Dear Clients and Friends,

As 2017 begins, the odds of comprehensive tax reform look promising. Individual, business, and estate tax rules could undergo major changes for the first time in 30 years. The Affordable Care Act will likely be revised in ways that affect information filing requirements, payment of penalties, and fringe benefits. While a proposed plan for reform exists, the extent, timing, and details will be subject to debate and discussion.

Whatever changes are coming, a new year and new tax legislation always provide fresh opportunities for tax planning. Keeping up may feel like a challenge, but a focus on the aspects you can control will help you stay on the right financial path.

Your goal, as always, is to minimize your taxes and keep more of your hard-earned money. This New Year Letter is a reminder of our commitment to help you do just that. We hope you find the Letter informative and helpful. Please contact us if we can assist you in your planning and in meeting your tax filing obligations.

Reap the most savings with early planning for changing conditions

You already know that tax laws — and your opportunities to plan for them — change regularly. This year, with comprehensive tax reform a real possibility, early planning, combined with a commitment to adapt to changing conditions, will help you reap the most savings. Here are suggestions to get you started.

Your itemized deductions

Regardless of what other tax changes Congress makes, it’s likely that a deduction for charitable donations will be preserved. To benefit, keep all the records required so you can claim a full deduction for your charitable gifts. For instance, if you give a monetary gift of $250 or more, obtain a written acknowledgment from the charity at the time of the gift.

You may also want to consider making a contribution of appreciated property in 2017. Typically, you can claim an itemized deduction of the fair market value of an asset when you donate property you’ve owned longer than a year. In addition, by donating the asset, you don’t have to pay tax on the gain.

One more way to benefit from charitable contributions: the IRA-to-charity rule that you can use when you’re age 70 1/2 or older. The rule lets you make a donation to your favorite charity with money from your IRA while using the amount you donate as an offset of some or all of your required minimum distribution. Though you can’t take a deduction for the charitable contribution, not having to claim the income from the required distribution can garner other benefits.

Your home offers a variety of tax breaks that are also likely to remain in effect during and after 2017. These benefits, which currently include deductions for mortgage interest and real estate taxes, offer opportunities for tax savings as well as financial planning benefits. For example, you can generally deduct mortgage interest on loans you take out to buy your home. To get a current-year tax deduction while reducing the overall amount of interest you’ll have to pay, you might consider refinancing your acquisition debt into a shorter-term loan.

Also consider a preventive bit of planning for a tax break you hope you’ll never have to use: casualty losses. Generally, you can deduct losses for damage to personal property in excess of 10% of your adjusted gross income (after subtracting $100 per casualty). Take photos or videotapes now so you can show the condition of your property before and after any casualty.

Your retirement plans

Retirement plan contributions are tax-saving winners for multiple reasons, which is why establishing a regular contribution schedule early in the year is standard tax planning advice. The contribution limit for 401(k) plans for 2017 is $18,000. You can make an additional catch-up contribution of $6,000 when you’re age 50 and over, for a total yearly contribution of $24,000.

In addition to your 401(k), you can contribute to your own IRA. The maximum contribution for 2016 and 2017 is $5,500, with an additional $1,000 catch-up contribution if you’re 50 or over. Your IRA also gives you the opportunity for late 2016 tax planning, because you can make a contribution for 2016 up until the April due date of your federal income tax return.

Your investments

Taxes can be a frustrating headwind against investment earnings. Part of the impact can be offset by location-aware investing. That’s a fancy way of saying you can save taxes on your portfolio income by making what would normally be taxable sales within your tax-deferred retirement account. In a taxable portfolio, consider investments that offer little or no dividend income, but instead generate non-taxable unrealized gains over time. If you’re looking into a mutual fund, research the fund’s dividend or capital gain payment schedule to time your purchases around taxable distributions.

When selling an appreciated security, pick shares you have owned for one year or more to qualify for the long-term capital gain tax rate. That’s generally 15%, while gain on stocks held less than a year can be taxed at rates as high as 39.6%. Selling a security that has lost value might also be a benefit. You can offset your capital gains with capital losses, and even offset up to $3,000 in ordinary income when capital losses exceed your gains.

Your business

Incorporate planning to make spending money on growing your business a tax-wise event. For example, you might want to treat a client or customer to a meal. When you meet for a business breakfast or lunch, you can deduct 50% of the meal, giving you a tax benefit while improving your business relationships.

Updating your professional skills is another opportunity to get a tax benefit. Schedule professional conferences during 2017 that will improve your current skills. With some limitations, travel to and from the conference, lodging, and related out-of-pocket expenses, as well as the actual conference cost, are tax deductible.

Finally, make time early in the year to review your business form. Your choice of entity plays an important role in the tax planning strategies you can use. Determine if your current entity type is the best for your business, or if a change might open up possibilities for tax savings.

Contact our office for more tax planning tips and tax-saving strategies, as well as updates on current changes to the rules. We’re here to help.
© MC 2017

While last year was quiet in terms of tax legislation, you’ll want to be aware of some changes that will have an impact on your 2016 personal and business tax returns and your 2017 planning. Here’s a brief summary.

IRA rollovers. In general, funds you withdraw from your IRA must be redeposited within 60 days of receipt. In some cases, when you inadvertently miss the 60-day deadline, you can get relief by “self-certifying” that the delay meets one of eleven specific reasons. If any of the eleven apply, you have up to 30 days after the reason or reasons no longer prevent you from making the contribution to complete the rollover.

Bonus depreciation. Bonus depreciation is an additional first-year deduction of up to 50% of the cost of qualified property that you purchase and place in service during the year. The 50% rate is effective for 2016 and 2017. You can claim bonus depreciation in addition to Section 179 accelerated depreciation.

Home mortgage interest. You may be able to claim a larger mortgage interest deduction if you co-own a home with someone other than your spouse. In specific situations, both owners may be able to claim a deduction.

Section 179. The maximum Section 179 immediate expensing limit for qualifying property you bought and placed in service in 2016 is $500,000 ($510,000 for 2017). The deduction is phased out above a $2,010,000 threshold for 2016 ($2,030,000 for 2017). Section 179 expensing is also available for certain lighting, heating, and cooling equipment placed in service in commercial buildings.

Estates. Under basis consistency rules, you’ll need to calculate your basis in inherited property consistently with the amount reported on the federal estate tax return. Generally, you’ll receive a form from the estate. Be aware these rules affect your duties as an executor, as well as your reporting requirements as a beneficiary.

Partnerships. New partnership audit rules take effect in 2017. Changes include allowing the IRS to assess audit adjustments to the partnership. Certain partnerships, generally those with fewer than 100 partners, can opt out of the new rules.

Home sale gain exclusion. Generally, you can exclude up to $250,000 of gain from the sale of a home when you’re single ($500,000 when you’re married), as long as you meet the requirements. You may also qualify for a partial exclusion, if the primary reason for the sale is unforeseen circumstances. “Unforeseen” means events you could not have reasonably anticipated before buying the home and moving in. For example, a partial exclusion was allowed when a family living in a two-bedroom, two-bath condominium gave birth to another child and needed a larger residence.

© MC 2017

Up-to-date with due dates

As you prepare for the tax filing season, take note of changes to 2016 tax return deadlines. Here are changes for common forms. Contact us for a complete list.

WHAT’S CHANGED

Form W-2. Forms W-2 for 2016 are due January 31 for all copies. In the past, employers had to provide Form W-2 to employees by January 31. Now the January 31 deadline also applies to copies submitted to the Social Security Administration.

Form 1099-MISC. The due date for filing all copies of 2016 Forms 1099-MISC with non-employee compensation in Box 7 is January 31, 2017. For these forms, the January 31 due date applies to both paper and electronic filing.

Partnerships. Partnerships and LLCs that file Form 1065 now must file or extend by March 15 instead of April 15. A six-month extension to September 15 is available.

C corporations. The due date for regular corporations filing Form 1120 has been pushed back one month to April 15. An automatic five-month extension to September 15 is available.

Foreign account reporting. FinCEN Report 114, Report of Foreign Bank and Financial Accounts, is due April 15, two and a half months earlier than the former due date of June 30. A new six-month extension is available.

WHAT’S THE SAME

S corporations. The due date for Form 1120-S remains March 15.

Individuals. Individual income tax returns are due April 15.

Estates and trusts. Form 1041 is due April 15.

2017 DUE DATES AT A GLANCE

© MC 2017

Is your business liable for taxes in other states?

If you’re doing business in more than one state, you need to know about “nexus.” Nexus is the level of business presence that enables a state to require you to register and collect taxes.

Sales and use taxes

Presently, forty-five states and the District of Columbia have enacted comprehensive sales and use tax laws. While the remaining states have no statewide sales tax, certain local areas within those states can collect sales tax. Although sales taxes generally apply to sales of tangible personal property to end users, states may also tax various services.

In most cases, if you’re a nonresident seller, you can’t be required to collect a state’s sales tax unless you have nexus with that state. Broadly speaking, in this context, nexus is a level of physical presence that’s more than minimal. Depending on state law, physical presence can include owning or leasing real or personal property within the state, or having employees, independent contractors, or agents living in the state or making frequent marketing-related visits.

Once your firm has established nexus according to state law, you must obtain a sales tax permit and collect taxes on sales in the state unless a specific exemption applies.

Other state taxes

Generally, states have applied the physical presence nexus rule only to sales and use taxes. However, states may tax the licensing of intangibles such as trademarks and franchise rights by out-of-state licensors to in-state licensees. States may also assess income or franchise taxes against out-of-state companies that bill royalties and license fees to resident customers for the use of patents, trademarks, and other intellectual property, even though the billing companies have no physical presence.

Nexus issues can be complex and counterintuitive. Please call us if you have questions.
© MC 2017

As you do your planning for 2017, be aware that Congress may make changes to the tax code. See us prior to making business and financial decisions so that current rules and pending changes can be considered.

© MC 2017

Philip L. Liberatore, CPA

[email protected]

Dear Clients and Friends,

So far, 2016 has been a quiet year in terms of new tax legislation. The most recent major change took place last December, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH). Many of the provisions in that law remain in effect until the end of 2016 and beyond.

Practically speaking, while tax reform continues to be a talking point in Congress and in presidential election campaigns, the probability of achieving meaningful changes in the near-term is unlikely. The longer-term outlook is more difficult to predict, with proposals and discussions ranging from a comprehensive overhaul to less sweeping revisions involving specific sections of the Internal Revenue Code, such as modifications to the way businesses are taxed.

Though a simpler tax code would be a welcome development, this interlude of relative stability does have benefits from a midyear planning standpoint. Because the rules haven’t changed much, you have an opportunity to look over last year’s tax return and implement planning ideas for 2016. In addition, you can review your current tax situation and select strategies to put in place during the remainder of this year. We encourage you to read through the suggestions in this Letter, then contact us for additional options. We’re ready to help with effective tax-saving advice suited to your needs.

Philip L. Liberatore, CPA

[email protected]

Create a tax-saving plan to reduce your 2016 tax bill

Contrary to what you may have heard, there is one sure way to reduce your tax bill: Create a tax-saving plan. And here’s more good news — you still have time to establish and implement your plan before the end of the year. Consider these suggestions as you put your plan together.

Make use of tax deferral strategies

Participating in a retirement plan is a tax deferral strategy with a double benefit. You get to put off paying federal income tax on money you earn currently and you can also put off paying tax on the income earned on the money you deposit in your plan. That’s true for a plan you participate in at work, such as a 401(k), a plan you establish for your own business, such as a Simplified Employee Pension (SEP) plan, and an account you set up with income earned from wages, salaries, and tips, such as an Individual Retirement Account (IRA).

Investors can employ the tax deferral strategy too. A simple method is to wait to sell investments that have appreciated in value until your holding period exceeds a year. At that point, you can benefit from long-term capital gain rates, which generally max out at 20%. Alternatively, you can wait to sell until you can offset gains with losses from other investments. Of course, you’ll want to balance this tax-saving strategy with sound investment decisions.

Reduce your taxable income

On your personal income tax return, expenses you can deduct “above-the-line,” standard or itemized deductions, and allowable exemptions for yourself and your family members can all reduce your taxable income. For example, if you’re a teacher, you may benefit from the $250 above-the-line deduction for expenses you pay out of pocket such as books and supplies. In addition, this year you can also deduct your expenses for professional development. Above-the-line means the deduction is available even if you don’t itemize.

The last quarter of the year is also a good time to sum up your outlays for expenses that qualify as itemized deductions. These include taxes, home mortgage interest, and charitable contributions, and are generally deductible in the year you pay them. Totaling how much you’ve already paid will show you if you have enough to itemize, or if you might want to consider accelerating or postponing expenses to shift the deductions into the current or future year, whichever gives you the bigger tax benefit.

Tip. If you’re age 65 or older, under current law, 2016 is the last year the 7.5% threshold for medical expenses is available. Starting in 2017, your medical expenses will need to exceed 10% of your adjusted gross income in order to claim a deduction. If you’re close to meeting the threshold this year, you may want to renew prescriptions before the end of the year, or schedule routine doctor visits.

Are you a business owner? Changes to the Section 179 depreciation expensing election can help you claim bigger deductions this year. One change to be aware of is an expanded definition of Section 179 property, which now permanently includes computer software and real property such as qualified leasehold and retail improvements, and restaurant property. Another change to note: Air conditioning and heating units are now eligible for Section 179 expensing.

Benefit from credits

Credits can reduce your personal and business taxes dollar for dollar — one reason they’re valuable enough to warrant giving special attention to the details. As an example, if you plan to claim the American Opportunity Tax Credit or other education credit this year, be aware you’ll need a copy of the information statement (Form 1098-T) sent by your school. This year, schools are generally required to report on Form 1098-T only the tuition and qualified expenses that you actually paid. However, you may buy books and credit-eligible materials from a supplier other than your school. Those costs would not be on the Form 1098-T that you receive. To include the expenses in the calculation of your tax benefit, keep receipts as proof of your payments.

Some “green” cars still qualify for federal tax credits too. When you buy a new personal or business plug-in electric drive vehicle in 2016, you may qualify for a credit of as much as $7,500. Eligible vehicles include cars, light trucks, and motorcycles. In general, the vehicle must be under 14,000 pounds and powered by a rechargeable electric motor. There’s also a credit for fuel cell motor vehicles, which are powered by cells that convert chemical energy into electricity. The base credit is $4,000 for vehicles weighing less than 8,500 pounds.

Avoid penalties

A good way to save tax dollars is to avoid paying extra because of missed deadlines or mistakes, including the underpayment of federal estimated tax. If you receive income not subject to withholding such as alimony or rent, verify that you’re on track to pay estimates that total at least the smaller of 90% of the tax for 2016 or 100% of the tax shown on your 2015 return. Special rules apply when your income exceeds $150,000.

Don’t want to make estimated payments? If you have earned income, increasing the amount withheld from your paycheck between now and the end of the year can help avoid a penalty. If you’re married and both working, remember to account for the 0.9% Medicare surtax when your joint income exceeds $250,000.

Looking for more tax planning opportunities? Contact us to schedule a year-end tax review and to explore additional options tailored to your specific circumstances.

© MC 2016

Proposed rules make estate planning an important part of your year-end review

Is your estate plan up-to-date? A year-end review as part of your overall tax planning is a good idea, especially in light of recently issued proposed rules that will make significant changes to certain estate planning techniques. Here’s what you need to know.

What’s changing. The new rules will limit the “valuation discounts” created when assets are transferred between individuals. These discounts help reduce the amount of your assets subject to gift and estate taxes, and are particularly relevant when you have more than $5,450,000 in assets ($10.9 million for a couple). Since the top estate and gift tax rate is 40%, taking advantage of these discounts can help reduce the tax bill on your estate.

Who’s affected. This type of estate planning usually involves the use of a family limited partnership to transfer ownership of assets such as businesses and real estate from parents to children. With this strategy, control of the partnership is dispersed among family members, making the partnership assets harder to sell. Due to the difficulty in selling, the value of the assets is reduced, creating a valuation discount. Once the rules go into effect, you may have to pay more gift and/or estate tax when utilizing this type of estate planning.

When the change will happen. Currently, the new rules are expected to be finalized in January 2017.

Contact us for details, and to schedule a review of your estate plan.

© MC 2016