Beware of income-based limits on itemized deductions and personal exemptions

Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.

 

Income thresholds

 

If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.

Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).

 

The limits in action

 

These AGI-based limits can be very costly to high-income taxpayers. Consider this example:

Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.

The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).

These two AGI-based provisions combined could increase the couple’s tax by $17,805!

 

Year-end tips

 

If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.

For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.

© 2016

 

 

 

Help retain employees with tax-free fringe benefits

One way your business can find and keep valuable employees is to offer an attractive compensation package. Fringe benefits are an important incentive — especially those that are tax-free. Here’s a rundown of some common perks and their tax implications.

  • Medical coverage. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions. Employers must meet a number of requirements when providing coverage. For instance, benefits must be provided through a group health plan (fully insured or self-insured).

  • Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.

  • Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.

  • Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.

  • Dependent care. You can provide employees with tax-free dependent care assistance up to certain limits during the year.

  • Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Other tax-free benefits include adoption assistance (up to a certain amount), on-premises athletic facilities and meals provided occasionally to employees who work overtime. Contact us for more information about how to treat fringe benefits for tax purposes.

© 2016

 

 

Tax impact of investor vs. trader status

If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?

Investors

Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.

That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.

Traders

Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.

Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.

Passing the trader test

What does it take to successfully meet the test for trader status? The answer is twofold:

1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.

2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.

If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.

© 2016

 

Department of Labor Changes

On May 18, 2016, the United States Department of Labor (DOL) published regulations that will modify certain provisions of the Fair Labor Standards Act (FLSA). The regulations increase the minimum salary required to be earned by an employee in order for that employee to be exempt from FLSA overtime requirements. The changes will take effect on December 1, 2016.

The FLSA requires employers to pay employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as “exempt” employees. To be considered “exempt,” these employees must generally satisfy three tests that focus on how the employee is paid and the type of job duties the employee performs:

• Salary-level test: Employers must pay employees a minimum salary requirement to qualify for the executive, administrative, and professional employee exemptions.

• Salary-basis test: Employees must receive a predetermined amount of compensation each pay period, on a weekly or less frequent basis. With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.

• Duties test: The employee’s primary duties must meet certain criteria.

Employees who meet the administrative, professional and executive exemptions must be paid a minimum weekly salary of $913 (or $47,476 annually) in order to be exempt from the FLSA’s minimum wage and overtime requirements. This is an increase of $458 from the previous minimum salary requirement.

Inclusion of Nondiscretionary Bonuses and Incentive Payments

For the first time, employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level. Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, the Final Rule requires such payments to be paid on a quarterly or more frequent basis and permits the employer to make a “catch-up” payment.

If you have any questions concerning these requirements, please contact our office.

How to Request a Transcript or Copy of a Prior Year’s Tax Return

You should alwayskeep a copy of your tax return for your records. You may need copies of your filed tax returns for many reasons. For example, they can help you prepare future tax returns. You’ll need them if you have to amend a prior year’s tax return. You often need them when you apply for a loan to buy a home or to start a business. Or, you may need them to apply for student financial aid. If you can’t find your copies, the IRS can give you a transcript of the information you need, or a copy of your tax return. Here’s how to get your federal tax return information from the IRS:

  • Transcripts are free. You can get them for the current year and the past three years. In most cases, a transcript includes the tax information you need.

  • Atax return transcript is a summary of the tax return that you filed. It also includes items from any accompanying forms and schedules that you filed. It doesn’t reflect any changes you or the IRS made after you filed your original return.

  • Atax account transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income. It also includes any changes that you or the IRS made to your tax return after you filed it.

  • The quickest way to get a copy of your tax transcript is to use theGet Transcriptapplication. Once you verify your identity, you will be able to view and print your transcript immediately online. ThisFact Sheet provides details on how to complete this step.

  • If you're unable or prefer not to use Get Transcript Online, you may order a tax return transcript and/or a tax account transcript using the online toolGet Transcript by Mailor by calling 800-908-9946. Transcripts arrive at the address we have on file for you in five to 10 calendar days from the time IRS receives your request.

oTo order by phone, call 800-908-9946 and follow the prompts. You can also request your transcript using your smartphone with theIRS2Go mobile phone app.

o Businesses that need a tax account transcript should useForm 4506-T, Request for Transcript of Tax Return.

  • If you need a copy of your filed and processed tax return, it costs $50 for each tax year. You should completeForm 4506, Request for Copy of Tax Return, to make the request. Mail it to the IRS address listed on the form. Copies are generally available for the current year and past six years. You should allow 75 days for delivery.

  • If you live in a federally declared disaster area, you can get a free copy of your tax return. Visit IRS.gov for moredisaster relief information.

Things You Should Know about Filing Late and Paying Penalties

April 18 was this year’s deadline for most people to file their federal tax return and pay any tax they owe. If you are due a refund there is no penalty if you file a late tax return. If you owe tax, and you failed to file and pay on time, you will most likely owe interest and penalties on the tax you pay late. To keep interest and penalties to a minimum, you should file your tax return and pay the tax as soon as possible. Here are some facts that you should know.

1. Two penalties may apply. One penalty is for filing late and one is for paying late. They can add up fast. Interest accrues on top of the penalties.

2. Penalty for late filing. If you file your 2015 tax return more than 60 days after the due date or extended due date, the minimum penalty is $205 or, if you owe less than $205, 100 percent of the unpaid tax. Otherwise, the penalty can be as much as five percent of your unpaid taxes each month up to a maximum of 25 percent.

3. Penalty for late payment. The penalty is generally 0.5 percent of your unpaid taxes per month. It can build up to as much as 25 percent of your unpaid taxes.

4. Combined penalty per month. If both the late filing and late payment penalties apply, the maximum amount charged for the two penalties is 5 percent per month.

5. File even if you can’t pay. Filing on time and paying as much as you can will keep your interest and penalties to a minimum. If you can’t pay in full, getting a loan or paying by debit or credit card may be less expensive than owing the IRS. If you do owe the IRS, the sooner you pay your bill the less you will owe.

6. Payment Options. Explore your payment options on our website atIRS.gov/payments. For individuals,IRS Direct Pay is a fast and free way to pay directly from your checking or savings account. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan using theOnline Payment Agreement tool on IRS.gov.

7. Late payment penalty may not apply. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 18 due date.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are yourTaxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

IRS YouTube Videos:

 

If you would like to pay your account directly, select the Pay Now button below and enter the amount you wish to pay. Thank you for your patronage.

  ShareFile Logo

Search

Copyright ©2017 odommoses.com - Design by Top 10 Binary Options