traditional IRA is converted to a Roth account, the converted amount must be held in the Roth IRA for at least five years; otherwise a penalty may apply. Any converted amount withdrawn before the end of the five-year period, to the extent it was included in income due to the conversion, is subject to a 10% early withdrawal penalty even if you have reached age 59-1/2. After the five-year period has been satisfied, the 10% penalty still applies to distributions of earnings if you have not attained the age of 59-1/2 or an exception applies. Any withdrawal made from a Roth IRA containing converted amounts before the five-year holding period ends are treated as coming FIRST from amounts that were included in income due to the conversion.Impact of Conversions on Other Tax ConsequencesWhen considering whether or not to convert to a Roth IRA, carefully consider how the move will increase your taxable income in the conversion year. The increase could have drastic effects on other tax consequences. For instance, the increase may: Limit the American Opportunity and Lifetime Learning Credits allowed for higher education expenses; Cause more of your social security income to be taxed; Limit your losses on rental real estate; and Mean some or all of your medical and miscellaneous itemized deductions aren't deductible. The income “catch” for Roth conversions can be averted with appropriate tax planning.That’s why it’s important to consult with your tax advisor before making a final Roth investment decision. Only by looking at your entire tax picture will you really be able to decide whether the Roth option is best for you. Factors That Favor Your Conversion to a Roth Your Traditional IRA has been open for a relatively short time. A large part of your Traditional IRA comes from nondeductible contributions. Roth accounts don’t require distribution at age 70-1/2. You have other funds from which to pay the tax on the conversion. Factors That Don't Favor Your Conversion to a Roth You may need to withdraw from the Roth account before meeting the five-year holding period. You have a short time until retirement and you expect to make withdrawals soon. You expect to be in a lower tax bracket when you withdraw from your IRA. You do not have other funds with which to pay the tax on the conversions. Saver's Credit The Retirement Savings Contribution Credit, frequently referred to as the Saver’s Credit, was established to encourage low- to moderate-income taxpayers to put funds away for their retirement. Up to $2,000 per taxpayer of contributions to an IRA (traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer’s income. The maximum credit per person is $1,000.The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If the modified AGI exceeds $30,500 (single and married separate), $61,000 (married joint) or $ 45,750 (head of household), no credit is allowed. The amounts indicated are for 2015. The 2014 amounts are $30,000, $60,000 and $45,000, respectively. Call this office for the rates for other years. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions.DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Thu, 04 Dec 2014 19:00:00 GMT Tax Smart Gifting http://www.messnerandhadley.com/blog/tax-smart-gifting/39903 http://www.messnerandhadley.com/blog/tax-smart-gifting/39903 Messner & Hadley LLP Article Highlights: Lifetime exemption Annual exemption Medical exemption Education exemption Gifting techniques Frequently, taxpayers think that gifts of cash, securities or other assets they give to other individuals are tax deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are interrelated with estate tax laws, and Uncle Sam does not want you giving away your wealth before you pass away to avoid inheritance taxes. As a result, what you give away prior to death will reduce the amount that can pass to your beneficiaries free of inheritance taxes after your death. For 2015, the lifetime exemption from inheritance tax is $5.43 million. The following amounts do not reduce the lifetime exemption: $14,000 each to any number of recipients during every tax year. The amount is periodically adjusted for inflation, but the amount for 2015 remains at $14,000. Directly pay medical expenses. This applies to amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion. Directly pay education expenses. This applies to amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual. Costs of room and board aren’t eligible as direct payments. If the gift giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $28,000 a year to each recipient under the annual limitation discussed previously. Gifting Techniques: High-Wealth Individuals – If you are a high-wealth individual who would like to pass as much on to your heirs as possible while living, without reducing the lifetime exemption, you could pay directly your heirs’ medical expenses and higher education expenses in addition to annual gifts of cash or property of $14,000. You may want to do this, even if you are not a high-worth individual, to avoid having to file a gift tax return. Medical Expenses – Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either since they did not pay them. Thus careful consideration should be given regarding whether you make the gift directly to the individual subject to the $14,000 annual limit, which would allow him or her to pay the medical expenses and claim the medical deduction on his or her tax return, or you pay the medical expenses directly. If the medical expenses you want to pay are greater than $14,000, then you could always gift $14,000 to the individual and pay the balance directly to the care provider(s), and thereby avoid reducing the lifetime exemption. Under rare circumstances, the recipient who will benefit from your gifts may qualify as your medical dependent, under which circumstance you would be able to deduct the medical expenses if they had been paid directly to the doctor, hospital or other provider. Education Expenses – When you pay the qualified post-secondary education tuition for another individual, it does not mean, as is the case for medical expenses, that someone cannot benefit taxwise. Tax law says that whoever claims the exemption for the student is entitled to the American opportunity credit or lifetime learning credit for higher education expenses if they otherwise qualify. Gifts of Appreciated Property – Consider replacing your cash gifts with gifts of appreciated property, such as stock for which you have a “paper gain.” When you gift an appreciated asset, the potential gain on the asset transfers to the recipient. This works for individuals, except for children who are subject to the kiddie tax, which requires the child’s income to be taxed at the parent’s tax rate if it is higher than the child’s rate. It also works great for contributions to charitable organizations. Although not subject to the gift tax rules, an appreciated asset gifted to a charity not only gets you out of reporting any gain from the appreciation, but you also get a charitable tax deduction equal to the fair market value (FMV) of the asset. The deduction for these gifts is generally limited to 30% of your adjusted gross income (AGI), but the excess carries over for up to five years of future returns. Please call this office if you need assistance with planning your gifting strategies. Thu, 04 Dec 2014 19:00:00 GMT Home Ownership - Your Best Tax Shelter http://www.messnerandhadley.com/blog/home-ownership-your-best-tax-shelter/407 http://www.messnerandhadley.com/blog/home-ownership-your-best-tax-shelter/407 Messner & Hadley LLP Homeowners Receive Big Tax BreaksHome ownership can provide you with several important tax benefits… Deductions for real estate taxes and home mortgage interest, and Gain exclusion if you meet certain occupancy and holding period requirements. In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home’s tax advantages because they aren’t aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home’s favorable tax edge. Your Home's BasisThe amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Don’t forget, inflation will take its toll, and in a few years the exclusion limits may not be as significant as they are today or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home. Once you buy a home, you need to begin keeping records related to your home’s “ basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately compute gain or loss if you decide to sell. For the purpose of computing basis, it’s important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don’t need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis. You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks): Room additionsNew drivewayFence Sprinkler systemExterior lightingIntercomStorm windows/doorsCentral vacuumCentral air Filtration systemWiring upgradeSoft water system Built-in appliancesBathroom upgrade Wall-to-wall carpet LandscapingWalkwaysRetaining wallSwimming poolSatellite dishSecurity systemRoofHeating systemFurnaceLight fixturesWater heaterInsulation Kitchen upgradeFlooring Whenever there’s doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway. That way, the ultimate decision of qualification can be made later when (and if) you decide to sell. Deductions Related to Your Home Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utilities, condo or homeowner association fees, etc., aren’t deductible. However, you generally will be able to deduct: Real Estate Taxes Home Mortgage Interest Keep in mind, however, that home mortgage interest deductions can be limited. Generally, you can deduct the interest from mortgages up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation. If you were to later refinance the home for more than the remaining balance on the original loan, the excess would have be used for home improvements or qualify under the provisions that allow a taxpayer to borrow up to $100,000 in home equity. If not, a portion of the interest would not be deductible. The additional $100,000 of home equity can be borrowed from the primary residence and a second home. When used wisely, the $100,000 equity loan can be used to finance other purchases where the interest expense would normally not be deductible. An example of this would be a personal vehicle. Equity debt interest is not deductible for Alternative Minimum Tax (AMT) purposes, so taxpayers who are taxed by the AMT should consider carefully whether or not to incur home equity debt. Because of the current strict home mortgage deduction limits and the complicated tax rules associated with this tax deduction, be sure to review any home financing plans with your tax advisor before finalizing loan deals.Loan Points: A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest – they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren’t deductible. However, when the points are paid as a charge for the use of money, the following rules apply: As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year. An exception to the general rules lets you deduct in full, points you pay in connection with obtaining a mortgage to purchase, construct or improve your main home. Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home’s basis. Reporting Gains/LossesExclusion of Gain: When you sell your principal home at a gain, you can exclude all (or a portion) of the gain if you meet certain occupancy and holding period requirements. To qualify for this exclusion, you must have owned and occupied the residence for two years out of the five year period that ends on the date of the sale. If you meet those qualifications and are filing a joint return with your spouse, you may exclude up to $500,000 ($250,000 for a single individual) of gain from the sale. A partial exclusion may be allowed even if the two-of-five year ownership and occupancy tests aren't met if the sale is due to a job-related move, health, or certain unforeseen circumstances. If you do not qualify for the full or partial exclusion, there is no deferral privilege and the gain not eligible for exclusion is fully taxable, but will be eligible for the beneficial maximum long-term capital gains tax rates if you owned the home over one year. NOTE: A second home, such as a mountain cabin or lake cottage, doesn’t qualify for the exclusion of gain. Caution: Gains in excess of any allowed exclusion are treated as investment income and may be subject to the 3.8% Net Investment Income. Previously Postponed Gain: Under prior tax law (generally pre-'98), gain from the sale of a principal residence could be deferred into your replacement residence. Those gains were accumulated from home to home as long as each replacement home cost more than the adjusted selling price (i.e., sales price less expenses of sale and pre-sale “ fix-up” costs) of the previous home. Although gain deferral from a principal residence is no longer permitted under current law, the gains deferred under prior law into a home currently being sold must be accounted for. Sales at a Loss: Losses from the sales of business or investment properties are normally tax-deductible. However, a loss from the sale of your main home is considered personal in nature and therefore, unless the law changes, it is not allowed as a deduction. This rule also applies to second homes. Reporting the Sale: You do not need to report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable - i.e., if the gain is greater than your allowed exclusion, the sale is reportable. Otherwise, if the gain is totally offset by the exclusion, the sale need not be shown on your tax return. However, to be certain that no reporting is required, you should provide your tax advisor with the sales documents, cost basis information, etc., to evaluate your situation. You may receive Form 1099-S showing the gross proceeds from the sale, although settlement agents (escrow companies) are not required to issue a Form 1099-S for most sales of main homes. If you do receive a Form 1099-S, let your tax advisor review it and determine if it is necessary to report the sale. Exclusion Qualifications Under prior law. . . (generally pre-1998), individuals were entitled to a once-in-a-lifetime exclusion of gain from the sale of their principal residence. To qualify for that exclusion, the taxpayer or spouse must have reached the age of 55 prior to the sale and they must have resided in the home for three of the prior five years. Having exercised that exclusion does not bar a taxpayer from qualifying for the current law exclusion. Under current law… there is no age requirement associated with the exclusion. The period of time the home must be owned and occupied as a principal residence is two out of the five years immediately preceding the sale date. The exclusion amount is $500,000 for married couples filing jointly and $250,000 for other individuals. Taxpayers are permitted to exclude a gain every two years if they meet all of the other conditions. There are no gain-deferral provisions in the current law for purchasing a replacement residence; thus, any gain not excludable is immediately taxable. Five-Year Holding Period: If you originally acquired the home you intend to sell by means of a tax-deferred exchange (sometimes referred to as a 1031 exchange), the required ownership period to qualify for the home sale exclusion becomes five years as opposed to the normal two years.Non-Qualified Use: If the home was previously used as other than your main home (non-qualified use), for example, as a second home or a rental, and converted to your personal residence after December 31, 2008, the portion of the prorated gain attributable to the non-qualified use will not qualify for the home gain exclusion. Special Military Rules: Generally, the five-year qualification period for the 2-out-of-5-year use test can be suspended for up to 10 years for persons on qualified extended duty in the U.S. Armed Services or the Foreign Service. Please call this office for more details.Tax Planning and Your HomeThe information outlined here is only a brief overview of the tax rules involving home ownership. Since the rules are complicated, if you’re thinking of buying or selling your home, or refinancing a home loan, it’s best to discuss the plans with your tax advisor to interpret closing documents and to make absolutely certain the transaction meets the necessary qualifications. DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Wed, 03 Dec 2014 19:00:00 GMT Are You Missing Out On the Research Credit? http://www.messnerandhadley.com/blog/are-you-missing-out-on-the-research-credit/22236 http://www.messnerandhadley.com/blog/are-you-missing-out-on-the-research-credit/22236 Messner & Hadley LLP The Internal Revenue Code (Sec 41) provides a tax credit of up to 20% of qualified expenditures for businesses that develop, design or improve products, processes, techniques, formulas or software and similar activities.  The credit has been available off and on since 1981 and has never been made permanent by Congress.  It has been extended several times and is currently scheduled to expire at the end of 2013, but may be extended for 2014.  Please contact this office to see if Congress has extended or made permanent this credit past 2013. The credit is calculated on the basis of increases in research activities and expenditures.  Its purpose is to reward businesses that pursue innovation by continually increasing investment.  Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years. The two methods used to compute the credit are the regular method that provides for the 20% credit, or the simplified method which is easier to document but results in reduced credit amounts. Regular Method - Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the taxpayer in 1984-1988 or by another method for companies that started up subsequently.  This method may be best for companies that can document a low base amount.  Simplified Method - The alternative simplified method credit equals 14% of qualified research expenses over 50% of the average annual qualified research expenses in the three immediately preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year's qualified research expenses.  This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, or taxpayers with a high base amount from that period. Qualified Research - The term “qualified research” means research which is undertaken for the purpose of discovering information which is technological in nature, and  the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to: A new or improved function,  Performance, or  Reliability or quality.  Certain purposes that are not qualified include style, taste, cosmetic, or seasonal design factors.  The definition is relatively broad and encompasses such activities as: Developing new or improved products, processes or formulas; Developing prototypes or models; Developing or applying for patents; Certification testing; Developing new technology; Environmental testing; Developing or improving software technologies; Building or improving manufacturing facilities; and Streamlining internal processes. Qualifying Research Expenditures - Generally, expenses that qualify for the credit include in-house wages and supplies attributable to the qualified research; computer time-sharing costs; 65% of contract research expenses (paid to outside contractors in the U.S. who are conducting qualified research on the taxpayer's behalf); and supplies directly used in the conduct of the qualified research.   Note:  Alternately, research and experimental expenses may be deducted or capitalized under Sec 174 on the Internal Revenue Code.  However, a taxpayer must elect either to deduct or amortize (not less than 60 months) such expenses OR claim the credit for them - he or she may not do both! Limitations - The R&D credit is also subject to limitations of the general business credit.  Its total and others included in the general business credit are limited to 25% of the taxpayer's net tax liability over $25,000.  To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward. If you have questions related to this credit or need assistance in developing the base amounts needed to compute this credit, please give this office a call. Wed, 03 Dec 2014 19:00:00 GMT Household Employees and Your Taxes http://www.messnerandhadley.com/blog/household-employees-and-your-taxes/409 http://www.messnerandhadley.com/blog/household-employees-and-your-taxes/409 Messner & Hadley LLP Employment Tax Responsibilities for Employers of Household Workers Household employees are workers you hire for “ domestic services,” i.e., those services performed in and about your home. Duties of cooks, butlers, housekeepers, governesses, maids, valets, babysitters, caretakers, gardeners, janitors, or personal chauffeurs all can qualify as “domestic services.” Not everyone you hire for work at your home is considered a household employee, though. For example, a self-employed gardener may take care of your lawn and several others in your neighborhood, providing all his own tools and job assistants and setting his own work schedule. That gardener probably won’t be considered your household employee because he is running an independent operation over which you have no “say-so.” You see, a worker at your home becomes an employee when you control what work that person is to do AND how and when the work is to be done. If you qualify as a household employer, you may have to pay certain federal payroll taxes, including social security and Medicare taxes and unemployment taxes. You withhold some of these taxes from your employee’s wages; others you must pay from your own funds. (Some states require certain taxes too, so be sure to check with the state employment department in your area.)Taxes You Withhold from WagesSocial Security and Medicare Taxes:If you pay cash wages in excess of a specified threshold amount during the year to a given employee, you must withhold social security and Medicare taxes from the employee’s wages. This threshold amount $1,900 (2014 and 2015) will vary from year to year and applies to each separate household employee you hire. Call for amounts applicable to other years.Example: This year, Jane hired Louise, a housekeeper, and Rose, a babysitter. She withheld social security and Medicare taxes from their wages. Over the course of the entire year, however, she paid Louise only $500 and Rose $800. Since neither worker’s yearly wage equaled the threshold amount, Jane owes no social security or Medicare tax for them. That being the case, she must repay to the workers the taxes she already had withheld from their wages.Federal Income Tax:Household employees may also ask you to withhold income tax from their wages; you aren’t required to agree to the request. If you choose to withhold, however, you must collect the income tax from the employee’s wages (the IRS publishes tables to let you know how much to withhold) and you pay the amount withheld to the government. Additional Taxes You Must PayEmployer’s Share of Social Security and Medicare Taxes: As an employer, you must match the amount of social security and Medicare tax you withhold from your employee’s wages. For instance, if you withheld $50 in social security from your housekeeper’s wages, you would be required to pay to the government $100 (the $50 withheld from your employee, plus another $50 from your own funds). Federal Unemployment Tax (FUTA): You are also responsible for FUTA taxes if you paid a total of $1,000 (2013 and 2014) call this office for other years) or more in household employee wages during any calendar quarter of the current year or the previous year. FUTA tax isn’t a withholding tax but is paid by you alone on behalf of your employees. (Certain states also assess unemployment taxes – check with the appropriate agency in your area.)Paying the TaxYou report and pay the required federal payroll taxes for your household employees along with your regular individual income tax return. Schedule H, Household Employment Taxes, is used to figure the amount of the tax that you owe. Reporting Wages to EmployeesYou need to give your household employees Form W- 2 ,Wage and Tax Statement, to report wages and tax withholding for the year. The W-2 is due to the employee by Jan. 31 of the year following the year in which you paid the wages . You must also file a copy of the W-2 with the Social Security Administration (usually by the end of February). To accurately prepare W-2s, you need certain information from your employee, including his/her name, address, and social security number. So that you have all the necessary information available for timely filing, you may want to have your workers fill out Form W-9, Request for Taxpayer Identification Number and Certification, when you hire them. That way you will have data on file to complete W-2s when the time comes.Other Paperwork ChoresForm SS-4:If you have household employees, you will need to obtain an employer identification number (EIN) for yourself. This number is not the same as your Social Security Number. The IRS issues the EIN and prefers that you apply online at their website – www.IRS.gov (type EIN in the search box) – or by filling out and faxing or mailing Form SS-4, Application for Employer Identification Number, to the IRS The IRS does not charge for an EIN; beware of web sites on the Internet that charge for this service. Employee Form W–4: If you agree to withhold income tax for an employee, ask him/her to complete Form W-4, Employee’s Withholding Allowance Certificate. The information on this form will help you determine the correct amount of income tax to withhold. Payroll Journal: You should record in a journal each payday the wages and withholding of household employees. Set up a separate record for each employee with room for the following information: Payment date Check number Gross wages (before withholding) Social security tax withheld Medicare tax withheld Federal withholding, if any State withholding amounts (establish a column for each separate kind of tax withheld) For computer users, an inexpensive payroll program may simplify the recordkeeping job. Keep employment tax records for at least four years after the later of: the due date of the return on which you report the taxes, or the date you pay the taxes.If You Have Other EmployeesIf, in addition to your household employees, you have employees in a sole proprietorship, you can choose whether to pay the employment taxes of your household workers with your personal tax return or along with your business payroll returns. If you choose the latter option, you file W-2s for you household employees along with those of all your business employees. Have You Forgotten Anything?Here’s a quick checklist of issues you should make sure you have considered when you hire and pay household employees: Legality of worker’s employment in the United States - complete Form I-9, Employment Eligibility Verification. This is not a tax form but required by the U.S. Citizenship and Immigration Services and available at the USCIS web site (www.uscis.gov). Applicability of state employment taxes and state return filing requirements Applicability of withholding social security and Medicare taxes Income tax withholding agreements with employees Recordkeeping system Employer identification number application W-2 filing with employees and Social Security Administration Return filing and payment deadlines Are the Payroll Taxes you Pay Deductible?In most cases, the payroll taxes you pay in connection with your household workers’ wages are not deductible on your individual tax return. The IRS considers these taxes, and the wages on which they are based, to be personal, nondeductible expenses. However, there are a couple of circumstances when you may be eligible for a tax benefit for the payroll taxes you pay: Child Care Credit – If you are eligible to claim a Child or Dependent Care Credit based on wages you pay a household employee who cares for your child, other dependent, or spouse, the payroll taxes you pay on the wages are counted as part of your eligible expenses when figuring the credit. Medical Care Providers – The wages and associated payroll taxes you pay to a household worker who provides nursing services for you, your spouse, or your dependent are medical expenses that may be deductible on your return if you itemize your deductions. (Note that the same expense can’t be used both as a medical deduction and for the Child or Dependent Care Credit.) In these two situations, the payroll taxes that you include are the FUTA (federal unemployment) tax, state unemployment tax, and your portion of the Social Security and Medicare taxes that you have actually paid during your tax year. For example, if you paid FUTA tax in January for medically deductible wages that you paid to a nurse in the prior year, you would include the FUTA tax as part of your medical expenses on your current year return (return for the year in which the FUTA tax was actually paid). (The wages paid in the prior year are deductible on your prior year return.) Do not include the Social Security and Medicare taxes, federal and state income taxes, or other state or local taxes you’ve withheld from the employee’s wages, since these amounts are already part of the gross wages for which you are claiming the credit or deduction. Are 1099s Required for Non-Employees Working at Your Home? If the person whom you paid during the year for household services is not your employee – as was the case of the gardener described at the beginning of this article – you would not issue a Form 1099-MISC to that individual. Form 1099-MISC is issued by a business to independent contractors who were paid $600 or more during the year for services performed for the business. You are not considered to be operating a business when you engage someone such as a self-employed gardener strictly to provide services at your home (unless, of course, you are operating a business at your home). DISCLAIMER - The tax advice included in this online brochure is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this online brochure without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation. Tue, 02 Dec 2014 19:00:00 GMT Refinanced Mortgage Interest May Not All Be Deductible http://www.messnerandhadley.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/39885 http://www.messnerandhadley.com/blog/refinanced-mortgage-interest-may-not-all-be-deductible/39885 Messner & Hadley LLP Article Highlights: Refinancing home mortgage interest  Acquisition debt  Equity debt  Traceable debt  Allocations  Alternative minimum tax  Mortgage interest rates continue to be low, and home values are on the uptick. If you are considering a refinance, there are some important home mortgage interest rules you should be aware of. Generally, the mortgage interest that you may deduct on your home includes the interest paid on the acquisition debt and on up to $100,000 of equity debt, provided the combined debt does not exceed the lesser of the value of the home or $1,100,000. Acquisition debt is the debt incurred to buy the home or substantially improve it, while equity debt is funds borrowed against the home for other uses. A big problem arises when taxpayers fail to consider that acquisition debt steadily declines over the life of the loan. So, for example, if the original acquisition debt was $400,000 and you refinance 15 years later, the acquisition debt has probably been paid down to somewhere around $300,000. In this case, if the loan was refinanced for $475,000, the refinanced debt would be allocated $300,000 to acquisition debt, $100,000 to equity debt and $75,000 to debt for which the interest would not be deductible as home mortgage interest. In this case, the interest paid on the $300,000 acquisition debt and the $100,000 equity debt would be deductible as home mortgage interest. If the use of the $75,000 can be traced to another deductible use (e.g., purchase of taxable investments or expenses related to operating a business), then the interest on the $75,000 loan would be deductible per the limitations of the other deductible use. If the use of the $75,000 cannot be traced to an interest-deductible use, then the interest would not be deductible. In the example above, the interest would be allocated as follows: 63.15% as acquisition debt interest, 21.05% as equity debt interest and 15.79% as interest not deductible as home mortgage interest. The result would be different if some or all of the new loan in excess of the $300,000 acquisition debt was used to make improvements to the home. For example, say that $125,000 of the new loan was used to add a bedroom and bathroom to the home. This increases the home acquisition debt to $425,000, leaving $50,000 as equity debt, and the interest would all be deductible because the equity debt amount would then be under $100,000. If you have already refinanced or are thinking of doing so, it is imperative that you retain a record of the terms of the original acquisition debt in case you exceed the debt limitation and need to prorate your interest deduction. When refinancing, you also need to watch out for the alternative minimum tax (AMT). The AMT is another way of computing tax liability that is used if it is greater than the regular method. Congress originally conceived the AMT as a means of extracting a minimum tax from high-income taxpayers who have significant items of tax shelter and/or tax-favored deductions. Since the AMT was created, inflation has driven up income and deductions so that more individuals are becoming subject to the AMT. When computing the AMT, only the acquisition debt interest is allowed as a deduction; home equity debt interest is not. Neither is the interest on debt for unconventional homes such as boats and motor homes, even if they are the primary residence of the taxpayer. Before you refinance a home mortgage, it may be appropriate to contact this office to determine the tax implication of your planned refinance and see if there are any other suitable alternatives. Tue, 02 Dec 2014 19:00:00 GMT 2014 TAX DEDUCTION FINDER & PROBLEM SOLVER http://www.messnerandhadley.com/blog/2014-tax-deduction-finder--problem-solver/18218 http://www.messnerandhadley.com/blog/2014-tax-deduction-finder--problem-solver/18218 Messner & Hadley LLP Our Tax Organizer is designed to help you maximize your deductions and minimize your problems in preparing and filing your tax return. The organizer is revised annually to be compatible with the ever-changing tax laws. The organizer currently posted below is primarily for the 2014 tax year, although it can be used for other years. The 2014 organizer is provided in three configurations to assist you in collecting relevant tax information needed to properly prepare your tax return. Access any of the three versions by double clicking on the underlined part version description. The organizers can be downloaded to your computer where you can fill and save the information until you have completed collecting all of your information. After you have completed it, please forward the organizer (printed or digitally) to our office for immediate service. If you have an office appointment, you can print it out and bring it with you to the meeting. A word of caution: you can fill the organizers online and print them out. However, if you close the file, your data will not be saved unless the form is saved to your computer.Once the completed organizer has been received, you will be contacted by phone, fax or e-mail with any questions, comments, or suggestions. If you e-mail our office advising us that you have sent your tax materials, we will notify you of their receipt.Basic Organizer – This organizer is suitable for clients that are not itemizing their deductions and DO NOT have rental property or self-employment expenses.Basic Organizer plus Itemized Deductions – This organizer is suitable for clients that are itemizing their deductions and DO NOT have rental property or self-employment expenses.Full Organizer – This organizer includes the information included in the basic organizer, plus entries for itemized deductions, rental properties and self-employment expenses.Business Organizer – Use this organizer for partnerships and incorporated business entities.Prior Year Individual Organizer – If you are filing your 2013 return late, please use this organizer. Mon, 01 Dec 2014 19:00:00 GMT Tax, Payroll and Personal Finance Calculators http://www.messnerandhadley.com/blog/tax-payroll-and-personal-finance-calculators/39923 http://www.messnerandhadley.com/blog/tax-payroll-and-personal-finance-calculators/39923 Messner & Hadley LLP This section includes a library of over one hundred financial calculators. The calculators are easy-to-use and provide in-depth analysis for virtually any financial scenario, along with graphs, charts and tables. The calculators are categorized by subject matter, which can be accessed from the links. Please give us a call if you need assistance with the input or understanding the computed results for any of the calculators. We are dedicated to providing our clients with valuable online resources to assist them with their everyday needs and long-range planning. Cash Flow How Does Inflation Impact My Standard Of Living? How Much Am I Spending? How Much Do I Need For Emergencies? Should I Pay Down Debt Or Invest My Monthly Surplus? How Long Will My Money Last With Systematic Withdrawals? Should My Spouse Enter The Work Force? What Is My Current Net Worth? What Is My Projected Net Worth? What Is My Current Cash Flow? What Is My Projected Cash Flow? What Is The Value Of Reducing, Postponing or Foregoing Expenses? College How Much Should I Be Saving For College? Feasibility of Student Loan Repayment What Are The Advantages Of A Coverdell ESA? What Are The Advantages Of A 529 College Savings Plan? What Is The Value Of A College Education? What Are The Payments On A Parental (PLUS) Loan? Should I Live At Home, On Campus, Or Off Campus? Credit How Long Will It Take To Pay Off My Credit Card? How Long Until My Loan Is Paid Off? What Would My Loan Payments Be? Should I Lease or Purchase An Auto? What Is The Balance On My Loan? Should I Consolidate My Personal Debt Into A New Loan? Which Is Better: Cash Up Front Or Payments Over Time? What Is The Impact Of Making Extra Payments On My Debt? Should I Pay Off Debt or Invest? Auto Purchase: Loan Versus 0% Dealer Financing? Home and Mortgage How Much Home Can I Afford? Should I Refinance My Mortgage? Comprehensive Mortgage Calculator Comparing Mortgage Terms (i.e. 15, 20, 30 year) Should I Pay Discount Points For A Lower Interest Rate? Should I Rent or Buy A Home? Should I Convert to a Bi-Weekly Payment Schedule? Compare A 'No-Cost' Versus Traditional Mortgage What Are The Tax Savings Generated By My Mortgage? Which is Better: Fixed or Adjustable-Rate Mortgage? Adjustable Rate Mortgage Calculator How Do Closing Costs Impact The Interest Rate? Investment How Should I Allocate My Assets? Compare Taxable Versus Tax-Free Investment Return What Is The Value Of A Bond? What Is The Return On My Real Estate Investment? What Is The Value Of Compound Interest? What Is The Value Of A Call Or Put Option? Taxable vs. Tax-Deferred Savings? What Is My Risk Tolerance? What Is The Long-Term Impact Of Increased Investment Return? Certificate Of Deposit (CD) Analyzer What Is The Dividend Yield On A Stock? Insurance How Much Life Insurance Do I Need? What Is My Life Expectancy? What Are My Needs For Burial And Final Expenses? How Much Disability Income Do I Need? What Are My Chances of Becoming Disabled? What Are My Long-Term Care Needs? How Much Will I Earn In My Lifetime? What Are The Tax Advantages Of An Annuity? How Long Will My Current Life Insurance Proceeds Last? What Is The Future Value Of An Annuity? Paycheck and Benefits The calculators offer unmatched features for paycheck modeling. These personal finance paycheck calculators are here for employees to better manage their paychecks. Paycheck Calculator Here you may calculate your net pay or "take home pay." Take home pay is what is left from your wages after withholdings for taxes and deductions for benefits have been subtracted. Salaried employees can enter either their annual salary or earnings per pay period. Other Paycheck and Benefit Calculators How Much Will My Company Bonus Net After Taxes? How Will Payroll Adjustments Affect My Take-Home Pay? Convert My Salary To An Equivalent Hourly Wage Convert My Hourly Wage To An Equivalent Annual Salary What Is The Future Value Of My Employee Stock Options? Should I Exercise My 'In-The-Money' Stock Options? What May My 401(k) Be Worth? What Is The Impact Of Increasing My 401(k) Contribution? Qualified Plans Evaluate My Company Pension Payout Options How Much Can I Contribute To An IRA? How Much Retirement Income May My IRA Provide? Should I Convert To A Roth IRA? What Will My Qualified Plan(s) Be Worth At Retirement? What Is My Current Year Required Minimum Distribution? What Is My Projected Required Minimum Distribution? What Are My Lump Sum Distribution Options? How Do I Maximize My Employer 401(k) Match? What Is The Impact Of Borrowing From My 401(k) Plan? What Is The Impact Of Early Withdrawal From My 401(k)? Self-Employed Retirement Plan Maximum Contribution Calculator Net Unrealized Appreciation (NUA) vs. IRA Rollover Retirement How Will Retirement Impact My Living Expenses? How Much Will I Need To Save For Retirement? Are My Current Retirement Savings Sufficient? Social Security Retirement Income Estimator How Does Inflation Impact My Retirement Income Needs? I'm Retired, How Long Will My Savings Last? When Should I Begin Saving For Retirement? Should I Convert Discretionary Expenses To Savings? How much retirement income may my 401(k) provide? Compare the Roth 401(k) to a Traditional 401(k) Saving Becoming A Millionaire Income Generated By A Savings Plan How Long Will It Take To Double My Savings? How Long Until My Savings Reach My Goal? Save Now vs. Save Later How Much Should I Save to Reach My Goal? What Will My Current Savings Grow To? Calculate Rate Of Return How Do Taxes and Inflation Impact My Investment Return? What Is The Effective Annual Yield On My Investment? Taxation What Is My Potential Estate Tax Liability? Federal Income Tax Estimator Should I Adjust My Payroll Witholdings? Will My Investment Interest Be Deductible? How Much Self-Employment Tax Will I Pay? Capital Gains (Losses) Tax Estimator Compare Taxable, Tax-Deferred And Tax-Free Investment Growth How Much Of My Social Security Benefit May Be Taxed? What Are The Tax Implications Of Paying Interest? Should I Itemize Or Take The Standard Deduction? What Is My Tax-Equivalent Yield? Sun, 30 Nov 2014 19:00:00 GMT Business Use of Your Car http://www.messnerandhadley.com/blog/business-use-of-your-car/307 http://www.messnerandhadley.com/blog/business-use-of-your-car/307 Messner & Hadley LLP When you use a vehicle for business purposes, you can deduct the business portion of the operating expenses on your tax return. If you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. You can generally determine the expense for the business use of your car in one of two ways: the standard mileage rate method or the actual expense method. If you qualify to use either method, figure the deduction both ways to see which gives you a larger deduction. If you use the standard mileage rate, add any parking fees and tolls incurred for business purposes.Standard Mileage Rate Method:To use the standard mileage rate, you: Must own or lease the car, Cannot use it for hire, such as a taxi, Cannot operate five or more cars at the same time, Must not have claimed a depreciation deduction for the car in an earlier year, and Must have chosen to use it in the first year you placed the car in service at your business. Then, for a car you own, in subsequent years, you can choose to use the standard mileage rate or actual expenses. However, if the car is leased, you must use the standard mileage rate method for the entire lease period. The standard mileage rate is determined by the government annually. Actual Expenses Method: To use the actual expense method, you determine the entire actual cost of operating the car for the year and then determining the business portion attributable to the business miles driven. As an example, a vehicle's operating costs for the year totaled $7,000; it was driven 6,000 miles for business, and 10,000 total miles. The business portion would be 60% (6,000/10,000) of $7,000 or a business deduction of $4,200. Operating expenses include gas, oil, repairs, wash and wax, tires, insurance, registration fees, depreciation (or lease payments). The actual expense method can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting car expenses as part of their itemized deductions. Parking fees and tolls attributable to business use are also deductible. Generally, cars are depreciated using an accelerated method of depreciation subject to the luxury auto rules, which limit the amount of allowable depreciation that can be deducted in a year. If the standard mileage rate was used in the first year the car was placed in service and you decide to switch to the actual expense method for a later year, straight line depreciation must be used and subject to the same luxury auto limits. Tue, 25 Nov 2014 19:00:00 GMT Employers: Beware of Dumping Employees on a Government Health Insurance Marketplace. http://www.messnerandhadley.com/blog/employers-beware-of-dumping-employees-on-a-government-health-insurance-marketplace/39851 http://www.messnerandhadley.com/blog/employers-beware-of-dumping-employees-on-a-government-health-insurance-marketplace/39851 Messner & Hadley LLP Article Overview: There are consequences to having employee health insurance reimbursement plans.   Health insurance reimbursement plans do not qualify as employer group plans to satisfy the employer insurance mandate.   Penalties can be as high $100 per day per employee for not having a qualified plan.  The IRS earlier this year cautioned employers of the consequences when an employer reimburses its employees for the cost of premiums the employees pay to purchase qualified health plans, either through a health insurance marketplace or outside the marketplace, rather than establishing a health insurance plan for its own employees. Employers may think they can use this strategy to avoid the employer insurance mandate required by the Affordable Care Act that applies to mid- and large-size firms, as well as shift some of the expense of providing employee health care away from the employer. Not so, says the IRS, which refers to this method of avoiding the employer insurance mandate as a “dumping” strategy. This type of arrangement, termed an “employer payment plan,” is considered a group health plan by the IRS, and as such, is subject to the reform provisions of the Affordable Care Act (ACA) and the penalty that applies for failing to meet those provisions. These reforms include a prohibition on the annual limits for essential health benefits and a requirement to provide certain no-cost-sharing preventive care. Employer payment plans can't be integrated with individual policies to achieve the market reform requirements, and therefore they fail to satisfy the market reform requirements. As a result, the employer may be subject to a $100/day per employee excise tax penalty amounting to $36,500 per year per employee for failure to meet the ACA provisions. However, an employer payment plan does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan. The employer group insurance mandate takes effect in 2015 for larger employers (those with 100 or more full-time employees) and in 2016 for employers with 50 to 99 full-time employees that meet certain conditions. Employers with fewer than 50 full-time employees are not required to provide health insurance coverage for their employees. One last item: because an employer payment plan is considered a group health plan, the employees participating in such an arrangement who purchase their health coverage through a marketplace cannot claim the premium assistance credit because employees who have an employer plan are not eligible for the credit. If you have further questions related to this issue, please give this office a call. Tue, 25 Nov 2014 19:00:00 GMT Did the Decedent Own Capital Assets? http://www.messnerandhadley.com/blog/did-the-decedent-own-capital-assets/149 http://www.messnerandhadley.com/blog/did-the-decedent-own-capital-assets/149 Messner & Hadley LLP If the decedent owned capital assets, the fair market value (FMV) of those assets at the time of death must be determined for estate and probate purposes and for determining the basis of the assets in the hands of the beneficiary.FMV is determined as of date of death (or an alternate valuation date in some cases when an estate tax return is required). This means that if the heirs sell inherited property soon after the decedent's death, the result will usually be little or no gain. FMV will be used to figure depreciation, as well as for figuring gain or loss on sale.Valuation of inherited property is generally taken from the estate tax return (if any) unless the taxpayer (heir) can prove a different value. If there is no estate tax return, probate papers may provide an "inventory" showing values of items in the estate. If no probate is required, for example because all of the decedent's assets were held in a living trust, the trustee of the trust may have compiled a list of the property and their values and should be able to provide the information to the beneficiaries. CAUTION: For assets inherited from decedents who died during 2010, the beneficiaries' basis will depend on whether the estate was subject to the estate tax or elected out of the tax and chose instead for the beneficiaries' basis to be determined under the modified carryover basis regime.  Regardless of which method the executor selects—estate tax with stepped up basis for the assets or the modified carryover basis—a beneficiary should contact the executor for information as to the basis of assets that he or she inherits. Stocks, mutual funds and other readily traded securities: The FMV of an inherited stock is the average of the high and low prices quoted for the stock on the valuation date (generally the date of death). If the date of death is a weekend or holiday, additional calculations are required.  The stock listings for the date of death from a newspaper will provide the high/low information for most stocks or it can be found on various internet web sites. The fair market value of inherited mutual funds generally is the last quoted public redemption price on the date of death. For more complicated portfolios, contact the brokerage firm and request a listing of all securities held by the decedent along with the high and low quotes (or closing price if that's all it can provide) on the date of death.  Real Property: Depending upon state law, for estate tax and probate purposes, real property generally must be appraised by a qualified appraiser. However, if there is no requirement for probate or estate tax filing, then the executor or heirs will need to establish the FMV through other means such as a qualified appraiser or comparable sales.  The valuation process can be complicated, and it may be to your benefit to consult with this office as soon as possible for assistance. Sun, 23 Nov 2014 19:00:00 GMT Tips to Avoid Tax Penalties for 2014 http://www.messnerandhadley.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 http://www.messnerandhadley.com/blog/tips-to-avoid-tax-penalties-for-2014/39813 Messner & Hadley LLP Article Highlights: Under-distribution penalty Required minimum distributions Underpayment penalties Withholding Thanksgiving marks the beginning of the holiday season and the time when we begin to think about family get-togethers, holiday gift sharing and parties. But don’t overlook what comes right after the holidays: tax season. And don’t overlook a couple of things you can do now to avoid or reduce potential penalties on your 2014 tax return. Under-Distribution Penalty - If you are over 70-1/2 years of age, don’t forget to take your required minimum distribution (RMD) from your IRA account; otherwise you could face a penalty equal to 50% of what you should have taken as a distribution in 2014. The RMD is based on your age and the balance of the IRA account on December 31, 2013. Please call this office for the distribution percentage for your age. If you just turned 70-1/2 in 2014, you can delay your first RMD until 2015 (but you must take it by April 1). However, that means you will have to double up your distributions in 2015, taking the one for 2014 and the one for 2015. This may or may not be beneficial taxwise, depending on your tax brackets in each year. If 2014 was your retirement year, your income tax bracket may be higher than it will be for 2015, so it may be advantageous taxwise to delay the 2014 distribution until 2015. Underpayment Penalty - If you are a wage earner and have not been having enough income tax withheld from your paycheck to meet your tax liability for 2014, or if you also have taxable income from other sources, you may be facing the possibility of underpayment penalties. If your advance payments toward your 2014 tax liability, through withholding and estimated tax payments, are less than 90% of your 2014 tax liability or 100% (110% for high-income taxpayers) of your prior year tax liability, you will be hit with an underpayment penalty. There is no penalty if your tax liability is less than $1,000. The underpayment penalty is figured on a quarterly basis, so making an estimated tax payment late in the year will not reduce the penalties from earlier in the year. However, wage withholding is deemed paid evenly throughout the year, allowing you to mitigate underpayments earlier in the year by increasing your withholding late in the year. If your state has a state income tax, be sure to consider whether you also need to adjust your state income tax withholding to offset under-withholding earlier in the year to avoid or reduce a state underpayment penalty. If you have questions related to either of these issues, please give this office a call. Thu, 20 Nov 2014 19:00:00 GMT Understanding Your Tax Basics http://www.messnerandhadley.com/blog/understanding-your-tax-basics/433 http://www.messnerandhadley.com/blog/understanding-your-tax-basics/433 Messner & Hadley LLP No matter what the season or your unique circumstances, when it comes to your taxes, planning usually pays off in a lower tax bill. The following is provided so that you may have a basic understanding of taxes before you discuss filing options and strategies. Filing Status - Except for a surviving spouse, or married individuals who have lived apart for the entire year, your filing status depends on your marital status at the end of the tax year. Generally, if you are married at the end of the tax year, you have three possible filing status options: Married Filing Jointly, Married Filing Separate, or if you qualify, Head of Household. If you were unmarried at the end of the year, you would file as Single status, unless you qualify for the more beneficial Head of Household status.Head of Household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: • Pay more than one half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one half the year of a qualifying child, or an individual (relative) for whom the taxpayer may claim a dependency exemption, or• Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for the Head of Household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.Surviving Spouse (also referred to as Qualifying Widow or Widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The joint tax rates are used, but no exemption is claimed for the deceased spouse. In the year the spouse passed away, the surviving spouse would file jointly with the deceased spouse if not remarried by the end of the year. Adjusted Gross Income (AGI) - AGI is the acronym for Adjusted Gross Income. AGI is generally the sum of a taxpayer's income less specific subtractions called adjustments (but before the standard or itemized deductions and exemptions). Many tax benefits and allowances, such as credits, certain adjustments and some deductions are limited by a taxpayer's AGI. Taxable Income - Taxable income is your AGI less deductions (either standard or itemized) and your exemptions. Your taxable income is what your regular tax is based upon using either the IRS tax tables or the tax rate schedule. Marginal Tax Rate - Not all of your income is taxed at the same rate. The amount equal to the sum of your deductions and exemptions is not taxed at all. The next increment is taxed at 10%, then 15%, etc., until you reach the maximum tax rate. When you hear people discussing tax bracket, they are referring to the marginal tax rate. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 25% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $250 in Federal tax ($1,000 x 25%). Your marginal tax bracket depends upon your filing status and taxable income. Find your marginal tax rate using the table below.When using this table, keep in mind that the marginal rates are step functions and that the taxable incomes shown in the filing status column are the top value for that marginal rate range. 2015 MARGINAL TAX RATES TAXABLE INCOME BY FILING STATUS Marginal Tax Rate Single Head of Household Joint* Married Filing Separately 10.0% 9,225 13,150 18,450 9,225 15.0% 37,450 50,200 74,900 37,450 25.0% 90,750 129,600 151,200 75,600 28.0% 189,300 209,850 230,450 115,225 33.0% 411,500 411,500 411,500 205,750 35.0% 413,200 439,000 464,850 232,425 39.6% Over413,200 Over439,000 Over464,850 Over232,425 * Also used by taxpayers filing as Surviving Spouse Taxpayer & Dependent Exemptions - You are allowed to claim a personal exemption for yourself, your spouse (if filing jointly) and each individual who qualifies as your dependent. The amount you are allowed to deduct is adjusted for inflation annually; the amount for 2015 is $4,000 (up from $3,950 in 2014).Dependents - To qualify as your dependent, an individual must be your qualified child or pass all five dependency qualifications: (1) Member of the Household or Relationship Test, (2) Gross Income Test, (3) Joint Return Test, (4) Citizenship or Residency Test, and (5) Support Test. The gross income test limits the amount of income a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support, although there are special rules for divorced parents and situations where several individuals together provide over half of the support.Qualified Child - A qualified child is one that meets the following tests:(1) Has the same principal place of abode as you for more than half of the tax year except for temporary absences.(2) Is your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual.(3) Is younger than you.(4) Did not provide over half of his or her own support for the tax year.(5) Is under age 19 or under age 24 in the case of a full-time student, or is permanently and totally disabled (any age).(6) Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund). Deductions - Taxpayers generally can choose between itemizing their deductions and using the standard deduction. The standard deductions, which are inflation adjusted annually, are illustrated below for 2015. Filing Status Standard Deduction Single $6,300 Head of Household $9,250 Married Filing Jointly $12,600 Married Filing Separately $6,300 The standard deduction is increased by multiples of $1,550 for unmarried taxpayers who are over age 64 and/or blind. For married taxpayers, the additional amount is $1,250. Those with large deductible expenses can itemize their deductions in lieu of claiming the standard deduction.Itemized deductions include:(1) Medical expenses (only if total exceeds 10% of your AGI for the year). Note: the reduction rate is 7½% for seniors age 65 and older through 2016;(2) Taxes consisting primarily of real property taxes, state income (or sales*) tax and personal property taxes;(3) Interest on qualified home debt and investments; the latter is limited to net investment income (i.e. the interest cannot exceed your investment income after deducting investment expenses);(4) Charitable contributions are generally limited to 50% of your AGI, but in certain circumstances the limit can be as little as 20% or 30% of AGI,(5) Miscellaneous employee business expenses and investment expenses, but only to the extent that they exceed 2% of your AGI;(6) Casualty losses in excess of $100 per occurrence plus 10% of your AGI; and(7) Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.*The option to deduct state and local sales tax instead of state and local income tax does not apply for 2014 and subsequent years, but there is a chance Congress may reinstate the provision retroactively. Please check with this office for updates. Alternative Minimum Tax (AMT) - The Alternative Minimum Tax is another way of being taxed that taxpayers frequently overlook. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments paid at least a minimum tax. However, unlike the regular tax computation, for many years the AMT was not adjusted for inflation, and years of inflation drove most taxpayers’ income up to the point where more and more taxpayers were being affected by the AMT. Congress finally changed the law to allow annual inflation-adjustment of the amount of income exempt from the AMT, and raised the amount of AMT taxable income at which the higher of two AMT tax rates applies. These changes have helped limit the number of additional taxpayers subject to the AMT. A full overhaul of the AMT law is yet to come from Congress. Meanwhile, your tax must be computed by the regular method and by the alternative method. The tax that is higher must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.- Personal and dependent exemptions -are not allowed for the AMT. Therefore, a separated or divorced parent should be careful not to claim a dependent’s exemption if they are subject to the AMT and instead allow the other parent to claim the exemption. This strategy can also be applied to taxpayers who are claiming an exemption under a multiple support agreement.- The standard deduction – is not allowed for the AMT and a person subject to the AMT cannot itemize for AMT purposes unless they also itemize for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT. - Itemized deductions:Medical deductions – only allowed in excess of 10% of AGI, now the same as for regular tax (except the reduction rate is 7½% for taxpayers age 65 or older). This difference for seniors will end when the AGI threshold percentage increases for them to 10% in 2017.Taxes – are not allowed at all for the AMT.Interest – Home equity debt interest and interest on debt for non-conventional homes such as motor homes and boats are not allowed as AMT deductions.Miscellaneous deductions subject to the 2% of AGI reduction are not allowed against the AMT. - Nontaxable interest from Private Activity Bonds – is tax-free for regular tax purposes but some are taxable for the AMT.- Statutory Stock Options (Incentive Stock Options) when exercised produce no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) is income for AMT purposes in the year the option is exercised.- Depletion Allowance – in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.The AMT exemptions are phased out for higher-income taxpayers. The amounts shown are for 2015. AMT EXEMPTION PHASE OUT Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out Married Filing Jointly $83,400 $492,500 Married Filing Separate $41,700 $246,250 Unmarried $53,600 $333,600 AMT TAX RATES AMT Taxable Income Tax Rate 0 – $185,400 (1) 26% Over $185,400 (1) 28% (1) $92,700 for married taxpayers filing separatelyYour tax will be the higher of the tax computed the regular way or the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation. and business tax credits only allowed against the regular tax. All of these can strongly impact your bottom line tax and raise a question of possible AMT. Tax Tip: If you were subject to the AMT in the prior year, itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be includable in the regular tax computation. To the extent you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not includable in the subsequent year’s income. Tax Credits - Once your tax is computed, tax credits can reduce the tax further. Credits are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to the succeeding years. Although most credits are a result of some action taken by the taxpayer, there are two commonly encountered credits that are based simply on the number of your dependents or your income.Child Tax Credit - The child tax credit is $1,000 per child. If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer's earned income exceeds a threshold ($3,000 2011 through 2017) is refundable. Taxpayers with three or more qualifying dependent children may use an alternate method for figuring the refundable portion of their credit. The credit is allowed against both the regular tax and the AMT for each dependent under age 17. The credit begins to phase out at incomes (AGI) of $110,000 for married joint filers, $75,000 for single taxpayers and $55,000 for married individuals filing separate returns. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the thresholds.Earned Income Credit -This is a refundable credit for low-income taxpayers with income from working, either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,400 (up from $3,350 in 2014) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available. 2015 EIC PHASE-OUT RANGE Number ofChildren Joint Return Others MaximumCredit None $13,750 - $20,325 $8,240 - $14,820 $503 1 $23,630 - $44,651 $18,110 - $39,131 $3,359 23 $23,630 - $49,974$23,630 - $53,267 $18,110 - $44,454$18,110 - $47,747 $5,548 $6,242 Residential Energy-Efficient Property Credit – This credit is generally for energy-producing systems that harness solar, wind or geothermal energy including solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2016. Withholding and Estimated Taxes - Our “pay-as-you-go” tax system requires that you make payments of your tax liability evenly throughout the year. If you don't, it's possible you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-go” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer's payroll department to take out the right amount of tax, based on the withholding allowances shown on the Form W-4 you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of: (1) 90% of the current year’s tax liability; or(2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing Married Separate), 110% of the prior year’s tax liability. If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date. Wed, 19 Nov 2014 19:00:00 GMT Cut Taxes On Your Investments http://www.messnerandhadley.com/blog/cut-taxes-on-your-investments/434 http://www.messnerandhadley.com/blog/cut-taxes-on-your-investments/434 Messner & Hadley LLP Long-term capital gains tax rates will produce automatic tax savings by taxing the gain from capital assets at rates lower than the regular tax rate. To take advantage of the long-term rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset. If your marginal rate is 15% or under - Your long-term capital gains rate will be 0% for property held longer than one year. To the extent your marginal rate is above 15% but below 39.6% - Your long-term capital gains rate will be 15% for property held longer than one year. To the extent your marginal rate is 39.6% - Your long-term capital gains rate will be 20% for property held longer than one year. Taxpayers in the 10% or 15% tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rate, possibly cashing in on existing gains while avoiding any federal tax on the gains. Also remember the gain itself adds to the taxpayer’s income, impacts income-based limitations, and possibly pushes the taxpayer into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate.Primarily because of this zero tax rate, Congress raised the age for the “kiddie” tax to include full-time students under the age of 25. Thus, Congress effectively nullified a popular strategy for funding college expenses by gifting appreciated stock to children who could then sell it with no or reduced tax liability.Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. Keep in mind that taxpayers may use up to $3,000 ($1,500 for taxpayers filing as married separate) of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI. Currently, individuals are subject to tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 20%.All of this means that having long-term capital losses offset long-term capital gains should be avoided, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn't want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.Special Considerations - Some long-term gains are treated differently. Long-term gain attributable to depreciation recaptured on certain depreciable real estate is taxed at a maximum rate of 25%, and long-term gain attributable to collectibles (works of art, coins, stamps, antiques and similar property) is taxed at a maximum of 28%. If a taxpayer owns shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to his or her benefit to pick the block of shares to sell based on their cost and holding period. If the taxpayer cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes, the mutual fund shares that are sold are considered to be the ones acquired first.When deciding whether to take gain or hold for long-term rates, compare the savings associated with long-term rates to the financial risk of continuing to hold the investment. Careful handling of capital gains and losses can save substantial amounts of tax. Please contact this office to discuss year-end planning strategies that apply to your particular situation so as to maximize tax savings. Owners of luxury homes with gains exceeding the $250,000/$500,000 exclusion limits, and owners of second homes that do not qualify for the home sale gain exclusion, will especially benefit from the lower capital gain rates.DividendsDividends received by an individual shareholder from domestic corporations (and certain foreign corporations) are treated as net capital gain for purposes of applying the capital gain tax rates. This means dividends are taxed at no more than 20% for taxpayers in the highest marginal rate, and either 15% or 0% for taxpayers in lower rates. Capital losses cannot offset the dividend income. Dividends on stock held in a retirement plan or Traditional IRA do not benefit from the lower rates; distributions from these plans are taxed at ordinary income rates.Deferring or Avoiding Tax When Disposing of AssetsDepending on the type of asset, there are a number of strategies that can be employed to reduce, defer, or even avoid the tax upon the asset’s disposition. Tax-Free Exchange - Commonly referred to as a Sec 1031 exchange in reference to the tax code section covering exchanges, this type of strategy is frequently used to defer taxes in real estate held for business or investment purposes by deferring the gain into a replacement real estate property also held for business or investment purposes. Tax-free exchanges are also available for non-real estate business assets, but must conform to stringent like-for-like requirements. Tax-free exchanges do not apply to personal-use real estate holdings, such as your home or second home, and generally do not apply to publicly-traded stock. If the property is mixed-use property, such as a house that is used partially as a home and partially for business (such as a home office), the business portion may qualify under the Sec 1031 exchange rules. Please call this office for additional details. Installment Sale - By carrying back the paper (loan) on the sale of an asset, you can spread the gain over a period of years. In these types of arrangements, the gain and nontaxable return of capital are taxed proportionally over the term of the sale agreement, thereby deferring the tax on the gain portion until actually received. Charitable Gift - Consider replacing cash charitable gifts with gifts of appreciated property. By giving the asset to a favorite charity, the taxpayer receives a charitable contribution deduction equal to the fair market value of the gift and at the same time avoids having to report the gain from the asset on his or her return. However, the maximum deduction for gifts of this type can be as low as 20% or 30% of AGI as compared to 50% for cash gifts. Caution: If the value of the stock a taxpayer is considering gifting is less than what was paid for it, he or she should sell it, take the loss on their return and then contribute the cash to the charity. Charitable Remainder Trust - This technique allows a taxpayer to contribute his or her asset(s) to a trust, which in turn pays income to the taxpayer during the remainder of the taxpayer's life and leaves the balance at death to the charity. The assets contributed to the trust can be sold within the trust without any tax consequences to the taxpayer. In addition, when the trust is formed, the taxpayer will receive a charitable deduction for the estimated amount that the trust will leave to charity upon death. The amount of income paid to the taxpayer each year is flexible (within some limitations) and provides annual funds, which can then supplement retirement needs. Gifts to Individuals - Giving a gift of appreciated property to an individual (donee) transfers the gain from that property to the donee. This can work to your advantage by gifting the appreciated asset rather than giving the donee cash. Let’s say that a taxpayer is assisting a low-income parent with living expenses (but doesn't pay over half the parent's support so the taxpayer cannot claim the parent as a dependent). Instead of selling some appreciated stock to pay for the parent's household costs, for example, the stock should be gifted to the parent, who can sell it in a much lower tax bracket and pay for his or her own expenses. The foregoing are abbreviated summaries of tax strategies that may have additional restrictions or other tax ramifications. Please consult with this office before attempting to employ any of these strategies.Take Investment LossesIf a taxpayer has investments that are worth less than what was paid for them, he or she can use the losses to offset other gains and in certain circumstances other types of income. Capital Losses - Tax law allows you as an investor to offset capital gains with capital losses, and if the losses exceed the gains, you can deduct losses up to a maximum of $3,000 ($1,500 if filing married separate) for the tax year. Any additional losses carry over to future years. For this reason, review your securities portfolio at year’s end and search for stocks and other securities whose sales will result in a capital loss. This will help minimize your gains or maximize your losses for the year. When planning this strategy, keep in mind that under the wash sale rules, a loss is disallowed if the security sold at a loss is repurchased within 30 days. A loss will also be disallowed if the investor buys the same security 30 days before the sale.Another planning strategy is to avoid having long-term capital losses offset long-term capital gains, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. Variable Annuity Losses - If a taxpayer has a variable annuity that is worth less than what was paid for it, consider surrendering it before year’s end so that a deductible loss can be realized. Usually, the amount that is deductible will be the surrender value less the tax basis in the annuity. The tax basis is generally the amount originally invested less any amounts previously received from the annuity that were excludable from income. Before making a decision to surrender, consider any possible surrender penalties and the potential for the annuity to recover. Please call this office if we can assist you with your decision. Invest in Tax-Exempt Securities Municipal Bonds - Interest received on obligations of states and their municipalities is exempt from Federal tax and may also be free from state taxation. Although these bonds generally pay a lower interest rate, their “after-tax” return (yield) can be higher than other similar investments such as corporate bonds, CDs, etc. Taxpayers in higher tax brackets and children subject to the “kiddie tax” frequently use this investment. Taxpayers drawing Social Security benefits should be reminded that even though municipal bond income may be tax-free, it is still used as income for purposes of determining the taxable portion of Social Security income. In addition, interest on certain “private activity bonds” is not exempt for AMT purposes. EQUIVALENT TAXABLE YIELD TaxExempt Tax Equivalent Taxable Yield Marginal Tax Rate 10 15 25 28 33 35 39.6 2.0 2.2 2.35 2.67 2.78 2.98 3.08 3.31 2.5 2.75 2.94 3.33 3.47 3.73 3.85 4.14 3.0 3.30 3.53 4.00 4.17 4.48 4.62 4.97 3.5 3.85 4.12 4.67 4.86 5.22 5.38 5.79 4.0 4.40 4.7 5.33 5.56 5.97 6.15 6.62 4.5 4.95 5.29 6.00 6.25 6.72 6.92 7.45 5.0 5.50 5.88 6.67 6.94 7.46 7.69 8.28 5.5 6.05 6.47 7.33 7.64 8.21 8.46 9.10 6.0 6.60 7.06 8.00 8.33 8.96 9.23 9.93 Direct U.S. Government Obligations - Interest from U.S. Savings Bonds, T-Bills, HH Bonds, etc., is taxable only for Federal purposes. Federal law prohibits states from taking a bite out of this income. In addition, interest from U.S. Savings Bonds (series E, EE and I) may be deferred until the year the bond is cashed, providing a vehicle for deferral strategies. Wed, 19 Nov 2014 19:00:00 GMT Plan For Selling Your Home http://www.messnerandhadley.com/blog/plan-for-selling-your-home/436 http://www.messnerandhadley.com/blog/plan-for-selling-your-home/436 Messner & Hadley LLP Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period is extended for military personnel and intelligence community employees). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable. If the home was previously used as a rental, second home, used by a relative, unoccupied, etc., and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain. Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home. Only home sale portion of the gain qualifies for the $250,000/$500,000 gain exclusion.The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office). A beneficiary who inherits the residence of a decedent generally (except in some cases for decedents who died in 2010 receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term. Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses. Wed, 19 Nov 2014 19:00:00 GMT Save Taxes by Shifting or Deferring Income http://www.messnerandhadley.com/blog/save-taxes-by-shifting-or-deferring-income/437 http://www.messnerandhadley.com/blog/save-taxes-by-shifting-or-deferring-income/437 Messner & Hadley LLP Shifting Income to Your Child - Children under the age of 19 and full-time students under the age of 24 are subject to the so-called kiddie tax. This was enacted by Congress to restrict taxpayers from shifting large amounts of income to their children by taxing the child at the parent’s marginal tax rate. However, for children without earnings from working, there is no kiddie tax on the first $1,050 for 2015 (up from $1,000 in 2014) of investment income, and the next $1,050 is taxed at 10%. Once the child is beyond the applicable age, all of their income is taxed at their own marginal rate.When the income of a child subject to this tax calculation reaches the point where it would be taxed at the parent’s rate, making investments through tax-deferred investment vehicles becomes a prudent option. Placing or moving a child's funds into tax deferred or tax free investments such as U.S. Savings Bonds, tax-deferred annuities, municipal bonds, growth stocks, etc., that produce little or no current taxable income, can help avoid the Kiddie Tax, at least in the years until the investments need to be sold or redeemed to pay for education expenses. Investing in U.S. Savings Bonds - Interest income from certain types of U.S. Savings Bonds may be deferred until the bonds mature or are cashed in, whichever occurs first. Thus, one can defer income for the life of the bonds. Investing in Deferred Annuities - Because the interest earned on a deferred annuity is tax-deferred, your earnings are not taxed until withdrawn. This also allows the investment to compound faster. Employing Your Child - Payments that you make to your child under the age of 18, who works for you in your trade or business that is a sole proprietorship or partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. As long as the pay is reasonable for the necessary services to the business provided by the child, you can deduct that pay as a business expense. Assuming the child has no other income, he or she will not have any tax on the first $6,300 of wages from you in 2015 (up from $6,200 in 2014). Your child may also make deductible contributions to an IRA of the lesser of earned income or $5,500. These contributions can offset income, so your child could receive $11,800 in gross income by combining the IRA deduction with the standard deduction and pay no tax. IRA Contributions - For 2013 through 2015, an individual may contribute the lesser of his or her compensation or $5,500 to their IRA accounts. The spouse can do the same even if he or she does not work, provided the joint compensation is at least $11,000 for the year. For individuals age 50 and over, the annual limit is increased by $1,000. Contributions to a Traditional IRA cannot be made once the taxpayer reaches age 70-1/2. For purposes of determining IRA deduction limits, individuals who receive taxable alimony and separate maintenance payments may treat the alimony as compensation even if it is the only income they have. This allows alimony recipients to save for their retirement by making either Traditional or Roth IRA contributions. Traditional IRA contributions are deductible if the taxpayer and spouse (if married) do not actively participate in another qualified retirement plan, or if participating in another plan, their AGI is below income phase-out levels. For married taxpayers where one spouse is an active participant in a qualified plan and the other is not, the IRA deduction is phased out when AGI is between $181,000 and $191,000 for the one who is not an active participant in 2014. For 2015 the range is $183,000 to $193,000. 2015 TRADITIONAL IRA PHASE OUT AGI Phase Out Single & Head of Household Joint* &Surviving Spouse MarriedSeparate Threshold $61,000 $98,000 $0 Complete $71,000 $118,000 $10,000 *When both spouses are active participants in qualified plans. See paragraph above this table for ranges that apply to the non-participant spouse when only one spouse is an active participant. If you cannot deduct your IRA contribution or you simply wish to generate tax-free retirement funds, you can contribute to a Roth IRA instead of the Traditional IRA, provided your AGI is below the phase-out levels shown in the table below. (The limits apply whether you are or are not a participant in a qualified retirement plan.) Roth IRA distributions are tax-free after a five-year waiting period and you have reached age 59-1/2 or become disabled. 2015 ROTH IRA PHASE OUT AGI Phase Out Single & Head of Household Joint &Surviving Spouse MarriedSeparate Threshold $116,000 $183,000 $0 Complete $131,000 $193,000 $10,000 You can convert all or any portion of your Traditional IRA to a Roth IRA. Since income tax must be paid on the conversion amount, it makes sense to convert if there are many years to go before you plan to withdraw the funds. This allows the IRA to accumulate tax-free earnings and appreciation. If you have one or more IRA accounts invested in stocks or mutual funds that have declined in value, this might be an opportune time to convert it to a Roth IRA. Another reason to convert to a Roth IRA is to pass on money to your heirs. Unlike a Regular IRA, there are no mandatory withdrawals for the Roth IRA owner, and the heirs will not be liable for income taxes when the Roth IRA is distributed to them. Roth Rollover Strategies - There are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA. Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings from the time of the original contributions up to the time of conversion would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy. Using the same strategy, even a taxpayer who can make a deductible contribution to a traditional IRA can elect to make it nondeductible, providing the same result as above. Self-Employed Retirement Plans - The maximum deduction for a self-employed individual’s contribution on their own behalf to a profit-sharing or SEP plan for 2015 is the lesser of 20% of net self-employment earnings (after the deduction for one-half of self-employment taxes) or $53,000 (up from $52,000 in 2014). In addition, a self-employed individual who is age 50 or older can make an additional catch-up contribution of $6,000 (up from $5,500 in 2014).Self-employed individuals are also allowed a 401(k)-style elective deferral of the lesser of the annual maximum ($18,000 in 2015, up from $17,500 in 2014) or the net profit from the self-employed business less the profit-sharing or SEP contribution. Wed, 19 Nov 2014 19:00:00 GMT Planning Pension Distributions http://www.messnerandhadley.com/blog/planning-pension-distributions/438 http://www.messnerandhadley.com/blog/planning-pension-distributions/438 Messner & Hadley LLP An individual may begin withdrawing, without penalty, from his or her qualified pension plans at the age of 59-1/2. Generally, distributions before age 59-1/2 are subject to a federal penalty equal to 10% of the taxable amount of the distribution, but there are several exceptions that will allow earlier withdrawal without penalty. Upon reaching age 70-1/2 (or, except in the case of a 5-percent owner, if later, upon retiring), you are required to take distributions from your plans or face a substantial penalty for failing to do so. The “retirement if later” exception does not apply to IRAs. Impact of Your Marginal Rate - If you are able to plan your withdrawals, you can save considerable tax dollars. This is not always possible, but the basic premise is to take distributions and pay the resulting tax in years when your marginal rate is low. Also watch for years when, for a variety of reasons, your taxable income is negative and some amount of distributions could be taken tax-free if age 59-1/2 and over. The penalty only applies to those under 59-1/2. Impact on Social Security - For retired individuals receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when the total of one-half of the taxpayer’s Social Security benefits plus the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50% to 85% of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount, even if the funds are not needed in that year. They can be set aside for a future year when they might be used for some unplanned need or large purchase. However, this strategy may not work if IRA distributions are required to be made (see next section). Minimum Distribution Requirements - The IRS does not allow taxpayers to keep funds in qualified plans indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the owner may have to pay a 50% penalty of the amount not distributed as required. Generally, distributions must begin in the year the plan owner reaches the age of 70-1/2. In most cases, the required minimum distribution can be figured using the “life” factor from the following table, which is divided into the value of the account as of the end of the preceding tax year. So, for example, an individual who reaches age 73 in 2015 and whose IRA had a value on December 31, 2014 of $50,000, would be required to withdraw $2,024.29 in 2015 ($50,000/24.7). UNIFORM LIFETIME TABLE Age Life Age Life Age Life Age Life Age Life 70 27.4 80 18.7 90 11.4 100 6.3 110 3.1 71 26.5 81 17.9 91 10.8 101 5.9 111 2.9 72 25.6 82 17.1 92 10.2 102 5.5 112 2.6 73 24.7 83 16.3 93 9.6 103 5.2 113 2.4 74 23.8 84 15.5 94 9.1 104 4.9 114 2.1 75 22.9 85 14.8 95 8.6 105 4.5 115 1.9 76 22.0 86 14.1 96 8.1 106 4.2 77 21.2 87 13.4 97 7.6 107 3.9 78 20.3 88 12.7 98 7.1 108 3.7 79 19.5 89 12.0 99 6.7 109 3.4 Wed, 19 Nov 2014 19:00:00 GMT Explore Education Tax Incentives http://www.messnerandhadley.com/blog/explore-education-tax-incentives/439 http://www.messnerandhadley.com/blog/explore-education-tax-incentives/439 Messner & Hadley LLP Congress, through the years, has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits. Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2014 and 2015, you can contribute $14,000 ($28,000 for married couples who agree to split their gift) a year without gift tax implications. The annual amount is subject to inflation-adjustment, so call for the limit for other years. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. No income tax deduction is allowed for the amount contributed. Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly and between $95,000 and $110,000 for all others. Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns. The American Opportunity Credit is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. 40% of the American Opportunity credit is refundable (if the tax liability is reduced to zero). The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. Qualifying expenses for these credits is generally limited to tuition. However, student activity fees and fees for course-related books, supplies and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student. You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer. Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses. For 2014 and 2015, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. The phase out range is inflation adjusted annually, so please call for limits other than those shown for 2014 and 2015. This deduction is not allowed for taxpayers who file married separate returns. Wed, 19 Nov 2014 19:00:00 GMT Make the Most of Your Deductions http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/440 http://www.messnerandhadley.com/blog/make-the-most-of-your-deductions/440 Messner & Hadley LLP As you plan for your tax year, keep in mind that some tax deductions are “above-the-line” and are available whether deductions are itemized or not. In addition to the educational “above-the-line” deductions, the following deductions are noteworthy. Health Savings Accounts - A Health Savings Account is a trust account into which tax-deductible contributions may be made by qualified taxpayers who have high deductible medical insurance plans. Interest earned on the HSA balance is tax-free. The funds from these accounts are then used to pay qualified medical expenses not covered by the medical insurance for an eligible individual. If these funds are not used, they roll over year to year. Once the taxpayer turns 65, the funds can be used as a retirement plan (taxable when withdrawn, but not subject to a withdrawal penalty) or saved for future medical expenses. Since the contribution is an above-the-line deduction, a taxpayer need not itemize deductions to take advantage of this tax break. High deductible plans are defined as those with the following deductible amounts for 2015: Self-only coverage with an annual deductible of $1,300 (up from $1,250 in 2014) or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $6,450 (up from $6,350 in 2014); or Family coverage with an annual deductible of $2,600 (up from $2,500 in 2014) or more and limits on annual expenses, other than premiums, required to be paid by the plan during the year, up to $12,900 (up from $12,700 in 2014). The deductibles and maximum out of pocket limits are inflation adjusted annually, so please call for amounts for years other than 2015. Itemized Deductions - A taxpayer with deductible expenses exceeding the standard deduction amount will want to itemize their deductions. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. The following is an overview of the itemized deductions o Medical Expenses - Deductible medical expenses are limited to unreimbursed expenses for the taxpayer, his or her spouse and dependents that exceed 10% (7-1/2% if age 65 or older) of the taxpayer's AGI for the year. For AMT purposes, the medical deduction of a taxpayer who is age 65 or more will be less because only the excess of unreimbursed expenses above 10% of AGI is deductible. For younger taxpayers, their regular tax and AMT medical deduction will be the same amount. Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer's cafeteria plan) cannot be included. Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible. Some less common deductions include the following: - The cost of a weight loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician. - Medicare-B premium payments and Medicare-D premiums for drug coverage. - Participation in smoking-cessation programs and for prescribed drugs (but not nonprescription items such as gum or patches) designed to alleviate nicotine withdrawal. - Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. - Medical dependent - For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling the taxpayer to deduct the individual’s medical expenses that the taxpayer paid. A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.) - Long-term care insurance - Amounts paid for long-term care services and certain premiums paid on long-term care insurance are includible as medical expenses. The maximum amount of long-term care premiums treated as medical expenses depends on the insured’s age and is inflation-indexed annually. For values for years other than 2015 please call this office. Deductio Limi2015 Long-Term Care Insurance Age 40 or less 41 to 50 51 to 60 61 to 70 71 & Older Limit $380 $710 $1,430 $3,800 $4,750 o Taxes - Deductible taxes primarily consist of real property taxes, state and local income taxes and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, taxpayers should attempt to minimize the payment of taxes in a year they are subject to the AMT if they can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, a taxpayer can annually elect to capitalize the taxes in lieu of deducting them. o Interest - The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on the taxpayer’s main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the current balance of the original debt that was incurred to purchase or substantially improve the home and is not increased by refinanced debt. Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, the taxpayer should attach a statement to their return (timely filed) for the year the election is to be effective stating the election is to apply. Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. A taxpayer can elect to treat qualified dividends and long-term capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains and qualified dividends are then not eligible for the lower capital gains/qualified dividends tax rate. o Charitable Contributions - A taxpayer may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent he or she receives no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), a taxpayer is generally required to have a qualified appraisal of the property that was donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of the taxpayer’s Adjusted Gross Income. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property. Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership. Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane. There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities or provides to a needy family.” Please call this office for more information. For 2013, taxpayers age 70½ and over were allowed to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity. The distribution is tax-free, and counts toward the taxpayer’s required minimum distribution for the year, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have Social Security income and/or do not itemize their deductions. This option has expired for 2014 and subsequent years. However, there is a chance the provision could be retroactively extended by Congress. Please call for possible future developments. o Miscellaneous Deductions - Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of a taxpayer's AGI and those that are not. - Those Subject to the 2% Reduction - This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses. - Those NOT Subject to the 2% Reduction - This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA. Wed, 19 Nov 2014 19:00:00 GMT Tax Planning For Your Business http://www.messnerandhadley.com/blog/tax-planning-for-your-business/441 http://www.messnerandhadley.com/blog/tax-planning-for-your-business/441 Messner & Hadley LLP • Business Entity Choices - Non-tax considerations generally take precedence in selecting the appropriate structure for your business. However, tax considerations can also play an important role in your decision. Choosing the right business entity at the inception of your business is important, and all aspects should be carefully considered.Your choices of business entities include: Corporation, Sub-S Corporation, Partnership, and Limited Liability Company; if there are no co-owners, one can choose a Sole Proprietorship. HOW BUSINESS ENTITIES ARE TAXED To TheBusiness To TheOwner(s) Sole Proprietorship No Yes Partnership No Yes Corporation Yes Dividends S-Corporation No (2) Yes Limited Liability Co. Depends Upon Structure (2) Exceptions apply • Business Start-Up Costs - A frequent question is how the start-up costs of a business are handled before actually in business. Typical expenses include legal consultation, travel, surveys, establishment of suppliers, employee training, etc. Current law allows a taxpayer to deduct up to $5,000 of start-up costs in the year the business begins; a partnership or corporation may expense up to $5,000 of organizational costs. Each $5,000 amount must be reduced, but not below zero, by the amount of accumulated start-up expenses and organizational costs in excess of $50,000. If not deductible in the year the business begins, these expenses are deducted ratably over 15 years. • Purchasing an Ongoing Business - If you are considering purchasing an ongoing business that is not a stock transaction, it is important that you and the seller agree on how the purchase price is allocated among the various elements of the business. The allocation can have significant tax ramifications for both the buyer and seller, and the IRS requires the treatment between the buyer and seller to be consistent. Some elements can be depreciated or written off quicker than others, while some cannot be written off at all. For the seller, the sales prices of some elements receive capital gains treatment, while others generate ordinary income. When negotiating the sale, be sure it includes the agreed allocation.• Deducting the Cost of Business Assets - Depreciation is a way of recovering the cost of an item purchased for business use over a period of time. Some assets are depreciated over a specified life. For some assets, the depreciation is straight-line, while for others, accelerated methods that front-load the deduction may be used. Following are examples of the depreciable life for some commonly encountered business assets. Assets that are used only partially for business must be prorated for business use. SAMPLE DEPRECIABLE LIVES Asset DepreciableLife Agricultural Equipment 7 Yrs Automobiles (3)(4) 5 Yrs Commercial Real Estate 39 Yrs Land Not Depreciable Land Improvements 15 Yrs Office Equipment 5 Yrs Office Furnishings 7 Yrs Residential Real Estate 27.5 Yrs Trucks (3) 5 Yrs (3) Vehicles under 6,000 lbs. gross unladen weight have additional deduction restrictions. (4) The Sec 179 deduction for SUVs is limited to $25,000 and applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Expense Deduction - For 2014, you may also elect to expense up to $25,000 ($12,500 if filing married separate), (down from $500,000 on 2013) of the cost of certain assets (generally those with a depreciable life of seven years or less) the first year the asset is placed in business service (Sec 179 deduction). The deduction is limited to the income from all of the taxpayer’s trades and businesses. There are additional restrictions, called the investment limit, if more than $200,000 of assets are placed in service during the tax year. Note: The drastic reduction in the expense limit is the result of sun setting tax laws, which Congress allowed to expire. However, there is a chance Congress could retroactively increase the limit. Please call for further updates. If the higher limits are not extended, the 2015 expense limitation will be increased for inflation.Excluded from this limitation is any vehicle that:- is designed for more than nine individuals in seating rearward of the driver's seat;- is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or - has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.Bonus Depreciation - Bonus depreciation expired after 2013.• Special Breaks for Incorporated Businesses - If a business is incorporated, there are two special tax provisions that may apply. You may want to qualify the stock as “Small Business Stock.” When stock of this type is sold or exchanged, losses up to $50,000 ($100,000 if married filing jointly) per year may be deducted as an ordinary loss instead of a capital loss, which would be limited to your capital gains plus $3,000 ($1,500 if filing as married separate). If the business is a C-Corporation and you acquired the stock at original issue, you may also qualify for a 50%, 75% or 100% exclusion of gain for certain small business stock held for more than five years (the applicable exclusion percentage depends on when the stock was acquired). Or, you may choose to roll over the gain from qualified small business stock held for more than six months by buying another small business stock within six months.• Business Automobiles - When a vehicle is used for business purposes, the taxpayer can deduct the business portion of the operating expenses on the business. If the car is used for both business and personal purposes, you may deduct only the cost of its business use. One can generally determine the expense for the business use of the car in one of two ways: the standard mileage rate method or the actual expense method.- Standard Mileage Rate Method—The standard mileage rate takes the place of fuel, oil, insurance, repair, maintenance, and depreciation (or lease) expenses. Beginning in January 2014, the standard mileage rate is 56 cents per mile (down from 56.5 cents in 2013). In addition, the cost of business-related parking and tolls is deductible. Note: Because of the volatility of fuel prices, the mileage rates may vary during the year.Caution: If the standard mileage rate is not used in the first year the vehicle is placed in service, it cannot be used in future years. If, in a subsequent year, the taxpayer switches to the actual method, the straight-line method for depreciation must be used. If the car is leased, continue to use the standard mileage rate in future years. The standard mileage rate can be used for up to four vehicles that are being used simultaneously in business.- Actual Expenses Method: To use the actual expense method, determine the entire actual cost of operating the car for the year and then determine the business portion attributable to the business miles driven. Parking fees and tolls attributable to business use are also deductible.Both methods can include interest paid on the car loan when deducted on business returns. However, the interest deduction is not allowed for employees deducting job connected car expenses as part of their itemized deductions. Unfortunately, if you deduct actual expenses for the business use of your car, you will probably find your write-offs for depreciation restricted due to so-called luxury car limitations. And most all cars (including trucks or vans) fit the IRS definition of a “luxury vehicle,” regardless of their cost. If a vehicle is four-wheeled, used mostly on public roads, and has an unloaded gross weight of no more than 6,000 pounds, the car is considered a “luxury vehicle.” The auto depreciation limit for 2014 and 2015 are $3,160. An additional $300 for 2014 and $200 for 2015 allowance is added to the above limitations for certain passenger autos built on a truck chassis, including minivans and sport utility vehicles (SUVs). In an effort to rein in the practice of purchasing SUVs as a tax shelter, Congress has placed a limit of $25,000 on the §179 deduction for certain vehicles. The limit applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less. Excluded from this limitation is any vehicle that: is designed for more than nine individuals in seating rearward of the driver's seat; is equipped with an open cargo area, or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length; or has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.• Self-Employed Health Insurance Deduction - Self-employed individuals may deduct, as an adjustment to income, 100% of health insurance expenses paid for themselves and their families. Don’t overlook as eligible amounts for this deduction both amounts paid for long-term care insurance premiums, up to the annual age-based limits, and Medicare-B and -D premium payments. In addition, as part of the recently-enacted health care provisions, a child no longer need qualify as your dependent to be included on your self-employed health insurance plan. They need only be your child under the age of 27. This would include children that are self-supporting or married.• Home-Based Businesses Can Deduct Office-In-Home Expenses - Deducting the costs of a home office gives rise to several issues:(1) the qualifications that must be met to take that deduction;(2) expenses that can be deducted; and(3) the tax implications when the home containing the home office is sold. - Qualifications for the Deduction - Generally, a home office that is part of a residence is deductible only if used regularly and exclusively as a principal place of business, or as a place to meet or deal with customers or clients in the ordinary course of business. For home-based businesses, the home office qualifies as a principal place of business if the office is used on an exclusive and regular basis for administrative or management activities of any trade or business of the taxpayer, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.- Home Office Expenses - Home office expenses are divided into two categories: those that are directly related to the office, such as painting the room, installing a phone, etc., and indirect expenses that relate to both the office and personal portions of the home, such as utilities, insurance, real estate taxes, home mortgage interest, repairs benefiting the entire home and depreciation if the home is owned or rent if the home is rented. There is also a simplified method that can be used in lieu of actual expenses and depreciation (or rent payments) that allows a deduction of $5 per square foot up a maximum of 300 square feet. The expenses for the business use of a home cannot exceed the income from the business requiring the office. • Acquire Equipment - If you wish to reduce your profits, consider purchasing some additional equipment or machinery needed for the business. This will allow you to take advantage of the depreciation and expensing deductions. • Establish A Retirement Plan - If you don’t have a retirement plan established, this might be the time to consider one. There are a variety of plans available, including Keogh Defined Contribution and Profit Sharing Plans, which must be established before the end of the year, or a SEP Plan, which can be established after the end of the year.• Reduce Inventory - The cost of goods is a deduction against business income. However, any inventory remaining at the conclusion of the business year will be used to reduce your cost of goods sold, and thereby increase your profits for the year. You may wish to minimize the inventory before the end of the business year.• Domestic Production Deduction - For 2014 and 2105, the domestic production deduction for both corporations and individual business owners is 9%. The deduction is 9% of the lesser of the individual taxpayer's:(1) Qualified production activities income for the year, or (2) Adjusted gross income* for the year determined without regard to this deduction (but limited for any year to 50% of the W-2 wages paid by the taxpayer as an employer) during the tax year. So, for example, a sole proprietor who has no employees would not be eligible for this deduction. The main beneficiaries of this deduction are businesses that produce goods, develop software or construct property in the U.S.*Substitute "taxable income" in lieu of adjusted gross income for other than individuals.Example - Computing Domestic Production Deduction: Linda actively conducts a business as a sole proprietor manufacturing and selling ceramic dishware, all in the United States. She has two employees. Linda's qualified production activities income (QPAI) for 2015 is $55,000, which is the same amount as her net earnings from self-employment. The W-2s she filed for the employees show qualifying wages of $80,000. Linda's AGI before the domestic production deduction (Sec. 199 of the Tax Code) is $45,000. Her Section 199 deduction will be $4,050. The applicable percentage for 2015 is 9%; the lesser of QPAI or AGI is AGI of $45,000. 9% x $45,000 = $4,050. Since 50% of W-2 wages (50% x $80,000 = $40,000) is greater than $4,050, the deduction is not limited by the W-2 wage element, and the deduction will be $4,050. Wed, 19 Nov 2014 19:00:00 GMT Real Estate Rental Limitations http://www.messnerandhadley.com/blog/real-estate-rental-limitations/442 http://www.messnerandhadley.com/blog/real-estate-rental-limitations/442 Messner & Hadley LLP Real estate rental income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. An exception allows most individuals to annually deduct up to $25,000 ($12,500 for married filing separate taxpayers who live apart the entire tax year) of real estate rental losses. This dollar limit phases out ratably at AGI between $100,000 and $150,000 ($50,000 and $75,000 for married filing separate taxpayers who live apart the entire tax year). Any unallowed passive loss will carry over to future years. If you qualify as a real estate professional, the passive loss limitations will not apply to your real estate rental activities. Wed, 19 Nov 2014 19:00:00 GMT Bunching Your Deductions Can Provide Big Tax Benefits http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 http://www.messnerandhadley.com/blog/bunching-your-deductions-can-provide-big-tax-benefits/9109 Messner & Hadley LLP If your tax deductions normally fall short of itemizing your deductions or even if you are able to itemize, but only marginally, you may benefit from using the “bunching” strategy. The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if that provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next. For the most part, itemized deductions include medical expenses, property taxes, state and local income (or sales*) taxes, home mortgage and investment interest, charitable deductions, unreimbursed job-related expenses, and casualty losses. The “bunching strategy” is more commonly associated with medical expenses, tax payments and charitable deductions, although there are circumstances in which the other deductions might come into play. There are many opportunities to bunch deductions, and the following are examples of the bunching strategies most commonly used:Medical Expenses – You contract with a dentist for your child’s braces. The dentist may offer you an up-front, lump sum payment or a payment plan. By making the lump sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you do not have the cash available for the up-front payment, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes. If you use a credit card, you must realize that the credit card interest is not deductible, and you need to determine if incurring the interest is worth the increased tax deduction. Another important issue with medical deductions is that only the amount of the total medical expenses that exceeds 10% (7.5% if age 65) of your adjusted gross income (AGI) is actually deductible. If you are caught by the Alternative Minimum Tax (AMT), then only the amount that exceeds 10% of your AGI is actually deductible. So, there is no tax benefit in bunching medical deductions if the total is less than your AGI threshold.If the current year is an abnormally high-income year, you may, where possible, wish to put off making medical expense payments until the subsequent year when the 10% (7.5%) threshold is less. Taxes – Property taxes on real estate are generally billed annually at mid-year, and most locales allow the tax bill to be paid in semi-annual or quarterly installments. Thus, you have the option of paying it all at once or paying in installments. This provides the opportunity to bunch the tax payments by paying one semi-annual installment or two quarterly installments and a full year’s tax liability in one year and only paying one semi-annual installment or two quarterly installments in the other year. In doing so, you are able to deduct 1-½ year’s taxes in one year and 50% of a year’s taxes in the other. If you are thinking of making the property tax payments late as a way to accomplish bunching, you should be cautious. The late payment penalty will probably wipe out any potential tax savings. If you reside in a state that has state income tax, the state income tax paid or withheld during the year is deductible as a federal item