2016 Year-end Newsletter

Happy Holidays!

December ushers in the holiday season, a time to celebrate with friends and family and enjoy all the hard work you’ve put in over the last year – enjoy this time and congratulations, you’ve made it!

This month also offers a time to proactively plan and minimize your 2016 tax burden in 2017.  Our year-end newsletter is designed to help you do just that – save time, money and aggravation.  So, when you have some time in the near future, grab a cup of coffee or a glass of wine and let’s get started.

Thanks for your trust and business!

Susan Clarke, CPA

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2016 Tax year Electronic Organizer

You will be receiving CPA’s electronic tax organizers in mid-January, please utilize it since this allows us to be as thorough as possible in the preparation of your return.  In addition, this is THE secure method of exchanging sensitive data via your client portal.  Security and identity theft are priority #1 here at CPA – please do not email any sensitive documents ever.

Retirement Planning:

The simplest and most effective tax planning tool for all Americans of all income levels is full participation in retirement plans. Make sure you maximize your 401-k deferral if available, contribute to tax-deductible IRAs, and if over 70 and ½ pay all charitable contributions through direct transfer from your IRA to the charity.

Investment Strategies

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
Think about selling assets in taxable accounts that have losses at the end of the year. The losses will offset capital gains for a total net loss of $3,000.

College Education Tax Strategies

  • Establish and fund the maximum annual contribution of $2,000 per year to a Coverdell Savings Account (formerly known as Education IRAs) for each child in order to shelter investment earnings for future tax-free payouts to cover college and/or private school costs.
  • Establish a Roth IRA for each employed child and contribute an amount equal to their earned income, up to a maximum of $5,500 for each in 2016. While these contributions are nondeductible, principal can be withdrawn tax-free for college, and all future earnings will be tax-free when withdrawn after age 59½.


 Business Automobiles

Consider purchasing a new business car in 2016, to take advantage of below-market financing & 50% bonus depreciation. Maximum depreciation deductions of up to $11,160 are available this year.

  • Get an even bigger write-off by purchasing an SUV with a gross vehicle weight of 6,000 pounds or more (fully loaded) on or before December 31, 2016 to obtain a six year write-off, and to achieve eligibility for the $25,000 expensing election (if business use is at least 50%), and 50% bonus depreciation (new vehicles only).


Gifts

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Charity

ALL deductions of any amount must have a receipt. Any individual contribution over $250 must also have an acknowledgement letter from the charity. The letter should show the date and amount of any individual contribution over $250, and should also state that no goods or services were received in return for the contribution. Remember if you charge a charitable contribution to a credit card by 12/31/2016 we are able to deduct it in 2016!

Charitable tax strategies:

 Increase charitable contribution deductions by making gifts of property, such as stocks, bonds, artwork, or real estate that have gone up in value, in lieu of cash donations, to qualified charitable organizations. The full fair market value of the property is tax-deductible as a charitable contribution if held for at least 12 months, and the gain is not subject to income tax.
Even though you can’t deduct services you donate to a charity, you can deduct the out-of-pocket expenses, including mileage on the use of your own car.

Affordable Care Act

All Americans will be affected in some manner by the Affordable Care Act from 2010 (Some people call it Obamacare). One of the requirement is that all taxpayers must be covered by health insurance or pay a penalty, and this is proven through Form 1095. If you received a Form 1095 from any issuer or agency we MUST have all copies to prepare your tax return.

Health Care Deductions

2013’s tax bill reduced your deduction for medical costs, including health insurance, for 2016.  We will see very few deductions available for medical costs now unless you have substantial bills. The amount of your medical expenses in most cases must now be more than 10% of your income before we can deduct anything, so weigh carefully whether to go to the trouble of summarizing these costs. If you are self-employed we still need to know how much you paid for health insurance.

  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • For married couples, filing separately may be better if one of you has high medical expenses. That’s particularly true for taxpayers 65 or older.


Foreign Accounts

If you have read any news in the last year you know that the IRS is looking closely for offshore accounts. If you have an account, retirement account, or business interest with a value over $10,000 in a foreign country, or a foreign business ownership (not through a mutual fund) please let us know as some special rules will apply to you. There are substantial penalties for failure to disclose these items.

Mortgage Interest

We must obtain Form 1098 from you when you pay mortgage interest. Additionally, we must obtain refinancing closing statements, and if you drew money out on a home mortgage or refinancing we must have general information on the use of the money according to the IRS.

Mortgage tax strategies:

Consider getting a home equity loan to repay personal debt, subject to certain limits so that personal interest, which isn’t deductible, is converted to home mortgage interest, which may be deductible.
If you plan to buy a residence and have personal loans, you may want to finance as much of the purchase price as possible so that you have extra funds to pay off your non-deductible loans.

Rental Property

If you own rental property, this year the IRS has demanded substantially more information. We now need, FOR EACH PROPERTY SEPARATELY, the physical location, the type of property (single-family, duplex, etc), and Forms 1099-K received, and a record, by property of the number of days rented and the number of days used for personal purposes.

  • If you moved out of your house within the last five years and either rented it or left it vacant, avoid re-occupying the property before selling it. That could trigger the “non-qualified use” rules, which could make part of any gain taxable.


Other Income

If you have any income from AirBNB, Turo, Etsy, EBay or similar consumer to consumer programs, please let us know because many income tax rules are affected and few of these sites provide you with adequate tax information.

Income Reduction Strategies

  • Postpone income until 2017 and accelerate deductions into 2016 to lower your 2016 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2016. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2017 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • It may be advantageous to try to arrange with your employer to defer, until early 2017, a bonus that may be coming your way.


Other Itemized Deductions

  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.
  • Bunch purchases or payment for deductible items into one year so that the total exceeds 2% of your adjusted gross income, giving you a bigger deduction.
  • Accelerate personal tax deductions into 2016 by paying any state estimated income tax payments due in January before year-end; if incorporated, increase your state income tax withholding on your corporate salary or bonus before December 31. Also, prepay your home mortgage payment due January 1, and pay all real estate and personal property taxes due, before December 31.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2016 IF you won’t be subject to alternative minimum tax (AMT) in 2016.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.


Household Employment Taxes

Household employers must file Schedule H of Form 1040 to pay FICA, FUTA, and any withheld federal income tax.  This means you must place these employees on payroll to be in compliance with the law.

  • FICA (Social Security) – Household employers must withhold and pay FICA on wages of $2,000 or more per employee.
  • FUTA (Unemployment) – Household employers must pay FUTA tax if they paid $1,000 or more in wages in any quarter.
  • States have their own rules to comply with as well, such as state unemployment tax