2016 tax rules — a quick review

Income tax rates — Range from 10% to 35% unless taxable income exceeds $415,050 for singles or $466,950 for married couples. Rate on income above those amounts is 39.6%.

Estate & gift tax — Annual tax-free gifts allowed with $14,000 per gift limit. Estate tax exemption of $5,450,000 for 2016 with 40% top tax rate.

Breaks now permanent — 1) optional deduction for state and local sales tax in lieu of state and local income tax; 2) the $250 deduction for classroom supplies paid by teachers; and 3) IRA-to-charity transfer of up to $100,000 by taxpayers 701/2 or older.

Itemized deductions — Limited for single taxpayers with adjusted gross income (AGI) above $259,400 and married couples with AGI above $311,300.

Alternative minimum tax — Exemption amount for 2016: $53,900 for singles; $83,800 for married filing jointly.

Business expensing — Up to $500,000 for new and used equipment and 50% bonus depreciation for new assets.

Personal exemptions — Phased out for singles with AGI above $259,400 and marrieds with AGI above $311,300.

Capital gains & dividends — Long-term gains taxed at 15% for most taxpayers. Zero percent for those in 10% and 15% ordinary income brackets; 20% for those in 39.6% ordinary income bracket.

Medicare tax on earned income — Medicare surtax of 0.9% imposed on wages and self-employment income exceeding $200,000 for singles and $250,000 for married couples.

Net investment income tax — A 3.8% tax imposed on unearned income for singles with modified AGI exceeding $200,000 and for couples with modified AGI exceeding $250,000.

© MC 2016

Keep up with Affordable Care Act information reporting

As 2017 approaches, turning your attention to your reporting requirements under the health care law can prevent a beginning-of-the-year rush to gather information. Need additional incentive? Consider this: Though the IRS offered extended deadlines and relief from filing penalties last year, those breaks will likely not apply to this year’s returns. Here’s what to think about as you prepare for the upcoming filing season.

How many employees you have. The key here is understanding that your employee count includes full-time employees as well as full-time equivalent employees. You’re an “applicable large employer,” or ALE, if your business employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year. Special rules apply to related companies with a common owner, seasonal workers, and new employers.

What’s the definition of full-time and full-time equivalent? A full-time employee is one who works an average of 30 or more hours per week (or 130 hours per month). Full-time equivalents are determined by multiplying the number of part-time employees by average hours worked and dividing the result by the hours required for full-time status.

Example. Twenty employees working an average of 15 hours per week are equivalent to 10 full-time employees (20 employees times 15 hours divided by 30 hours).

How do you count employees? Here’s the general rule. Add the total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each month of the prior calendar year. Divide that number by 12. Is the answer fewer than 50? You’re not an ALE, and you generally have no reporting requirements. If the answer is 50 or more, you are an ALE.

The forms you’ll need to file. If your employee count reveals that you are an ALE, you’re required to file a Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, for each employee who was a full-time employee for any month of the calendar year. You’ll also have to file one or more Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. Form 1095-C informs individual employees about the health coverage offered by your business. Form 1094-C reports the summary of all your Forms 1095-C.

2017 DEADLINES

Form 1095-C (copies sent to employees) — January 31, 2017

Forms 1094-C and 1095-C (copies due to IRS, if filed on paper) — February 28, 2017

Forms 1094-C and 1095-C (copies due to IRS, if filed electronically) — March 31, 2017

© MC 2016

Wrap up tax benefits for year-end charitable gifts

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

The general rule. Generally, you can deduct the full amount of contributions you make to a qualified charitable organization, up to 50% of your adjusted gross income for the year. Did you make a large contribution? You can carry the excess forward for five years. Just remember that you have to get written acknowledgment from the charity for monetary gifts of $250 or more.

Tip: A contribution made by credit card late in the year is still deductible if posted to your account this year. You can charge an online donation on December 31, and take a deduction on your 2016 return, even if you don’t pay the credit card bill until 2017.

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

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

Gifts of property. In general, the annual deduction for gifts of property is 30% of your adjusted gross income. You can carry the remainder forward for five years. If you donate appreciated property you’ve owned for more than a year, in most cases you can deduct the property’s fair market value. You’ll need an independent appraisal for gifts over $5,000.

Tip: To claim the full deduction, the gift must be used to further the charity’s tax-exempt mission. For instance, if you donate a painting to your alma mater, it must be displayed where students can study it.

If you have questions about charitable giving tax rules, contact us. We’ll help you lock in deductions before January 1.

© MC 2016

Midyear 2016

Philip L. Liberatore, CPA

[email protected]

Dear Clients and Friends,

So far, 2016 has been a quiet year in terms of new tax legislation. The most recent major change took place last December, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH). Many of the provisions in that law remain in effect until the end of 2016 and beyond.

Practically speaking, while tax reform continues to be a talking point in Congress and in presidential election campaigns, the probability of achieving meaningful changes in the near-term is unlikely. The longer-term outlook is more difficult to predict, with proposals and discussions ranging from a comprehensive overhaul to less sweeping revisions involving specific sections of the Internal Revenue Code, such as modifications to the way businesses are taxed.

Though a simpler tax code would be a welcome development, this interlude of relative stability does have benefits from a midyear planning standpoint. Because the rules haven’t changed much, you have an opportunity to look over last year’s tax return and implement planning ideas for 2016. In addition, you can review your current tax situation and select strategies to put in place during the remainder of this year. We encourage you to read through the suggestions in this Letter, then contact us for additional options. We’re ready to help with effective tax-saving advice suited to your needs.

Philip L. Liberatore, CPA

[email protected]

Midyear 2016

Take action to get results from midyear tax planning

Happy midyear! Are you ready to review and revise your 2016 tax plan? With half the year over, you have a solid foundation for making decisions. You can start by assessing the types of income you have already received and what you expect to receive through the remainder of the year. As you know, under federal tax law, income is taxed in different ways, depending on the source. Here are tips to consider.

Investment income

Interest, dividends, and capital gains are investment income, and the 3.8% net investment income tax generally applies to all three when your adjusted gross income exceeds certain levels. Under regular rules, each type of income can be taxed at varying rates, or in some cases, not at all. For example, you’ll typically pay tax at your ordinary income tax rate on interest income in the year you receive it. But you can usually exclude municipal bond interest from your taxable income as well as from the net investment tax calculation, although the alternative minimum tax may apply to interest earned from certain municipal bonds.

Planning tip: Decide if adding municipal bonds to your portfolio makes sense.

Dividends earned from your investments can be taxed at capital gain or ordinary income rates. The distinction matters because the maximum capital gain rate is 20%, while ordinary income can be taxed at rates up to 39.6%. For capital gain rates to apply, the dividends you receive have to meet certain requirements, one of which is a holding period for the underlying stock.

Planning tip: Review the dividend-paying stocks that you already own. As you rebalance your portfolio, you can determine whether including these investments in your taxable accounts or placing them in tax-deferred retirement accounts will provide more benefit.

The tax rate on the sale of investments you own for a year or less is based on your ordinary income. The more beneficial long-term capital gain rate applies to gain on most investments that you hold longer than a year. Tracking your holding period can result in a lower tax, but you may have to sell an investment before you can take advantage of the long-term rates. That’s when having an accurate measure of your basis can be even more valuable than usual.

Planning tip: Update your basis records for reinvested dividends, stock splits, and other investment activity, including prior and current year “wash sales.” If you inherited any of your investments, be aware of whether the new estate tax rules for basis consistency apply. In some cases, these rules require the executor of an estate to notify the IRS and the estate beneficiaries of the value of inherited property. When the rules apply, penalties can be assessed if you sell the property and use a different value as your basis.

Business income

The structure of your business determines how you report the income earned from operations, and influences how that income is taxed. As an example, S corporations are pass-through entities, meaning the business income “flows through” the corporation and is taxed on your personal income tax return. In addition, the pass-through income typically retains its character, so, for instance, interest earned by the corporation is taxed as interest on your personal return.

Planning tip: Revise and arrange your company’s chart of accounts to classify income into tax-specific categories. Making changes now can point out areas that will benefit from early planning, as well as streamline year-end tax preparation time and reduce misstatements. Having your chart of accounts set up properly can be especially important this year, since a recent law requires earlier due dates for certain 2016 tax and information returns.

Passive income

Generally, all income from rental properties and business ventures in which you’re not actively involved is taxable. You may also have to pay net investment income tax on your passive income. In contrast, losses from your passive activities can only be deducted against other passive income. Losses that are unused in the current year are carried forward to offset future passive income or taxable gains from selling the underlying asset.

Planning tip: If you have multiple passive income sources, investigate whether you will benefit from treating them as a single activity for purposes of the passive loss rules. “Grouping” several activities can help you more easily meet the rules that will allow you to treat the income as nonpassive. Be aware that making the election to group assets means you may not be able to easily use prior-year losses if you dispose of one of the grouped assets.
Earned income

Income you earn from your job or your business is taxed at ordinary rates on your federal income tax return. When your wages or self-employment income exceed $200,000 (if you’re single), $250,000 when you file jointly, or $125,000 when you file separately, you’ll also owe an additional Medicare tax of 0.9% on the amount over the threshold.

Planning tip: One way to reduce your tax liability when the bulk of your income is from employment is to maximize contributions to tax-deferred retirement plans, such as 401(k) plans and deductible IRAs. You get a double benefit from your contributions: tax deferral on asset growth inside the plan and a lower adjusted gross income in the current year that can increase other tax breaks. Similarly, you may also want to take full advantage of other employer-provided benefit programs, such as flexible spending accounts.

The most important fact to remember about tax planning is that you don’t have to have it all figured out to move forward. Action generates results. Contact us today to get started.

© MC 2016

Philip L. Liberatore, CPA

[email protected]

Midyear 2016

Follow the “PATH” to tax planning

For your personal taxes

The Protecting Americans from Tax Hikes Act (PATH) that became law last December provides a clear path to midyear planning for your personal taxes. Here are seven ways you might benefit.

1. Higher education. The PATH Act made the American Opportunity Tax Credit permanent and restored the tuition deduction through 2016. But you can only claim a credit or deduction, not both. Plan ahead for next semester.

2. Sales tax. Instead of state and local income taxes, you can deduct sales taxes based on an IRS table or actual receipts. Thinking of buying a car or boat this summer? Hang on to the invoice. You can add sales tax paid on those items to the amount in the IRS table.

3. Charitable IRA transfers. Are you age 701/2 or older? If you want to make a summertime donation to your favorite charity, follow the rules and you can transfer up to $100,000 directly from your IRA to the charity with no tax consequences. The transfer counts as part of your required minimum distribution in the year you make it.

4. Qualified small business stock. As you rebalance your portfolio this summer, consider investing in the stock of certain small corporations. When you hold the stock at least five years before selling it, your gain is completely excluded from federal income tax.

5. Energy credits. Prepare for summer heat by installing energy-saving improvements in your home. You can claim a 10% energy credit, up to a lifetime limit of $500.

6. Conservation easements. Combine tax savings with your estate planning this summer by donating a conservation easement in real estate you own. The easement permanently limits uses of the land for conservation purposes. You can claim a charitable contribution deduction for the donation and benefit from special tax rules.

7. Classroom expenses. Keep the receipts when you stock up on classroom supplies during summer sales. If you’re an educator, you can deduct unreimbursed expenses of up to $250.

For your business taxes

Business tax breaks restored by last December’s PATH Act can provide benefits as you begin your midyear planning. Here are five examples.

1. Buy equipment. Under Section 179 of the tax code, for 2016 your business can claim a maximum deduction of $500,000, subject to a phase-out threshold of $2,010,000. You can also claim 50% bonus depreciation on qualified property placed in service this year.

2. Fast-track research activities. The PATH Act restored the research credit with enhancements for qualified small businesses. Starting in 2016, special offsets against alternative minimum tax and FICA tax may be available.

3. Hire target employees. The Work Opportunity Tax Credit is available when you hire workers from certain “target groups.” And don’t overlook the special summertime credit for disadvantaged youth.

4. Make building improvements. The new law permanently extends the shorter 15-year depreciation period for qualified leasehold improvements, restaurant property, and retail improvements.

5. Offer employee transportation benefits. The PATH Act creates parity for the tax exclusion for mass transit passes, van pooling, and employer-provided parking. The monthly maximum for 2016 is $255.

© MC 2016

Philip L. Liberatore, CPA

[email protected]

Midyear 2016

Getting ready to retire? Benefit from advance planning

As you approach retirement age, you will have to manage many risks to secure your well-being. The risk of inflation, volatile markets, and outliving your retirement savings all threaten your nest egg. Taxes will also present a risk to your savings. Here are tips to consider in the years before you retire.

Diversify your savings. Maximizing contributions to tax-deferred retirement accounts, such as IRAs and employer-sponsored plans, can reduce your current taxable income as well as defer the tax on asset growth into your retirement years. But you’ll also want to supplement retirement plan assets with investments in taxable accounts. Having the option to take funds from those accounts allows you to maximize the tax-deferred growth in your retirement plans.

Consider a Roth conversion. Converting your traditional IRA to a Roth may be a smart move because Roth accounts have tax advantages over traditional IRAs. For example, you’re generally not required to take distributions from a Roth no matter your age, unless the Roth is inherited or is a Roth 401(k). The downside is that you’ll pay current-year income tax on the amount you convert so you’ll need to plan around your expected current and future income tax rate.

Take advantage of tax-free bond income. Bonds issued by state and local government entities generate income that’s free from federal income tax and generally not subject to the 3.8% Medicare surtax. That means purchasing these bonds in your taxable investment account can make sense if you expect high earnings in the years before you retire. As retirement gets closer, revisit your decision. Why? Interest from these bonds is considered in the calculation of whether your social security benefits will be taxed.

Know your social security options. If you’re still working but nearing the age where you could begin to collect social security, a major question is when to start receiving payments. While one goal is to maximize your lifetime benefit, factors such as what other sources of income you can rely on will influence your final decision. In general, the longer you wait — whether that’s until you reach your full retirement age or age 70, when your benefit stops increasing — the more you’ll collect each month.

Once you retire, your savings may have to provide income for a span of 30 years or more. Planning in advance can help you minimize the tax you’ll owe during those years. Give us a call. We’re here to help you prepare now for life after work.

© MC 2016

Philip L. Liberatore, CPA

[email protected]

Midyear 2016

Plan wisely for post-retirement withdrawals

Planning for retirement doesn’t end when you stop working. Instead, the questions shift from how to save for retirement to how to begin withdrawing from your accounts. Here are tips for making the most of retirement plan withdrawals.

Know the basic rules. Funds withdrawn from a regular IRA or 401(k) are taxed at your ordinary income tax rate, which could lead to a surprising tax bill come April 15th. Worse, you can only put off withdrawals from these accounts until age 701/2, when required minimum distributions kick in. (An exception is if you have a 401(k) and are still working for the company where you have the account. In that case, you can delay withdrawals from that plan.) Withdrawals from a Roth IRA are tax-free and are not subject to required minimum distribution rules.

Consider delaying withdrawals. In the years prior to age 701/2, you might consider keeping your retirement accounts untapped and instead live off capital gains within a taxable account. The advantage: the tax rate on long term capital gains is likely lower than your marginal rate.

Remember the fundamentals. No matter where you begin drawing funds, you will have a portfolio of securities to monitor and decisions to make regarding what to sell along the way. Consider selling volatile securities first, leaving safer investments for later in life when you have less time to recover from a mistake. At the same time, avoid being too conservative, especially in the early years of retirement.

Your retirement plan withdrawal strategy could impact the taxation of your social security benefits as well as your eligibility for certain deductions. Contact us for additional suggestions for tax-efficient retirement account withdrawals

© MC 2016

Philip L. Liberatore, CPA

[email protected]