Year-End Tax Planning Strategies for Individuals
Once again, tax planning for the year ahead presents a number of challenges, first and foremost being what tax reform measures (if any) will actually become legislation–and when they take effect (e.g. retroactive to January 1, 2017, or a future date). Furthermore, a number of tax extenders expired at the end of 2016, which may or may not be reauthorized by Congress and made retroactive to the beginning of the year. And then, of course, there are the normal variations in individual tax circumstances such as the sale of a home that could bump up income into another tax bracket.
With this in mind, let’s take a look at some of the tax strategies you can use given the current uncertainties.
General Tax Planning
General 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. For example, taxpayers might consider using one or more of the following:
- Selling 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 this year (2017) 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 2018 tax return in 2019. Don’t hesitate to call the office if you have any questions about this.
- Prepaying 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 2017 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 2018. 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 2017 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 2017, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax 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 2018, by year-end. This does not apply to mortgage escrow accounts.
- It may be beneficial to pay 2018 tuition in 2017 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 expenses 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.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). For example, to deduct medical and dental expenses these amounts must exceed 10 percent of 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.
Note: The temporary exemption of 7.5 percent for individuals age 65 and older and their spouses expired on December 31, 2016 and is no longer available.
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 2017 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 (NIIT) 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 2017 and 2018.
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 2017 are as follows:
- $54,300 for single and head of household filers,
- $84,500 for married people filing jointly and for qualifying widows or widowers,
- $42,250 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. For more information about this topic, see Charitable Contributions of Propertybelow.
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 2017 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 $75,900 or single filers making less than $37,950), 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 starting in 2013.
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 2017 for high-income earners ($418,400 single filers, $470,700 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000. 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.
Wash Sale Rule. 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 in 2017. You opt for automatic reinvestment of dividends, and in late December of 2017, 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. 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 $5.49 million, is set to increase to $5.60 million in 2018. 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 in 2017. Next year, in 2018, the gift tax exclusion increases to $15,000, however.
Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2017, 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 2017 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.” Please call the office 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 2017, 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 2017), 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 amount of 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 2017, 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 Strategies for Businesses
There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2017. Here are a few of them:
Businesses using the cash method of accounting can defer income into 2018 by delaying end-of-year invoices, so payment is not received until 2018. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2018.
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 2017 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $510,000 for the first $2,030,000 million of property placed in service by December 31, 2017. 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 $2.03 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 with 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 $52,400 in 2017) 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, 2021, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include geothermal electric, large wind (expires in 2019), and solar energy systems used to generate electricity, to heat or cool (or to provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible; however, passive solar and solar pool-heating systems excluded are excluded. 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 2017 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 2017, 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 2017. 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 2017. If you’d like more information about tax planning for 2018, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
Charitable Contributions of Property
If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed here, the amount of your deduction must be decreased. As with many aspects of tax law, the rules are quite complex. If you’re considering a charitable contribution of property, here’s what you need to know:
After discussing how to determine the fair market value of something you donate, we’ll discuss the following categories of charitable gifts of property:
- Contributions subject to special rules
- Property that has decreased in value;
- Property that has increased in value;
- Food Inventory.
- Bargain Sales.
Determining Fair Market Value
Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of all of the relevant facts.
Used Clothing and Household Items
The fair market value of used clothing and used household goods, such as furniture and furnishings, electronics, appliances, linens, and other similar items is typically the price that buyers of used items actually pay clothing stores, such as consignment or thrift shops. Be prepared to support your valuation of other household items, which must be in good used condition unless valued at more than $500 by a qualified appraisal, with photographs, canceled checks, receipts from your purchase of the items, or other evidence.
Cars, Boats, and Aircraft
The FMV of a donated car, boat, or airplane is generally the amount listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. The FMV may be less than that, however, if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear.
Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value.
If you donate a qualified vehicle to a qualified organization, and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle’s fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you might have to reduce the fair market value to figure the deductible amount.
Paintings, Antiques, and Other Objects of Art
Deductions for contributions of paintings, antiques, and other objects of art should be supported by a written appraisal from a qualified and reputable source unless the deduction is $5,000 or less.
- Art valued at $20,000 or more. If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10-inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
- Art valued at $50,000 or more. If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. You must request the statement before filing the tax return that reports the donation.
Contributions Subject to Special Rules
Special rules apply if you contribute:
- Clothing or household items,
- A car, boat, or airplane,
- Taxidermy property,
- Property subject to a debt,
- A partial interest in property,
- A fractional interest in tangible personal property,
- A qualified conservation contribution,
- A future interest in tangible personal property,
- Inventory from your business, or
- A patent or other intellectual property.
Donating Property That Has Decreased in Value
If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property’s basis and its fair market value. Common examples of property that decreases in value include clothing, furniture, appliances, and cars.
Donating Property That Has Increased in Value
If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction. Again, your basis in the property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is Ordinary income property, Capital gain property, or Ordinary Income Property.
Ordinary Income Property
Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held 1 year or less.
Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.
Capital Gain Property
Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in a long-term capital gain. Capital gain property includes capital assets held more than 1 year.
Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes. For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year.
Real property. Real property is land and generally, anything that is built on, growing on, or attached to land.
Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.
Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.
Special rules apply to certain donations of food inventory to a qualified organization. Please call if you would like information about donations of food inventory.
A bargain sale of property to a qualified organization (a sale or exchange for less than the property’s fair market value) is partly a charitable contribution and partly a sale or exchange. The part of the bargain sale that is a sale or exchange may result in a taxable gain.
Seek advice from a tax professional.
Stiff penalties may be assessed by the IRS if you overstate the value or adjusted basis of donated property. If you’re considering a charitable contribution of property, don’t hesitate to call the office to speak with a qualified tax professional.
Small Business: Tax Breaks for Charitable Giving
Tax breaks for charitable giving aren’t limited to individuals, your small business can benefit as well. If you own a small to medium size business and are committed to giving back to the community through charitable giving, here’s what you should know.
1. Verify that the Organization is a Qualified Charity.
Once you’ve identified a charity, you’ll need to make sure it is a qualified charitable organization under the IRS. Qualified organizations must meet specific requirements as well as IRS criteria and are often referred to as 501(c)(3) organizations. Note that not all tax-exempt organizations are 501(c)(3) status, however.
There are two ways to verify whether a charity is qualified: use the IRS online search tool or ask the charity to send you a copy of their IRS determination letter confirming their exempt status.
2. Make Sure the Deduction is Eligible
Not all deductions are created equal. In order to take the deduction on a tax return, you need to make sure it qualifies. Charitable giving includes the following: cash donations, sponsorship of local charity events, in-kind contributions such as property such as inventory or equipment.
Lobbying. A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks the loss of its tax-exempt status. As such, you cannot claim a charitable deduction (or business expense) for amounts paid to an organization if both of the following apply.
- The organization conducts lobbying activities on matters of direct financial interest to your business.
- A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses.
Further, if a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues.
3. Understand the Limitations
Sole proprietors, partners in a partnership, or shareholders in an S-corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Corporations (other than S-corporations) can deduct charitable contributions on their income tax returns, subject to limitations.
Note: Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Likewise, if the payments are charitable contributions or gifts, you cannot deduct them as business expenses.
As a sole proprietor (or single-member LLC), you file your business taxes using Schedule C of individual tax form 1040. Your business does not make charitable contributions separately. Charitable contributions are deducted using Schedule A, and you must itemize in order to take the deductions.
Partnerships do not pay income taxes. Rather, the income and expenses (including deductions for charitable contributions) are passed on to the partners on each partner’s individual Schedule K-1. If the partnership makes a charitable contribution, then each partner takes a percentage share of the deduction on his or her personal tax return. For example, if the partnership has four equal partners and donates a total of $2,000 to a qualified charitable organization in 2017, each partner can claim a $500 charitable deductions on his or her 2017 tax return.
Note: A donation of cash or property reduces the value of the partnership. For example, if a partnership donates office equipment to a qualified charity, the office equipment is no longer owned by the partnership, and the total value of the partnership is reduced. Therefore, each partner’s share of the total value of the partnership is reduced accordingly.
S-Corporations are similar to Partnerships, with each shareholder receiving a Schedule K-1 showing the amount of charitable contribution.
Unlike sole proprietors, Partnerships and S-corporations, C-Corporations are separate entities from their owners. As such, a corporation can make charitable contributions and take deductions for those contributions.
4. Categorize Donations
Each category of donation has its own criteria with regard to whether it’s deductible and to what extent. For example, mileage and travel expenses related to services performed for the charitable organization are deductible but time spent on volunteering your services is not. Here’s another example: As a board member, your duties may include hosting fundraising events. While the time you spend as a board member is not deductible, expenses related to hosting the fundraiser such as stationery for invitations and telephone costs related to the event are deductible.
Generally, you can deduct up to 50 percent of adjusted gross income. Non-cash donations of more than $500 require completion of Form 8283, which is attached to your tax return. In addition, contributions are only deductible in the tax year in which they’re made.
5. Keep Good Records
The types of records you must keep vary according to the type of donation (cash, non-cash, out of pocket expenses when donating your services) and the importance of keeping good records cannot be overstated.
Ask for–and make sure you receive–a letter from any organizations stating that said organization received a contribution from your business. You should also keep canceled checks, bank and credit card statements, and payroll deduction records as proof or your donation. Further, the IRS requires proof of payment and an acknowledgment letter for donations of $250 or more.
Here are six things to keep in mind about charitable donations and written acknowledgments:
1. Taxpayers who make single donations of $250 or more to a charity must have one of the following:
- A separate acknowledgment from the organization for each donation of $250 or more.
- One acknowledgment from the organization listing the amount and date of each contribution of $250 or more.
2. The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year. For example, if someone gave a $25 offering to his or her church each week, they don’t need an acknowledgment from the church, even though their contributions for the year are more than $250.
3. Contributions made by payroll deduction are treated as separate contributions for each pay period.
4. If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
5. A taxpayer must get the acknowledgment on or before the earlier of these two dates:
- The date they file their return for the year in which they make the contribution.
- The due date, including extensions, for filing the return.
6. If the acknowledgment doesn’t show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.
If you’re a small business owner, don’t hesitate to call if you have any questions about charitable donations.
Reconstructing Records After a Disaster
As the end of year approaches and tax season right around the corner, taxpayers who are victims of a natural disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement. With that in mind, here are some tips will help individual taxpayers, as well as business owners, reconstruct their records after a disaster:
1. Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov or use their smartphone with the IRS2Go mobile phone app. They can also call 800-908-9946 to order them by phone.
2. To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
3. Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of appropriate documents.
4. Homeowners should review their insurance policy as the policy usually lists the value of a building to establish a base figure for replacement.
5. Taxpayers who made improvements to their home should contact the contractors who did the work to see if records are available. If possible, the homeowner should get statements from the contractors to verify the work and cost. They can also get written accounts from friends and relatives who saw the house before and after any improvements.
6. For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, the taxpayer could contact the attorney who handled the trust.
7. When no other records are available, taxpayers can check the county assessor’s office for old records that might address the value of the property.
8. There are several resources including Kelley’s Blue Book, National Automobile Dealers Association, and Edmunds that can help someone determine the current fair-market value of most cars on the road. These resources are all available online and at most libraries:
9. Taxpayers can look on their mobile phone for pictures that show the damaged property before the disaster.
10. Taxpayers can support the valuation of property with photographs, videos, canceled checks, receipts, or other evidence.
11. If they bought items using a credit card or debit card, they should contact their credit card company or bank for past statements.
12. If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
Small Business Owners
After a disaster, many business owners might need to reconstruct records to prove a loss as well. Here are four tips that may be helpful for business owners that need to reconstruct their records:
1. To create a list of lost inventories, business owners can get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year.
2. For information about income, business owners can get copies of last year’s federal, state and local tax returns. These include sales tax reports, payroll tax returns, and business licenses from the city or county. These will reflect gross sales for a given period.
3. Owners should check their mobile phone or other cameras for pictures and videos of their building, equipment, and inventory.
4. Business owners who don’t have photographs or videos can simply sketch an outline of the inside and outside of their location. For example, for the inside the building, they can draw out where equipment and inventory were located. For the outside of the building, they can map out the locations of items such as shrubs, parking, signs, and awnings.
Help is Just a Phone Call Away
If you have been a victim of a natural disaster this year, and need assistance reconstructing tax records, don’t hesitate to call.
New e-Services Scam Affects Taxpayers, Tax Pros
As IRS e-Services begins its move later this month to Secure Access authentication and its two-factor protections, cybercriminals are likely to make last-ditch efforts to steal passwords and data prior to the transition.
IRS e-Services users should be aware of a new phishing scam that tries to trick tax professionals into “signing” a new e-Services user agreement.
The phishing scam seeks to steal passwords and data.These and other sophisticated schemes are adaptive in nature, and everyone should be cautious before clicking on a link or entering sensitive personal information.
How the e-Services Scam Works
The scam email claims to be from “e-Services Registration” and uses “Important Update about Your e-Services Account” in the subject line. It states, in part, “We are rolling out a new user agreement, and all registered users must accept its revised terms to have access to e-Services and its products.” It asks the individual to review and accept the agreement but takes them to a fake site instead.
What to do if you Clicked on a Link
For those who may have clicked on this link, perform a deep scan with security software, and then contact IT/cybersecurity personnel and the IRS e-Help Desk on IRS.gov.
Questions or Concerns?
Don’t hesitate to call the office if you have any questions about IRS e-Services or believe you may have been a victim of an IRS-related scam. To learn more about what the IRS is doing to protect accounts with Secure Access authentication, please visit the e-Services landing page on the IRS website.
Solar Technology Tax Credits Available for 2017
Certain energy-efficient home improvements can cut your energy bills and save you money at tax time. While many of these tax credits expired at the end of 2016, tax credits for residential and non-business energy-efficient solar technologies do not expire until December 31, 2021. Here are some key facts that you should know about these tax credits:
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 and solar electric equipment placed into service on or after January 1, 2006, and on or before December 31, 2021.
- There is no maximum credit for systems placed in service after 2008.
- The tax credit does not apply to solar water-heating property for swimming pools or hot tubs.
- 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.
- At least half the energy used to heat the dwelling’s water must be from solar in order for the solar water-heating property expenditures to be eligible.
- Solar water-heating equipment must be certified for performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.
- The home must be in the U.S. It does not have to be your main home.
- Use Form 5695, Residential Energy Credits, to claim the credit.
Equipment costs such as assembling or installing original systems, on-site labor costs, and costs related to wiring or piping solar technology systems are considered final when the installation is complete. For a new home, the placed in service date is the occupancy date.
The maximum allowable credit varies by the type of technology:
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
Solar water-heating property
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/2022
If you would like more information about this topic please contact the office today.
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:
Seasonal worker. 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.
Seasonal employee. 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 call.
Tax Deductions for Educators
With the fall semester of the school year well underway teachers, administrators and aides should not forget to keep track of education-related expenses that could help reduce their taxes when they file their returns next spring. With that in mind, let’s take a look at three key work-related tax benefits that are available to educators.
Educators can take advantage of tax deductions for qualified expenses related to their profession. The costs many educators incur out-of-pocket include items such as classroom supplies, training and travel.
There are two methods educators can choose for deducting qualified expenses: Claiming the Educator Expense Deduction (up to $250) or, for those who itemize their deductions, claiming eligible work-related expenses as a miscellaneous deduction on Schedule A, Itemized Deductions.
A third key benefit enables many teachers and other educators to take advantage of various education tax benefits for their ongoing educational pursuits, especially the Lifetime Learning Credit or, in some instances depending on their circumstances, the American Opportunity Tax Credit.
Educator Expense Deduction
Educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) of unreimbursed business expenses. The educator expense deduction is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.
Itemizing Deductions using Schedule A
Often educators have qualifying classroom and professional development expenses that exceed the $250 limit. In that case, the IRS encourages them to claim these excess expenses as a miscellaneous deduction on Schedule A (Form 1040 or Form 1040NR). In addition, educators can claim other work-related expenses, such as the cost of subscriptions to professional journals, professional licenses, and union dues. Transportation expenses may also be deductible in situations such as, for example, where an educator assigned to teach at two different schools needs to drive from one school to the other on the same day.
Miscellaneous deductions of this kind are subject to a two-percent limit. This means that a taxpayer must subtract two percent of their adjusted gross income from the total qualifying miscellaneous deduction amount. For more information, see Publication 529, Miscellaneous Deductions or call the office for assistance.
Educators should keep detailed records of qualifying expenses noting the date, amount, and purpose of each purchase. This will help prevent a missed deduction at tax time.
Taxpayers should also keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income. Tax transcripts are available free of charge from the IRS.
The quickest way to get a copy of a tax transcript is to use the Get Transcript application on the IRS website. After verifying identity, taxpayers can view and print their transcript immediately online. The online application includes a robust identity verification process. Those who can’t pass the verification must request the transcript be mailed. This takes five to 10 days, so plan ahead and request the transcript early.
Questions about tax deductions for educators?
Don’t hesitate to call the office if you have any questions about tax deduction available to educators including teachers, administrators, and aides.
Relief for Drought-Stricken Farmers and Ranchers
Farmers and ranchers who previously were forced to sell livestock due to drought in an applicable region now have an additional year to replace the livestock and defer tax on any gains from the forced sales, according to the Internal Revenue Service. An applicable region is a county designated as eligible for federal assistance plus counties contiguous to that county.
This relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry are not eligible.
To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance.
Under these circumstances, livestock generally must be replaced within a four-year period, instead of the usual two-year period. But in addition, the IRS is authorized to extend this replacement period further if the drought continues.
The one-year extension of the replacement period gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock.
The IRS provides this extension to farmers and ranchers located in the applicable region that qualified for the four-year replacement period if any county, parish, city, or district, that is included in the applicable region is listed as suffering exceptional, extreme or severe drought conditions by the National Drought Mitigation Center (NDMC), during any weekly period between Sept. 1, 2016, and Aug. 31, 2017. All or part of 42 states, plus the District of Columbia, are listed.
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. U.S. Drought Monitor maps are archived at 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.
As a result, farmers and ranchers in the applicable region whose drought sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2017, 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 2013. But because of previous drought-related extensions affecting some of these localities, the replacement periods for some drought sales before 2013 are also affected. Additional extensions will be granted if severe drought conditions persist.
For additional details on tax relief for drought-stricken farmers and ranchers please contact the office.
Creating Customer Statements in QuickBooks
Let’s say you have a regular customer who used to pay on time, but he’s been hit-and-miss lately. How do you get him caught up? Or, one of your customers thinks she’s paid you more than she owes. How do you straighten out this account?
Both of these situations have a similar solution: QuickBooks’ Statements.
QuickBooks’ statements provide an overview of every transaction that has occurred between you and individual customers during a specified period of time. They’re easy to create, easy to understand, and can be effective at resolving payment disputes.
A Simple Process
Here’s how they work. Click Statements on the home page, or open the Customers menu and select Create Statements. A window like this will open:
Figure 1: QuickBooks provides multiple options on this screen so you create the statement(s) you need.
First, make sure the Statement Date is correct, so that your statement captures the precise set of transactions that you want. Next, you will need to tell QuickBooks what that set is. Should the statement(s) include transactions only within a specific date range? If so, then click the button in front of Statement Period From, and enter that period’s beginning and ending dates by clicking on the calendar graphic. If you would rather, you can include all open transactions by clicking on the button in front of that option. As you can see in the screenshot above, you can choose to Include only transactions over a specified number of days past due date.
Now, you need to tell QuickBooks which customers you want to include in this statement run. Your options here are:
- All Customers.
- Multiple Customers. When you click on this choice, QuickBooks displays a Choosebutton. Click on it, and your customer list opens in a new window. Click on your selections there to create a check mark. Click OK to return to the previous window.
- One Customer. QuickBooks displays a drop-down menu. Click the arrow on the right side of the box, and choose the correct one from the list that opens.
- Customers of Type. Again, a drop-down list appears, but this one contains a list of the Customer Types you created to filter your customer list, like Commercial and Residential. You would have assigned one of these to customers when you were entering data in their QuickBooks records (click the Additional Info tab in a record to view).
- Preferred Send Method. E-mail or Mail?
At the top of the right column, you can select a different Template if you would like, or Customize an existing one. Not familiar with the options you have to change the layout and content of forms in QuickBooks? Let one of our QuickBooks experts introduce you to the possibilities.
Below that, you can opt to Create One Statement either Per Customer or Per Job. The rest of the choices here are pretty self-explanatory–except for Assess Finance Charges. If you have never done this, then it may be helpful to call the office and arrange for a QuickBooks pro to work with you on this complex process.
When you are satisfied with the options that you have selected in this window, click the Preview button in the lower left corner of the window (not pictured here). QuickBooks will then prepare all the statements in the background, and display the first one. Click Next to view them one by one. At the bottom of each, you will see a summary of how much is due in each aging period, like this:
Figure 2: It is easy to see how much each customer is past due within each aging period. This summary appears at the bottom of statements.
After you have checked all the statements, click the Print or E-mail button at the bottom of the window.
Your company’s cash flow depends on the timely payment of invoices. Sending statements is only one way to encourage your customers to catch up on their past due accounts. There are many others, like opening a merchant account so customers can pay you online with a bank card or electronic check. If poor cash flow is threatening the health of your business, a QuickBooks professional can help.
Tax Due Dates for November 2017
Employers – Income Tax Withholding. Ask employees whose withholding allowances will be different in 2018 to fill out a new Form W-4. The 2018 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 2017. 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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