2016 Tax Provisions for Individuals: A Review
Many of the tax changes affecting individuals and businesses for 2016 were related to the Protecting Americans from Tax Hikes Act of 2015 (PATH) that modified or made permanent numerous tax breaks (the so-called “tax extenders”). To further complicate matters, some provisions were only extended through 2016 and are set to expire at the end of this year while others were extended through 2019. With that in mind, here’s what individuals and families need to know about tax provisions for 2016.
The personal and dependent exemption for tax year 2016 is $4,050.
The standard deduction for married couples filing a joint return in 2016 is $12,600. For singles and married individuals filing separately, it is $6,300, and for heads of household the deduction is $9,300.
The additional standard deduction for blind people and senior citizens in 2016 is $1,250 for married individuals and $1,550 for singles and heads of household.
Income Tax Rates
In 2016 the top tax rate of 39.6 percent affects individuals whose income exceeds $415,051 ($466,951 for married taxpayers filing a joint return). Marginal tax rates for 2016–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.
Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $75,300 for a married couple filing a joint return.
Estate and Gift Taxes
In 2016 there is an exemption of $5.45 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.
Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.
For 2016, exemption amounts are $53,900 for single and head of household filers, $83,800 for married people filing jointly and for qualifying widows or widowers, and $41,900 for married people filing separately.
Marriage Penalty Relief
The basic standard deduction for a married couple filing jointly in 2016 is $12,600.
Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $259,400 for single filers and $311,300 for married filing jointly in tax year 2016.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts (FSAs) are limited to $2,550 per year in 2016 (same as 2015) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,550 limit for the subsequent plan year.
Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.
Long Term Capital Gains
In 2016 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $415,050 ($466,950 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Individuals – Tax Credits
In 2016 a nonrefundable (i.e. only those with a lax liability will benefit) credit of up to $13,460 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit
For tax year 2016, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.
Earned Income Tax Credit (EITC)
For tax year 2016, the maximum earned income tax credit (EITC) for low and moderate income workers and working families increased to $6,269 (up from $6,242 in 2015). The maximum income limit for the EITC increased to $53,505 (up from $53,267 in 2015) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2016. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit
For 2016, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Employer-Provided Educational Assistance
In 2016, as an employee, you can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.
Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2016, the modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $108,000 for joint filers and $54,000 for singles and heads of household.
Student Loan Interest
In 2016 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $130,000 (married filing jointly). The deduction is phased out at higher income levels. In addition, the deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
Individuals – Retirement
For 2016, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,000 (same as 2015). For persons age 50 or older in 2016, the limit is $24,000 ($6,000 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,500 (same as 2015) for persons under age 50 and $15,500 for anyone age 50 or older in 2016. The maximum compensation used to determine contributions increased to $265,000.
In 2016, the adjusted gross income limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and-moderate-income workers is $61,500 for married couples filing jointly, $46,125 for heads of household, and $30,750 for married individuals filing separately and for singles.
Please call if you need help understanding which deductions and tax credits you are entitled to.
2016 Recap: Tax Provisions for Businesses
Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes for 2016.
Standard Mileage Rates
The standard mileage rates in 2016 are as follows: 54 cents per business mile driven, 19 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.
Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $52,000 (adjusted annually for inflation) in 2016.
In 2016 (as in 2015 and 2014), the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.
Section 179 Expensing and Depreciation
The Section 179 expense deduction was made permanent at $500,000 by the Protecting Americans from Tax Hikes Act of 2015 (PATH). For equipment purchases, the maximum deduction is $500,000 of the first $2.01 million of qualifying equipment placed in service during the current tax year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold amount (indexed for inflation) and eliminated above amounts exceeding $2.5 million. In addition, Section 179 is now indexed to inflation in increments of $10,000 for future tax years.
The 50 percent bonus depreciation has been extended through 2019. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019. The standard business depreciation amount is 24 cents per mile.
Please call if you have any questions about Section 179 expensing and the bonus depreciation.
Work Opportunity Tax Credit (WOTC)
Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.
SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $12,500 for persons under age 50 and $15,500 for persons age 50 or older in 2016. The maximum compensation used to determine contributions increases to $265,000.
Please contact the office if you need help understanding which deductions and tax credits you are entitled to.
Employee or Independent Contractor–Which is it?
If you hire someone for a long-term, full-time project or a series of projects that are likely to last for an extended period, you must pay special attention to the difference between independent contractors and employees.
Why It Matters
The Internal Revenue Service and state regulators scrutinize the distinction between employees and independent contractors because many business owners try to categorize as many of their workers as possible as independent contractors rather than as employees. They do this because independent contractors are not covered by unemployment and workers’ compensation, or by federal and state wage, hour, anti-discrimination, and labor laws. In addition, businesses do not have to pay federal payroll taxes on amounts paid to independent contractors.
Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
The Difference Between Employees and Independent Contractors
Independent Contractors are individuals who contract with a business to perform a specific project or set of projects. You, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Example: Sam Smith, an electrician, submitted a bid of $6,400 to a housing complex for electrical work. Per the terms of his contract, every two weeks for the next 10 weeks, he is to receive a payment of $1,280. This is not considered payment by the hour. Even if he works more or less than 400 hours to complete the work, Sam will still receive $6,400. He also performs additional electrical installations under contracts with other companies that he obtained through advertisements. Sam Smith is an independent contractor.
Note: Labor laws vary by state. Please call if you have specific questions.
Employees provide work in an ongoing, structured basis. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. A worker is still considered an employee even when you give them freedom of action. What matters is that you have the right to control the details of how the services are performed.
Example: Sally Jones is a salesperson employed on a full-time basis by Rob Robinson, an auto dealer. She works 6 days a week and is on duty in Rob’s showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager’s approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Rob. Rob also pays the cost of health insurance and group term life insurance for Sally. Sally Jones is an employee of Rob Robinson.
Independent Contractor Qualification Checklist
The IRS, workers’ compensation boards, unemployment compensation boards, federal agencies, and even courts all have slightly different definitions of what an independent contractor is though their means of categorizing workers as independent contractors are similar.
One of the most prevalent approaches used to categorize a worker as either an employee or independent contractor is the analysis created by the IRS, which considers the following:
- What instructions the employer gives the worker about when, where, and how to work. The more specific the instructions and the more control exercised, the more likely the worker will be considered an employee.
- What training the employer gives the worker. Independent contractors generally do not receive training from an employer.
- The extent to which the worker has business expenses that are not reimbursed. Independent contractors are more likely to have unreimbursed expenses.
- The extent of the worker’s investment in the worker’s own business. Independent contractors typically invest their own money in equipment or facilities.
- The extent to which the worker makes services available to other employers. Independent contractors are more likely to make their services available to other employers.
- How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job.
- The extent to which the worker can make a profit or incur a loss. An independent contractor can make a profit or loss, but an employee does not.
- Whether there are written contracts describing the relationship the parties intended to create. Independent contractors generally sign written contracts stating that they are independent contractors and setting forth the terms of their employment.
- Whether the business provides the worker with employee benefits, such as insurance, a pension plan, vacation pay, or sick pay. Independent contractors generally do not get benefits.
- The terms of the working relationship. An employee generally is employed at will (meaning the relationship can be terminated by either party at any time). An independent contractor is usually hired for a set period.
- Whether the worker’s services are a key aspect of the company’s regular business. If the services are necessary for regular business activity, it is more likely that the employer has the right to direct and control the worker’s activities. The more control an employer exerts over a worker, the more likely it is that the worker will be considered an employee.
Minimize the Risk of Misclassification
If you misclassify an employee as an independent contractor, you may end up before a state taxing authority or the IRS.
Sometimes the issue comes up when a terminated worker files for unemployment benefits and it’s unclear whether the worker was an independent contractor or employee. The filing can trigger state or federal investigations that can cost many thousands of dollars to defend, even if you successfully fight the challenge.
There are ways to reduce the risk of an investigation or challenge by a state or federal authority. At a minimum, you should:
- Familiarize yourself with the rules. Ignorance of the rules is not a legitimate defense. Knowledge of the rules will allow you to structure and carefully manage your relationships with your workers to minimize risk.
- Document relationships with your workers and vendors. Although it won’t always save you, it helps to have a written contract stating the terms of employment.
If you have any questions about how to classify workers, please call.
Understanding the Net Investment Income Tax
One of the most significant tax changes affecting higher income taxpayers was the Net Investment Income Tax that went into effect on January 1, 2013. While it tends to affect wealthier individuals most often, in certain circumstances, it can also affect moderate income taxpayers whose income increases significantly in a given tax year. Here’s what you need to know:
What is the Net Investment Income Tax?
The Net Investment Income Tax (NIIT) is a 3.8 percent tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts, referred to as modified adjusted gross income or MAGI.
What is Included in Net Investment Income?
In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.
What is Not Included in Net Investment Income?
Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans are not included in net investment income.
Individuals with MAGI of $250,000 (married filing jointly) or $200,000 for single filers are taxed at a flat rate of 3.8 percent on investment income such as dividends, taxable interest, rents, royalties, certain income from trading commodities, taxable income from investment annuities, REITs and master limited partnerships, and long and short-term capital gains.
The NIIT is a flat rate tax that is paid in addition to other taxes owed, and threshold amounts are not indexed for inflation.
Non-resident aliens are not subject to the NIIT; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien for the purposes of filing married jointly, there are special rules. Please call if you have any questions.
Investment income is generally not subject to withholding, so NIIT is going to affect your tax liability for the 2016 tax year. In addition, even lower income taxpayers not meeting the threshold amounts may be subject to NIIT if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough to be subject to the NIIT.
Strategies to Minimize NIIT
Tax planning is crucial–for this year as well as next. If you are anticipating a windfall this tax year or next, there are a number of strategies that you could use to minimize your MAGI and reduce or possibly eliminate tax liability when you file your tax return. These include but are not limited to:
- Rental Real Estate (depreciation deductions)
- Installment sales (including figuring out the best timing for sale)
- Roth conversions
- Charitable donations
- Tax-deferred annuities
- Municipal bonds
Sale of a Home
The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence from gross income for regular income tax purposes. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer is over the MAGI threshold amount.
Estates and Trusts Affected
Estates and Trusts are subject to NIIT if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2016, this threshold amount is $12,400.
Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts, and some trusts, including “Grantor Trusts” and Real Estate Investment Trusts (REIT) are not subject to the NIIT.
Please note, however, that non-qualified dividends generated by investments in a REIT that are taxed at ordinary tax rates may be subject to the Net Investment Income Tax.
Questions? If you need guidance on the NIIT and estates and trusts, help is just a phone call away.
Reporting and Paying the Net Investment Income Tax
Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041.
Individuals, estates, and trusts that expect to be pay estimated taxes in 2016 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For employed individuals, the NIIT is not withheld from wages; however, you may request that additional income tax be withheld.
Wondering how the Net Investment Income Tax affects you? Give the office a call today and find out.
Choosing a Retirement Destination
With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one they currently reside in.
But some retirees may be in for a surprise. While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they’re liable for including sales taxes, excise taxes, inheritance and estate taxes, income taxes, intangible taxes, and property taxes.
In addition, states tax different retirement benefits differently. Retirees may have several types of retirements benefits such as pensions, social security, retirement plan distributions (which may or not be taxed by a particular state), and additional income from a job if they continue to work in order to supplement their retirement income.
If you’re thinking about moving to a different state when you retire, here are five things to consider before you make that move.
1. Income Tax Rates
Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + Nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, or Washington state.
2. Income Tax on Retirement Income
Income tax on pension income varies for each state. Some states, including Pennsylvania and Mississippi, do not tax it at all. In other states a portion of pension income is exempt, and still other states tax pension income in its entirety. Remember however, that state tax laws, like federal tax laws are always changing. Call if you have any questions about tax law changes in your state.
3. Tax on Social Security
In 2016, thirteen states tax social security income in addition to taxing social security income at the federal level. Among them are Colorado, Connecticut, Montana, New Mexico, Vermont, and West Virginia.
4. State and Local Property Taxes
Despite a decline in property values, property taxes have not decreased for most homeowners. Some states however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state. Please consult us if you have any questions about your state or the state you are planning to move to.
5. State and Local Sales Taxes
State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose any sales or use tax.
6. Estate Taxes
Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state you reside in. In eighteen states, there is a tax on estates below the federal threshold amount ($5.45 million in 2016, increasing to $5.50 million in 2017). Two states, Delaware and Hawaii use the same threshold amount as the IRS when figuring federal estate tax, and many states have no estate tax whatsoever including North Carolina (repealed in 2013), Kansas, Oklahoma, and Arizona.
So what’s the bottom line? When it comes to retirees, relocating, and taxes there are a number of factors to consider–including the overall tax burden. And, as you’ve read here, not all states are created equal. If you’re thinking about retiring to another state, please consult us first. We’ll help you figure out which state is best for your particular circumstances.
Reminder: College Tax Credits for 2016
With another school year in full swing, now is a good time for parents and students to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2016 federal income tax returns next year.
American Opportunity Tax Credit or Lifetime Learning Credit. In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse, and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.
Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.
The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return.
Normally, a student will receive a Form 1098-T from their institution by Jan. 31, 2017. This form shows information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits.
Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:
- The credit is only available for four tax years per eligible student.
- The credit is available only if the student has not completed the first four years of post-secondary education before 2016.
Here are some more key features of the credit:
- Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
- The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get a payment of up to $1,000 for each eligible student.
- The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
Lifetime Learning Credit. The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.
Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:
- Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
- The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
- Income limits are lower than under the American Opportunity Tax Credit. For 2016, the full credit can be claimed by taxpayers whose MAGI is $55,000 or less. For married couples filing a joint return, the limit is $111,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $131,000 or more and singles, heads of household and some widows and widowers whose MAGI is $65,000 or more.
Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4 with their employer to claim additional withholding allowances.
There are a variety of other education-related tax benefits that can help many taxpayers. They include:
- Scholarship and fellowship grants–generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
- Tuition and fees deduction claimed on Form 8917–for some, a worthwhile alternative to the American Opportunity Tax Credit or Lifetime Learning Credit.
- Student loan interest deduction of up to $2,500 per year.
- Savings bonds used to pay for college–though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
- Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.
Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.
If you have any questions about college tax credits, don’t hesitate to call.
Take Retirement Plan Distributions by December 31
Taxpayers born before July 1, 1946, generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by December 31.
Known as required minimum distributions (RMDs), typically these distributions must be made by the end of the tax year, in this case, 2016. The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2016 RMD, this amount is on the 2015 Form 5498 normally issued to the owner during January 2016.
A special rule allows first-year recipients of these payments, those who reached age 70 1/2 during 2016, to wait until as late as April 1, 2017, to receive their first RMDs. What this means that those born after June 30, 1945, and before July 1, 1946, are eligible. The advantage of this special rule is that although payments made to these taxpayers in early 2017 can be counted toward their 2016 RMD, they are taxable in 2017.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by December 31. So, for example, a taxpayer who turned 70 1/2 in 2015 (born after June 30, 1944, and before July 1, 1945) and received the first RMD (for 2015) on April 1, 2016, must still receive a second RMD (for 2016) by December 31, 2016.
The RMD for 2016 is based on the taxpayer’s life expectancy on December 31, 2016, and their account balance on December 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B. For a taxpayer who turned 72 in 2016, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than ten years younger and is the taxpayer’s only beneficiary. If you need assistance with this, don’t hesitate to call.
Though the RMD rules are mandatory for all owners of traditional, SEP and SIMPLE IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions; however, there may be a tax on excess accumulations. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
For more information on RMDs, please call.
Plan now to take Advantage of Health FSAs in 2017
FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, now is when many employers are offering employees the option to participate during the 2017 plan year.
Interested employees who wish to contribute to an FSA during the new year must make this choice again for 2017, even if they contributed in 2016. Self-employed individuals are not eligible.
An employee who chooses to participate can contribute up to $2,600 during the 2017 plan year (up from $2,550 in 2016). Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details about eligible expenses and claim procedures.
Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year–for example, an employee with $500 of unspent funds at the end of 2017 would still have those funds available to use in 2018. Under the grace period option, an employee has until 2 1/2 months after the end of the plan year to incur eligible expenses–for example, March 15, 2018, for a plan year ending on Dec. 31, 2017. Employers can offer either option, but not both, or none at all.
Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. Please call if you have any questions about how FSA contributions affect your taxes.
Retirement Contributions Limits Announced for 2017
Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2017 have been announced by the IRS. Here are the highlights:
In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2017. Contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged at $12,500.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply. Here are the phase-out ranges for 2017:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $62,000 to $72,000, up from $61,000 to $71,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $99,000 to $119,000, up from $98,000 to $118,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $186,000 and $196,000, up from $184,000 and $194,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is $118,000 to $133,000 for singles and heads of household, up from $117,000 to $132,000. For married couples filing jointly, the income phase-out range is $186,000 to $196,000, up from $184,000 to $194,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers is $62,000 for married couples filing jointly, up from $61,500; $46,500 for heads of household, up from $46,125; and $31,000 for singles and married individuals filing separately, up from $30,750.
Limitations that remain unchanged from 2016
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
- The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
If you have any questions about retirement contributions or pension plans, don’t hesitate to contact the office.
Seasonal Workers and the Health Care Law
Businesses often need to hire workers on a seasonal or part-time basis. For example, some businesses may need seasonal help for holidays, harvest seasons, commercial fishing, or sporting events. Whether you are getting paid or paying someone else, questions often arise over whether these seasonal workers affect employers with regard to the Affordable Care Act (ACA).
For the purposes of the Affordable Care Act the size of an employer is determined by the number of employees. As such, employer-offered benefits, opportunities, and requirements are dependent upon your organization’s size and the applicable rules. For instance, if you have at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, you are an ALE (Applicable Large Employer) for the current calendar year.
If you hire seasonal or holiday workers, you should know how these employees are counted under the health care law:
A seasonal worker is generally defined for this purpose as an employee who performs labor or services on a seasonal basis, generally for not more than four months (or 120 days). Retail workers employed exclusively during holiday seasons, for example, are seasonal workers.
In contrast, a seasonal employee is an employee who is hired into a position for which the customary annual employment is six months or less, where the term “customary employment” refers to an employee who typically works each calendar year in approximately the same part of the year, such as summer or winter.
The terms seasonal worker and seasonal employee are both used in the employer shared responsibility provisions but in two different contexts. Only the term seasonal worker is relevant for determining whether an employer is an applicable large employer subject to the employer shared responsibility provisions; however, there is an exception for seasonal workers:
Exception: If your workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 during that period were seasonal workers, your organization is not considered an ALE.
For additional information on hiring seasonal workers and how it affects the employer shared responsibility provisions please contact the office.
Creating Reports in QuickBooks, Part 2
QuickBooks is a faster, safer, and more accurate method of doing your bookkeeping than using a manual system is. Still, you may occasionally tire of your daily tasks and wonder what all of these forms and records mean in terms of your overall financial health–and how to create the reports that go along with them.
The actual mechanics of creating reports in QuickBooks are fairly straightforward. You can go to the Report Center, make a selection, maybe change the date range, and voila! Your company’s related data appears in neat rows and columns.
Figure 1: You may be able to get some of the information you need by simply changing the date range on a QuickBooks report.
But perhaps you to see different columns than what QuickBooks’ report templates include. Furthermore, you might want to filter your output for more meaningful, targeted analysis. Some of QuickBooks’ reports–particularly those included in the categories Company & Financial and Accountant & Taxes–can be a little advanced for the average small businessperson with little bookkeeping experience. Yes, they’re easy to run, but they are also difficult to understand so you may need the assistance of a professional.
We strongly encourage you to let an experienced QuickBooks professional run these more complex reports, such as the Balance Sheet, for you on a regular (monthly or quarterly) basis. Balance sheets provide valuable insight when making critical business decisions.
But don’t be discouraged from working with QuickBooks’ reports on your own either. Some of the easier reports are A/R Aging Detail (to keep an eye on past-due payments) and Unpaid Bills Detail (to see where you stand with your own financial obligations).
Make Reports Yours
Sometimes, QuickBooks’ own report output is a bit too broad for your needs. So the program provides sophisticated customization options. You can work with these to narrow down and shape the data that appears in your reports.
First, columns. Building reports from scratch would be too time-consuming and frustrating for you to do all of the time. And it’s unnecessary since QuickBooks provides templates for its reports, sets of columns and data filters that would serve some businesses well, but which can be modified by each user.
Try this. Open the Profit & Loss Detail report and click on the Customize Report button in the upper left corner. You will see that the Modify Report window opens.
Figure 2: QuickBooks lets you modify the columns that appear in reports.
The Display tab should be highlighted. Change the Report Date Range if necessary by clicking on the down arrow to the right of the Dates field. You can also create your own custom date range by deleting the dates in the From and To fields and entering new ones, or by clicking on the small calendar icons and clicking on the desired dates.
Warning: Do you understand the difference between running reports as either Accrual or Cash? This is important. If you don’t, please call the office to go over some basic report concepts.
It’s easy to change the default columns that appear in reports. You can either enter a column label in the Search Columns box or scroll down the list of all possible labels. Click in the space in front of the ones you want to include, and click on existing check marks if you want to remove those labels. You can also designate a sort order, either Ascending or Descending.
If you want to work with the Advanced options, or if you come across a Display screen that puzzles you (depending on the report, you may have some complex choices). Please call for assistance if you need it.
Figure 3: QuickBooks report Filters screen
When you’re done here, click on the Filters tab. This is a powerful element of QuickBooks report customization. You can limit your report output to data that meet certain criteria. In the image above, for example, you can tell QuickBooks which subset of Accounts should be included. Click on the Billing Status filter, and you can limit the results to Any, Not Billable, Unbilled, or Billed. You get the idea.
You can apply multiple filters to a report. Every one that you select will appear in the list under Current Filter Choices.
The Header/Footer and Fonts & Numbers tabs are primarily cosmetic options you can explore on your own, but as you can see from this brief overview there are many ways to use QuickBooks reports as is or customized for your particular situation. We recommend that you work with reports regularly, both on your own and with a QuickBooks professional. The insight they provide can help your company grow and flourish instead of just getting by.
Tax Due Dates for December 2016
Employees who work for tips – If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
Corporations – Deposit the fourth installment of estimated income tax for 2016. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.
Employers Social Security, Medicare, and withheld income tax – If the monthly deposit rule applies, deposit the tax for payments in November.
Employers Nonpayroll withholding – If the monthly deposit rule applies, deposit the tax for payments in November.
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