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11/16/2017

McRuer CPAs 2017 Year-End Tax Guide

The 2017 calendar year is wrapping up quickly. While many of us have our eyes on the holiday season, this is the time to review your personal and business financial goals. Think of it as a  “checkup” to make certain you make the most effective, tax-savvy financial moves to end this year fiscally healthy.

"Timely financial planning is one of the best gifts you can give yourself as it will affect you and/or your business for years to come."

Even with significant tax reform expected for the 2018 tax season, we are still working under the federal and state tax laws that are on the books for 2017 taxes. We have compiled a quick tax tip guide to review some of the financial topics that we have determined to be the most important and relevant tax issues for most taxpayers for year-end review.

Click now to download the 2017 McRuer CPAs Year-End Tax Tips Guide.

Each individual and business is unique, so consider discussing your options with a professional in time to make any tax-saving moves that may help your particular needs. Please contact us if you have any questions or would like to schedule a year-end tax planning session with a McRuer CPAs Tax Planning Team Member.  If you are already a McRuer CPAs client, the year-end planning session is free.  Call us at: 816.741.7882.

11/03/2017

Details of House Tax Reform Bill

As you may know the House Ways and Means Committee has released the Tax Cut and Jobs Act (H.R. 1) providing some new tax reform provisions while incorporating many of the details included in the Republican-backed tax reform package submitted in September. There are a number of tax issues that may affect you, should they be approved following the budget debate process in Washington. Those details include changes, updates and protections for various business and individual tax rates, deductions and retirement plan contributions.

Tax-Reform with flagThe Journal of Accountancy has published an article with a review of the provisions of the new tax proposal draft (as submitted before debate and possible amendments) that offers a review of many of the details that we hope will be informative and helpful to you as you begin thinking of year-end tax planning.

 Note: his article has been published by the Journal of Accountancy, a professional’s resource for information regarding accounting and taxation issues.  It is the primary publication, as edited and released by the Association of International Certified Professional Accountants. It is one of many resources we use at McRuer CPAs to keep us informed about issues that affect the businesses and individuals we serve.  This particular news information article regards the consideration of a legislative proposal. Such initial legislation is subjected to debate and amendments. Therefore, this first review of the tax reform legislation draft is to be considered as a preliminary summary and first look at the new tax reform proposal and may not be the actual legislation approved by lawmakers over time.

For a look at the actual bill itself, noting that the language will likely be edited in several ways before passing, click here.

Details of Tax Reform Legislation Revealed

By Sally Schreiber, J.D.; Paul Bonner; and Alistair Nevius, J.D.

The House Ways and Means Committee released draft tax reform legislation on Thursday. The Tax Cuts and Jobs Act, H.R. 1, incorporates many of the provisions listed in the Republicans’ September tax reform framework while providing new details. Budget legislation passed in October would allow for the tax reform bill to cut federal government revenue by up to $1.5 trillion over the next 10 years and still be enacted under the Senate’s budget reconciliation rules, which would require only 51 votes in the Senate for passage. The Joint Committee on Taxation issued an estimate of the revenue effects of the bill on Thursday showing a net total revenue loss of $1.487 trillion over 10 years.

The bill features new tax rates, a lower limit on the deductibility of home mortgage interest, the repeal of most deductions for individuals, and full expensing of depreciable assets by businesses, among its many provisions.

Lawmakers had reportedly been discussing lowering the contribution limits for Sec. 401(k) plans, but the bill does not include any changes to those limits.

The Senate Finance Committee is reportedly working on its own version of tax reform legislation, which is expected to be unveiled next week. It is unclear how much that bill will differ from the House bill released on Thursday.

Individuals

Tax rates: The bill would impose four tax rates on individuals: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The current rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 25% bracket would start at $45,000 of taxable income for single taxpayers and at $90,000 for married taxpayers filing jointly.

The 35% bracket would start at $200,000 of taxable income for single taxpayers and at $260,000 for married taxpayers filing jointly. And the 39.6% bracket would apply to taxable income over $500,000 for single taxpayers and $1 million for joint filers.

Standard deduction and personal exemption: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019. However, the personal exemption would be eliminated.

Deductions: Most deductions would be repealed, including the medical expense deduction, the alimony deduction, and the casualty loss deduction (except for personal casualty losses associated with special disaster relief legislation). The deduction for tax preparation fees would also be eliminated.

However, the deductions for charitable contributions and for mortgage interest would be retained. The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on deductibility would be reduced to $500,000 of acquisition indebtedness from the current $1.1 million. The overall limitation of itemized deductions would also be repealed.

Some rules for charitable contributions would change for tax years beginning after 2017. Among those changes, the current 50% limitation would be increased to 60%.

The deduction for state and local income or sales taxes would be eliminated, except that income or sales taxes paid in carrying out a trade or business or producing income would still be deductible. State and local real property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

Credits: Various credits would also be repealed by the bill, including the adoption tax credit, the credit for the elderly and the totally and permanently disabled, the credit associated with mortgage credit certificates, and the credit for plug-in electric vehicles.

The child tax credit would be increased from $1,000 to $1,600, and a $300 credit would be allowed for nonchild dependents. A new “family flexibility” credit of $300 would be allowed for other dependents. The $300 credit for nonchild dependents and the family flexibility credit would expire after 2022.

The American opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017. Contributions to Coverdell education savings accounts (except rollover contributions) would be prohibited after 2017, but taxpayers would be allowed to roll over money in their Coverdell ESAs into a Sec. 529 plan.

The bill would also repeal the deduction for interest on education loans and the deduction for qualified tuition and related expenses, as well as the exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs.

Other taxes: The bill would repeal the alternative minimum tax (AMT).

The estate tax would be repealed after 2023 (with the step-up in basis for inherited property retained). In the meantime, the estate tax exclusion amount would double (currently it is $5,490,000, indexed for inflation). The top gift tax rate would be lowered to 35%.

Passthrough income: A portion of net income distributions from passthrough entities would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates, effective for tax years after 2017. The bill includes provisions to prevent individuals from converting wage income into passthrough distributions. Passive activity income would always be eligible for the 25% rate.

For income from nonpassive business activities (including wages), owners and shareholders generally could elect to treat 30% of the income as eligible for the 25% rate; the other 70% would be taxed at ordinary income rates. Alternatively, owners and shareholders could apply a facts-and-circumstances formula.

However, for specified service activities, the applicable percentage that would be eligible for the 25% rate would be zero. These activities are those defined in Sec. 1202(e)(3)(A) (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees), including investing, trading, or dealing in securities, partnership interests, or commodities.

Business provisions

A flat corporate rate: The bill would replace the current four-tier schedule of corporate rates (15%, 25%, 34%, and 35%, with a $75,001 threshold for the 34% rate) with a flat 20% rate (25% for personal services corporations). The corporate AMT is repealed along with the individual AMT.

Higher expensing levels: The bill would provide 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (with an additional year for longer-production-period property). It would also increase tenfold the Sec. 179 expensing limitation ceiling and phaseout threshold to $5 million and $20 million, respectively, both indexed for inflation.

Cash accounting method more widely available: The bill would increase to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the uniform capitalization (UNICAP) rules. The exemption from the percentage-of-completion method for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.

NOLs, other deductions eliminated or limited: Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses. Carryforwards for losses arising after 2017 would be increased by an interest factor. Other deductions also would be curtailed or eliminated:

  • Instead of the current provisions under Sec. 163(j) limiting a deduction for business interest paid to a related party or basing a limitation on the taxpayer’s debt-equity ratio or a percentage of adjusted taxable income, the bill would impose a limit of 30% of adjusted taxable income for all businesses with more than $25 million in average gross receipts.
  • The Sec. 199 domestic production activities deduction would be repealed.
  • Deductions for entertainment, amusement, or recreation activities as a business expense would be generally eliminated, as would employee fringe benefits for transportation and certain other perks deemed personal in nature rather than directly related to a trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).

Like-kind exchanges limited to real estate: The bill would limit like-kind exchange treatment to real estate, but a transition rule would allow completion of currently pending Sec. 1031 exchanges of personal property.

Business and energy credits curtailed: Offsetting some of the revenue loss resulting from the lower top corporate tax rate, the bill would repeal a number of business credits, including:

  • The work opportunity tax credit (Sec. 51).
  • The credit for employer-provided child care (Sec. 45F).
  • The credit for rehabilitation of qualified buildings or certified historic structures (Sec. 47).
  • The Sec. 45D new markets tax credit. Credits allocated before 2018 could still be used in up to seven subsequent years.
  • The credit for providing access to disabled individuals (Sec. 44).
  • The credit for enhanced oil recovery (Sec. 43).
  • The credit for producing oil and gas from marginal wells (Sec. 45I)

Other credits would be modified, including those for a portion of employer Social Security taxes paid with respect to employee tips (Sec. 45B), for electricity produced from certain renewable resources (Sec. 45), for production from advanced nuclear power facilities (Sec. 45J), and the investment tax credit (Sec. 46) for eligible energy property. The Sec. 25D residential energy-efficient property credit, which expired for property placed in service after 2016, would be extended retroactively through 2022 but reduced beginning in 2020.

Bond provisions: Several types of tax-exempt bonds would become taxable:

  • Private activity bonds would no longer be tax-exempt. The bill would include in taxpayer income interest on such bonds issued after 2017.
  • Interest on bonds issued to finance construction of, or capital expenditures for, a professional sports stadium would be taxable.
  • Interest on advance refunding bonds would be taxable.
  • Current provisions relating to tax credit bonds would generally be repealed. Holders and issuers would continue receiving tax credits and payments for tax credit bonds already issued, but no new bonds could be issued.

Insurance provisions: The bill would introduce several revenue-raising provisions modifying special rules applicable to the insurance industry. These include bringing life insurers’ NOL carryover rules into conformity with those of other businesses.

Compensation provisions: The bill would impose new limits on the deductibility of certain highly paid employees’ pay, including, for the first time, those of tax-exempt organizations.

  • Nonqualified deferred compensation would be subject to tax in the tax year in which it is no longer subject to a substantial risk of forfeiture. Current law would apply to existing nonqualified deferred compensation arrangements until the last tax year beginning before 2026.
  • The exceptions for commissions and performance-based compensation from the Sec. 162(m) $1 million limitation on deductibility of compensation of certain top employees of publicly traded corporations would be repealed. The bill would also include more employees in the definition of “covered employee” subject to the limit.
  • The bill would impose similar rules on executives of organizations exempt from tax under Sec. 501(a), with a 20% excise tax on compensation exceeding $1 million paid to any of a tax-exempt organization’s five highest-paid employees, including “excess parachute payments.”

Foreign income and persons

Deduction for foreign-source dividends received by 10% U.S. corporate owners: The bill would add a new section to the Code, Sec. 245A, which replaces the foreign tax credit for dividends received by a U.S. corporation with a dividend-exemption system. This provision would be effective for distributions made after 2017. This provision is designed to eliminate the “lock-out” effect that encourages U.S. companies not to bring earnings back to the United States.

The bill would also repeal Sec. 902, the indirect foreign tax credit provision, and amend Sec. 960 to coordinate with the bill’s dividends-received provision. Thus, no foreign tax credit or deduction would be allowed for any taxes (including withholding taxes) paid or accrued with respect to any dividend to which the dividend exemption of the bill would apply.

Elimination of U.S. tax on reinvestments in U.S. property: Under current law, a foreign subsidiary’s undistributed earnings that are reinvested in U.S. property are subject to current U.S. tax. The bill would amend Sec. 956(a) to eliminate this tax on reinvestments in the United States for tax years of foreign corporations beginning after Dec. 31, 2017. This provision would remove the disincentive from reinvesting foreign earnings in the United States.

Limitation on loss deductions for 10%-owned foreign corporations: In a companion provision to the deduction for foreign-source dividends, the bill would amend Sec. 961 and add new Sec. 91 to require a U.S. parent to reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. parent from its foreign subsidiary, but only for determining loss, not gain. The provision also requires a U.S. corporation that transfers substantially all of the assets of a foreign branch to a foreign subsidiary to include in the U.S. corporation’s income the amount of any post-2017 losses that were incurred by the branch. The provisions would be effective for distributions or transfers made after 2017.

Repatriation provision: The bill would amend Sec. 956 to provide that U.S. shareholders owning at least 10% of a foreign subsidiary will include in income for the subsidiary’s last tax year beginning before 2018 the shareholder’s pro rata share of the net post-1986 historical earnings and profits (E&P) of the foreign subsidiary to the extent that E&P have not been previously subject to U.S. tax, determined as of Nov. 2, 2017, or Dec. 31, 2017 (whichever is higher). The portion of E&P attributable to cash or cash equivalents would be taxed at a 12% rate; the remainder would be taxed at a 5% rate. U.S. shareholders can elect to pay the tax liability over eight years in equal annual installments of 12.5% of the total tax due.

Income from production activities sourced: The bill would amend Sec. 863(b) to provide that income from the sale of inventory property produced within and sold outside the United States (or vice versa) is allocated solely on the basis of the production activities for the inventory.

Changes to Subpart F rules: The bill would repeal the foreign shipping income and foreign base company oil-related income rules. It would also add an inflation adjustment to the de minimis exception to the foreign base company income rules and make permanent the lookthrough rule, under which passive income one foreign subsidiary receives from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, provided that income was not subject to current U.S. tax or effectively connected with a U.S. trade or business.

Under the bill, a U.S. corporation would be treated as constructively owning stock held by its foreign shareholder for purposes of determining CFC status. The bill would also eliminate the requirements that a U.S. parent corporation must control a foreign subsidiary for 30 days before Subpart F inclusions apply.

Base erosion provisions: Under the bill, a U.S. parent of one or more foreign subsidiaries would be subject to current U.S. tax on 50% of the U.S. parent’s foreign high returns—the excess of the U.S. parent’s foreign subsidiaries’ aggregate net income over a routine return (7% plus the federal short-term rate) on the foreign subsidiaries’ aggregate adjusted bases in depreciable tangible property, adjusted downward for interest expense.

The deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group would be limited to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110% of the U.S. corporation’s share of the group’s global earnings before interest, taxes, depreciation, and amortization (EBITDA).

Payments (other than interest) made by a U.S. corporation to a related foreign corporation that are deductible, includible in costs of goods sold, or includible in the basis of a depreciable or amortizable asset would be subject to a 20% excise tax, unless the related foreign corporation elected to treat the payments as income effectively connected with the conduct of a U.S. trade or business. Consequently, the foreign corporation’s net profits (or gross receipts if no election is made) with respect to those payments would be subject to full U.S. tax, eliminating the potential U.S. tax benefit otherwise achieved.

Exempt organizations

Clarification that state and local entities are subject to unrelated business income tax (UBIT): The bill would amend Sec. 511 to clarify that all state and local entities including pension plans are subject to the Sec. 511 tax on unrelated business income (UBI).

Exclusion from UBIT for research income: The act would amend the Code to provide that income from research is exempt from UBI only if the results are freely made available to the public.

Reduction in excise tax paid by private foundations: The bill would repeal the current rules that apply either a 1% or 2% tax on private foundations’ net investment income with a 1.4% rate for tax years beginning after 2017.

Modification of the Johnson Amendment: Effective on the date of enactment, the bill would amend Sec. 501 to permit statements about political campaigns to be made by religious organizations.

Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) and Paul Bonner (Paul.Bonner@aicpa-cima.com) are JofA senior editors, and Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

05/01/2017

Trump Tax Reform Goals: Press Release and Articles

Trump at microphonePresident Donald Trump has released a single-page summary of the goals and priorities of his tax reform package.  We have a copy of the document to share with you as well as links to various articles on the subject available online for your review. While specifics of an actual proposal are not yet available, we hope the information and various media reviews will help clarify the intended direction of a tax reform proposal from the perspective of the White House. Please contact one of our tax planning experts if you have questions as to how the proposed tax reforms may affect your individual and/or business tax planning strategies.

Click on the information lines below to download articles and postings:

Actual Media Release from the White House

White House Press Briefing on Proposed Tax Reform Goals

Various Media Articles With Responses and Opinions   (Postings of these links to articles should not infer that McRuer CPAs is in agreement with any or all of the following media responses. The list is simply a way to provide you more information from various views.)

Journal of Accountancy from the American Institute of CPAs (AICPA.org)

FOX Business News

Wall Street Journal

New York Times

Bloomberg Review

The National Review

CNN Money

Kansas City Star

St. Louis Post-Dispatch

Jefferson City News Tribune

04/13/2017

Taxes on Tips

While tips are discretionary and reflect a happy customer, taxes on tips are not optional and, if overlooked, can cause unhappy headaches for both taxpayers and their employers.

Tip jar picAll cash and non-cash tips are considered income and are subject to Federal income taxes. Tips include cash left by a customer, tips added to debit or credit card charges, and tips received from other employees or employer through tip sharing, tip pooling or other arrangements.

Employees who receive tips regularly are responsible for keeping a daily tip record and reporting all tips on their individual income tax return.  They must report tips that total $20 or more in any month by the 10th of the following month regardless of total wages and tips for the year.

If an employee doesn’t have or isn’t assigned a tip-tracking and reporting tool, the IRS provides a Daily Record of Tips (Form 4070) that an employee may use to document tips in the manner which is considered sufficient proof of tips received. Reliable proof of tip income would include copies of restaurant bills and credit card charges that show the amounts customers added as tips.

Automatic service charges that are often added onto bills are not considered tips, but rather are treated as regular wages so any taxes owed would be withheld by an employer on an employee’s next paycheck. Examples of service charges include things like bottle service charges, gratuity that is automatically added to a bill for large parties, delivery charges, and room service charges.

Employers must withhold income, social security and Medicare taxes on tips just as they would on other income earned by their employee.  If tips are not reported to an employer as required, an employee may face a penalty of 50% of the unpaid social security and Medicare taxes due.

If there are any unreported tips, a taxpayer must file a report of the income through another Form 4137 "Social Security and Medicare Tax on Unreported Tip Income" which helps the employee figure the amount that is subject to tax and how much is owed.

It can be a tedious process especially for workers who make money through a predetermined hourly wage with unpredictable tip income added to the total.  Workers who receive their tips at the end of each shift must make certain they record the tip amounts on their monthly tip report to their employers.  The taxes owed would then be deducted from their next paycheck. It’s possible that hourly wages may not cover the taxes owed. When this happens, any remaining taxes owed can paid out of the next paycheck through an employer agreement. This is the area where most problems occur as tax obligations on tips for one month may impact several paychecks.  It’s up to the employee to keep track of required tax payments so that there are no outstanding payroll taxes owed at year’s end.

If you need more help understanding how to record and report tip income, please contact one of our tax preparation experts at McRuer CPAs.

04/12/2017

Tax Reform Timeline

Although Republicans appear to have more agreement on the specifics of tax reform than health care reform, experts predict we’ll be hearing more debate in committees and in the media before an actual tax reform bill makes it to the House or Senate floor.  Now many experts predict a tax reform or reduction bill will pass, but it may not happen in 2017.

Capitol-hill-washington-d_cThe White House and Republican lawmakers know they need a more unified front to sustain a push for major tax reform, especially in the wake of continued angst and division over health care reform. Treasury Secretary Steven Mnuchin is a key player in drafting and negotiating a tax reform proposal.  He says he is optimistic that a comprehensive plan should win approval by the Congressional recess this August. But President Donald Trump has been less specific. When asked recently whether he could “cut a deal on tax reform this year” by a Financial Times editor, Trump responded he did not want to talk about timing saying, “We will have a massive and very strong tax reform. But I am not going to talk about when.”

Leading House Republicans, including House Speaker Paul Ryan, have proposed tax code changes that include a much-debated border adjustment tax. CEOs of 16 U.S. companies including General Electric and Boeing support the proposal that would reduce corporate income tax from 35% to 20%.  It would also impose a 20% tax on imported goods while removing taxes on exported goods.  Critics claim such a tax structure would cause consumer prices to rise and unfairly burden retail and automotive manufacturing industries that purchase low-cost parts and supplies from overseas.

Trump has also expressed an interest in pushing simplified personal income and corporate tax reform through at the same time and may also include an infrastructure investment package in a comprehensive tax plan. Tackling big issues with a massive all-encompassing bill may provide opportunities to please all parties, but may also result in the same kind of partisan and intraparty fractures suffered by health care reform efforts.  

Democrats are also unlikely to support major income tax cuts at either the corporate or personal level.

Based on their recent disappointment over a failed attempt to repeal the Affordable Care Act, Republicans know they need to build and confirm support for significant tax reform.  Many financial experts say that means an agreement may not be reached until late 2017 or early 2018.

04/10/2017

Deducting Work-Related Expenses

Work expensesTaxpayers who work for an employer and who pay for work-related expenses out of their own pocket may be able to deduct them on their income tax returns.  Qualified employee business expenses are deductible if when combined with other miscellaneous deductions, the total spent is more than two percent of a taxpayer’s adjusted gross income.

Some examples of qualified deductible employee business expenses may include:

  • the cost of purchasing required uniforms or work clothes not worn away from the work environment,
  • business use of a home,
  • business use of a personal vehicle,
  • business-related meals and entertainment,
  • work-related travel away from home, and
  • tools and supplies purchased for use on the job.

Other deductible expenses that employed taxpayers often overlook are costs of things like the depreciation of their own computer they use for work-related purposes, union dues, malpractice or business liability insurance premiums and subscriptions to professional journals and trade magazines related to work.

Taxpayers must to itemize the deductions and maintain records of income along with receipts of expenses.  If expenses have been reimbursed by an employer, they are not tax deductible.

The expenses must also be ordinary and necessary for their work.  An employee who purchases an item featuring their company’s logo may not deduct the expense unless the employer requires them to wear or use the item while performing their job.  For example, flight attendants who must buy their own uniforms to wear while serving passengers on an aircraft may deduct the expense of the uniform, but not the cost of personal earrings worn to complement their uniform.

K-12 teachers may be able to deduct up to $250 of certain out-of-pocket expenses.  Deductible expenses for 2016 federal income taxes may include the cost of books, classroom supplies, equipment and other materials teachers use to help instruct students.  For example, a physical education teacher may deduct up to $250 of athletic supplies purchased for students that were needed and used by the student(s) to complete or perform physical education course requirements. This particular work-related deduction is calculated as an adjustment to income rather than an itemized deduction, so they need not itemize to claim this deduction.

IRS Publication 529 “Miscellaneous Deductions” and Publication 463 “Travel, Entertainment, Gift and Car Expenses” provide more specific details about deducting employee business expenses.

If you need more information on deducting work-related expenses, contact one of our experts on tax preparation at McRuer CPAs.

04/07/2017

Tax Deadline Dance

So, once again, the mandated income tax filing deadline day gets a little kick and a jump this year from the designated April 15 date on the calendar.  For the second year in a row, the last day to file your federal and state income tax returns for the 2016 calendar year is April 18. And next year’s filing deadline for 2017 income tax returns will be April 17. The reasons for the date changes are nearly as complicated as tax laws.

Gene kelly tap dancing picThe three-year stretch in adjusted tax deadline days is due to the odd assortment of federal holidays and a restriction against the deadline falling on a weekend day. This tax season the assigned April 18 deadline is partly due to the fact that April 15 falls on a Saturday.  Normally the deadline would have then been moved to the next Monday.  However, this year, Monday is a holiday observed in Washington D.C. and, thereby, is a holiday that is observed by the IRS.  So, the tax deadline day for filing 2016 income tax returns moves to the next available calendar day which is Tuesday, April 18.  In case you’re wondering, the holiday on April 17 is Emancipation Day which commemorates the day President Abraham Lincoln signed the Emancipation Proclamation to end slavery.

Taxpayers in some states have an even longer time to file their tax returns because the IRS has enacted its authority to extend deadlines for taxpayers living in designated federal disaster areas.  In past months, thousands of taxpayers were affected by damaging storms in Louisiana, Georgia and Mississippi.  Those who live or own a business in Louisiana parishes designated as disaster areas have been given additional time to file their income and business tax returns as well as any quarterly tax payments. The deadline for them has been extended to June 30. Taxpayers living in disaster-designated counties in Georgia and Mississippi have until May 31.

For taxpayers living in Maine or Massachusetts, the Patriot’s Day holiday occurs on April 18 which pushes their income tax filing deadline to April 19.

Taxpayers living and working abroad as well as military personnel serving abroad or in combat zones may also qualify for an extension of time to file a return and/or pay their income taxes.

If you’re not able to get your records together in time for the tax return filing deadline that applies to you, you will need to request an extension of time to file to escape penalties. The IRS allows six extra months to qualifying taxpayers.  However, the deadline to pay the taxes you owe remains the same as the original tax filing deadline.  Penalties and interest accrue for all unpaid dollars.  Dare we mention that this year, IF you file for a six-month extension, even though the actual six-month calendar would reflect an October 18 deadline to file, the actual deadline is Monday, October 16.  That’s because the October deadline is based on the originally mandated April 15 filing deadline.  But, because the 15th of October falls on a Sunday, October 16 becomes the deadline. Makes you want to shake your head a bit, doesn’t it?

If you need help completing your tax return or submitting a request for an extension to file a return, please contact one of our tax experts at McRuer CPAs.

03/25/2017

Do's and Don'ts of Deducting Charitable Donations

So, you donated six bags of clothes to Goodwill and gave your used washer and dryer to the Salvation Army.  Now you hope to claim the donations as a deduction. There are a few things to know before your tax preparer reports your Gifts to Charity on your federal income tax return.

Please Give Jar picFirst, donations must be made to a qualified charity in order to be deductible.  Gifts to individuals, political organizations or candidates are not deductible.  A qualified charity that is designated as a non-profit organization or a 501(c)(3) must not benefit or have as a focus any private shareholder or individual.  Qualified charities must also be up-to-date on their information reports to the IRS that show that their profits are being used for their tax-exempt purposes. To check the status of a charity the IRS now provides a one-stop online tool called Exempt Organizations Select Check (EO Select Check).

In order to deduct a charitable contribution, you must first itemize deductions on Form 1040, Schedule A - Itemized Deductions.  It is important to have documentation that shows the dollar amount of all claimed qualified donations and the specific organization to which the donation was made.  Noncash contributions should have information or may even need an appraisal that reflects the fair market value of the donation at the time it was given.

If you happened to get something in return for your donation, the value of what you received must be subtracted from the claimed donation amount.  You may only deduct the amount that exceeds the fair market value of the benefit received.  Many taxpayers miss this point.  For example, let’s say you participated in a silent auction fundraiser and you “won” with the highest bid, and the item you received was worth more than the amount you paid for it.  You may only deduct the difference between what you paid for the item and the fair market value of the item.  This includes benefits you received like merchandise, meals, and tickets to events or goods and services.

If you donate property instead of cash, the deductible amount is limited to the donated item’s fair market value or the price a seller would receive if the property sold on the open market.  Many taxpayers struggle with determining the value of things like used clothing and household items.  The IRS requires that the items be in good condition or better, and has an online resource to help taxpayers determine the fair market value of items.  Technically each item, including a pair of socks, is supposed to be identified on a worksheet along with its value in order to calculate the actual value of a donation.  Many taxpayers simply take their chances and submit only a receipt from a recognized charitable organization that lists the date and a general description of what is donated, such as “2 boxes of clothing”.  If a taxpayer is audited, they must provide proof for each donation.  Cars, boats and other types of property donations are subject to additional rules.

Whether you donate cash or goods, if the amount of any specific donation is $250 or more, you must submit a written statement from the charity confirming the details.  That statement must report the same donation amount that you’re claiming, and a description of any property that was given.  It must also state whether any goods or services were received in exchange for the donation.

If you make total noncash charitable contributions that exceed $500 for the year, you’ll need to fill out another form, Form 8283, that requires more details and more proof of value.  The type of records that a taxpayer must keep depends upon the amount and type of donation.

Here are examples of charitable contributions:

  • Money or property given to churches, synagogues and other religious organizations
  • Gifts to nonprofit schools and hospitals
  • Gifts to qualified charities such as The Salvation Army, Boy Scouts or Girl Scouts of America, CARE and Goodwill Industries
  • Donations to War Veterans groups
  • Out-of-pocket expenses when you serve a qualified organization as a volunteer

Here are items that are NOT deductible as charitable contributions:

  • The value of your time or services
  • The value of blood given to a blood bank (yes, it has been tried)
  • Cost of raffle, bingo, or lottery tickets
  • Dues, fees or bills paid to country clubs, lodges or fraternal orders
  • Money or property to groups that lobby for law changes
  • Donations to candidates for public office or political groups

If you have any questions about deducting charitable donations from your federal income tax, please contact one of our tax preparation experts at McRuer CPAs for more information.

Find out more about deducting Medical and Dental Expenses in our blog.

03/22/2017

Deducting Medical and Dental Expenses

If you incurred medical or dental expenses, you may be able to deduct them on your federal income tax return.  You may also include medical expenses you paid for your spouse and/or a dependent.  To do so you must itemize your deductions; so keeping receipts and good records is important as is knowing what qualifies as a deductible expense.

Qualified medical and dental expenses generally include the costs of:

  • diagnosing, treating, easing and preventing disease
  • prescription drugs and insulin
  • insurance premiums for policies that cover medical care
  • dental x-rays, extractions, dentures and teeth cleaning
  • chiropractic and acupuncture treatments
  • and much more!

Healthcare-costsEquipment and property improvements that are medically necessary may also be deducted.  This would include the cost of updates like installing railings and support bars, porch lifts, and widening doorways to address medical care needs.  However, the deductible amount of the capital improvement costs may be reduced if it increases the value of your property.  The allowable deduction would be reduced by the increase in the value of your property.

Even travel costs specifically related to medical care may be deducted; including public transportation, ambulance service, tolls and parking fees.  Personal vehicle mileage used for qualified medical care travel may be deducted using the standard medical travel mileage rate which is 19 cents per mile for 2016, or the actual travel costs may be deducted.

Costs that have been reimbursed by insurance and other sources do not qualify for a deduction.  You also may not claim a tax deduction for medical expenses that were paid from a Health Savings Account or Flexible Spending Arrangement, as those payments are made from pre-tax dollars and would be considered a double benefit.

Generally, you can deduct only the amount of your medical and dental expenses that is more than 10% of your Adjusted Gross Income (AGI).  But if either you or your spouse was born before January 2, 1952, you can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI.

To find out more about allowable qualified medical and dental expense deductions, click here for the tax information guide.  If you have questions, please contact one of our tax preparation specialists at McRuer CPAs for more information.

03/20/2017

April 1 Deadline For Required IRA Distributions

Taxpayers who reached age 70½ during 2016 have until April 1st to apply for and begin receiving required minimum distributions (RMDs) from an Individual Retirement Account (IRA) and/or workplace retirement plan.

Deadline approaches picThe April 1st deadline applies to owners of traditional IRAs, such as SEP and SIMPLE IRAS, but not Roth IRAs.  It also generally applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.  Some employees who are still working may wait to receive distributions, if their plan allows, until April 1st of the year after they retire.

The April 1st deadline only applies to the required distribution for the first year.  For all subsequent years, the RMD must be made by December 31st of each year.  So, a taxpayer who turned age 70½ in 2016 and has received the first required distribution by April 1, 2017, must still receive the second RMD by December 31, 2017.

The amount of the distribution is calculated using life expectancy tables matched to the year-end IRA account value of the IRA.  Worksheets and life expectancy tables are available in in IRS Publication 590-B “Distributions From Individual Retirement Arrangements”.

It can be costly to miss the deadline for receiving a distribution, as the taxpayer faces a 50 percent tax that would be applied to any required amount not received by the April 1st deadline.

For more information, click here to read through frequently asked questions or contact one of our tax experts at McRuer CPAs.

03/17/2017

Saver's Credit Option Offers Rewards

Hand holding moneyThere’s a little known tax credit for people who have low to moderate income and are putting money aside to save for retirement.  The Saver’s Credit is available to eligible taxpayers to use in conjunction with the tax deduction they may already have qualified for by contributing to an IRA.

If your adjusted gross income is below $30,750 as an individual, $46,125 as a head of household or $61,500 as a married couple in 2016, you might be eligible for tax credit.  It can be worth between 10 and 50 percent of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.  You would receive the tax credit on top of the benefits of a tax-free or tax-deferred retirement fund contribution.

The Saver’s Credit applies to contributions made to a traditional or Roth IRA, a 401(K) plan, a SIMPLE IRA, a SARSEP, your 403(b) plan, 501(c)(18) plan or a governmental 457(b) plan.  Voluntary after-tax employee contributions to a qualified retirement and 403(b) plans may also be eligible for the tax credit.

Find out more by clicking here for detailed information.

Splitting Your Tax Refund

Many taxpayers are choosing to split their tax refunds. Splitting refunds is easy and is done electronically through direct deposit allowing the Department of Treasury to deposit your refund dollars in any proportion you want. You may split funds for deposits in up to three different accounts with U.S. financial institutions.

Splitting wood with axe 1A taxpayer may also choose to have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card. A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

By splitting your refund, you benefit from the convenience of opting to have some of the money deposited into your checking account for immediate use and some deposited to an interest-bearing savings for future use.  In addition, you receive the safety and speed of direct deposit, allowing access to your refund faster than if you opt to receive a paper check. (See more about the direct deposit option in our blog “Going Digital with Direct Deposits”.)

You also may use part or all of your refund to buy U.S. Series I Savings Bonds for yourself or someone else.  The splitting of refunds is a rapidly growing choice among taxpayers as more digital resources become available and security concerns increase about paper trails and identity theft.

03/16/2017

IRA Moves That Save Tax Dollars

There’s still time to reduce your 2016 tax bill as you take steps to maximize the benefits of saving money for retirement.  There are different strategies that can save money or defer taxes through contributing to IRAs and retirement funds each tax year.  For the 2016 tax year, you have until April 18th to make a move. However, if you do make a qualifying IRA contribution between January 1 and April 18, make certain you specifically instruct your financial institution to apply the deposit to the 2016 tax year.  Otherwise, the deposit may automatically be considered a 2017 deposit.

Taxes and moneyUsing a Tax Refund for Tax Savings  Here’s another tip regarding your tax refund and saving for retirement: consider depositing all or part of your tax refund directly into an IRA.  It saves a step by directly depositing the money, it can speed up the timing of the contribution and ensures the deposit is made as you intend.  With a direct deposit, you can even choose to use your 2016 refund to pay for the amount of your 2016 IRA contribution as long as the tax return can be processed and the refund paid before the April 18th deadline. You would designate on Form 8888 “Allocation of Refund” how much of your refund should be deposited directly into your IRA and that it should be designated as your 2016 contribution.

How Much You Can Save  A working taxpayer can defer paying income tax on a contribution of pre-tax dollars up to $5,500 to a Traditional IRA and may split contributions to more than one IRA.  Income tax won’t be due on the money until it is withdrawn from the account.  Contributions to a Roth IRA are after-tax dollars and do not qualify for a tax deduction, though qualified distributions may be withdrawn tax-free at retirement. Contributions to both Traditional and Roth IRAs are limited depending upon modified adjusted gross income.

The actual amount of the tax deduction on a Traditional IRA depends upon the taxpayer’s income tax rate.  For example, a worker in the 25% tax bracket may save $1,375 in income taxes by making the maximum IRA contribution.  Workers in the 35% tax bracket may save $1,925 for the same contribution amount.

If you are age 50 and above, you may contribute an additional $1,000 to an IRA up to a total tax-deductible contribution of no more than $6,500. For example, the tax deduction can range from $975 for individuals in the 25% income tax bracket to $2,275 for those who are in a 35% tax bracket.

Married couples can double their tax deduction if they make the maximum contribution to an IRA in each spouse’s name.  Even if one of the spouses doesn’t work, a contribution can be made for that spouse subject to the spousal IRA limit. The combined contributions must be no more than $11,000 if both are under age 50, $12,000 if one spouse is 50 or older and $13,000 if both are at least 50 years old.

Who Qualifies For Tax Deduction  A taxpayer must earn income in order to save in an IRA. If a worker has no retirement plan at work, the tax deduction for Traditional IRA contributions is allowed in full regardless of income.  If a person or spouse has a retirement plan at work, the tax deduction and the contributions may be limited.  Amounts for both the allowable deduction and contributions phase out at higher income levels calculated as modified adjusted gross income.

People aged 70 ½ and older may no longer claim a tax deduction for their contributions to Traditional IRAs. Upon reaching that age, the fund’s owner must start taking required minimum distributions (RMDs).  Any deductible contributions and earning withdrawn from a Traditional IRA are taxable. Early withdrawals by a person under the age of 59 ½ may be subject to a 10% penalty.  Contributions made to a Roth IRA can be made after age 70 ½ and the amount in the account can be left there as long as the person lives. Qualified distributions are generally not taxable, but early withdrawals are subject to a 10% penalty.

Click here for a description of the difference between Traditional and Roth IRAs.

03/15/2017

Going Digital With Direct Deposits

More than ever before, taxpayers are choosing digital tools to file their tax returns and receive refunds. The latest numbers show 4 out of 5 taxpayers filed electronically in 2016 using a professional tax preparer or online software.  Of those taxpayers who qualified for a refund, 8 out of 10 chose to have the money deposited directly into a bank account rather than waiting for a check to arrive by mail.

Picture1The growth in digital tax tools use is due in part to IRS mandates.  Paper returns require more man hours to process; costing more and lengthening the time to receive a tax refund by weeks or months.  The IRS now requires most tax preparation professionals to file all tax returns and attachments electronically.  While under no mandate, more do-it-yourself taxpayers with simple tax returns are choosing to use the internet to prepare their returns using the IRS Free File software, and send electronically prepared returns through IRS e-File.  This trend reflects security and privacy concerns as well as worries about delays that can come from paper filings and paper checks.

Combining IRS e-File with the direct deposit program is the fastest way to receive a refund and the transaction is free.  Most refunds are issued within 21 calendar days once the IRS receives a tax return.  A taxpayer may request that their refund be split into deposits in up to three separate financial accounts.  There are also options to purchase savings bonds, have a portion of a refund deposited into an Individual Retirement Account or make a deposit into an account with a pre-paid debit card.  A refund should only be deposited into an account or accounts that are in the taxpayer’s own name or spouse’s name, if it’s a joint account.

Tax agency officials try to reassure taxpayers the system used to receive tax records and payments as well as send refunds is the safest system available.  In the fall of 2015 and again in January 2016, new IRS software updates crashed the system and a small part of its online payment collection system was hacked causing delays and the need to reset taxpayer pins for security.  

Today, the IRS uses the same electronic transfer system for refunds that is used to deliver almost all Social Security and Veterans Affairs benefits to millions of accounts.  It combines built-in security protection tools with layers of online protection programs provided by banks and financial institutions.

You can request the electronic direct deposit option to receive your refund even if you file a paper return by mail; yet know that processing a paper return takes the IRS on average two months longer than processing a digital return.  Requesting a direct deposit of your refund will not speed up the processing time.

If you have questions about the direct deposit option for income tax refunds, please contact one of our tax preparation specialists at McRuer CPAs for more information.

02/15/2017

Costs of Free Online Tax Prep Tools

More taxpayers who prepare their own taxes are turning to internet resources versus software, but they should be aware of information-sharing nuances as they sign-up for the growing number of free online services.

A recent Wall Street Journal article took a look at the “free” of free online tax preparation services to identify whether there were any hidden costs.  The article reveals that while the online companies are attracting millions of do-it-yourself tax filers by offering free tax preparation tools, some service providers seek “to collect income and other data from its tax-prep users to make recommendations for credit cards and other financial products to them.”

Online tax software probeThe article confirms that when a customer follows through and buys the recommended products, that’s when the service provider makes money by being paid by a third party financial institution. This doesn’t cost the user upfront, but it’s a type of third party advertising that uses information sharing as its money-making tool.

Free online tax preparation service provider Credit Karma was interviewed in the article about the practice and the Company responded that this year it requires people to become Credit Karma “members” before they can use the free tax preparation services.  On the Company’s website members must provide their name, address, date of birth, mobile phone number and the last 4 digits of their Social Security Number.  Credit Karma says it does not charge third parties to advertise about their products or services, but rather uses a member’s information to suggest products and services that could help the member financially. The members are not charged, and Credit Karma is only paid if a member buys a product or service that it suggested.

Credit Karma members can select an “opt out” option to prevent the Company from using their tax return data, which includes their income and tax payments or refunds information, but not all customers are aware that their basic membership data may be shared.  One customer was quoted in the article saying that she had been approached by her credit-card company asking her to update her income after using Credit Karma’s free tax preparation service.  Credit Karma responded that the notice had nothing to do with her membership, but the customer deactivated her account anyway. Other providers say they also offer users ways to opt out of any information sharing.

Some of the other major online tax preparation service providers include Intuit, H&R Block, TaxAct and Blucora.  These companies may provide easy-to-use cost-free tax preparation tools via the internet, but when it comes to more complicated tax returns or state income tax returns, there are usually charges for the necessary forms and data calculation which are considered upgrades by the vendor.

It is also important for taxpayers with more complicated returns to know the questions and forms they need in order for the systems to share information and solutions, so there can be confusion and missed opportunities to claim tax credits and file the proper forms.

More taxpayers than ever before are turning to digital resources both online and through software to prepare and file their simple tax returns, but they should be mindful that even basic tax preparation services may have a complicated back-end effect on privacy and hidden advertising tactics.

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