Taxation

Congress passes “extenders” legislation reviving expired tax breaks for 2015 01-04-2016

Many valuable tax breaks expired December 31, 2014. For them to be available for 2015, Congress had to pass legislation extending them — which it now has done, with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by the President on December 18. The PATH Act not only revives expired breaks for 2015 but also makes many breaks permanent, generally extends the rest through either 2016 or 2019, and enhances some breaks.

Here is a sampling of extended breaks that may benefit you or your business:

  • The deduction for state and local sales taxes in lieu of state and local income taxes (extended permanently),
  • Tax-free IRA distributions to charities (extended permanently),
  • Bonus depreciation (extended through 2019, but with reduced benefits for 2018 and 2019),
  • Enhanced Section 179 expensing (extended permanently and further enhanced beginning in 2016),
  • Accelerated depreciation for qualified leasehold-improvement, restaurant and retail improvement property (extended permanently),
  • The research tax credit (extended permanently and enhanced beginning in 2016),
  • The Work Opportunity credit (extended through 2019 and enhanced beginning in 2016), and
  • Various energy-related tax incentives (extended through 2016).

Please contact us for more information on these and other breaks under the PATH Act. Keep in mind that, for you to take maximum advantage of certain extended breaks on your 2015 tax return, quick action may be required.  For assistance please contact:  rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2015

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7 last-minute tax-saving tips 12-15-2015

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2015 tax liability — you just must act by December 31:

  1. Pay your 2015 property tax bill that’s due in early 2016.
  2. Make your January 1 mortgage payment.
  3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the applicable floor).
  4. Pay tuition for academic periods that will begin in January, February or March of 2016 (if it will make you eligible for a tax credit).
  5. Donate to your favorite charities.
  6. Sell investments at a loss to offset capital gains you’ve recognized this year.
  7. Ask your employer if your bonus can be deferred until January.

Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.

If you’re unsure whether these steps are right for you, consult us before taking action.  For assistance please contact:  rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2015

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Avoid a 50% penalty: Take retirement plan RMDs by December 31 12-08-2015

After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).

If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us – rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

 

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Don’t miss your opportunity to make 2015 annual exclusion gifts 12-03-2015

Recently, the IRS released the 2016 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.45 million (up from $5.43 million in 2015). But even with the rising exemptions, annual exclusion gifts offer a valuable tax-saving opportunity.

The 2015 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2016.)

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.

But you need to use your 2015 exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your grandson this year, you can’t add $28,000 to your 2016 exclusions to make a $56,000 tax-free gift to him next year.

Questions about making annual exclusion gifts or other ways to transfer assets to the next generation while saving taxes? Contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2015

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PTO contribution arrangements can help prevent the year-end vacation-time scramble 11-25-2015

From the Thanksgiving kick-off of the holiday season through December 31, many businesses find themselves short-staffed as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace to be nearly a ghost town as employees scramble to use their time off rather than lose it.

A paid time off (PTO) contribution arrangement may be the solution. It allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting the excess PTO amounts to employer contributions.

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

To offer a PTO contribution arrangement, you simply need to amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms, and additional rules apply.

To learn more about PTO contribution arrangements, including their tax implications, please contact bbailey@abcpa.com, dchandler@abcpa.com, cmozingo@abcpa.com, and rsibley@abcpa.com.

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Reduce taxes on your investments with these year-end strategies 11-19-2015

While tax consequences should never drive investment decisions, it’s critical that they be considered — especially by higher-income taxpayers, who may be facing the 39.6% short-term capital gains rate, the 20% long-term capital gains rate and the 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

  • Use unrealized losses to absorb gains.
  • Avoid wash sales.
  • See if a loved one qualifies for the 0% rate (or the 15% rate if your rate is 20%).

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

These are only a few of the year-end strategies that may help you reduce taxes on your investments. For more ideas, contact us.

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Protect your deduction: Verify that a charity is eligible 11-11-2015

Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. But before you donate, it’s critical to make sure the charity you’re considering is indeed a qualified charity — that it’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Also, with the 2016 presidential election heating up, it’s important to remember that political donations aren’t tax-deductible.

Of course, additional rules affect your charitable deductions, so please contact us if you have questions about whether a donation you’re planning will be fully deductible. We can also provide ideas for maximizing the tax benefits of your charitable giving.

© 2015

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The 529 savings plan: A tax-smart way to fund college expenses 11-03-2015

If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. For contributions to the Alabama CollegeCounts 529 Fund, Alabama taxpayers are allowed to deduct a maximum of $5,000 per year when filing a single return and $10,000 per year for married couples filing jointly. Rollover contributions from another state’s 529 plan are also eligible for the Alabama deduction.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes, and typically for state purposes as well (unless the withdrawal is from a non-Alabama 529 plan), thus making the tax deferral a permanent savings.

529 plans offer other benefits as well:

  • They usually offer high contribution limits, and there are no income limits for contributing.
  • There’s generally no beneficiary age limit for contributions or distributions.
  • You can control the account, even after the child is of legal age.
  • You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downside may be that your investment options — and when you can change them — are limited. Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.

Contact Bonnee Bailey – bbailey@abcpa.com, David Chandler – dchandler@abcpa.com, Cathy Mozingo – cmozingo@abcpa.com, or Rhonda Sibley – rsibley@abcpa.com for more information.

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Save tax — or at least defer it — by carefully timing business income and expenses 10-27-2015

The first step to smart timing is to project your business’s income and expenses for 2015 and 2016. With this information in hand, you can determine the best year-end timing strategy for your business.

If you expect to be in the same or lower tax bracket in 2016, consider:

Deferring income to 2016. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into 2015. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

If you expect to be in a higher tax bracket in 2016, accelerating income and deferring deductible expenses may save you more tax over the two-year period (though it will increase your 2015 tax liability).

For help projecting your income and expenses or for more ideas on how you can effectively time them, please contact us.

© 2015

 

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2 tax consequences to consider if you’re refinancing a home 10-20-2015

Now may be a great time to refinance, because mortgage rates are still low but expected to increase. Before deciding to refinance, however, here are a couple of tax consequences to consider:

1. Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness, and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt, and deductible interest is subject to a $100,000 debt limit.

2. Prepaying interest. “Points” paid when refinancing generally are amortized and deducted ratably over the life of the loan, rather than being immediately deductible. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. But if you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.

Is your head spinning? Don’t worry; we can help you understand exactly what the tax consequences of refinancing will be for you. Contact us today!

© 2015

 

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