Tax Cuts and Jobs Act
With the President signing the new bill in December there are a number of questions and concerns about how this will affect us and what will this do to our taxes. I have compiled a few resources to help you out. Go to my website at modestotaxes.com and hit the *NEW* tab. There you will find a calculator, a brief comparison and a more in depth comparison of the new laws and rates versus the old laws and rates. Hopefully this will answer some of your questions. And as tax season hits and we prepare your taxes for 2017 we will look ahead to 2018 and try to help you make adjustments as needed.
Federal law requires you to maintain copies of your tax returns and supporting documents for three years. But, this is just for those years we call the open years. The IRS has 3 open years to look over your returns and assess additional taxes or audit the information. However, if the IRS believes you have underreported your in income by 25% or more than they may go back six years in an audit. If you do not file at all or there is an indication of fraud then all bets are off and there is no time limit. So what is the best practice for keeping returns and documents? Here is a comprehensive list of documents and the suggested time frame for keeping them.
Personal Documents To Keep For One YearWhile it's important to keep year-end mutual fund and IRA contribution statements forever, you don't have to save monthly and quarterly statements once the year-end statement has arrived.
Personal Documents To Keep For Three Years
Possible year end moves to make.
From THOMSON REUTERS TAX & ACCOUNTING NEWS
Federal Taxes Weekly Alert, 11/23/2016
Year-end moves for those who believe President-elect Trump will cut their taxes next year
In his first televised interview, President-elect Trump declared that a “major tax bill lowering taxes in this country” would be one of his top three priorities. Those middle and upper income taxpayers who are betting he can deliver on this promise, and put his tax reduction plan in place for 2017, should revisit their year-end tax moves to make the most of what might be windfall savings next year.
Defer income to 2017. The Trump tax plan would feature three tax brackets instead of current law's seven, and a top tax rate of 33% instead of current law's 39.6%. The upshot of these and other tax-reduction changes, if retained in the final tax plan, would be reduced taxes for middle and upper income taxpayers, with the biggest tax savings realized by the wealthiest taxpayers.
The standard year-end tax-savings wisdom always has been to defer income, where possible, into the coming year. This standard approach would make even more sense for middle and upper income taxpayers if the Trump tax plan prevails over others in Congress, and goes into effect for tax year 2017.
Here are some of the ways to defer income until 2017:
If the sale can't be postponed, it may be possible to structure the deal as an installment sale. By making a sale this year with part or all of the proceeds payable next year or later, a non-dealer seller to whom the installment method applies becomes taxable in any year on only that proportion of his profit which the payments he receives that year bear to the total sale price. If the 3.8% surtax is repealed for tax years beginning after 2016, the profit on the post-2016 installment payments would escape the surtax. Note that the Trump tax plan would keep current law's maximum tax rate of 20% of capital gains.
On the deduction side. Itemized deductions produce no tax savings for a year in which a taxpayer claims the standard deduction, and many more taxpayers would claim the standard deduction under President-elect Trump's tax plan. It calls for a dramatically increased standard deduction: $30,000 for joint filers (up from $12,600 for 2016) and $15,000 for singles (up from $6,300). If the boosted standard deduction makes it into law for 2017, many taxpayers who itemize under current law and wouldn't be able to under the Trump plan would be better off accelerating next year's itemized deductions into this year, when they will generate a tax savings. And, even if the standard deduction proposal is watered down, itemized deductions still will be more valuable to a taxpayer this year than next if he expects to be in a lower marginal tax bracket in 2017.
For example, those whose medical expenses exceed the 10% of AGI floor (7.5% of AGI for those age 65 or older) could accelerate into this year discretionary or elective medical procedures or expenses, such as dental implants or expensive eyewear. Individuals could boost charitable contributions (e.g., making two years worth of contributions this year to a favorite cause), pay state income tax and local property tax a bit early (keeping in mind that such taxes are not deductible for alternative minimum tax purposes), or making a year-end mortgage payment.
© 2016 Thomson Reuters/Tax & Accounting. All Rights Reserved.
AFFORDABLE CARE ACT
In 2010, when Congress passed the Affordable Care Act (commonly called Obamacare), the effects seemed far away to many of us. Now that 2014 is here, there will be several direct effects upon every American, with the requirement that all Americans of all ages obtain qualified health insurance for the entire year. The requirement to obtain health insurance applies to you individually as well as to anyone you claim as a dependent on your return.
Several new forms will be issued to taxpayers this year, primarily Form 1095-A, B and C. These forms provide the necessary information to report your health insurance coverage, calculate any credit and calculate any penalty that may apply.
Because much of the reporting for 2014 will be voluntary you may not receive any Forms 1095 but in order to complete your tax return you will need the following.
If you received an advance payment of the Health Care credit by purchasing insurance through the Exchange please be aware that if you received a greater credit than allowed you will be forced to repay the excess with this year’s return.
TAX HIGHLIGHTS FOR 2014
Annual Gift Tax Exclusion: The most commonly used method for tax-free giving is the annual gift tax exclusion,
which for 2014 allows a person to give up to $14,000 to each donee without reducing the giver's estate and
lifetime gift tax exclusion amount.
Retirement Plan Contributions:
Traditional IRAs: $5,500 ($6,500 over 50 years of age) subject to income limitations.
Roth IRA: $5,500 ($6,500 over 50 years of age) subject to income limitations.
401(k) Contribution: $17,500 ($23,000 over 50 years of age).
SIMPLE Plan Contribution: $12,000 ($14,500 over 50 years of age).
Capitalization v. Expensing for Materials and Supplies and Repairs: Effective for taxable years beginning on or
after January 1, 2014, the IRS finalized regulations that determine when taxpayers should capitalize or deduct as
a current expense repairs on tangible property, plus the deductibility of materials and supplies. A deduction for
materials and supplies is allowed under a de minimis rule that includes property that has an acquisition or
production cost of $200 or less. Also, another de minimis safe harbor states that for repairs to be deductible,
among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by
the invoice for taxpayers with applicable financial statements and $500 per invoice for taxpayers without
applicable financial statements.
Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return.
Education Credits: The maximum credit for 2014 is $2,500 (100% on the first $2,000, plus 25% of the next
$2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a
dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the
student's post-secondary education. For 2014, the credit is phased out at modified AGI levels between $160,000
and $180,000 for joint filers and between $80,000 and $90,000 for other taxpayers.
The Lifetime Learning credit maximum in 2014 is $2,000 (20% of qualified tuition and fees up to $10,000). A
student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to
acquire or improve job skills. As with the Hope (American Opportunity Tax Credit in 2014) credit, eligible
students include the taxpayer, the taxpayer's spouse, or a dependent. For 2014, the Lifetime Learning credit is phased out at modified AGI levels between $108,000 and $128,000 for joint filers, and between $54,000 and
$64,000 for single taxpayers.
Residential Energy Efficient Property Credit: Until 2016, tax incentives are available to taxpayers who install
certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property,
small wind energy property and geothermal heat pumps. The property purchased cannot be used to heat
swimming pools or hot tubs.
Capital Gains Rates
• Capital gains on property held one year or less are taxed at an individual's ordinary income tax rate.
• Capital gains on property held for more than one year are taxed at a maximum rate of 20% (0% if an individual
is in the 10% or 15% marginal tax bracket; 15% for individuals in the 25%, 28%, 33% and 35% brackets).
Investment Income Tax: Continuing from enactment in 2013, a 3.8% tax is levied on certain unearned income.
The tax is levied on the lesser of net investment income or the amount by which modified AGI exceeds certain
dollar amounts ($250,000 for joint returns and $200,000 for individuals). Investment income is: (1) gross income
from interest, dividends, annuities, royalties, and rents (other than from a trade or business); (2) other gross
income from any business to which the tax applies; and (3) net gain attributable to property other than property
attributable to an active trade or business. Investment income does not include distributions from a qualified
retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and
the trading in financial instruments or commodities. With this additional tax, the maximum net capital gains
rate is 23.8% in 2014. Because distributions from qualified retirement plans are not subject to the tax, taxpayers
may want to invest in retirement accounts, if possible, rather than taxable accounts.
Tax Return Related Identity Theft
Fraudulently filed tax returns are becoming an issue for both the Internal Revenue Service and taxpayers. An
identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. This link
provides information on how to protect yourself, what to look for, and what to do if you become a victim:
www.irs.gov/uac/Taxpayer -Guide-to-Identity -Theft.
The payment of taxes
One may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
Judge Learned Hand - famed american judge
Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)
Tax season opens January 31. Start gathering your info now
What are the odds of being audited?
Clients often ask me, "what are the chances I will be audited?" Well here are the numbers from last year, according to the Internal Revenue Service's Fiscal Year 2012 Enforcement and Service Results report, which covered the tax season that ended in April 12, 2012:
Total of All Individual Returns Filed: 143,399,737
Mail/Correspondence Audit: 1,122,216
- Field Audit/In Person: 359,750
- Total Combined Audits: 1,481,966
- 1.03 percent
Total Individuals with Income Under $200,000:
- Mail/Correspondence Audit: 1,012,898
- Field Audit/In Person: 290,015
- Total Combined Audits: 1,302,913
- 0.94 percent
Total Individuals with Income Over $200,000: 4,845,267
- Mail/Correspondence Audit: 109,318
- Field Audit/In Person: 69,735
- Total Combined Audits: 179,053
- 3.70 percent
Total Individuals with Income Over $1 Million: 337,477
- Mail/Correspondence Audit: 23,139
- Field Audit/In Person: 17,826
- Total Combined Audits: 40,965
- 12.14 percent
So what does that mean? Well, as you can see the chances of being audited are less than 1% if you make less than 200k. But that doesn't mean you shouldn't be prepared. Keep all documents that pertain to your tax return and make sure you have the necessary reciepts to backup the deductions you are taking especially those that deal with mileage, meals and contributions as those are areas they often look at.
Taxpayers often forget or don't realize that there are a number of miscellaneous items that they
can deduct on their schedule A such as tax preparation fees, job expenses, investment fees, job
education costs etc. The total of these deductions must be greater than 2% of your adjusted gross income, but added together they just may hit the mark and save you a few extra dollars. The following is a list from
IRS pub 529 of common unreimbursed employee expenses. Keep in mind that these expenses must be paid or incurred during your tax year, for carrying on your trade or business of being an employee, and ordinary and necessary.
Business bad debt of an employee
Business liability insurance premiums.
Damages paid to a former employer for breach of an employment contract.
Depreciation on a computer your employer requires you to use in your work.
Dues to a chamber of commerce if membership helps you do your job.
Dues to professional societies.
Home office or part of your home used regularly and exclusively in your work.
Job search expenses in your present occupation.
Laboratory breakage fees.
Legal fees related to your job.
Licenses and regulatory fees.
Malpractice insurance premiums.
Medical examinations required by an employer.
Passport for a business trip.
Repayment of an income aid payment received under an employer's plan.
Research expenses of a college professor.
Rural mail carriers' vehicle expenses.
Subscriptions to professional journals and trade mag-azines related to your work.
Tools and supplies used in your work.
Travel, transportation, meals, entertainment, gifts, and local lodging related to your work.
Union dues and expenses.
The education credits, including the American Opportunity Credit, were extended through 2012 for expenses
paid for tuition, certain fees and course materials for higher education. The maximum credit available is $2,500 in 2012 which includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000. Additionally, the Lifetime Learning Credit sticks around for 2012, capped at $2,000, which applies to 20% of the first $10,000 of qualifying out-of-pocket expenses The above-the-line Tuition and fee deduction was also extended so that taxpayers who don’t itemize can continue to benefit. So don't overlook these credits as they can mean big savings on your return and they may be gone soon.
Chris has been working in the industry for over a decade and has a passion for ensuring her clients have the best service in the area of taxation, accounting and bookkeeping.