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Retirement Account Catch-Up Contributions Can Add Up 11-16-2017

Are you age 50 or older? If so, you can currently make extra “catch-up” contributions to certain types of tax-favored retirement accounts. Over time, these contributions can make a significant difference in your retirement-age wealth.

What about tax reform? After President Trump and other lawmakers stated that they wouldn’t tinker with retirement plan contribution tax breaks, the U.S. Senate has proposed limits to catch-up contributions. These are just proposals. For now, the rules in this article are current law.

Unfortunately, many people are unaware of this retirement savings bonus. Here’s what you need to know to reap the benefits.

The Basics

Eligible taxpayers can make catch-up contributions to a traditional IRA or a Roth IRA. In addition, some employer-sponsored retirement plans allow participants to make catch-up contributions.

IRA catch-up contributions. Once you reach age 50, you can make extra catch-up contributions of up to $1,000 annually to your traditional IRA or Roth IRA. If you’ll be 50 or older as of December 31, 2017, you can still make a catch-up contribution for the 2017 tax year. You have until April 16, 2018, to make your contribution.

Tax-deductible contributions to traditional IRAs create tax savings, but your income may be too high to qualify. Contributions to Roth IRAs don’t generate any upfront tax savings, but you can take federal-income-tax-free withdrawals after age 59 1/2 (assuming you’ve had at least one Roth account open for over five years).

There are income restrictions on Roth contributions, too. Worst case, you can make extra nondeductible traditional IRA contributions and benefit from the account’s tax-deferred earnings advantage.

Catch-up contributions to employer-sponsored plans. If your employer’s retirement plan allows extra salary reduction contributions and you’ll be age 50 or older at the end of next year, you can contribute up to $6,000 in added savings for 2018 to your 401(k), 403(b) or 457 account.

Salary reduction contributions are subtracted from your taxable wages, so you effectively get a federal income tax deduction. If your state has a personal income tax, you’ll generally get a state income tax deduction, too.

You can use the resulting tax savings to help pay for part of your catch-up contributions. Or you can set the tax savings aside in a taxable retirement savings account to further increase your retirement-age wealth.

Having trouble deciding which tax-favored account to make extra contributions to? In a nutshell, making deductible catch-up contributions to a traditional IRA or to an employer-sponsored retirement plan will lower your tax bills. Contributing extra to a Roth IRA won’t lower your taxes, but you can take more tax-free withdrawals later in life.

Retirement Savings Bonus

How much extra could you accumulate just by making catch-up contributions? The extra savings quickly add up, because maximum catch-up contributions are considerably larger than they once were.

For example, the maximum catch-up contribution to a 401(k) account was only $1,000 in 2002 vs. $6,000 for 2018. The maximum catch-up contribution to an IRA was only $500 in 2002 vs. $1,000 for 2017 and 2018.

To illustrate how much catch-up contributions can add to a retirement nest egg, suppose Beth, who’s currently 50, decides to contribute an extra $1,000 to her IRA in 2017. She contributes an extra $1,000 each year through 2032. By age 65, Beth will have accumulated roughly $30,000 more in savings (assuming an 8% annual return).

Alternatively, let’s suppose that Beth decides to contribute an extra $6,000 to her 401(k) plan each year through age 65, starting in 2018. In that case, by age 65, she’ll accumulate roughly $182,000 in additional savings (assuming an 8% annual return).

To maximize your savings, you can make catch-up contributions to both your IRAs and employer-provided retirement plans in the same year. In the hypothetical example, Beth’s combined savings could add up to $212,000 by age 65 (assuming an 8% annual return), if she contributed to $1,000 extra to her IRA annually (starting in 2017) and $6,000 to her 401(k) annually (starting in 2018).

Deadlines

There’s still plenty of time to make an extra catch-up contribution of up to $1,000 to your IRA for the 2017 tax year. The 2017 IRA contribution deadline is April 16, 2018. Then you can make another IRA catch-up contribution for your 2018 tax year anytime between January 1, 2018, and April 15, 2019.

If you are an employee and your employer-sponsored qualified retirement plan allows catch-up contributions, you can sign up to make them for 2018 year during this year’s open enrollment period that is probably already underway at your job. Or your employer may allow you to modify your contributions any time during the year, which means you might still be able to do it for this year. Check with your benefits department to see what your options are.

Contact your tax advisor if you have questions or want more information about retirement account catch-up contributions.

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Open Enrollment: Sign Up for Tax-Smart Benefits Before the Deadline 11-13-2017

Have you signed up for employer-provided benefits for 2018? November is open enrollment season at most offices.

Benefits enrollment is a little trickier this year, because it’s uncertain how tax reform legislation that could be enacted soon will change the tax rules starting in 2018. Some employer-provided benefits might be repealed. But there are two open enrollment options that apparently won’t be on the chopping block.

1. Health Care FSAs

Under a health care flexible spending account (FSA) plan, you make an election near the end of this year to contribute a designated amount of next year’s salary to your health care FSA. The maximum amount you can contribute for next year is $2,650.

Contributions will be withheld in installments from your 2018 paychecks. You can use the FSA to reimburse yourself for uninsured medical expenses, such as:

Insurance deductibles and copayments,

Prescriptions, and

Dental and vision care costs.
The total amount withheld from your paychecks during the year is treated as a salary reduction for purposes of your federal income tax, Social Security tax, Medicare tax and state income tax (if applicable). Reimbursements from the FSA to cover qualified health care expenses are tax-free.

A healthcare FSA allows you to pay for all or a portion of next year’s out-of-pocket medical costs with pretax dollars. That’s the same as getting an income tax deduction — plus a reduction in your payroll tax withholding.

Those savings add up. For example, if you’re in the 25% federal income tax bracket next year, you could save up to $865 in federal income and payroll taxes by contributing the maximum $2,650 in 2018. People in higher brackets could save even more. And these savings are permanent — not just a timing difference.

Important note: Healthcare FSA plans will become particularly attractive for families with high medical costs if Congress passes tax reform legislation that would eliminate itemized deductions for medical expenses starting in 2018. Under current tax law, if you itemize deductions, you can deduct out-of-pocket medical expenses for you, your spouse and your dependents to the extent the expenses exceed 10% of adjusted gross income (AGI).

There is one downside to health care FSAs: If you don’t incur enough qualified expenses to drain your FSA each year, any leftover balance generally reverts to your employer. Thankfully, there are two helpful exceptions to the “use-it-or-lose-it” rule:

A 2 1/2-month grace period for unused FSA balances. If your company’s plan offers a grace period, you’ll have until March 15, 2019, to use up your 2018 contribution.

A carryover of unused health care FSA balances of up to $500. If your company’s plan includes a carryover provision, you can carry over up to $500 of any remaining balance on the books at the end of 2018. Then you can apply that amount to expenses incurred in 2019.
An employer can offer either the 2 1/2-month grace period or the $500 carryover, but not both deals. Management (not individual employees) decides whether to include an exception to the use-it-or-lose-it rule.

2. Retirement Plan Contributions

Does your company have a salary-reduction retirement savings plan? If so, open enrollment is a good time to review your contribution amount for 2018. The maximum salary reduction contribution to 401(k), 403(b) or 457 plans for next year is currently scheduled to be $18,500 — or $24,500 if you will be age 50 or older by the end of 2018.

Important note: These limits aren’t expected to change under the recently proposed tax reform legislation.

Although 401(k) contributions will reduce your monthly cash flow, your retirement nest egg will be increased. In addition, salary-reduction contributions will reduce your taxable salary for federal income tax purposes and possibly state income tax purposes (if applicable). However, withholding from your paychecks for Social Security and Medicare taxes will be unaffected.

Enroll Now

Be smart. All too often, employees procrastinate and fail to participate in employer-sponsored tax-saving arrangements. If you have questions or want more information contact your tax advisor.

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Give Back and Save Taxes with Charitable Contributions 10-31-2017

As year-end approaches, you may be thinking about making some charitable donations. Here’s a rundown of the potential tax breaks for your generosity.

Donating Clothing and Household Items

When it comes to your old clothes, furniture, linens, electronics, appliances, and the like, the general rule is that you can claim deductions only for items in “good condition or better.” However, you can deduct the fair market value of an item that’s not in good condition or better if you attach a written qualified appraisal that values the item at more than $500. For example, this rule might apply to a Persian rug that’s valuable despite being in only “fair” condition.

Itemized Deductions

You can claim write-offs for contributions of cash and other items donated to charitable organizations, such as United Way and Goodwill. What you might not realize is that not all contributions to charities qualify for tax breaks.

First, you receive tax savings from charitable donations only if you itemize deductions on your personal tax return. For 2017, the standard deduction amounts are:

    • $6,350 for singles,

 

    • $9,350 for heads of households, and

 

  • $12,700 for married joint-filers.

Unless your total itemized deductions, including any charitable donations, exceed the applicable standard deduction, you won’t get any tax savings for your generosity. In general, most people who don’t own homes don’t itemize.

Also, be aware that some not-for-profit organizations aren’t qualified charities for federal income tax purposes. You can search for IRS-approved charities on the IRS website or ask your tax advisor for help. And of course, you can’t deduct money or property you give to an individual.

In addition, there are limits on the amount of itemized charitable donations that you can deduct in any one year. For most types of donations, the limit is 50% of adjusted gross income (AGI). However, lower limits apply to certain types of donations.

Any amount of charitable contribution that’s disallowed under the applicable percent-of-AGI limitation is carried forward to the following five tax years. If you can’t use up the carryover amount during the five-year period, the remainder can’t be deducted.

Supporting Documentation

The tax rules also require proper documentation for charitable contribution deductions. The type of documentation depends on the size and nature of the donation.

Cash contribution under $250. These donations require a written receipt from the organization showing its name, the date and place of the contribution, and the amount. Alternatively, you can save canceled checks or credit card statements.

Cash contribution of $250 or moreThe IRS won’t accept canceled checks or other evidence supplied by you for these donations. Instead, you must obtain a written acknowledgment from the charity by the time you file your federal tax return. If you don’t get a written acknowledgment and you do get audited, the IRS will reject your deduction, even if there’s no doubt that your donations were legitimate.

Noncash donation under $250. Here, you’ll need to obtain a receipt from the charity by the time you file your return. Keep it with your tax records for the year, but don’t file it with your return.

Noncash donation worth between $250 and $5,000These donations require a contemporaneous written acknowledgment from the charity (more detailed than a receipt) that meets IRS guidelines. Keep it with your tax records, but don’t file it with your return.

A qualified acknowledgment must include the following information:

    • A description (but not the value) of the noncash item,

 

    • Whether the charity provided you with any goods or services in exchange for the donation (other than intangible religious benefits), and

 

  • A description and good-faith estimate of the value of any goods or services provided by the charity in exchange for your donation.

An acknowledgment meets the contemporaneous requirement if you obtain it on or before the earlier of 1) the date you file your Form 1040 for the year you made the donation, or 2) the due date (including any extension) for filing that return. If you don’t have a qualified acknowledgment in hand by the relevant date, you can’t claim a charitable deduction.

Noncash donation worth between $501 and $5,000. In addition to the aforementioned contemporaneous written acknowledgment from the charity, you’ll need to provide written evidence that supports the item’s acquisition date, fair market value and cost.

The written evidence — which may be as simple as your own handwritten notes — will be used to complete IRS Form 8283, “Noncash Charitable Contributions.” Keep the evidence with your tax records, but don’t file it with your return.

Noncash donation worth more than $5,000. In addition to a contemporaneous written acknowledgment and written evidence, these donations require a written qualified appraisal. Specific appraisal requirements apply to certain types of donated property and donations valued above certain amounts. However, no appraisal is required for donations of publicly traded securities.

Special restrictions apply to donations of vehicles, planes and boats. As a general rule, your charitable write-off will usually be limited to the amount the charity receives when it sells the vehicle, plane or boat (as opposed to the item’s fair market value).

Save Taxes by Donating

You can reap tax savings by making charitable donations, but the rules are complicated. Your tax advisor can help devise a plan that delivers the maximum tax savings for your generosity. Just don’t wait too long to get started: Year-end will be here before you know it.

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Last-Minute Reminders: Mortgage Interest & FBAR 04-14-2017

Update on Home Mortgage Interest Deductions

For 2016, the IRS Form 1098 – “Mortgage Interest Statement” – you received from your lender with information used to claim an itemized deduction for qualified residence interest should include additional information this year.

A qualified residence includes your principal residence and up to one additional personal residence. Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”

Acquisition debt is debt that is:

  • Incurred to acquire, construct, or substantially improve a qualified residence, and
  • Secured by a qualified residence

Home equity debt is debt (other than acquisition debt) that is:

  • secured by a qualified residence
  • used for any purpose
  • deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence

Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.

Additional information is required to be included in Form 1098 this year to allow the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt, as well as those taxpayers who attempt to claim mortgage interest deductions for more than two residences. That information is:

  • Mortgage origination date
  • Outstanding principal balance as of the beginning of the calendar year for which the Form 1098 is provided
  • Address of the property that secures the mortgage (or a description if the property doesn’t have an address)

Note: You also may raise a red flag if the amount of your qualified residence interest deduction differs from the combined mortgage interest reported on your Form(s) 1098. This sometimes legitimately happens if, for example, you have more than $1.1 million of combined acquisition debt or own more than two homes.

New FBAR Filing Deadline

If you have an interest in — or authority over — a foreign financial account, the IRS wants you to provide information about the account by filing a form called the “Report of Foreign Bank and Financial Accounts” (FBAR).

The annual deadline for filing FBARs has been changed. It now coincides with the tax filing deadlines for individuals, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. So, for accounts held in 2016, you must generally file FBARs by April 18, 2017. (Formerly, the deadline was June 30, excluding weekends and holidays.)

Important note: If you fail to meet the annual FBAR due date, the Financial Crimes Enforcement Network (FinCEN) will grant an automatic extension to October 15. Accordingly, specific requests for this extension aren’t required.

Reporting Requirements
FBARs are not filed with federal tax returns. Each year, citizens and resident aliens of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file an FBAR form electronically with the FinCEN if:

  1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts, and
  2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to certain foreign corporations, foreign partnerships, foreign disregarded entities, or transactions with foreign trusts and receipt of certain foreign gifts.

Exceptions to the Rules
FBAR filing exceptions are available for the following U.S. taxpayers or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses
  • United States persons included in a consolidated FBAR
  • Correspondent/nostro accounts
  • Foreign financial accounts owned by a governmental entity
  • Foreign financial accounts owned by an international financial institution
  • IRA owners and beneficiaries
  • Participants in and beneficiaries of tax-qualified retirement plans
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
  • Foreign financial accounts maintained on a United States military banking facility
  • Important note: Filers living abroad may coordinate FBAR filing with their tax return deadline (June 15, 2017)

Penalties for Noncompliance
Take the FBAR requirement seriously. Failing to file an FBAR can result in the following penalties if assessed after August 1, 2016, and associated violations occurred after November 2, 2015:

  • An inflation-adjusted civil penalty of as much as $12,459 per violation, if the failure wasn’t willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of: 1) 50% of the account, or 2) $124,588 per violation, if the failure to report was willful.
  • Criminal penalties and time in prison.

For Assistance

Consult with a tax professional if you have questions about any of this. Your tax advisor can ensure you meet the requirements for reporting mortgage interest and foreign accounts and help avoid penalties for noncompliance.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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4 Big Questions to Answer Before Claiming Higher Education Tax Credits 04-06-2017

The Internal Revenue Code offers two federal income tax credits for post-secondary education expenses: the American Opportunity tax credit, and the Lifetime Learning credit.  While these credits aren’t new, there are several recent developments that might affect your 2016 federal income tax return. Here are four questions you need to answer to help preserve and maximize your credits.

1. Did the School Require You to Purchase That Computer?

The U.S. Tax Court recently decided that the cost of a computer isn’t eligible for the American Opportunity credit unless the school specifically requires the student to have one. In this case, the taxpayer bought a computer for his college English class to prepare a paper while he was traveling. According to the Tax Court, the cost of the computer wasn’t a qualifying expenditure for the American Opportunity credit, because having a computer wasn’t a condition of the student’s enrollment. (Djamal Mameri v. Commissioner, T.C. Summary Opinion 2016-47)

2. When Did You Actually Pay Your Tuition?

In another recent Tax Court decision, the taxpayer was a student at Arizona State University. In December 2011, the taxpayer prepaid his tuition for the spring semester of 2012. The tuition bill wasn’t actually due until January 2012. The taxpayer then claimed a $2,500 American Opportunity credit on his 2012 federal income tax return, based on the tuition for the 2012 spring semester. (Lucas McCarville v. Commissioner, T.C. Summary Opinion 2016-14)

The IRS disallowed the taxpayer’s credit for 2012, citing tax code provisions that stipulate that tuition payments made in the current year (2011 in this case) for educational sessions that begin in the first three months of the following year (2012 in this case) are eligible for the American Opportunity credit only in the current year (the year of payment, which was 2011 in this case).

The taxpayer had already claimed the maximum $2,500 American Opportunity credit on his 2011 return. So he was attempting to include the payment for the spring 2012 semester tuition (paid in 2011) on his 2012 return in order to claim a $2,500 American Opportunity credit for that year. The Tax Court agreed with the IRS, requiring credits to be claimed in the year in which a bill is paid, regardless of when it’s due.

3. Did You Check Your Math?

Tax law requires post-secondary educational institutions to supply annual Form 1098-T, Tuition Statement, to taxpayers and the IRS. Taxpayers are supposed to use the amount of qualified tuition and related fees reported on these forms to calculate their allowable education credits. In turn, the IRS can use the same information to see if taxpayers got it right. But this common-sense provision won’t work the way it is supposed to anytime soon. As a result, there will be ongoing confusion about tuition and fee information reported on Form 1098-T.

For pre-2016 years, Form 1098-T issued by educational institutions could report either:

  • Payments received by the institution during the year for qualified tuition and related fees, or
  • Amounts billed by the institution during the year for qualified tuition and related fees.

Many institutions chose to report amounts billed, because that information was more easily retrieved from their accounting systems. However, the amount billed during the year isn’t what a taxpayer needs to know to calculate the allowable credit for that year. Instead, taxpayers need to know the amount paid during the year. Therefore, the information reported on Form 1098-T can be misleading to both taxpayers who claim education credits and to the IRS when reviewing the credits.

Congress attempted to correct this situation, but the IRS gave institutions the option to continue reporting amounts billed during the year on Form 1098-T issued for both 2016 and 2017.

Therefore, Form 1098-T issued for both 2016 and 2017 can report either:

  • The total amount billed by the institution during the year for qualified tuition and related fees, or
  • The total amount paid to the institution during the year.

Taxpayers must base their education credit calculations on amounts paid during the year, but Form 1098-T for 2016 and 2017 may not supply that information. As a result, reconciling credit amounts claimed on tax returns with tuition and fee amounts reported on Form 1098-T will continue to be problematic for many taxpayers.

4. Do You Have ID Numbers?

Fraudulent claims for higher education tax credits have become common, so Congress enacted two anti-fraud controls that apply to 2016 returns:

  1. You can’t claim the American Opportunity credit for a student who doesn’t have a federal tax identity number (TIN) issued on or before the due date of the return for that year. For a U.S. citizen, the TIN is his or her Social Security number (SSN). Non Citizens can obtain TINs that aren’t SSNs.
  2. When you file your tax return, you must include the educational institution’s employer identification number (EIN) on Form 8863, Education Credits, for each student for whom you claim the American Opportunity or Lifetime Learning credit.

Need Help?

College is expensive. Why not let Uncle Sam help make it more affordable via higher education tax credits? Contact us about navigating the rules to ensure you maximize the credits that are currently available under the tax law.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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2017 Q2 tax calendar: Key deadlines for businesses and other employers 04-02-2017

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

© 2017

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2016 Tax Breaks For Seniors 03-30-2017

Are you an “experienced” taxpayer? Here are a couple of age-based tax breaks you shouldn’t overlook when filing 2016 returns.

Claim Your Medical Expense Deductions

If you’re 65 years of age or older, you may have fallen into the habit of automatically claiming the standard deduction instead of itemizing your deductions. But the standard deduction isn’t always the better option for seniors with significant medical expenses.For 2016, many seniors will easily clear the hurdle of minimum costs if they include all of their medical expenses. If you paid Medicare insurance premiums or had other significant health care costs in 2016, itemizing deductions (including medical expense deductions) could result in a lower federal income tax bill.

When adding up your expenses, remember to count premiums for Medicare insurance. Specifically, premiums for Medicare Parts A, B, C, and D, as well as for Medigap coverage, qualify as health insurance premiums for purposes of the itemized deduction for medical expenses (See “Understanding Medicare Insurance Deductions” below).

Premiums for qualified long-term care (LTC) insurance also count as medical expenses for itemized deduction purposes, subject to the following age-based limits for 2016:

Age as of Dec. 31 Maximum LTC
Premium Per Person
61 to 70 $3,900
Over 70 $4,870


Beyond insurance premiums, add any out-of-pocket medical costs, such as 
insurance copayments and dental and vision care deductibles.

Once you’ve evaluated whether your medical expenses exceed the AGI threshold, consider other categories of expenses that can be itemized, including:

  • State and local income taxes (or state and local general sales taxes if you choose to claim them instead)
  • State and local property taxes
  • Qualified residence interest on a first or second home
  • Charitable donations

You should itemize if the total of your itemizable expenses exceeds your 2016 standard deduction amount of:

Filing Status Under 65 on Dec. 31 65 or Older on Dec. 31
Single $6,300 $7,850
Married, filing jointly $12,600

$13,850, if one spouse is at least 65

$15,100, if both spouses are 65 or older

Head of household $9,300 $10,850


Make Retirement Account Catch-Up Contributions

If you’re 50 or older, you can make extra catch-up contributions each year to certain types of tax-favored retirement accounts.

Important note: If you were 50 or older as of December 31, 2016, you have until April 18, 2017, to make a catch-up contribution for the 2016 tax year.

Which retirement accounts qualify for catch-up contributions?

Traditional IRAs
Deductible contributions to traditional IRAs can create tax savings, but many seniors have too much income to qualify for a deduction. If you don’t qualify for deductible IRA contributions,
you can always make nondeductible contributions and thereby benefit from the traditional IRA’s tax-deferred earnings advantage. The maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Roth IRAs
Contributions to Roth IRAs don’t generate any up-front tax savings, but — assuming you’ve had at least one Roth IRA open for over five years — you can take tax-free withdrawals from Roth IRAs after age 59½. There are also income restrictions on Roth contributions. Again, the maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Employer-Sponsored Qualified Retirement Accounts
Some company retirement plans also allow employees to make catch-up contributions. If permitted under your plan, you can make extra salary-reduction contributions of up to $6,000 to your 401(k), 403(b), or 457 account, starting the year you turn 50.

You can use the resulting tax savings to help pay for part of your catch-up contributions — or you can set the tax savings aside in a taxable account to further increase your retirement-age wealth.

Important note: It’s too late to make a catch-up contribution to your company plan for the 2016 tax year if you’re still working. In addition, you can’t make regular (or catch-up) contributions to a traditional IRA beginning in the year you reach 70 1/2. However, you can still contribute to a Roth IRA if you have earned income (and make rollover contributions to a Roth or traditional IRA) regardless of age.  Even relatively modest catch-up contributions can accumulate into a large sum over time.

As an added bonus, making larger deductible contributions to a traditional IRA can lower your annual tax bills (additional Roth IRA contributions won’t lower your annual tax bills, but you’ll be able to take more tax-free withdrawals later in life).

The incremental savings can be even greater if your company’s retirement plan allows catch-up contributions. For example, if you turn 50 in 2016 and contribute an extra $6,000 to your company plan for each of the next 15 years, you’ll accumulate about $131,000 by the time you turn 65, assuming a modest 4% annual return. Plus, contributions to employer-sponsored plans are deductible, which lowers your annual tax bills.

Contact Your Tax Advisor

Seniors may be eligible for some special tax breaks that aren’t available to younger people. Before filing your 2016 tax return, contact your tax advisor to make sure you take advantage of any special breaks that may be available.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

 

Addendum: Understanding Medicare Insurance Deductions

Don’t forget to include all Medicare and supplemental insurance costs when totaling up your medical expenses for 2016. Here are descriptions of the major types of Medicare coverage:

Medicare Part A: Hospital insurance coverage. Most eligible individuals are automatically covered for Part A without paying any premiums, because the premiums are considered paid from Medicare taxes on wages while you or your spouse was working. However, if you didn’t pay Medicare taxes while you worked and you’re not eligible for free coverage, you could have paid a monthly premium of up to $411 for 2016, depending on your income.

Medicare Part B: Medical insurance coverage. Even if you don’t qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. This insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. It doesn’t cover other medical expenses, such as routine physical exams or medications.

For 2016, you probably paid the standard monthly premium of $104.90 ($1,259 per covered person for the year). Higher-income individuals paid more — up to a monthly maximum of $389.80 for 2016 (up to $4,678 per covered person).

Medicare Part C: Private Medicare Advantage health plan coverage. This coverage is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don’t need Medigap coverage (below).

Medicare Part D: Private prescription drug coverage. Premiums for this coverage vary depending on the plan. People with higher income levels pay a surcharge called the “adjustment amount” in addition to the basic premiums. For 2016, the adjustment amount could have been up to $69.10 per month (up to $829 per covered person).

Medigap insurance. This is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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Self-Employed Individuals and Small Businesses Can Still Set Up Retirement Plans for 2016 03-23-2017

(SEPs) If you don’t already have a tax-favored retirement plan set up for your business, consider establishing a Simplified Employee Pensions (SEP). SEPs are stripped-down retirement plans intended for self-employed individuals and small businesses. Plus, if you act quickly enough, you can claim a deduction for your initial contribution on your 2016 tax return.

Putting SEPs to Work for You

Because SEPs are relatively easy to set up and can allow large annual deductible contributions, they’re often the preferred retirement plan option for self-employed individuals and small business owners — unless they have employees (See “Beware of Requirements to Cover Employees” section below).

The term “self-employed” generally refers to:

  • A sole proprietor
  • A member (owner) of a single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes
  • A member of a multimember LLC that’s treated as a partnership for tax purposes
  • A partner

If you’re in one of these categories, your annual deductible SEP contributions can be up to 20% of your self-employment income. For a sole proprietor or single-member LLC owner, self-employment income for purposes of calculating annual deductible SEP contributions equals the net profit shown on their Schedule C, less 50% of self-employment tax. For a member of a multi-member LLC or a partner, self-employment income equals the amount reported on their Schedule K-1, less 50% of self-employment tax claimed on their personal income tax return.

If you’re an employee of your own corporation, it can establish a SEP and make an annual deductible contribution of up to 25% of your salary. The contribution is a tax-free fringe benefit and is, therefore, excluded from your taxable income.

For 2016, the maximum contribution to a SEP account is $53,000. For 2017, the maximum contribution is $54,000. However, there’s no requirement to contribute anything for a particular year. So when cash is tight, a small amount can be contributed or nothing at all.

As with most other tax-advantaged retirement plans, assets in a SEP can grow tax-deferred, so there’s no tax liability until withdrawals are made. Early withdrawals (before age 59½) are generally subject to a 10% penalty, in addition to income tax, and certain minimum distributions are generally required beginning after age 70½.

Setting Up Your Plan

A SEP is fairly simple to set up, especially for a one-person business. Your advisors can help you complete the required paperwork in just a few minutes. A key benefit of SEPs is that you can establish your plan as late as the extended due date of the return for the year in which you claim a deduction for your initial SEP contribution.

For example, say your business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes. If you establish a SEP and make your initial SEP contribution by April 18, 2017 — the deadline for filing your 2016 federal income tax return — you can deduct the contribution on your 2016 tax return.

Important note: If you extend your 2016 return, you have until October 16, 2017, to set up the plan and make a deductible 2016 contribution.

Beware of Requirements to Cover Employees

Establishing a SEP is more complicated if your business has employees. Specifically, contributions may be required for any employee who:

  1. Is age 21 or older
  2. Has worked for your business during at least three of the past five years, and
  3. Receives at least $600 of compensation.

Your business can deduct any contributions made for employees. Because SEP contributions made for employees vest immediately, a covered employee can leave your company at any time without losing any of his or her SEP money. For this reason, SEPs generally aren’t preferred by businesses with more than a few trusted employees.

Need Help?

SEPs can be a smart way for many small businesses to save tax. You still have time to retroactively set up a SEP for the 2016 tax year and make a contribution that can be deducted on your 2016 return. If you have questions or want more information about SEPs and other small-business retirement plan options, contact your tax or financial advisor.

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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Deduct all of the mileage you’re entitled to — but not more 03-09-2017

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.  Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

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Do you need to file a 2016 gift tax return by April 18? 02-15-2017

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com to learn more.

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