December 2016 – January 2017 – TAX TIPS
Dear Taxpayers, Clients & Friends:
With another tax filing season quickly approaching, we want to inform you of some key tax tips that will affect you this season. As your tax experts and advisors, our mission statement is to “Minimize your Federal and State Taxes and Maximize your Wealth”. We do this by keeping you proactively informed of current tax events that will meet our mission statement. We don’t have any last minute tax-law changes this year, but recommend you review our 2016/2017 tax filing tax tips for changes.
Due to the Government passing PATH-Protecting Americans from Tax Hikes Act approved as of 12.18.15, e-filing of your tax returns will be delayed until January 19, 2017 and some refunds will be delayed until February 15, 2017.
The final date to file a personal tax return is Tuesday April 18, 2017, rather than the traditional April 15 due date, which is on the weekend. Washington DC also will celebrate Emancipation Day on that Monday, which pushes the deadline to the following Tuesday. We also don’t have a final approvals of the tax extension/changes, but we will keep you posted.
Personal/Business Tax Changes include 2016/2017:
1) Personal or dependent exemptions are the same of $4,050;
2) Standard deduction is $12,600/$12,800 for married couples filing
joint or qualifying widows or widowers, $6,300/$6,400 for single or MFS, & an
additonal $1,300 for married or $1,650 if you are blind or older than
3) The income tax brackets have remained the same at 0, 10, 15 25, 28, 33, 35 &
39.6 percent, but these rates have $ limit that will change due to indexing.
Capital gain is 0% if you are in the 10% or 15% tax bracket, 15% if
you are in 25%, 28%, 33% or 35% tax brackets and 20% if you are in
the 39.6% tax bracket;
4) The Estate and Trust tax rates now range from 15% to 39.6% on
taxable income, but you do have gross estate/trust tax exemptions
of over $5.4 million;
5) Corporate Tax rate will also range from 0% to 38% on taxable
6) Death/Gift tax rates range from 0 to 40% beginning in 2015/2016. The
annual gift tax exclusion is $14K for individual and $28K for married
couples. The annual gift tax exemption is the same at the Estate
tax exemption of $5.43M/$5.45M;
7) Your Employer 401K or 403b retirement limits is $18K/$18.5K
and you can add another $5,500 for anyone who is 50 or older;
For self employed business owners, you have nice self-employed
401K, 403 or 457 plans which are limited at 25% of your compensation or
20% of profit up to maximum of $52K per year. However, they all
have a catch-up amount of $5.5K that can be added if you are 50 or
9) The Simple & SEP plans also have been increased. Please check with us if you
have interest in these plans and we will help determine your limit;
10) Your plan must be in place by the end of the year, but you don’t
need to fund your 2016 deduction until your filing deadline in the
spring of 2017. You can also combine an employee and employer
plan to minimize your taxes and maximize your wealth!
The following tax deductions were made permanent with the approved budget bill, which was signed last year.
1) Teacher out of pocket expenses, up to $250;
2) The ability to deduct either general sales tax or state income tax
As an itemized deduction;
3) The ability to treat mortgage insurance premiums as interest
expense on Schedule A, itemized deductions;
4) The ability for those 70 1/2 or older to make up to $100,000 in
charitable contributions directly from your IRA accounts;
5) Cancellation of income for certain home indebtedness forgiveness.
Provisions of the new PATH Law that impacts our small business partners through 2016/2017:
1) The 50% Bonus Depreciation was extended thru the end of 2016 and you
may want to wait on capital expenditures as a benefit unless you have a need;
2) Section 179 expense limits continue to be a good deduction for you on your 2016 and 2017 returns.
The limit is now $500,000, up from $139,000 per year, with a $2
million investment limit.
3) Many of the business general credits were extended as well. They
include Research Tax Credit and the Work Opportunity Credits for
Please think about a review of your recordkeeping practices and an update of your business plan for the new year. These are tools to help you with key information to adjusting your rates of services, cutting expenses or raising money that will help you expand your business in 2016/2017. You also need to think about maintaining good inventory controls and do those important year end physical inventory counts for proper tax planning.
Claim American Opportunity/Education Deduction deduction/Credits: This $2,500 credit was extended through 2017 with the passing in the new law. The credit can be claimed for the first four years of college and the credit/deduction is for the first $4,000 of tuition, less grants; plus direct books and supplies (including a lap top computer) of paid. Your payment can also include your student loan payment directly to the school. You can pay your tuition ahead to get the benefit, but keep in mind the limits above. We also recommend that we do some tax planning together regarding a State 529 college program, where you can deduct from state taxes $8K for each child.
Standard Miles Rates:
As mentioned your business standard miles rate for 2016 is 54.0 cents per miles. Beginning on Jan. 1, 2017, the standard mileage rates for the business, medical or charitable use of a car, vans, pickups or panel trucks will be:
The expected Rates for 1/1 through 12/31/17 are;
Business 54/mile; Medical/Moving 19 mile/ Charitable 14 cents per mile
As mentioned above, the provision for any taxpayers who is over 70 1/2 and wants to make a charitable contribution directly from an IRA has been extended. It is an excellent tax tip since this provision allows the donation withdrawn from the IRA to not be claimed as income and then deducted as a donation. As we know, please keep good documentation with each transaction.
You should also clean out your closet and take the unused good clothes, toys, other things to your charity of choice. Please keep in mind that donations of cash or non cash items to Idaho education programs will get you extra credits up to $1K off your State tax income tax (but not below zero). You also can earn a credit of $100 to $200 credit if you give non-cash items to Idaho Youth Ranch or the ARC programs(local area). I recommend you take a picture of items given, complete an itemized list and ask for a receipt from the business to support your donation(s). The law required the above information for any donations greater than $250.
As you may recall, beginning with the 2011 tax year, brokers must report an asset’s basis, the value that is used to determine profit when you sell, to the IRS. That amount will show up on the 1099 forms you again will receive in 2017 for 2016 stock transactions. You might have heard of this new requirement when your investment managers asked which type of basis reporting you preferred they use. Generally, brokers must report the sale of securities on a first-in, first-out basis unless the customer specifically identifies which securities are to be sold. They have expanded the new 8926 form and we will need more detail. We also expect you may received additonal investment statements again this year since some client wanted to take advantages of the lower capital gain rates in 2016 and sold at the end of the year. The capital gain tax rate has gone up in 2015 and we should review your investment for the upcoming year.
Investments: Capital Gains: Along with higher ordinary income tax rates, there’s a possibility of higher tax rates on investment income next year. Through 2016, the top federal capital gains tax rate is 20 percent for most taxpayers in the 39.6 bracket, and no tax is due from investors in the 10 percent and 15 percent tax brackets. The tax brackets of 25, 28, 33 & 35 percent will have a flat rate of 15% on their capital gains. We know the capital gains taxes are going stay at these rates in 2016/2017. The tax rates above also apply to qualified dividends as well.
Medical Expenses: This has long been one of the least useful deductions in the tax code unless a taxpayer is seriously ill or in a nursing home because the taxpayer must spend more than 10% if you are under 65 and 7.5% of adjusted gross income if you are older to claim any deduction. We also have the new Affordable Care Act (ACA) that is effective 1/1/2014. If you don’t have insurance in 2016, you may owe a penalty tax on your 2016 tax return of 695 per person or 2.5% of income.
You can deduct all un-reimbursed medical expenses recognized by the IRS. This category includes after-tax dollars spent on insurance premiums, Medicare Part B, D premiums, co-payments for drugs and treatments. It also extends to costs that insurance almost never covers—such as weight-loss plans (if prescribed for a medical condition), lead abatement, bandages, wigs after chemotherapy, acupuncture, and medical travel. But it typically does not cover expenses for over-the-counter drugs such as aspirin or antihistamines.
We recommend you have a Health Saving Account (HSA) or a State MSA which can be withheld from your payroll check as deferred deduction. Please keep in mind that FSA plans must be used by year end or you lose the balance. However, an HSA plan can be kept year after year and you will never lose your balance.
Residential Energy Efficient Property Credit:
The credit is 10% of $5,000 of energy-efficient property such as doors, windows, insulation, water heaters, and central air units. So if you’re considering energy-efficient improvements to your home, 2016/2017 is the year to have that done. Individuals are also allowed a credit for expenditures for qualified solar electric property, qualified solar water heating property, and qualified fuel cell property. These credits have been extended through 2016.
Gift & Estate Plans: Giving to charity can help reduce an annual tax bill, but if you have a large estate, gifts also are important estate tax tools. Thanks to the resurrection of the estate tax in last several years, the unified gift tax also returned. This means you can give away $5.43 or $5.45 million during your lifetime without having to pay gift tax or estate tax. There’s also an annual amount to note in giving away your estate’s assets while you’re still around to give thanks. In 2016, you can give up to $14,500 each to as many individuals as you wish without any tax costs to you or your gift recipients.
Alternative Minimum Tax (AMT):
As we know, the regular tax law excludes certain kinds of income and provides deductions and credits for certain expenses. Enacted by Congress in 1969, the alternative minimum tax (AMT) attempts to ensure that individuals and corporations that benefit from certain exclusions, deductions, or credits pay at least a minimum amount of tax. The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax. After many of patching the tax, the AMT tax is now permanent and adjusts for inflation. The exemption amount is $52,800 single and $82,100 for married couples filing jointly.
State of Idaho changes:
Effective January 1, 2014 Investment tax credit clarified. The investment tax credit isn’t allowed for investments in property for which a deduction has been allowed under section 168(k) or section 179 of the Internal Revenue Code in arriving at Idaho taxable income. The previous law didn’t allow the credit if the deductions had been claimed in arriving at taxable income, which by definition is federal taxable income.
Idaho Education Credit:
Please be reminded the Idaho credit has increased/extended for some charitable contributions. For individual taxpayers, the tax credit is limited to 50% of the taxpayer’s total Idaho income tax liability, and the maximum annual credit increases to $500 ($1,000 on a joint return). For corporate taxpayers, the maximum annual credit increases to $5,000. Donations that qualify are limited to monetary donations minus the value of any benefits received. The new provisions (except for the change to allow only monetary donations) will expire in five years.
The tax credit increase applies to donations to the following Idaho organizations:
Public and nonprofit private K-12 schools and universities
Idaho Public Broadcasting
Idaho State Historical Society
Idaho libraries and museums
Idaho Commission of Hispanic Affairs
Idaho Commission for the Blind and Visually Impaired
Idaho Council on Developmental Disabilities
Idaho State Independent Living Council
Idaho Council for the Deaf and Hard of Hearing
Here are some of the 2017 estimated tax changes coming to you as of 01/01/2017: The OASDI limit is $119,000 for 2016 and 120,000 for 2017. The Medicare maximum has no limit. The additonal .9% Medicare Tax applies to individuals with wages or self employed income in excess of $200,000 for singles and $250,000 for married.
We recommend you review your paycheck and plan for less pay. It is also a good plan to review and file a new W-4 with your employer if you expect to owe more than $1,000 in federal taxes. We are glad to review that process when we complete your taxes this year.
The 2016 Standard mileage rates for the use of your car or vans, pickups or panel trucks for business, medical or charitable support have went down to:
• 54 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 13 cents per mile driven in service of charitable organizations
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used.
As mentioned above, beginning in tax year 2014, new tax brackets have been set from rates of 0 to 39.6 percent has been added for individuals whose income exceeds $250,000 or $450,000 for married taxpayers filing a joint return. The guidance contains the taxable income thresholds for each of the marginal rates, which are adjusted for inflation. For example, married-filing-jointly couples reach a 25% tax bracket when their taxable income reaches $74,900 to $151,200 and the 28% rate starts at $151,200 to $230,450. For single filers, the 25% tax bracket will start at $37,450 and increases to 28% when your taxable income reaches $90,750.
You are also going to pay higher tax on investments. In 2016/2017, on the new 3.8 percent Medicare tax is slated for collection on profits from the sale of investment property. This includes capital gains, dividends, interest payments and, for those who own rental property, net rental income. The tax will apply to single/HH individuals with a gross income of $200K or more and married couples filing jointly/QW with a combined gross income of $250K or more or $125K for MFS. If you’re in the targeted income brackets, talk with us about steps you can take this year to prepare for the new tax.
Retirement-plan contribution limits rise. The IRS has stated the cost-of-living adjustments will push your 401(k) or 403(B) and 457 plans and the government’s Thrift Savings Plan will jump to $18,500 in 2015 and the catch-up contribution limit for those 50 and older will be $5,500. The income phase-out for those who contribute to a Roth IRA also will rise. For married-filing-jointly couples, the phase-out range is $173,000 to $183,000, up from $169,000 to $179,000. For singles and heads of household, the range will be $110,000 to $125,000, up from $107,000 to $122,000. If you have a business and wish to setup an SEP retirement plan, please contact us for assistance.
Personal and dependent exemption will be $4,050 and $4,050 in 2016/2017, but the new law put in a phase-out with this deduction beginning with Adjusted Gross Income (AGI) of 250,000 through $372,500 for singles and $300,000 through $422,500 for couples in 2015 and AGI over $254,200 for singles & $305,050 for married-filing-jointly.
Standard deduction: for married-filing-jointly couples will be $12,600 in 2015 and $12,800 in 2016 for couples who file married-filing-jointly and $6,300 in 2016 and $6,400 in 2016 for single individuals. About two out of three taxpayers claim the standard deduction, but we will examine if standard or itemized deduction is best for you. Congress also added a limitation on any itemized deductions claimed on 2016 returns with individual income of $250,000 or more or $300,000 for married couples filing jointly. The 2016 limits are the same at the personal exemption phase out above.
Earned income tax credit or EITC for 2016/2017 will range from max credit $ of $3,305/$3,373 for on child, $5,460/$5,572 for two children, $6,43/$6,269 for three and $496/$506 with no children. The Child Credit applies to your child that is younger than 17th.
Both these credits, along with the Education credits will hold up any refunds until February 15, 2017. We can prepare and file, but you will not get any refunds until after the date above.
In 2016 the final credit varies by family size and earned income factors such as: No Children: Income Less than $14,900 for single; $21,000 MFJ; One Child $39,000 for single; $44,000 MFJ; Two Children $44,000 for single; $50,000 MFJ; Three or more kids: $47,000 for single; $53,000 for MFJ. The credit amount is available to earning income single/family with no or qualifying children.
Estate tax exclusion will rise to $5.43/$5.45 million in 2015/2016 and the annual gift tax exclusion will stay the same at $14,000.
I have provided you only a sampling of some of the most important 2015 & 2016 year tax law changes. As your professional tax preparer, I am an expert on these complicated areas of taxes and will work with you and others to make sure that you receive all the tax deduction and credits that are eligible to you.
If you would like more information about these changes, or any other aspects of the new laws, please contact our team at 208-938-0701 for an appointment. We will keep you posted with additional information when the budget bill is single this month.
David W. Hockman, BA, EA, PA
Sr.Accountant, Sr. Tax Specialist, Sr. Business Manager
D. W. Hockman Financial Services LLC
Office 208-938-0701, Cell 208-891-7214
DWHFS Clients Notice/Newsletter
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