Tax News: April 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.

Tax News: March 2016

Walk the Path to Tax Savings for 2015

Like many taxpayers, you may have been expecting to encounter a few roadblocks while traversing your preferred tax-saving avenues. If so, tax extenders legislation signed into law this past December may make your journey a little easier. Let’s walk through a few highlights of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).

Of Interest to Individuals

If you’re a homeowner, the PATH Act allows you to treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, this deduction is phased out for higher income taxpayers. The law likewise extends through 2016 the exclusion from gross income for mortgage loan forgiveness.

Those living in a state with low or no income taxes (or who make large purchases, such as a car or boat) will be pleased that the itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. Your deduction can be determined easily by using an IRS calculator and adding the tax you actually paid on certain major purchases.

Investors should note that the PATH Act makes permanent the exclusion of 100% of the gain on the sale of qualified small business stock acquired and held for more than five years (if acquired after September 27, 2010). The law also permanently extends the rule that eliminates qualified small business stock gain as a preference item for alternative minimum tax (AMT) purposes.

Breaks for Businesses

The PATH Act gives business owners much to think about as well. First, there’s the enhanced Section 179 expensing election. Now permanent (and indexed for inflation beginning in 2016) is the ability for companies to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction phases out, dollar for dollar, to the extent qualified asset purchases for the year exceeded $2 million.

The 50% bonus depreciation break is also back, albeit temporarily. It’s generally available for new (not used) tangible assets with a recovery period of 20 years or less, and certain other assets. The 50% amount will drop to 40% for 2018 and 30% for 2019, however.

In addition, the PATH Act addresses two important tax credits. First, the research credit has been permanently extended, with some specialized provisions for smaller businesses and start-ups. Second, the Work Opportunity credit for employers that hire members of a “target group” has been extended through 2019.

Does your company provide transit benefits? If so, note that the law makes permanent equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits.

Much, much more

Whether you’re filing as an individual or on behalf of a business, the PATH Act could have a substantial effect on your 2015 tax return. We’ve covered only a few of its many provisions here. Please contact us to discuss these and other provisions that may affect your situation.

Sidebar: Good news for Generous IRA Owners

The recent tax extenders law makes permanent the provision allowing taxpayers age 70½ or older to make direct contributions from their IRA to qualified charities up to $100,000 per tax year. The transfer can count toward the IRA owner’s required minimum distribution. Many rules apply so, if you’re interested, let us help with this charitable giving opportunity.

5 Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.

No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:

  1. Cash contributions of less than $250 are the easiest to substantiate.A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.
  2. Noncash donations of less than $250 require a bit more.You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.
  3. Bigger cash donations mean more paperwork.If you donate $250 or more in cash, a canceled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.

Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged item or service. You can deduct only the difference between the amount donated and the value of the item or service.

  1. Noncash donations valued at $250 or more and up to $5,000 require still moreYou must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgment also must include a description of the item.
  2. Noncash donations valued at more than $5,000 are the most complicatedGenerally, both a contemporaneous written acknowledgment and a qualified appraisal are required — unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.

Why You Might Want to Not Claim Your Child as a Dependent

Understandably, many parents get in the habit of claiming their children as dependents on their federal tax returns. You generally may do so as long as your child is either under age 19 (nonstudents) or under age 24 (students). But there is a reason to not claim your child as a dependent — and it has everything to do with higher education.

Credits and Phaseouts

The two primary college-funding tax credits available are the American Opportunity credit and the Lifetime Learning credit. Thanks to recently passed legislation, the American Opportunity credit now permanently allows eligible taxpayers to take an annual credit of up to $2,500 for the first four years of postsecondary education. Meanwhile, the Lifetime Learning credit provides up to $2,000 in relief to those eligible. (You can’t claim both credits in the same year for the same student.)

But these credits are subject to “phaseouts” that limit eligibility for higher-income taxpayers. For example, for 2015, eligibility for the American Opportunity credit begins to phase out for taxpayers with modified adjusted gross incomes (MAGIs) beyond $80,000 (single filers) or $160,000 (married couples filing jointly). Similarly, eligibility for the Lifetime Learning Credit begins to phase out for taxpayers with MAGIs beyond $55,000 (singles) or $110,000 (joint filers).

Good Reasons

If your income disqualifies you from claiming these credits, your child’s income probably doesn’t disqualify him or her. Therefore, your child may be able to report payment of education expenses for tax purposes and then claim one of the credits — but only if you don’t claim him or her as a dependent.

Under this scenario, the child’s tax benefit typically outweighs the value of the dependency exemption to the parents. Why? First, a credit reduces taxes dollar-for-dollar, while an exemption reduces only the amount of taxable income. Second, an income-based phaseout may reduce or eliminate the benefit of the exemption even if you did claim your child as a dependent. For 2015, the phaseout starting points for the exemption are adjusted gross incomes of $258,250 (singles) and $309,900 (joint filers).

The Right Call

If your dependency exemption is phased out, it will probably make sense not to claim your child as a dependent so he or she can grab a tax credit. But if your exemption isn’t phased out or is only partially phased out, the decision becomes trickier. We can help you make the right call.

 

Run a Business “On the Side”? Make Sure It’s No Hobby

If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS.

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure some pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

For example, if you haven’t earned a profit from your business in three out of five consecutive years, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. If a profit can be proven within this period, the burden falls on the IRS. In either case, the agency uses nine nonexclusive factors to determine whether the activity is a business or a hobby — including management expertise and time and effort dedicated.

If your enterprise is redefined as a hobby, there are many business deductions and credits that you won’t be eligible to claim. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.

 

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.

Tax News: February 2016

Good Eats, Tax Breaks: Deducting Employee Meal Costs

One thing about human resources — they need to eat. Just about every employer encounters situations in which it needs to provide meals to its employees. No matter how often you do so, be sure you’re aware of the tax rules for deducting these costs.

Claim half or all

Generally, a business may deduct only 50% of the cost of business meals for federal tax purposes. But food provided to employees may be fully deductible in circumstances such as when meals:

  • Are provided as additional compensation (and thus included in employee taxable income), or
  • Qualify as tax-free de minimis fringe benefits.

You may also write off food, and exclude it from employees’ income, if it’s furnished for your convenience and on your premises.

Furnish with a purpose

Under IRS regulations, the “convenience of the employer test” is met only if meals are furnished for a “substantial noncompensatory business purpose.” Although whether meals pass this test depends on the facts and circumstances of each case, the IRS has given examples of a number of acceptable circumstances.

For instance, food provided to keep employees available for emergency calls during the meal period generally qualifies for the full deduction. But such calls must actually occur or be reasonably expected to occur.

Another example is when the nature of the employer’s business tends to shorten a meal to, say, 30 to 45 minutes. The furnishing of meals, however, isn’t considered to be for a substantial noncompensatory business purpose if a meal period is shortened in order to allow employees to leave early.

A third instance is when employees cannot otherwise secure proper meals within a reasonable period. The regulations state that meals are fully deductible under this test if there aren’t enough eateries near the workplace.

Important note: Under the current tax rules, if more than 50% of the employees fed on premises are furnished meals for the employer’s convenience, then all meals furnished on premises are treated as furnished for the employer’s convenience. Therefore, these meals are excludable from employees’ income, regardless of whether every employee meets the convenience test.

Enjoy your meals

From a tax perspective, providing meals to employees can be deceptively simple. On their face, the rules seem straightforward, but many exceptions and caveats apply. Stay apprised of the latest IRS guidance and double-check your company’s meal deductions every year.

Sidebar: Considering a cafeteria?

Years ago, only the largest companies had on-site cafeterias. But some midsize businesses are now establishing them, too. There are a number of potential advantages to doing so. Keeping employees on your premises can cut down on excessively long lunch breaks and foster collaboration among team members. A good cafeteria could also attract better job candidates.

From a tax perspective, an employer-operated eating facility is usually considered a de minimis fringe benefit. So the costs of providing meals there are generally 100% deductible as long as the cafeteria is located on or near your premises.

But there are a number of complex rules involved. For instance, the eating facility’s revenue must normally equal or exceed its direct operating costs. We would be glad to work with you to ensure that the facility qualifies for tax-advantaged treatment when established and on an annual basis.

Reacquainting Yourself With The Roth IRA

If you’ve looked into retirement planning, you’ve probably heard about the Roth IRA. Maybe in the past you decided against one of these arrangements, or perhaps you just decided to sleep on it. Whatever the case may be, now’s a good time to reacquaint yourself with the Roth IRA and its potential benefits, because you have until April 18, 2016, to make a 2015 Roth IRA contribution.

Free withdrawals

With a Roth IRA, you give up the deductibility of contributions for the freedom to make tax-free qualified withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.

With a Roth IRA, you can withdraw your contributions tax-free and penalty-free anytime. Withdrawals of account earnings (considered made only after all your contributions are withdrawn) are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older. Earnings withdrawn before this time are subject to ordinary income taxes, as well as a 10% penalty (with certain exceptions) if withdrawn before you are age 59½.

On the plus side, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ for traditional IRAs.

Limited contributions

For 2016, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.

In 2016, the contribution limit phases out for married couples filing jointly with MAGIs between $184,000 and $194,000. The 2016 phaseout range for single and head-of-household filers is $117,000 to $132,000.

Conversion question

Regardless of MAGI, anyone may convert a traditional IRA into a Roth to turn future tax-deferred potential growth into tax-free potential growth. From an income tax perspective, whether a conversion makes sense depends on whether you’re better off paying tax now or later.

When you do a Roth conversion, you have to pay taxes on the amount you convert. So if you expect your tax rate to be higher in retirement than it is now, converting to a Roth may be advantageous — provided you can afford to pay the tax using funds from outside an IRA. If you expect your tax rate to be lower in retirement, however, it may make more sense to leave your savings in a traditional IRA or employer-sponsored plan.

Retirement radar

Roth IRAs have become a fundamental part of retirement planning. Even if you’re not ready for one just yet, be sure to keep the idea of opening one on your radar.

 

Why Flip Real Estate When You Can Exchange It?

There’s no shortage of television shows addressing real estate these days. Many of these programs emphasize “flipping” properties when an adequate gain has been reached. But, if you’re ready to move one of your investments, you might prefer to exchange it rather than flip it.

Reviewing the concept

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. So if you wish to exchange your personal residence (including a vacation home), you’ll have to first convert it into an investment property.

Executing the deal

Although an exchange may sound quick and easy, it’s relatively rare for two investors to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

Proceeding carefully

The rules for like-kind exchanges are complex, so these arrangements present many risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to call us when exploring a Sec. 1031 exchange and particularly before executing any documents.

 

 

Married Filers, the Choice is Yours

Some married couples assume they have to file their tax returns jointly. Others may know they have a choice but not want to rock the boat by filing separately. The truth is that there’s no harm in at least considering your options every year.

Granted, married taxpayers who file jointly can take advantage of certain credits not available to separate filers. They’re also more likely to be able to make deductible IRA contributions and less likely to be subject to the alternative minimum tax.

But there are circumstances under which filing separately may be a good idea. For example, filing separately can save tax when one spouse’s income is much higher than the others, and the spouse with lower income has miscellaneous itemized deductions exceeding 2% of his or her adjusted gross income (AGI) or medical expenses exceeding 10% of his or her AGI — but jointly the couple’s expenses wouldn’t exceed the applicable floor for their joint AGI. However, in community property states, income and expenses generally must be split equally unless they’re attributable to separate funds.

Many factors play into the joint vs. separate filing decision. If you’re interested in learning more, please give us a call.

 

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.

 

 

Tax News: January 2016

How you can help prevent tax-related identity theft

Tax-related fraud isn’t a new crime, but tax preparation software, e-filing and increased availability of personal data have made tax-related identity theft increasingly easy to perpetrate. The IRS is taking steps to reduce such fraud, but taxpayers must play their part, too.

How they do it

Criminals perpetrate tax identity theft by using stolen Social Security numbers and other personal information to file tax returns in their victims’ names. Naturally, the fake returns claim that the filer is owed a refund — and the bigger, the better.

To ensure they’re a step ahead of taxpayers filing legitimate returns and employers submitting W-2 and 1099 forms, the thieves file early in the tax season. They usually request that refunds be made to debit cards, which are hard for the IRS to trace once they’re distributed.

IRS takes action

The increasing rate of tax-related fraud — not to mention the well-publicized 2015 IRS data breach — has spurred government agencies and private sector businesses to act. This past June, a coalition made up of the IRS, state tax administrators, tax preparation services and payroll and tax product processors announced a new program with five initiatives:

  1. Taxpayer identification.Coalition members will review transmission data such as Internet Protocol numbers.
  2. Fraud identification.Members will share fraud leads and aggregated tax return information.
  3. Information assessment.The Refund Fraud Information Sharing and Assessment Center will help public and private sector members share information.
  4. Cybersecurity framework.Members will be required to adopt the National Institute of Standards and Technology cybersecurity framework.
  5. Taxpayer awareness and communication.Members will increase efforts to inform the public about identity theft and protecting personal data.

Your role in preventing fraud

But the IRS and tax preparation professionals can’t fight fraud without your help. Be sure to keep your Social Security card secure, and if businesses (including financial institutions and medical providers) request your Social Security number, ensure they need it for a legitimate purpose and have taken precautions to keep your data safe. Also regularly review your credit report. You can obtain free copies from all three credit bureaus once a year.

Road rules: Deducting business travel expenses

If you travel for business, you’ll want to ensure that the expenses you incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can cost you.

Away from home rule

Generally, ordinary and necessary expenses of traveling away from home for work are deductible. For the expenses to qualify, you must be away from your tax home — your regular place of business — substantially longer than an ordinary day’s work and need to sleep or rest to meet the work demands while away.

You don’t necessarily have to stay away from home overnight to satisfy the rest requirement. If you travel for business purposes throughout the day but return home that night to sleep, you may still be considered “away from home” for tax purposes. In this case, expenses you incur for such trips are still deductible.

Also, the trip must be primarily for business purposes. If your trip involves both business and personal activities, a portion of the travel expenses may be nondeductible personal expenses.

Deductible travel expenses

Most airfare, taxis, rental cars, lodging, meals (with exceptions), tips and business phone calls are tax deductible. But you can’t write off “lavish or extravagant” travel expenses, so be prepared to prove that your patronage of a high-end restaurant or five-star hotel was reasonable under the circumstances.

Generally, only 50% of business-related meal and entertainment expenses are deductible. If your employer reimburses you under an accountable plan (see below), the 50% limit applies to your employer rather than you.

You must substantiate deductions for lodging — and for other travel expenses greater than $75 — with adequate records. These include credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose.

Be accountable

If your employer reimburses your travel expenses, an accountable plan enables the company to deduct the reimbursements, but the reimbursements aren’t included in your income as salary and aren’t subject to FICA and other payroll tax obligations. Although you may still be able to deduct some or all business travel expenses without an accountable plan, such deductions are available only if you itemize and your expenses and other miscellaneous deductions exceed 2% of your adjusted gross income.

For reimbursed expenses to qualify under an accountable plan, you must have paid or incurred them while on company business and reported the expenses to your employer within a reasonable time (usually within 60 days). You also must return any excess reimbursements — usually within 120 days after they were paid or incurred.

Generally, to be reimbursable on a tax-free basis, your travel must meet the “away from home” rule discussed earlier. However, your employer can reimburse local lodging expenses if the lodging is temporary and necessary for you to participate in or be available for a bona fide business meeting or function. The expenses involved must be otherwise deductible by you as a business expense (or be expenses that would otherwise be deductible if you paid them).

Exceptions happen

As with most IRS rules, there are exceptions to which travel expenses you can deduct. If you’re unsure about some expenses, give us a call.

Hoping to grow your business? Start with the financing

Let’s say you’ve drafted a strategic growth plan that discusses in detail the new products and markets that you hope will power your company’s future growth. You’ve performed extensive market research and are confident that your offerings will appeal to customers and that you know how to reach them. Unfortunately, if your plan covers only such topics as product development, manufacturing, distribution, sales and marketing, it probably won’t succeed.

To avoid potential cash-flow issues and other financial crises, your strategic plan should specify precisely how you’ll fund your growth initiatives. If your company is sitting on a pile of cash just waiting to be invested, you’re lucky. Most businesses must finance growth with equity or debt.

Equity isn’t necessarily easy

Using your own equity in the business to raise capital can be a good solution. However, selling ownership to outside investors, such as private equity firms and venture capitalists, isn’t always as easy as it sounds. For starters, you’ll need a professional appraisal of your company and you’ll have to find investors who believe in your growth strategy — and ability to execute it.

Equity financing doesn’t need to be repaid. But, depending on how much equity you sell and how successful your company is in reaching its goals, equity can end up being expensive in the long run. For example, you may need to give up some control to investors, which can lead to disputes over major decisions.

Price of debt

Debt financing, on the other hand, does have to be repaid, and will cost you interest. Depending on the size and financial health of your company and the nature of your growth plans, you may be able to qualify for:

  • Term loans,
  • Commercial mortgages,
  • Construction loans,
  • Equipment leases, and
  • Small Business Administration loans.

Banks require borrowers to provide detailed financial information and pledge collateral, possibly including your home and other personal assets. They may also hold you to covenants that, for example, prevent you from borrowing additional money until their loan is repaid.

Reasonable expectations

We stand ready to help you weigh the advantages and drawbacks of the financing options available to your business. We can also help you evaluate your growth assumptions to ensure that your profit expectations are reasonable.

Tax calendar

January 15

Individual taxpayers’ final 2015 estimated tax payment is due unless Form 1040 is filed by February 2, 2016, and any tax due is paid with the return.

February 1

  • Most employers must file Form 941 (Employer’s Quarterly Federal Tax Return) to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2015. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (Employer’s Annual Federal Tax Return).
  • Give your employees their copies of Form W-2 for 2015. If an employee agreed to receive Form W-2 electronically, have it posted on the website and notify the employee.
  • Give annual information statements to recipients of certain payments you made during 2015. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be filed electronically with the consent of the recipient.
  • File Form 940 [Employer’s Annual Federal Unemployment (FUTA) Tax Return] for 2015. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945 (Annual Return of Withheld Federal Income Tax) for 2015 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees) to report Social Security and Medicare taxes and withheld income for 2015. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 29

  • The government’s copy of Form 1099 series returns (along with the appropriate transmittal form) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to March 31.
  • The government’s copy of Form W-2 series returns (along with the appropriate transmittal Form W-3) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to March 31.

March 15

  • 2015 income tax returns must be filed or extended for calendar-year corporations. If the return is not extended, this is also the last day for calendar-year corporations to make 2015 contributions to pension and profit-sharing plans.

Consolidate accounts and simplify your financial life

If you’ve accumulated many bank, investment and other financial accounts over the years, you might consider consolidating some of them. Having multiple accounts requires you to spend more time tracking and reconciling financial activities and can make it harder to keep a handle on how much you have and whether your money is being invested advantageously.

Start by identifying the accounts that offer you the best combination of excellent customer service, convenience, lower fees and higher returns. Hold on to these and consider closing the rest, keeping in mind the bank account amounts you’ll be consolidating. The Federal Deposit Insurance Corporation generally insures $250,000 per depositor, per insured bank. So if consolidation means that your balance might exceed that amount, it’s better to keep multiple accounts. You should also keep accounts with different beneficiaries separate.

When closing accounts, make sure you stop automatic payments or deposits and destroy checks and cards associated with them. To prevent any future disputes, obtain letters from the financial institutions stating that your accounts have been closed. Closing an account generally takes several weeks.

Tax News: December 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.

6 Important Tax Changes for 2015

6 Important Tax Changes for 2015

With 2015 officially in motion, you may be in the mindset of preparing to file your 2014 taxes. However, you also need to consider the newest changes in the tax code for 2015 and starting planning now to avoid costly mistakes throughout the year. Planning ahead for tax changes and adjusting your budget accordingly can mean the difference between writing a large or small check to the IRS in 2016. To help you get started, here are a few of the big tax changes for 2015 and how they may affect you.

  1. 401(k) Limits: In 2014, the cap for employee contributions to 401(k) plans was set at $17,500. In 2015, that limit will increase to $18,000. What does this mean for you? If you do have a 401(k) plan through work, be sure to inform your payroll department to increase your contribution (beginning January 1st) to make sure you are saving the maximum allowable in 2015. The allowance for those 50 years old and older has also been increased from $5,500 to $6,000.
  2. Alternative Minimum Tax: The AMT is an income tax on corporations, estates, trusts, and individuals imposed by the government. Moving into 2015, the AMT exemption has been raised by 1.5% from 2014. The AMT exemption amount for FY 2015 is $53,600 for individuals and $83,400 for those filing jointly.
  3. Standard Deduction: In 2015, the standard deduction (the fixed amount that reduces one’s taxable income each year) will increase to $6,300 for single filers and $12,600 for those filing jointly. This important change is crucial to tax planning. If you are unable to itemize enough deductions to exceed your standard deduction, it may be the only tax break you receive from the government on your next year’s tax return.
  4. Affordable Care Act:
    • For Employers: The ObamaCare Employer Mandate was set to begin in 2014, but was delayed until 2015. The Employer Mandate states that businesses with 100 or more full-time equivalent employees (30 hours or more per week)  must provide health insurance to at least 70% for 2015 of their F/T employees and dependents (age 26 and under), or pay a fine. A way for businesses to circumvent any financial penalty involved making “employer healthcare arrangements” with their full-time staff members, which means the employer reimbursed employees for some or all of the premium expenses incurred for health insurance policies. However, under section 498D of the Internal Revenue Code, if these types of arrangements were done, the employer could be subject to a $100 excise tax per day per employee.
    • For Individuals: The Affordable Care Act has been top of mind to many since being enacted. Part of its regulations mandates that most Americans must have health insurance or they are subject to paying a tax penalty. In 2014, the penalties were 1% of your household income or $95 per person (whichever is greater). Most people may have thought that was steep. However, in 2015, the penalties have increased to 2% of total household income or $325 per person. Those fees can add up quickly for the lower and middle class tax brackets.
  1. Flexible Spending Account Limits: In 2014, the annual limit for employee contributions to flexible spending accounts was set at $2,500 for qualified healthcare expenses. Beginning January 1, 2015, that limit will be raised $50 (up to $2,550). Those enrolled in flexible spending accounts through their employer need to make sure they opt in for the new maximum to get full benefit from the program.
  2. Tax Brackets: Income tax figures will once again be raised for 2015 at about 1.6% from 2014.

Unsure how these changes may affect you? Click here to contact a Scheffel Boyle Representative today!

2015 Illinois Tax Rate Changes

2015 Illinois Tax Rate Changes

  • Illinois Personal Income Tax rate is increased from 3% to 5% between January 1, 2011 and December 31, 2014. The rate will revert to 3.75% (originally proposed at 4%) from January 1, 2015 to December 31, 2024.
  • Corporate Income Tax Rate is increased from the current 7.3% rate to 9.5% starting January 1, 2011 through December 31, 2014. It then drops to 7.75% between January 1, 2015 and December 31, 2024.

Unsure about how this might affect you? Click here to contact your Scheffel Boyle team today!

One Year Delay for Play or Pay Penalties

SUMMARY

In response to employers’ requests for more time to implement complex regulations regarding reporting requirements under the Affordable Care Act, the Obama Administration announced on Tuesday, July 2, 2013, a one-year delay in the effective date of a major component of the Act requiring employers with at least 50 workers to offer health coverage or be exposed to a penalty. The provision, commonly known as the “play or pay” penalty or employer mandate, will now become effective on January 1, 2015. Obviously, the delay removes the pressure to redesign plan coverage in the next few months to maximize the cost benefit of avoiding (or paying) the penalties. Employers now have an extra year to vet the pros and cons of their plan designs and to implement the Act’s requirements on coverage.

The Act’s other two major provisions, expanding Medicaid and requiring individuals to obtain coverage or pay a penalty, will still become effective on January 1, 2014.

BACKGROUND

The extended provision, commonly known as the “play or pay” penalty or employer mandate, requires businesses with 50 or more full-time or full-time-equivalent workers to provide insurance to full-time workers or risk a penalty of $3,000 for each full-time employee over 30. Even employers that offer health care benefits can be subject to a different penalty calculation if the offered coverage is not of the right quality or is not affordable. In this instance, a penalty of $3,000 will be assessed for each full-time employee who actually received a federal subsidy to purchase health coverage on an exchange.

For more information or to speak with one of the Scheffel & Company, PC experts, please contact us today.

This article originally appeared in BDO USA, LLP’s “BDO Knows Compensation & Benefits” (July 2013) Copyright @ 2013 BDO USA, LLP, All rights reserved. www.bdo.com