Taxation

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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Your exec comp could be subject to the 0.9% additional Medicare tax or the 3.8% NIIT 10-13-2015

The additional Medicare tax and net investment income tax (NIIT) apply when certain income exceeds the applicable threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers.

The following types of executive compensation could be subject to the 0.9% additional Medicare tax if your earned income exceeds the applicable threshold:

  • Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold
  • FMV of restricted stock when it’s awarded if you make a Section 83(b) election
  • Bargain element of nonqualified stock options when exercised
  • Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture

And the following types of gains from exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold:

  • Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election
  • Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements

Concerned about how your exec comp will be taxed? Please contact us. We can help you assess the potential tax impact and implement strategies to reduce it.

© 2015

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Selling rather than trading in business vehicles can save tax 09-29-2015

Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.

If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.

For more ideas on how to maximize your vehicle-related deductions, contact us.

© 2015

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Why you should contribute more to your 401(k) in 2015? 09-23-2015

Contributing to a traditional employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, offers many benefits:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

For 2015, you can contribute up to $18,000. If your current contribution rate will leave you short of the limit, consider increasing your contribution rate through the end of the year. Because of tax-deferred compounding, boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.

If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2015). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.

Have questions about how much to contribute? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.

© 2015

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How to determine if you need to worry about estate taxes 09-16-2015

Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies. The net number represents your taxable estate.

You can transfer up to your available exemption amount at death free of federal estate taxes. So if your taxable estate is equal to or less than the estate tax exemption (for 2015, $5.43 million) reduced by any gift tax exemption you used during your life, no federal estate tax will be due when you die. But if your taxable estate exceeds this amount, it will be subject to estate tax. Many states, however, now impose estate tax at a lower threshold than the federal government does, so you’ll also need to consider the rules in your state.

If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.

© 2015

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All income investments aren’t alike when it comes to taxes 09-02-2015

The tax treatment of investment income varies, and not just based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at the favorable long-term capital gains tax rate (generally 15% or 20%) rather than at the applicable ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay qualified dividends may be more attractive tax-wise than other income investments, such as CDs and taxable bonds.

But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:

  • Real estate investment trusts (REITs),
  • Regulated investment companies (RICs),
  • Money market mutual funds, and
  • Certain foreign investments.

Also, the tax treatment of bond income varies. For example:

  • Interest on U.S. government bonds is taxable on federal returns but exempt on state and local returns.
  • Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also might be excludable on your state return.
  • Corporate bond interest is fully taxable for federal and state purposes.

While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.  Feel free to contact Bonnee Bailey (bbailey@abcpa.com), Callis Blake (cblake@abcpa.com), David Chandler (dchandler@abcpa.com), Rena Minton (rminton@abcpa.com), Cathy Mozingo (cmozingo@abcpa.com), Rhonda Sibley (rsibley@abcpa.com) or any of our other excellent CPAs on staff.

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Tax Savings Opportunity for Exporters and Others 08-25-2015

Exporters and others: Save taxes with an IC-DISC

If your business exports American-made goods or performs architectural or engineering services for foreign construction projects, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.

An IC-DISC is a “paper” corporation you set up to receive commissions on export sales, up to the greater of 50% of net income or 4% of gross receipts from qualified exports. Your business deducts the commission payments, while distributions received from the IC-DISC are treated as qualified dividends, not capital gains.

Essentially, an IC-DISC allows you to convert ordinary income taxed at rates as high as 39.6% into dividends taxed at 15% or 20%. An IC-DISC also allows you to defer taxes on up to $10 million in commissions held by the IC-DISC by paying a modest interest charge to the IRS.

Think an IC-DISC might be right for you? Contact us for more information.

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What You Need to Know Before Donating Collectibles 08-18-2015

If you’re a collector, donating from your collection instead of your bank account or investment portfolio can be tax-smart. When you donate appreciated property rather than selling it, you avoid the capital gains tax you would have incurred on a sale. And long-term gains on collectibles are subject to a higher maximum rate (28%) than long-term gains on most long-term property (15% or 20%, depending on your tax bracket) — so you can save even more taxes.

But choose the charity wisely. For you to receive a deduction equal to fair market value rather than your basis in the collectible, the item must be consistent with the charity’s purpose, such as an antique to a historical society.

Properly substantiating the donation is also critical, and this may include an appraisal. If you donate works of art with a collective value of $5,000 or more, you’ll need a qualified appraisal, and if the collective value is $20,000 or more, a copy of the appraisal must be attached to your tax return. If an individual item is valued at $20,000 or more, you may also be required to provide a photograph of that item.

If you’re considering a donation of artwork or other collectibles, contact us for help ensuring you can maximize your tax deduction.

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How to begin collecting your 2015 tax refund now 08-02-2015

If you usually receive a large federal income tax refund, you’re essentially making an interest-free loan to the IRS. Rather than wait until you file your 2015 tax return in 2016, why not begin enjoying your “refund” now by reducing your withholdings or estimated tax payments for the remainder of 2015?

It’s particularly important to review your withholdings, and adjust them if necessary, when you experience a major life event, such as marriage, divorce, birth or adoption of a child, or a layoff suffered by you or your spouse.

If you’d like help determining what your withholding or estimated tax payments should be for the second half of the year, please contact us.

© 2015

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