Year-End Tax Planning for Individuals
Tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning.
General tax planning strategies that taxpayers might consider include the following:
- Sell any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
- If you anticipate an increase in taxable income in 2016 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2017 tax return in 2018. Don’t hesitate to call the office if you have any questions about this.
- Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.
For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2016 tax return.
- If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2017. Exercising this option is often but not always a taxable event; sale of the stock is almost always a taxable event.
- If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.
Caution: Keep an eye on the estimated tax requirements.
Accelerating Income and Deductions
Accelerating income into 2016 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2016, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.
Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
Here are several examples of what a taxpayer might do to accelerate deductions:
- Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
- Pay your entire property tax bill, including installments due in year 2017, by year-end. This does not apply to mortgage escrow accounts.
- It may be beneficial to pay 2017 tuition in 2016 to take full advantage of the American Opportunity Tax Credit, an above-the-line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
- Try to bunch “threshold” expenses, such as medical and dental expenses–10 percent of AGI (adjusted gross income)–and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Note: The temporary exemption of 7.5 percent for individuals age 65 and older and their spouses ends on through December 31, 2016.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
Health Care Law
If you haven’t signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduces your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately or receive it as a refund when you file your taxes next spring. Please contact the office if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2016 tax return next April.
High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.
If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax as well (more about the NIIT below).
Alternate Minimum Tax
The Alternative Minimum Tax (AMT) exemption “patch,” which was made permanent by the American Taxpayer Relief Act (ATRA) of 2012, is indexed for inflation and it’s important not to overlook the effect of any year-end planning moves on the AMT for 2016 and 2017.
Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call if you’re not sure whether AMT applies to you.
Note: AMT exemption amounts for 2016 are as follows:
- $53,900 for single and head of household filers,
- $83,800 for married people filing jointly and for qualifying widows or widowers,
- $41,900 for married people filing separately.
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of your charitable contributions–including travel expenses such as mileage–is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.
Investment Gains and Losses
This year, and in the coming years, investment decisions are likely to be more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2016 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.
Caution: In recent years, extreme fluctuations in the stock market have been commonplace. Don’t assume that a down market means investment losses. Your cost basis may be low if you’ve held the stock for a long time.
If your tax bracket is either 10 or 15 percent (married couples making less than $75,300 or single filers making less than $37,650), then you might want to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. If you fall into the highest tax bracket (39.6 percent), the maximum tax rate on long-term capital gains is capped at 20 percent for tax years 2013 and beyond.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are usually taxed at a much higher tax rate than long-term gains–up to 39.6 percent in 2016 for high-income earners ($415,050 single filers, $466,950 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000.
Tip: As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.
Tip: After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.
Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment (i.e., any future gain will be lower).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.
Please call if you need assistance with any of your long term tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Example: You invest $20,000 in a mutual fund at the end of 2016. You opt for automatic reinvestment of dividends, and in late December of 2016, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.
Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.
Tip: To find out a fund’s ex-dividend date, call the fund directly.
Please call if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.
Year-End Giving To Reduce Your Potential Estate Tax
The federal gift and estate tax exemption, which is currently set at $5.45 million, is set to increase to $5.49 million in 2017. ATRA set the maximum estate tax rate set at 40 percent.
Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $14,000 a year per donee.
Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2016, you must make your gift by December 31.
Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $28,000 ($14,000 each). Though what’s given may come from either you or your spouse or both of you, both of you must consent to such “split gifts.”
Gifts of “future interests,” assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.
Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, don’t hesitate to call the office for assistance.
Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings and built-in gain on sale.
Gift tax returns for 2016 are due the same date as your income tax return. Returns are required for gifts over $14,000 (including husband-wife split gifts totaling more than $14,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $14,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.”
Tip: Call if you’re considering making a gift of property whose value isn’t unquestionably less than $14,000.
Income earned on investments you give to children or other family members are generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced child tax rate, generally 10 percent, where the first $1,050 in investment income is exempt from tax and the next $1,050 is subject to a child’s tax rate of 10 percent (0 percent tax rate on long-term capital gains and qualified dividends).
Caution: In 2016, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $2,100 is taxed at the parent’s tax rate.
Other Year-End Moves
Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,000 for 2016), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don’t apply.
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 10 percent of AGI). For amounts withdrawn at age 65 or later that are not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2016, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,300 for single coverage or $2,600 for a family.
These are just a few of the steps you might take. Please contact the office for assistance with implementing these and other year-end planning strategies that might be suitable to your particular situation.
Year-End Tax Planning for Businesses
There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2016. Here are a few of them:
Businesses using the cash method of accounting can defer income into 2017 by delaying end-of-year invoices so payment is not received until 2017. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2017.
Purchase New Business Equipment
Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2016 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $500,000 for the first $2,010,000 million of property placed in service by December 31, 2016. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.01 million threshold and eliminated above amounts exceeding $2.5 million.
Bonus Depreciation. 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.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Please contact the office if you have any questions regarding qualified property.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here’s a simplified explanation:
Conventions. The tax rules for depreciation include “conventions” or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
- The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as “placed in service” (or “disposed of”) at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.
- The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
- The mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.
If you’re planning on buying equipment for your business, call the office and speak to a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.
Other Year-End Moves to Take Advantage Of
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $52,000 in 2016) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2016 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.
Caution: Remember that by increasing basis, you’re putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Section 199 Deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2016, businesses can increase the amount of this deduction. Please call to find out how your business can take advantage of Section 199.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2016. Call today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.
If you need help developing a budget for your business, don’t hesitate to call.
Call a Tax Professional First
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2016. If you’d like more information about tax planning for 2017, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
When Disaster Strikes
Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. With hurricanes, floods, and other natural disasters affecting so many homeowners and businesses throughout the US this year, here is some useful information about disaster-related tax relief that taxpayers should know about:
Immediate relief. If you have damaged or lost property in a location declared by the President as a major disaster area, you may be able to get some money back from the IRS right now. Please call the office for more information.
Tax filing and penalty relief. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
Taxpayers who live outside the disaster area. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Don’t hesitate to contact the office if you need assistance with this.
Disaster-related losses. Individuals and businesses who suffer uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2016 return normally filed next year), or the return for the prior year (2015).
Retirement plan hardship distributions. Finally, employees and certain members of their families who live or work in disaster area localities affected by Hurricane Matthew who participate in employee sponsored retirement accounts such as 401(k)s, 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take loans and hardship distributions without incurring the 10 percent early withdrawal tax penalty.
Tax Relief Specifically for Victims of Hurricane Matthew
Hurricane Matthew victims in much of North Carolina and parts of South Carolina, Georgia and Florida have until March 15, 2017, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for those with valid extensions that were due on October 17, 2016.
This expanded relief applies to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for either individual assistance or public assistance. In addition, taxpayers in counties that are added later to the disaster area will automatically receive the same filing and payment relief.
The tax relief postpones various tax filing and payment deadlines that occurred starting on October 4, 2016. As a result, affected individuals and businesses will have until March 15, 2017, to file returns and pay any taxes that were originally due during this period. This includes the January 17 deadline for making quarterly estimated tax payments.
For individual tax filers, it also includes 2015 income tax returns that received a tax-filing extension until October 17, 2016. However, because tax payments related to these 2015 returns were originally due on April 18, 2016, those are not eligible for this relief.
A variety of business tax deadlines are also affected including the October 31 and January 31 deadlines for quarterly payroll and excise tax returns. It also includes the special March 1 deadline that applies to farmers and fishermen who choose to forgo making quarterly estimated tax payments.
In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after October 4 and before October 19 if the deposits are made by October 19, 2016.
Ready to Help
Please call the office if you have any questions about the impact of a natural disaster on your tax situation or need assistance figuring out what you need to do next.
ACA Requirements for Employers
The health care law contains tax provisions that affect employers. The size and structure of a workforce–small or large–helps determine which parts of the law apply to which employers. Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates during the year.
Two parts of the Affordable Care Act apply only to applicable large employers. These are the employer shared responsibility provisions and the employer information reporting provisions for offers of minimum essential coverage.
The number of employees an employer has during the current year determines whether it is an applicable large employer (ALE) for the following year. For example, you will use information about the size of your workforce during 2016 to determine if your organization is an ALE for 2017.
Applicable large employers are generally those with 50 or more full-time employees or full-time equivalent employees. Under the employer shared responsibility provision, ALEs are required to offer their full-time employees and dependents affordable coverage that provides minimum value. Employers with fewer than 50 full-time or full-time equivalent employees are not applicable large employers.
Who is a Full-time Employee?
There are many additional rules on determining who is a full-time employee, including what counts as hours of service, but in general:
- A full-time employee is an employee who is employed on average, per month, at least 30 hours of service per week, or at least 130 hours of service in a calendar month.
- A full-time equivalent employee is a combination of employees, each of whom individually is not a full-time employee, but who, in combination, are equivalent to a full-time employee.
- An aggregated group is commonly owned or otherwise related or affiliated employers, which must combine their employees to determine their workforce size.
Figuring the Size of the Workforce
To determine your workforce size for a year, you add your total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year and divide that total number by 12. If the result is 50 or more employees, you are an applicable large employer.
Employers with Fewer than 50 Employees
If an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is not an ALE for the current calendar year. Therefore, the employer is not subject to the employer shared responsibility provisions or the employer information reporting provisions for the current year.
Information Reporting (Including Self-Insured Employers)
All providers of health coverage, including employers that provide self-insured coverage, must file annual returns with the IRS reporting information about the coverage and about each covered individual. The coverage is reported on a Form 1095-B, Health Coverage and the employer must also furnish a copy of Form 1095-B to the employee by March 2, 2017.
Certain employers may be eligible for the small business health care tax credit if they:
- cover at least 50 percent of employees’ premium costs
- have fewer than 25 full-time equivalent employees with average annual wages of less than $52,000 in 2016 (indexed for inflation)
- purchase their coverage through the Small Business Health Options Program.
Employers with fewer than 50 full-time employees or full-time equivalent employees are not subject to the employer shared responsibility provisions.
Employers with 50 or More Employees
All employers including applicable large employers that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.
Applicable large employers must file an annual return–and provide a statement to each full-time employee–reporting whether they offered health insurance, and if so, what insurance they offered their employees.
ALEs are required to furnish a statement to each full-time employee that includes the same information provided to the IRS by March 2, 2017. ALEs that file 250 or more information returns during the calendar year must file the returns electronically.
Employer Shared Responsibility Payment
ALEs are subject to the employer shared responsibility payment if at least one full-time employee receives the premium tax credit and any one these conditions apply. The ALE:
- failed to offer coverage to full-time employees and their dependents
- offered coverage that was not affordable
- offered coverage that did not provide a minimum level of coverage
Questions? Don’t hesitate to call for assistance.
The Overtime Rule: What Employers Need to Know
UPDATE: On November 22, 2016, a federal judge in Texas issued a nationwide injunction blocking the enforcement of the Overtime Rule, that was to have gone into effect on December 1, 2016. The injunction is not a final decision; rather it means that it preserves the status quo. As such, employers are not required to comply with the new overtime rule, and instead should follow existing overtime regulations. Furthermore, the overtime rule could still go into effect at a later date if the Department of Labor appeals and wins its case. Approximately 4.2 million employees were expected to benefit from the new overtime rule, according to the Department of Labor.
What is the Overtime Rule?
The final overtime rule raises the salary threshold for overtime eligibility from $455/week to $913 ($47,476 per year). What this means for employers is that if you have an employee that makes less than $47,476 ($913 a week), then he or she automatically qualifies for overtime pay when they work more than 40 hours per week.
In accordance with the FLSA (Fair Labor Standards Act) employers are required to pay at least a minimum wage for up to 40 hours per week and to pay overtime for hours in excess of 40; however, many workers with at least some managerial duties who make between $23,660 and $47,476 are currently considered “exempt” from overtime pay. The Final Overtime Rule is, among other things, intended to make sure that these workers are adequately compensated, ensuring all employees that make less than $47,476 ($913 a week) automatically qualify for overtime pay when they work more than 40 hours per week.
What is the Effective Date?
Starting December 1, 2016, regular employees paid $913 per week will be eligible for overtime time for any works worked in excess of 40 hours effective on that date. Further, the exemption salary threshold for highly compensated employees (more on this below) rises to $134,004 per year. Exempt employees are not subject to overtime pay.
Future automatic updates to salary threshold amounts will occur every three years, beginning on January 1, 2020. The Department of Labor will publish all updated rates in the Federal Register at least 150 days before their effective date, and also post them on the Wage and Hour Division’s website.
Are all Businesses Affected by the new Overtime Regulations?
All businesses are affected by the overtime regulations; however, because the overtime regulations fall under the FLSA, only businesses with gross annual sales of $500,000 or that are engaged in interstate commerce must comply with the new overtime rule.
How does the new Overtime Rule affect a Highly Compensated Employee (HCE)?
The Final Rule sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually).
To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $913 per week on a salary or fee basis and pass a minimal duties test. The HCE annual compensation level set in this Final Rule brings this threshold more in line with the level established in 2004 and will avoid the unintended exemption of large numbers of employees in high-wage areas who are clearly not performing EAP (executive, administrative, and professional) duties.
Are Commissions or Bonuses Included in the Salary Calculation?
Up to 10 percent of total compensation meeting the salary threshold amount can be in the form of bonuses or commissions. Prior to the new rule, employers were not permitted to count these forms of compensation toward meeting the minimum salary threshold for overtime.
Employers will now be able to use non-discretionary bonuses and incentive payments such as including commissions to satisfy up to 10 percent of the standard salary level. However, for employers to credit non-discretionary bonuses and incentive payments toward a portion of the standard salary level test, payments must be paid on at least a quarterly basis. It is the employer’s discretion when the quarter will begin (i.e. not necessarily a calendar quarter).
Example: You pay an employee $821.70 per week and s/he also receives a bonus of $1,186.90 every quarter. The base pay plus the bonus ($91.30 x 13 weeks in a quarter) is equivalent to paying your employee a salary of $913 per week.
The Final Rule also allows an employer to make a “catch-up” payment. Catch-up payments are made when an employee doesn’t meet their sales quota in a given quarter (and doesn’t earn their expected quarterly commission) but exceeds a sales quota during the next quarter. In this case, an employer is able to make a catch-up payment and avoid paying overtime compensation.
Example: Let’s say your employee typically earns a commission of at least $1,500 every 13 weeks (quarter). You pay the employee a weekly salary of $821.70 (90 percent) and anticipate applying the 10 percent bonus commission ($91.30) toward the total salary requirement of $913 per week. However, the employee doesn’t meet his sales quota and only earns a commission of $1,000 or $76.92 per week, which is $14.38 less than required to meet the $913 per week requirement. In this example, employers are allowed to make a catch-up payment in the next quarter of $186.94 ($14.38 x 13 weeks) to maintain the employee’s exempt from overtime status.
Nondiscretionary bonuses. A form of compensation promised to employees, for example, to induce them to work more efficiently or to remain with the company.
Discretionary bonuses. The decision to award the bonus and the payment amount is at the employer’s sole discretion. For example, a previously unannounced holiday bonus qualifies as a discretionary bonus, because the bonus is entirely at the discretion of the employer, and therefore could not satisfy any portion of the standard salary threshold level of $913 per week.
Note: For businesses that pay employees large bonuses the amount attributable toward the standard salary level is capped at 10 percent of the required salary amount.
Non-discretionary bonuses and commissions continue to count toward the total annual compensation requirement for highly compensated employees ($134,004) as long as the HCE receives at least the full standard salary amount each pay period ($913).
What are my Options as an Employer?
While the new overtime regulations don’t specify exactly what actions employers need to take, there are a number of ways that employers can comply such as:
- Increasing workers’ salaries so they are exempt from the overtime salary threshold
- Paying the mandatory time-and-a-half for overtime hours in excess of 40 hours per week
- Limiting workers to 40-hour work weeks so there is no overtime
- Reducing base salaries, but keep overtime pay with the goal of keeping weekly pay the same
- Using a combination of the above
Are you Ready for the new Overtime Rule?
The best way to prepare for the new overtime rule is to understand how it works and how it will affect your business and your employees. Please call the office if you have any questions or need assistance complying with the new regulations.
Tips for Taxpayers about Charity Travel Expenses
Do you plan to donate your time to charity this year? If travel is part of your charitable giving, for example, driving your personal auto to collect donations from local business, you may be able to these travel expenses on your tax return and lower your tax bill. Here are five tax tips you should know if you travel while giving your services to charity.
1. Qualified Charities. To deduct your costs, your volunteer work must be for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified and do not need to apply to the IRS. Ask the group about its status before you donate. You can also use the “Exempt Organizations Select Check” search tool on IRS.gov to check a group’s status or call the office.
2. Out-of-Pocket Expenses. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel, but they must be necessary while you are away from home. All out-of-pocket costs must be:
- Directly connected with the services,
- Expenses you had only because of the services you gave, and
- Not personal, living or family expenses.
3. Genuine and Substantial Duty. Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
4. Value of Time or Service. You can’t deduct the value of your time or services that you give to charity. This includes income lost while you serve as an unpaid volunteer for a qualified charity.
5. Travel You Can Deduct. The types of expenses that you may be able to deduct include: Air, rail and bus transportation, car expenses, lodging costs, cost of meals, and taxi or other transportation costs between the airport or station and your hotel.
6. Travel You Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or vacation.
Don’t hesitate to call if you have any questions about travel expenses related to charitable work.
Employers: Terms to Know about Health Coverage
Under the Affordable Care Act, certain employers–known as applicable large employers–are subject to the employer shared responsibility provisions. You might be thinking about these topics as you make plans about 2017 health coverage for your employees.
If you are an employer that is subject to the employer shared responsibility provisions, you may choose either to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents or to potentially owe an employer shared responsibility payment to the IRS.
Here are definitions of key terms related to health coverage you might offer to employees:
Affordable coverage: If the lowest cost self-only only health plan is 9.5 percent or less of your full-time employee’s household income, then the coverage is considered affordable. Because you likely will not know your employee’s household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to you as the employer.
Minimum essential coverage: For purposes of reporting by applicable large employers, minimum essential coverage means coverage under an employer-sponsored plan. It does not include fixed indemnity coverage, life insurance or dental or vision coverage.
Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
Help is Just a Phone Call Away
Please call if you have any questions or need more information about the employer shared responsibility provisions.
Tax Relief for Drought-Stricken Farmers
Farmers and ranchers who previously were forced to sell livestock due to drought, like the drought currently affecting much of the nation, have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales. The relief applies to all or part of 37 states and Puerto Rico.
The one-year extension of the replacement period generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes due to drought. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, and poultry are not eligible.
Farmers and ranchers in these areas whose drought sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2016, in most cases, will now have until the end of their next tax year. Because the normal drought sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2012. But because of previous drought-related extensions affecting some of these localities, the replacement periods for some drought sales before 2012 are also affected. Additional extensions will be granted if severe drought conditions persist.
The IRS is providing this relief to any farm located in a county, parish, city, borough, census area or district, listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center (NDMC), during any weekly period between Sept. 1, 2015, and Aug. 31, 2016. Any county that borders a county listed by the NDMC also qualifies for this relief.
A taxpayer may determine whether exceptional, extreme, or severe drought is reported for any location in the applicable region by reference to U.S. Drought Monitor maps that are produced on a weekly basis by the National Drought Mitigation Center.
In addition, in September of each year, the IRS publishes a list of counties, districts, cities, boroughs, census areas or parishes (hereinafter “counties”) for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxpayers may use this list instead of U.S. Drought Monitor maps to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region.
- If the drought caused you to sell more livestock than usual, you may be able to defer tax on the extra gains from those sales.
- You generally must replace the livestock within a four-year period; however, the IRS has the authority to extend the period if the drought continues. For this reason, the IRS has added an additional year to the replacement year.
- The one-year extension of time authorized by the IRS generally applies to certain sales due to drought.
- If you are eligible, your gains on sales of livestock that you held for draft, dairy or breeding purposes apply.
- Sales of other livestock, such as those you raised for slaughter or held for sporting purposes and poultry, are not eligible.
- The IRS relief applies to farms in areas suffering exceptional, extreme or severe drought conditions. The National Drought Mitigation Center (NDMC) has listed all or parts of 37 states that qualify for relief (see above). Any county that is contiguous to a county that is on the NDMC’s list also qualifies.
- This extension immediately impacts drought sales that occurred during 2012. However, the IRS has granted previous extensions that affect some of these localities. This means that some drought sales before 2012 are also affected. Further, the IRS will grant additional extensions if severe drought conditions persist.
If you have any questions about whether you’re eligible for this particular tax relief, don’t hesitate to call.
Tax Tips for Separated or Divorced Individuals
If you are recently separated or divorced, taxes may be the last thing on your mind; however, these events can have a big impact on your wallet at tax time. Alimony, or a name or address change, are just a few items you may need to consider. Here are a few key tax tips to keep in mind:
1. Child Support. Child support payments are not deductible and if you received child support, it is not taxable.
2. Alimony Paid. You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree, regardless of whether you itemize deductions. Voluntary payments made outside a divorce or separation decree are not deductible. You must enter your spouse’s Social Security Number or Individual Taxpayer Identification Number on your Form 1040 when you file.
3. Alimony Received. If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.
4. Spousal IRA. If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
5. Name Changes. If you change your name after your divorce, be sure to notify the Social Security Administration. File Form SS-5, Application for a Social Security Card. You can get the form on the Social Security Administration’s website (SSA.gov) or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can cause problems in the processing of your return and may delay your refund.
6. Health Care Law Considerations
Special Marketplace Enrollment Period. If you lose health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. You may enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period if you lose coverage due to a divorce.The Special Enrollment Period (SEP) is defined as a specific length of time outside the yearly Open Enrollment Period when you can sign up for health insurance. You qualify for a Special Enrollment Period if you’ve had certain life events, including losing health coverage, moving, getting married, having a baby, or adopting a child.If you qualify for the SEP, you generally have up to 60 days following the event to enroll in a plan. If you miss that window, you have to wait until the next Open Enrollment Period to apply.Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit. If you do, you should report changes in circumstances to your Marketplace throughout the year. These changes include a change in marital status, a name change, a change of address, and a change in your income or family size. Reporting these changes will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting too much or too little credit in advance.
Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. Please call the office if you have any questions about the Shared Policy Allocation.
If you need more information about tax rules related to divorce or separation, please call the office.
Energy Tax Credits Expire at the end of 2016
Certain energy-efficient home improvements can cut your energy bills and save you money at tax time; however, these energy-related tax credits expire at the end of 2016. Here are some key facts that you should know about home energy tax credits:
Nonbusiness Energy Property Credit
- Part of this credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This may include items such as insulation, windows, doors, and roofs.
- The other part of the credit is not a percentage of the cost. This part of the credit is for the actual cost of certain property. This may include items such as water heaters and heating and air conditioning systems. The credit amount for each type of property has a different dollar limit.
- This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
- Your main home must be located in the U.S. to qualify for the credit.
- Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.
- You must place qualifying improvements in service in your principal residence by Dec. 31, 2016.
Residential Energy Efficient Property Credit
- This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
- Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property.
- Qualified wind turbine and fuel cell property must be placed into service by Dec. 31, 2016. Hot water heaters and solar electric equipment must be placed into service by Dec. 31, 2021.
- The tax credit for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity. The amount for other qualified expenditures does not have a limit. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
- The home must be in the U.S. It does not have to be your main home unless the alternative energy equipment is qualified fuel cell property.
- Use Form 5695, Residential Energy Credits, to claim these credits.
For more information about this topic please call.
Creating Reports in QuickBooks, Part 1
Reports are your reward for all that hard work you put in entering records and transactions in QuickBooks. Sure, you can always find individual invoices, sales receipts, and customers by using the software’s search tools, but in order to make smart business decisions, you need to be able to see related subsets of the information you so carefully entered in neat rows and columns.
You’ve probably created at least some basic reports in QuickBooks. You may have, for example, wanted to see who’s late paying you, or whether you have unpaid bills. You might need to know your stock levels, or which purchase orders are still unfilled. You certainly want to keep a close eye on whether you’re making or losing money.
Figure 1: The QuickBooks Report Center displays examples of reports you can create using your company’s own data.
QuickBooks makes it easy to get those answers in only a few seconds. But to get really meaningful, targeted views of your accounting information, you’ll want to shape your reports so that they reveal precisely what you need to know. You can do some of this on your own, but you might want to enlist our help to drill down even further–and to create and analyze the more complex output that some reports can provide.
Configure Preliminary Settings
As often happens when starting a tutorial on a specific QuickBooks feature, the first step is to send you to the Preferences window. Open the Edit menu and select Preferences, then Reports & Graphs. With the My Preferences section open, you can instruct QuickBooks on some of the ways reports should be handled. You can choose to:
- Have the Modify Report window open every time you create a report (to remind you to make any necessary changes first).
- Set your Refresh options. If you always want to have the most current data displayed when you generate a report, you can tell QuickBooks to Prompt me to refresh or Refresh automatically by clicking on the button in front of the appropriate response. Choose Don’t refresh–the fastest method–if you don’t want to be interrupted when you’re working with a report. You can refresh when you’re done.
- Draw graphs in 2D to make them run faster, and Use [black and white] patterns instead of colors to better differentiate between segments.
Each person who has access to QuickBooks can set these Preferences any way he or she wishes.
Setting Up Company Preferences
Figure 2: You must be the QuickBooks Administrator to set Company Preferences.
You can decide on your own whether Aging Report should start the aging process from the due date or the transaction date. Decide how you want Items and Accounts to appear in reports. And if you click the Format button located directly below Default formatting for reports, you can alter their appearance, for example, by changing fonts and indicating what information should appear in the header and footer.
For other preferences, you may need help. For example, do you understand the difference between running Summary Reports as Accrual or Cash? And have you worked with a Statement of Cash Flows before so you can assign accounts to various sections? This is a report the office should be generating and analyzing periodically for you, so don’t worry about dealing with it on your own.
Note: QuickBooks was designed for small business people, not accountants. But if you really want to get the most out of it to make the best business decisions possible, call the office for assistance with any concepts you don’t understand.
Navigating the Report Center
Figure 3: The QuickBooks Reports menu.
Unless you’re working with a very old version of QuickBooks, you have two options for accessing the software’s reporting functions. You can simply click on Reports in the left vertical pane to open the Report Center. Or you can get there by opening the Reports menu (which includes links to other areas, like the Transaction Journal, in addition to lists of QuickBooks’ reports divided by category).
Next month’s QuickBooks will cover several reports and their customization options. In the meantime, as always, don’t hesitate to call if you need help with QuickBooks reports and setup.
Tax Due Dates for November 2016
Employers – Income Tax Withholding. Ask employees whose withholding allowances will be different in 2017 to fill out a new Form W-4. The 2017 revision of Form W-4 will be available on the IRS website by mid-December.
Employees who work for tips – If you received $20 or more in tips during October, report them to your employer. You can use Form 4070.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the third quarter of 2016. This due date applies only if you deposited the tax for the quarter in full and on time.
Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in October.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in October.
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