2016 Year-End Tax Planning for Individuals

Although tax planning is a 12-month activity, yearend is traditionally the time to review tax strategies from the past and to revise them for the future. Yearend has also become a time when there is an increasing need to take a careful look at what’s changed within the tax law itself since the beginning of the year. Opportunities and pitfalls within these recent changes – as they impact each taxpayer’s unique situation—should not be overlooked. This is particularly the case during year-end 2016. Here are some of the many consideration that taxpayers should review as year-end 2016 approaches.

Data, including 2015 return

Year-end planning should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes. Alternative minimum tax liability also needs to be explored as well as potential liability for the net investment income tax and the Additional Medicare Tax.

Investments

Taxpayers holding investments toward the end of the year, whether in the form of securities, real estate, collectibles, or other assets, often have an opportunity to reduce their overall tax bill by some strategic buying and selling (or like-kind exchanging). Balancing the existing tax rates within those considerations is part of that challenge: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.

Income caps on benefits

Monitoring adjusted gross income (AGI) at year end can also pay dividends in qualifying for a number of tax benefits. Often tax savings can be realized by lowering income in one year at the expense of realizing a bit more in the other: in this case, either 2016 or 2017. Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

  • itemized deductions
  • personal exemptions
  • education savings bond interest exclusion
  • maximum child’s income on parent’s return (form 8814):
  • medical savings account adjustments
  • education credits
  • student loan interest deduction
  • adoption credits
  • maximum Roth IRA contributions
  • maximum IRA contributions for individuals

PATH Act “extenders” and more

Year to year, the tax law changes; and with it, opportunities and pitfalls that need particular attention at year end. In many cases, these changes are accounted for based on a tax-year period. Once the current tax year is over, there often is no going back for a “do-over” for a missed opportunity or to correct a costly mistake. Year-end 2016 is no exception to this rule.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted immediately before the start of 2016, permanently extended many tax incentives that were previously temporary, removing for the first time in many years the year-end concern over whether these incentives will be extended either retroactively for the current year or prospectively into the coming year. Not all of these “extenders” provisions were extended beyond 2016, however; and some were modified in the process. Others were extended for up to five years, deferring to “tax reform” a more lasting solution. Here’s a list of the major changes made by the PATH Act, especially focused on how they impact year-end transactions:

  • permanent American Opportunity Tax Credit
  • permanent teachers’ $250 “classroom” expense deduction
  • permanent state and local sales tax deduction election, in lieu of state income taxes
  • permanent exclusion for direct charitable donation of IRA funds of up to $100,000
  • permanent 100-percent gain exclusion on qualified small business stock
  • permanent conservation contributions benefits
  • five-year solar energy property
  • nonbusiness energy property credit through 2016
  • fuel cell motor vehicle credit through 2016
  • mortgage insurance premium deduction through 2016
  • tuition and fees deduction through 2016

Life events

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. A change in filing status will affect tax liability. The possibility of significant changes and/ or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2017, and predict, if possible, any events that could trigger significant income, losses or deductions.

Retirement strategies

Taxpayers may want to take a look at a number of different provisions in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. Among others, these include contributions to employer plans, strategic use of IRAs and “required minimum distributions,” and timing Roth IRA conversions and reconversions to maximize your retirement nest egg.

Affordable Care Act compliance

The Affordable Care Act (ACA) imposes new requirements on individuals and tightens or eliminates some tax incentives. Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Acceleration or delay

Year-end tax planning, especially if done “at the eleventh hour,” requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income acceleration/deferral. Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies. These may include:

  • sell appreciated assets
  • receive bonuses before January
  • sell outstanding installment contracts
  • redeem U.S. Savings Bonds
  • accelerate debt forgiveness income
  • avoid mandatory like-kind exchange treatment

Deduction acceleration/deferral. A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction. There are exceptions, including those made in connection with:

  • January mortgage payment in December
  • tuition prepayment
  • estimated state taxes
  • real estate taxes
  • charitable giving

A New Administration

When the new Administration moves into Washington in January 2017, it is clear that changes will follow. How these changes will impact upon your long-term tax situation remains to be developed. That, and an eventual groundswell for tax reform, make the future more difficult to read than in prior years. Nevertheless, in looking toward the future, you should not lose sight of the short term tax dollars to be saved immediately through 2016 year-end strategies.

Please feel free to call our offices if you have any questions about how year-end tax planning might help you save taxes. Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.

Planning 2016: Vehicle Depreciation and Deductions

In general, if you use your vehicle in pursuit of a trade or business, you are allowed to deduct the ordinary and necessary expenses incurred while operating the vehicle. However, any expenses associated with the personal use of the vehicle are not deductible. For purposes of these deductions, “car” includes a passenger vehicle, van, pickup or panel truck.

Personal vs. business miles. Business use of your car can include traveling from one work location to another work location within your tax home area; visiting customers; attending a business meeting away from the regular workplace; and traveling from home to a temporary workplace if you have one or more regular places of work. The costs of travel between home and a regular place of work, however, are nondeductible commuting expenses.

Standard mileage rate vs. actual cost method. In lieu of proving the actual costs of operating an automobile owned by them, employees and self-employed individuals may compute the deductible costs for their business use of an auto using a standard mileage rate. The 2016 standard mileage rate is 54 cents per mile. You may not depreciate your car or deduct lease payments if you use the standard mileage rate method. If you use the actual cost method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees. Regardless of the method used, if the vehicle is driven for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. There are separate considerations involved in leasing a car for business.

Substantiation. If you are using your car for business purposes, whether owned or leased, proper recordkeeping is critical. The recordkeeping requirements vary depending upon which method you use. If you use the standard mileage rate, you should keep a daily log showing the miles traveled, destination and business purpose. Recordkeeping under the actual cost method is somewhat more onerous. You should also keep a mileage log if you use the actual cost method in order to establish business use percentage. In addition, you must keep receipts, invoices and other documentation to verify expenses. Finally, you must be able to prove the original cost of the vehicle and the date it was placed in service for business use in order to claim depreciation.

Vehicle fringe benefits. The fact that an employer allows an employee to use an employer-provided car for personal purposes generally does not deprive the employer of a vehicle expense deduction. An employer who provides a vehicle to an employee as a fringe benefit may use one of the special valuation rules, rather than the fair market value (FMV) of leasing a comparable car, to calculate the amount of the benefit that is attributable to the employee’s personal use of the car. These special rules include the lease, cents-per-mile, commuting, and fleet-average valuation rules. An employer is not required to use the same valuation rule for all of the vehicles that are provided to employees. However, once a valuation method for a particular vehicle is elected, it must be used for income tax, employment tax, and reporting purposes for all employees who share the vehicle, as well as those who use it in subsequent periods.

Employers must report their employees’ personal use of the car on their W-2, Wage and Tax Statement. They are not required to withhold income taxes on this income, although social security and railroad retirement taxes must be withheld. An election not to withhold income taxes may be made on an employee-by-employee basis. However, affected employees must be notified in writing by the later of January 31st of the applicable year, or 30 days after the day on which the employee receives a car.

An employee with an employer-provided car must substantiate the business use of the car with adequate records or evidence in order to claim a fringe benefit exclusion from income for personal use of the car. An employee who uses a personal car in the performance of services for his or her employer is entitled to deduct the car expenses if the car is used for the convenience of the employer, and is required as a condition of employment. Any unreimbursed employee expenses attributable to such use are deductible only to the extent that they exceed two percent of the employee’s adjusted gross income (AGI).

Whether you are an employer, an employee, or a self-employed individual, we would like to evaluate the business use of your vehicle(s) in order to provide guidance in claiming and substantiating these expenses. Please call us at your earliest convenience to arrange an appointment.

Tips for Maximizing Disaster Recoveries

All too often we hear about damage caused by floods, fires, and other natural disasters. Just in case this ever happens to you we’d like to remind you that keeping records will help ease your way in getting tax deductions or insurance reimbursements.

You can deduct nonbusiness property losses caused by casualty within limits. But you won’t get the deduction you’re entitled to unless you can prove not only that you suffered a loss, but also the amount of the loss. Equally important is to make sure you know what records will satisfy your insurance company.

For starters you should put together an inventory of your property. You might do this by making a detailed listing, taking photographs or making a video recording. Whichever method you choose, be sure to keep a duplicate record in a separate location. A description of the property is key information. It’s also necessary to maintain proper records of your cost or other tax basis.

Also, be sure to document the state of your property after the disaster. Remember that there are several relief provisions for disasters in federally designated disaster areas. In particular, you are allowed to take a casualty loss on an amended return for the prior year, and favorable rules apply to insurance proceeds if your home or contents are destroyed which make it easier to defer or avoid gain.

Please don’t hesitate to call if we can help you further.

Personal Use Property Casualty Losses

If your home or other property is damaged as a result of a fire, earthquake, flood, hurricane, vandalism or similar event, you may be able to take a deduction for the loss. To be deductible as a casualty loss, the property must be damaged, lost or destroyed by a sudden, unexpected or unusual event. Therefore, using the term “tax planning” when referring to a casualty loss may seem inappropriate. However, if you have suffered a loss, there are several tax issues that you need to consider, such as determining the year in which to take the loss, the benefit of married individuals filing separately, valuation of the property, limitations and adjustments to the loss, and finally the tax consequences of any insurance reimbursements or recoveries.

A casualty loss is not allowed when the loss is gradual, such as insect damage to trees or water damage from a leaky roof. Therefore, damage or destruction resulting from progressive deterioration of property, such as beachfront erosion, would not qualify as a casualty loss. Loss of property through theft is deductible, but merely misplacing property is not.

The amount of a deduction is generally determined by the difference in the fair market value of the property before and after the loss, or by the cost of the necessary repairs to restore the property to its original condition. However, the amount of a loss cannot exceed your basis. Even with the destruction of a home or building, the loss is actually not a total loss since the land retains its value.

The amount of the loss is further reduced by any amounts covered by your insurance company, regardless of whether or not you file a claim.  After the loss is determined and the insurance reimbursement is subtracted, the loss deduction is generally reduced by $100 for each casualty, any casualty gains, and 10 percent of your adjusted gross income.

Recovering from a casualty loss takes time and planning. There are many things to consider, but our office is available to answer your questions. Please call us to discuss your casualty loss tax issues and determine your best options to recovery.

Post Tax Season Budget

It’s the middle of the year and the pain and contempt for realizing your actual tax obligations are beginning to subside.  Now is the time to take action and help yourself avoid that same agony next year.  While it is good to take an appropriate break from the realities of family and business financial goals, now is the time to commit to leveraging the knowledge and power of today’s technology against a good old fashioned budget.

Historically accounting and bookkeeping in and of itself has been a painful process for businesses and families.  Beyond the accounting and recordkeeping, applying a budget was another layer of time and difficulty.  The results were often riddled with layers of confusing comparisons.  That is no longer the case.  Today we are able to leverage technology in way that simplifies our accounting and bookkeeping needs.  Budgets are designed and arranged for automated comparison.  With transaction recognition technology your income and expenses are semi-automatically coded in a logical and consistent manner.  The process of organizing your finances has become greatly simplified with cloud accounting software. Now more time can be spent making decisions.

When you employ semi-automated accounting information systems to your family and business finances you will finally be able to realize the value of the information rather than the burden of assembling it.  Many time people are so worn out from processing the information they forget to think critically about the result of the work.  After all, aside from preparing for the next annual tax return, the purpose of compiling all of that information is to use it for decision making.

As we all cruise into life after tax season, let’s think about how we can work smarter this year by being proactive with understanding the ins and outs of our number one resource, cash.  Leveraging technology to account for and measure our finances is the first step to taking control of our financial lives.  At Swamp Fox CPA, LLC we can assist with initial set-up, implementation, and maintenance of your family and business financial needs.  Further, we will assist with budget preparation, retirement and tax planning.

Contact us for assistance or more information.

CPA Summerville