AMT AWARENESS: BE READY FOR ANYTHING

When it comes to tax planning, you’ve got to be ready for anything. For example, do you know whether you’re likely to be subject to the alternative minimum tax (AMT) when you file your 2016 return? If not, you need to find out now so that you can consider taking steps before year end to minimize potential liability.

Bigger bite

The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.

AMT rates begin at 26% and rise to 28% at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6%, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite.

For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the 2% floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.

Steps to consider

Fortunately, you may be able to take steps to minimize your AMT liability, including:

Timing capital gains. The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.

Timing deductible expenses. Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.

Investing in the “right” bonds. Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.

Appropriate strategies

Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact us for help assessing your risk and, if necessary, implementing the appropriate strategies for your situation.

Sidebar: Does this sound familiar?

High-income earners are typically most susceptible to the alternative minimum tax. But liability may also be triggered by:

• A large family (meaning you take many exemptions),
• Substantial itemized deductions for state and local income taxes, property taxes, miscellaneous itemized deductions subject to the 2% floor, home equity loan interest, or other expenses that aren’t deductible for AMT purposes,
• Exercising incentive stock options,
• Large capital gains,
• Adjustments to passive income or losses, or
• Interest income from private activity municipal bonds.

5 TIPS FOR SAFE INTRAFAMILY LOANS

If a relative needs financial help, offering an intrafamily loan might seem like a good idea. But if not properly executed, such loans can carry substantial negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to consider:

1. Create a paper trail.In general, to avoid undesirable tax consequences, one thing you’ll need to do is show that the loan was bona fide. Doing so should include documenting evidence of:

• The amount and terms of the debt,
• Interest charged,
• Fixed repayment schedules,
• Collateral,
• Demands for repayment, and
• The borrower’s solvency at the time of the loan and payments made.

Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by documenting the loan and payments received, as well.

2. Demonstrate an intention to collect.Even if you think you may eventually forgive the loan, ensure the borrower makes at least a few payments. By having some repayment history, you’ll make it harder for the IRS to argue that the loan was really an outright gift. And if a would-be borrower has no realistic chance of repaying a loan — don’t make it. If you’re audited, the IRS is sure to treat such a loan as a gift.
3. Charge interest if the loan exceeds $10,000.If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR). In any case, the interest on the loan will be taxable income to you. (If no or below-AFR interest is charged, taxable interest is calculated under the complicated below-market-rate loan rules.) However, if no or below-AFR interest is charged, all of the forgone interest over the term of the loan may have to be treated as a gift in the year the loan is made. This will increase your chances of having to use some of your lifetime exemption.
4. Use the annual gift tax exclusion.If you want to, say, help your daughter buy a house but don’t want to use up any of your lifetime estate and gift tax exemption, make the loan, charge interest and then forgive the interest, the principal payments or both each year under the annual gift tax exclusion. For 2016, you can forgive up to $14,000 per borrower ($28,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. But you will still have interest income in the year of forgiveness.
5. Forgive or file suit.If an intrafamily loan that you intended to collect is in default, don’t let it sit too long. To prove this was a legitimate loan that soured, you’ll need to take appropriate legal steps toward collection. If you know you’ll never collect and can’t bring yourself to file suit, begin forgiving the loan using the annual gift tax exclusion, if possible.

FUNDING A COLLEGE EDUCATION? DON’T FORGET THE 529

When 529 plans first hit the scene, circa 1996, they were big news. Nowadays, they’re a common part of the college-funding landscape. But don’t forget about them — 529 plans remain a valid means of saving for the rising cost of tuition and more.

Flexibility is king

529 plans are generally sponsored by states, though private institutions can sponsor 529 prepaid tuition plans. Just about anyone can open a 529 plan. And you can name anyone, including a child, grandchild, friend, or even yourself, as the beneficiary.

Investment options for 529 savings plans typically include stock and bond mutual funds, as well as money market funds. Some plans offer age-based portfolios that automatically shift to more conservative investments as the beneficiaries near college age.

Earnings in 529 savings plans typically aren’t subject to federal tax, so long as the funds are used for the beneficiary’s qualified educational expenses. This can include tuition, room and board, books, fees, and computer technology at most accredited two- and four-year colleges and universities, vocational schools, and eligible foreign institutions.

Many states offer full or partial state income tax deductions or other tax incentives to residents making 529 plan contributions, at least if the contributions are made to a plan sponsored by that state.

You’re not limited to participating in your own state’s plan. You may find you’re better off with another state’s plan that offers a wider range of investments or lower fees.

The downsides

While 529 plans can help save taxes, they have some downsides. Amounts not used for qualified educational expenses may be subject to taxes and penalties. A 529 plan also might reduce a student’s ability to get need-based financial aid, because money in the plan isn’t an “exempt” asset. That said, 529 plan money is generally treated more favorably than, for instance, assets in a custodial account in the student’s name.

Just like other investments, those within 529s can fluctuate with the stock market. And some plans charge enrollment and asset management fees.

Finally, in the case of prepaid tuition plans, there may be some uncertainty as to how the benefits will be applied if the student goes to a different school.

Work with a pro

The tax rules governing 529 savings plans can be complex. So please give us a call. We can help you determine whether a 529 plan is right for you.

BARTERING BUSINESSES CAN’T CUT UNCLE SAM OUT OF THE DEAL

Bartering may seem like something that happened only in ancient times, but the practice is still common today. And the general definition remains the same: the exchange of goods and services without the exchange of money.

Because, in a typical barter transaction, no cash exchanges hands, it’s easy to forget about taxes. But, as one might expect, you can’t cut Uncle Sam out of the deal. The IRS treats a barter exchange the same as a transaction, so you must report the fair market value of the products or services you receive as income.

Any income arising from a bartering arrangement is generally taxable in the year you receive the bartered product or service. And income tax liability isn’t the only thing you’ll need to consider. Barter activities may also trigger self-employment taxes, employment taxes or an excise tax.

You may wish to arrange a bartering deal though an exchange company. For a fee, one of these firms can allow you to network with other businesses looking to trade goods and services. For tax purposes, a barter exchange typically must issue a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” annually to its clients or members.

Although bartering may appear cut and dried, the tax implications can complicate the deal. We can help you assess a bartering arrangement and manage the tax impact.

 

Copyright © 2016

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2016.

HAVE A HOUSEHOLD EMPLOYEE? BE SURE TO FOLLOW THE TAX RULES

Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.

Important distinction

Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.

Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.

Social Security and Medicare taxes

If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:

• Your spouse,
• Your children under age 21,
• Your parents (with some exceptions), and
• Household workers under age 18 (unless working for you is their principal occupation).

The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).

Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.

Unemployment and federal income taxes

If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.

The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal income tax — or, usually, state income tax — unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).

Other obligations

As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).

After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.

The details

Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

KNOW YOUR CUSTOMERS BEFORE YOU EXTEND CREDIT

The funny thing about customers is that they can keep you in business — but they can also put you out of it. The latter circumstance often arises when a company overly relies on a few customers that abuse their credit to the point where the company’s cash flow is dramatically impacted. To guard against this, diligently assess every customer’s creditworthiness before getting too deeply involved.

Information, please

A first step is to ask new customers to complete a credit application. The application should request the company’s name, address, website, phone number and tax identification number; the number of years it’s existed; its legal form and parent company, if one exists; and a bank reference and several trade references.

If the company is private, consider asking for an income statement and balance sheet. You’ll want to analyze financial data such as the profit margin, or net income divided by net sales. Ideally, this will have remained steady or increased during the past few years. The profit margin also should be similar to that of other companies in its industry.

From the balance sheet, you can calculate the current ratio, or the company’s current assets divided by its current liabilities. The higher this is, the more likely the company will be able to cover its bills. Generally, a current ratio of 2:1 is considered acceptable.

Check references and more

Next up is contacting the potential customer’s trade references to check the length of time the parties have been working together, the approximate size of the potential customer’s account and its payment record. Of course, a history of late payments is a red flag.

Similarly, you’ll want to follow up on the company’s bank references to determine the balances in its checking and savings accounts, as well as the amount available on its line of credit. Equally important, you’ll want to find out whether the company has violated any of its loan covenants. If so, the bank could withdraw its credit, making it difficult for the company to pay its bills.

After you’ve completed your own analysis, find out what others are saying — especially if the potential customer could be a significant portion of your sales. Search for articles on the company, paying attention to any that raise concerns, such as stories about lawsuits or plans to shut down a division.

In addition, you may want to order a credit report on the business from one of the credit rating agencies, such as Dun & Bradstreet or Experian. Among other information, the reports describe the business’s payment history and tell whether it has filed for bankruptcy or had a lien or judgment against it.

Most credit reports can be had for a nominal amount these days. The more expensive reports, not surprisingly, contain more information. The higher price tag also may allow access to updated information on a company over a period of time.

Stay informed, always

Although assessing a potential customer’s ability to pay its bills requires some work upfront, making informed credit decisions is one key to running a successful company. Please let us know how we can help you with this or other financially critical business practices.

 

MARRIAGE PENALTY LEAVES MANY (BUT NOT ALL) NEWLYWEDS SINGING A SAD TUNE

Love and marriage — according to the song, they go together like a horse and carriage. But matrimony can leave some couples singing a sad tune when they encounter the ominously named “marriage penalty.” However, for other couples, marriage brings tax-saving opportunities.

In a nutshell

When tax brackets for married couples aren’t twice as big as those for singles, newlyweds could wind up in a higher tax bracket than if they were able to file as singles. This, in a nutshell, is the marriage penalty.

A 2012 tax law made marriage penalty relief permanent for the 10% and 15% brackets. Here, brackets for married filing jointly are now exactly twice the size of those for singles (and brackets for married filing separately are equal to those for singles).

Rates move fast

But there remains a financial danger for married couples in the middle and higher brackets, and the danger is substantial for those who hit the 39.6% bracket. As single tax filers, neither spouse would be subject to the 39.6% rate for 2016 until his or her own taxable income exceeded $415,050. But married couples face that rate as soon as their combined taxable income hits $466,950 — only $51,900 more.

So let’s say that each spouse has taxable income of $400,000. The tax that they’d pay as a married couple is more than twice what they’d pay as two unmarried people. In this simplified example (not taking into account any credits or other tax breaks), the couple would face a tax bill more than $31,000 higher than if they were single.

Exceptions and opportunities

Even if a married couple is in the middle or higher brackets, the marriage penalty doesn’t always apply. For example, if only one spouse is working, being married might actually save the couple tax — in other words, the marriage penalty can turn into a marriage bonus. If the spouse who isn’t employed expects to be working the next year, the couple might benefit from accelerating some income into the current tax year and deferring deductible expenses to the next one.

Another tax-saving opportunity may be available if one spouse earns substantially less than the other and has incurred significant medical expenses. For taxpayers under age 65, medical expenses are deductible only to the extent they exceed 10% of their adjusted gross income for the year. Filing jointly, the couple might not exceed the threshold. But, filing separately, the lower-earning spouse might be eligible for a valuable deduction. (This needs to be weighed against any additional tax liability the higher-earning spouse faces from filing separately.)

Differing solutions

How to best deal with the tax consequences of marriage will vary from couple to couple. For help with your situation, please contact us.

TAX CALENDAR

 

July 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

August 1 — If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.

The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (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.

August 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

September 15 — Third quarter estimated tax payments are due for individuals, trusts, and calendar-year corporations.

• If a five-month extension was obtained, partnerships should file their 2015 Form 1065 by this date.
• If a six-month extension was obtained, calendar-year corporations should file their 2015 income tax returns by this date.
• If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

 

GETTING COMFORTABLE WITH THE HOME OFFICE DEDUCTION

 

One of the great things about setting up a home office is that you can make it as comfy as possible. Assuming you’ve done that, another good idea is getting comfortable with the home office deduction.

To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s benefit.

The only option to calculate this tax break used to be the actual expense method. With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don’t have a separate hookup), security system costs and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.

But now there’s an easier way to claim the deduction. Under the simplified method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the actual expense method, that will save you more tax. Questions? Please give us a call.

 

Copyright © 2016

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2016.

Protect Yourself Against Tax Scams

Taxpayers are still receiving the same highly aggressive and threatening phone calls by criminals impersonating IRS agents asking for payment. However, the IRS has recently been made aware of a new tactic underway in which scammers are calling consumers asking to verify tax return information over the phone.

The IRS has received multiple complaints from consumers saying they received calls from “IRS Agents” needing to confirm some of their information before they can process their return. The callers ask for social security numbers, bank account information, and even credit card numbers.

The IRS and tax professionals want to continue to remind all taxpayers to guard their information and protect themselves against all sorts of cons used by these criminals. Their tactics continually change. However, please keep in mind the IRS will never call asking for immediate payment or personal or financial information.

We advise all of our clients to please consult us before giving any form of payment or information to anyone, whether it be by phone, email, or letter. We will be happy to advise you of the validity of any and all forms of communication from the IRS. Also, keep in mind tax scams happen throughout the year, so try and be aware of these scammers even outside of tax season.

Below is information provided by the IRS for your reference:

The IRS Will Never:

• Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you several bills.
• Call or email you to verify your identity by asking for personal and financial information.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Require you to use a specific payment method for your taxes, such as a prepaid debit card.
• Ask for credit or debit card numbers over the phone or email.
• Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

• Do not give out any information. Hang up immediately.
• Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
• Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:

• Call the IRS at 800-829-1040. IRS workers can help you.

Go, Save Green with Sustainable Tax Breaks

Many people want to do something, however small, to contribute to a healthier environment. There are many ways to do so and, for some of them, you can even save a few tax dollars for your efforts.

Indeed, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) late last year, a couple of specific ways to go green and claim a tax break have been made permanent or extended. Let’s take a closer look at each.

Not driving for dollars

Air pollution is a problem in many areas of the country. Among the biggest contributors are vehicle emissions. So it follows that cutting down on the number of vehicles on the road can, in turn, diminish air pollution.

To help accomplish this, many people choose to commute to work via van pools or using public transportation. And, helpfully, the PATH Act is doing its part as well. The law made permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for both parking benefits and van pooling / mass transit benefits.

Before the PATH Act’s parity provision, the monthly limit for 2015 was only $130 for van pooling / mass transit benefits. But, because of the new law, the 2015 monthly limit for these benefits was boosted to the $250 parking benefit limit and the 2016 limit is $255.

Sprucing up the homestead

Energy consumption can also have a negative impact on the environment and use up limited natural resources. Many homeowners want to reduce their energy consumption for environmental reasons or simply to cut their utility bills.

The PATH Act lends a helping hand here, too, by extending through 2016 the credit for purchases of residential energy property. This includes items such as:

• New high-efficiency heating and air conditioning systems,
• Qualifying forms of insulation,
• Energy-efficient exterior windows and doors, and
• High-efficiency water heaters and stoves that burn biomass fuel.

The provision allows a credit of 10% of eligible costs for energy-efficient insulation, windows and doors. A credit is also available for 100% of eligible costs for energy-efficient heating and cooling equipment and water heaters, up to a lifetime limit of $500 (with no more than $200 from windows and skylights).

Doing it all

Going green and saving some green on your tax bill? Yes, you can do both. Van pooling or taking public transportation and improving your home’s energy efficiency are two prime examples. Please contact us for more information about how to claim these tax breaks or identify other ways to save this year.

Training Day: Reimbursing Employees’ Education Expenses

Naturally, most employee training occurs in-house. But area colleges and trade schools may also provide a great source of education in professional development. And if you reimburse employees for their education expenses at these institutions, you and your employees may be able to save valuable tax dollars.

Offer a fringe benefit

Payment of an employee’s expenses usually results in taxable wages subject to income and payroll taxes. However, reimbursements and direct payments of job-related education costs are excludable from workers’ wages as working condition fringe benefits. Furthermore, you can deduct these costs as employee education costs (as opposed to wages), so you don’t have to withhold income tax or pay payroll taxes on them.

To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the workers’ occupations and not qualify them for new jobs. There’s no ceiling on the amount your workers can receive tax-free, and you can classify education costs as not subject to payroll taxes if the IRS considers the expenses to be working condition fringe benefits.

Establish a program

Another approach to reimbursing education costs in a tax-efficient manner is to establish a formal written educational assistance program. These programs can cover both job-related and non-job-related education. Assuming it meets eligibility requirements, such a program can allow employees to exclude from income up to $5,250 (or an unlimited amount if the education is job related) annually in education reimbursements for costs such as:

• Undergraduate or graduate-level tuition,
• Fees,
• Books, and
• Equipment and supplies.

The IRS, however, won’t allow reimbursement of materials that employees can keep after the courses end (except for textbooks). You can deduct up to $5,250 (or an unlimited amount if the education is job related) of education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or pay payroll taxes on these reimbursements.

To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated workers, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available to workers.

Discover the hidden advantage

Another “hidden” advantage to reimbursing education costs is attracting new hires and retaining them. The labor markets in many industries are competitive right now, so it’s important not to overlook ways to differentiate yourself from other companies looking to hire from the same pool. Moreover, keeping an engaged, well-trained staff in place enables you to avoid constantly enduring the high costs of hiring.

Also bear in mind the “Millennial” perspective. Prospective employees between the ages of 18 and 35, so-called “Millennials,” make up a significant portion of the labor market now. This generation has its own distinctive traits and preferences toward working — one of which is a need for ongoing challenges and education, particularly when it comes to technology.

Keep them on board

If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Feel free to contact us about how to ensure you’ll enjoy the tax advantages of doing so.

 

Could Your Debt Relief Turn Into a Tax Defeat?

Restructuring debt has become a common approach to personal financial management. But many people fail to realize that there’s often a tax impact to debt relief. And if you don’t anticipate it, a winning tax return may turn into a losing one.

Less debt, more income

Income tax applies to all forms of income — including what’s referred to as “cancellation-of-debt” (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.

Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex but, essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit.

Mortgage matters

You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. Here, the tax consequences depend on which of the following two categories the mortgage falls into:

1. Nonrecourse.Here the lender’s sole remedy in the event of default is to take possession of the home. In other words, you’re not personally liable if the foreclosure proceeds are less than your outstanding loan balance. Foreclosure on a nonrecourse mortgage doesn’t produce COD income.
2. Recourse.This type of foreclosure can trigger COD tax liability if the lender forgives the portion of the loan that’s not satisfied. In a short sale, the lender permits you to sell the property for less than the amount you owe and accepts the sale proceeds in satisfaction of your mortgage. A deed in lieu of foreclosure means you convey the property to the lender in satisfaction of your debt. In either case, if the lender agrees to cancel the excess debt, the transaction is treated like a foreclosure for tax purposes — that is, a recourse mortgage may generate COD income.

Keep in mind that COD income is taxable as ordinary income, even if the debt is related to long-term capital gains property. And, in some cases, foreclosure can trigger both COD income and a capital gain or loss (depending on your tax basis in the property and the property’s market value).

Exceptions vs. exclusions

Several types of canceled debt are considered nontaxable “exceptions” — for example, debt cancellation that’s considered a gift (such as forgiveness of a family loan). Certain student loans are also considered exceptions — as long as they’re canceled in exchange for the recipient’s commitment to public service.

Other types of canceled debt qualify as “exclusions.” For instance, homeowners can exclude up to $2 million in COD income in connection with qualified principal residence indebtedness. A recent tax law change extended this exclusion through 2016, modifying it to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. Other exclusions include certain canceled debts relating to bankruptcy and insolvency.

Complex rules

The rules applying to COD income are complex. So if you’re planning to restructure your debt this year, let us help you manage the tax impact.

Tax Calendar

April 18 — Besides being the last day to file (or extend) your 2015 personal return and pay any tax that is due, 2016 first quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today. So are 2015 returns for trusts and calendar-year estates, partnerships, and LLCs, plus any final contribution you plan to make to an IRA or Education Savings Account for 2015. SEP and Keogh contributions are also due today if your return is not being extended.

June 15 — Second quarter estimated tax payments for individuals, trusts, and calendar-year corporations are due today.

A Product/Services Remix Could Get Your Sales Moving

If your company’s sales results were a dance floor, how would it look? Are the numbers jumping off the page, dazzling you with their lively performances? Or are they slow, sluggish — perhaps even disappearing entirely? To keep the party moving, every business needs to regularly remix its line of products or services.

There are many potential causes of a sales slowdown. But these troubles aren’t all bad — they can help you shape the sound of your revised offerings. Start with the obvious: Are your customers drifting away? Conduct market research to find out whether they still like what you’re selling or if their needs have changed. Evolution is normal, so be ready to adjust your menu to keep pace.

Also look into how long you’ve been offering the same products or services, and whether you’ve saturated the market. Some things have enduring value, but demand for others can wane as new products take the spotlight. Regular evaluations can help you decide whether you should:

• Test a product or service in a different market or geographic area,
• “Reinvent” a product or service (for instance, by repackaging or renaming it), or
• Discontinue it.

Finally, don’t ignore the economy — both national and local. Market conditions can influence the sales of even the strongest products or services. Try to bolster the strongest ones, but also consider discontinuing weak ones or adding new ones that reflect the strength of the local economy.

An effective remix of your products or services can turn a sad song into a happy tune. For help making the right tweaks, please give us a call.

 

Copyright © 2016

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2015.

What You Should Know About Capital Gains And Losses

When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:

• Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
• Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts — $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. The rate of this tax is 3.8%.
• Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
• Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
• Net capital gain. . If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
• Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates.
• Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
• Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

 

Providing Tax-Free Fringe Benefits To Employees

One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee’s perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let’s look at these and other common fringe benefits.

• Medical coverage. If you maintain a health care plan for your employees, coverage under that 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.

Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.

• Disability insurance. Your disability insurance premium payments aren’t included in your employee’s income, nor are your contributions to a trust providing disability benefits. The employees’ premium payments (or any other contribution to the plan) generally are not deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.
• Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren’t taxable to your 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 is taxable to the extent it exceeds the employee’s contributions toward coverage.
• Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pretax contributions.
• Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee’s gainful employment.
• Adoption assistance. Generally, in 2015, employees can exclude from income qualified adoption expenses of up to $13,400 for each eligible child paid or reimbursed by you under an adoption assistance program.
• Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Benefits provided to self-employed individuals. Generally, different and less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors (including farmers), partners, members of limited liability companies (LLCs) electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is a bona fide employee of the business, but not an owner, the business may be able to provide tax-free benefits to the spouse just like any other employee.

Education Planning: It’s Best To Start Early

The increasing costs of higher education have made education planning an important aspect of personal financial planning. However, because the actual expenditure will not be incurred for many years, it is often given a low current priority. Also, some parents are counting on scholarships to cover the cost of their children’s education. Unfortunately, this tendency to postpone the issue may eliminate several education planning strategies that must be implemented early to be effective.

Escalating costs. Although the increase in the cost of attending college has slowed down to its lowest escalation rate in years, the College Board reports that 2014—2015 tuition and fees continue to rise at a rate faster than the consumer price index (www.collegeboard.com). All told, the cost of a college education is staggering, and this is unlikely to change.

According to the College Board report, for one year of full-time study, private four-year colleges rose 3.7% (to an average cost of $31,231) from 2013—2014 for tuition and fees alone. Average total charges with room and board are $42,419. Public four-year colleges are up 2.9% (to an average of $9,139) from last year for in-state tuition and fees — room and board adds on another $9,804. Public four-year colleges are up 3.3% (to an average of $22,958) from last year for out-of-state tuition and fees. Average total charges with room and board are $32,762. Even tuition and fees at public two-year schools are up 3.3% (to an average of $3,347).

The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $6,110 in 2014—2015 —far below the actual cost of attending.

Six methods to pay for college. In general, the six basic methods of paying for a child’s higher education include a child working his or her way through school; obtaining financial aid (scholarships and federal loans); paying college expenses out of the parents’ current income or assets; using education funds accumulated over time; obtaining private loans; and grandparents (or others) paying college costs.

The first method (child pays) can work, and many successful persons have obtained a good education while working to pay their way. But this often limits the student’s choice of schools and can adversely affect grades. Planning to rely on financial aid (the second method) is risky, and the family may not qualify for enough. The third method (parents paying out of current income or assets) works for some, but many parents will not know if their current income and/or assets will be sufficient until it is too late. In addition, this method is not as tax-efficient as some strategies used to accumulate separate education funds (the fourth method). However, these strategies are not without risks. Poor investment choices could prove costly. The fifth method (private loans) can result in a serious debt burden. Obviously, the sixth method is ideal, but it is not available to many.

How grandparents can help. . Grandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2015.) A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2015) to a beneficiary’s 529 plan account(s) with no adverse federal gift tax consequences. As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid.

Conclusion. The key to effective education planning is to start planning and saving early to create future options. In addition, the use of tax-sheltered investment and savings vehicles like a 529 plan can help ensure adequate funds are available when a child enters college.

Seniors Age 70 1/2 Take Your Required Retirement Distributions Before Year End 

The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.

If you turned age 70 1/2 in 2015, you can delay your 2015 required distribution to 2016. Think twice before doing so, though, as this will result in two distributions in 2016 — the amount required for 2015 plus the amount required for 2016, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2016 if you expect to be in a substantially lower bracket in 2016.

Earn 5% Or More On Liquid Assets

Yes, that is too good to be true, but we got your attention. As you are painfully aware, it is extremely difficult to earn much, if any, interest on savings, money market funds, or CDs these days. So, what are we to do? Well, one way to improve the earnings on those idle funds is to pay down debt. Paying off a home loan having an interest rate of 5% with your excess liquid assets is just like earning 5% on those funds. The same goes for car loans and other installment debt. But, the best return will more likely come from paying off credit card debt! We are not suggesting you reduce liquid assets to an unsafe level, but examine the possibility of paying off some of your present debt load with your liquid funds. Paying down $100,000 on a 5% home loan is like making more than $400 per month on those funds.

 

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2015.