Multiple Retirement Plans

I make a SEP(simplified employee pension) and a Roth contribution every year. If you are a 401k plan participant, you can still do a IRA contribution too. Many people think if you do one type of plan you can't do the other. There are income limitations for making regular deductible IRA contributions and Roth contributions, but there is no limit for making nondeductible IRA contributions which you could then transfer to a Roth. It is a good idea in retirement to have a source of nontaxable funds like a Roth to draw on because more taxable income increases your medicare costs and taxable social security.

Tax Extenders

Congress passed on December the 18th a bill concerning tax extenders among other issues. The following provisions were made permanent:

1. The section 179 depreciation limit was increased to $500,000 and indexed to inflation for future years. This is very significant since the limit was only $25,000.
2. The research credit was made permanent.
3. The tax free distribution from IRA accounts by those aged 70 and 1/2 to charities was made permanent.
4. State and local sales tax itemized deductions will be available and especially helpful in those states without income taxes.


Some provisions were extended but not permanently such as bonus depreciation, work opportunity tax credit, exclusion from income for forgiveness of debt on a home foreclosure or short sale, and deductions for private mortgage insurance premiums.

8 Ways to Reduce your Taxes for 2015 Right Now

What can you do in the next two weeks to lower your taxes? Time is running out but you can still take the following actions:

1. Make noncash donations of clothing and household items to a recognized charity. Keep a receipt and a record of items donated and value each item per the valuation guide at salvationarmyusa.org.
2. Organize your tax documents and deductions in one file folder for the year.
3.If you have a business, delay mailing bills until late December so that payments won't be received until 2016. Pay your January business rent in December and buy office supplies.
4. Sell investments with losses so that you can offset any capital gains plus $3,000.
5. Now is the time to write a check to your favorite charity.
6. Pay your fourth quarter estimated state taxes by 12/31/15.
7. Increase your 401(k) contributions. This year workers can contribute up to $18,000 and if you are at least 50, you can contribute $24,000.
8. Instead of taking pretax funds from a  retirement account, consider taking funds from your Roth or a reverse mortgage. Both are sources of tax free cash flow.

Roth IRA Excess Contributions

If your income is too high, you can't make Roth IRA contributions. Instead you can make nondeductible IRA contributions because there is no income limit on those and there are no rules preventing you from converting the nondeductible contribution immediately to a Roth. You also have until the due date of the return plus the extension period of six months to withdraw an excess Roth contribution. If you miss the deadline, there is a 6% excise tax on excess contributions per year until the excess is withdrawn.

Tax Extenders for 2015

Current speculation is that the only tax extender that will done by Congress this year is the direct charitable transfer of $100,000 out of your IRA because of all the pressure from the charities. This is bad news for those businesses that are counting on the section 179 depreciation increase from $25,000 to $500,000. I'll keep you posted on any changes.

Tax Extenders Bill for 2015

There are about 50 tax provisions that Congress will consider at the last minute again this year which may affect your 2015 tax return. These include section 179 depreciation which is now capped out at only $25,000, 50% bonus depreciation, state and local sales tax deduction, teacher expense deduction of $250, mortgage insurance premium deduction, energy efficient home improvement tax credit, and the qualified charitable distribution out of your IRA up to $100,000 which counts toward your required minimum distribution. Look for a decision on the bill on Friday, December 18 which is the day Congress leaves on Christmas vacation.

Social Security Strategies

The recent budget agreement signed into law on November 2, 2015 ended two popular claiming strategies for married couples; file and suspend, and a restricted application for spousal benefits only. Both strategies involve elections for one spouse to continue to earn deferral credits from full retirement age 66 to age 70 while spousal benefits are claimed. The claiming methods have been available since 2000.  Each year of deferral credit increases monthly social security benefits by 8%. Couples that have already used these strategies are grandfathered in and there are transition rules allowing a spouse to claim on their spouse's suspended benefit by May 1, 2016. If you are 62 by the end of 2015, you can still file a restricted application for spousal benefits when you reach age 66 provided your spouse is at full retirement age.

Nondeductible Taxes

Federal taxes are nondeductible such as the income tax, social security, medicare, gift, estate, excise, and Obamacare tax. Also custom duties, penalties and fines such as parking tickets and speeding tickets, and personal licenses like a dog license are not deductible.

2016 Inflation Adjustments for Tax Provisions

The IRS announced inflation adjustments for more than 50 tax provisions for 2016 on October 21, 2015. Some of the major ones are below:

1. The personal exemption rose from $4,000 to $4,050.
2. The standard deduction for singles and joint returns remained at $6,300 and $12,600 respectively.
3. The top rate of 39.6 percent applies at $415,050 for singles and $466,950 for joint returns. This is up from $413,200 and $464,850.
4. The basic exclusion for estates increased to $5,450,000 from $5,430,000.
5. The foreign earned income exclusion went from $100,800 to $101,300.

Small Business Health Care Insurance Reimbursements

Many small businesses  reimburse employees for some or all of their individual health insurance premiums as opposed to establishing their own health insurance plan. Beginning 7/1/2015 this is no longer an option due to new IRS regulations. The penalty is $100 a day in excise tax per employee up to $500,000 per company for any size company. S Corporations are exempt through the end of 2015. Bills have been introduced in the House and Senate to remedy the situation but nothing has happened yet.

Social Security for 2016- No Increase

Social security recipients will not receive a cost of living adjustment benefit increase in 2016 because of low inflation this year. This is only the third time in 40 years that payments won't change.  Also payments for Medicare Part B coverage will increase by about $54 a month for all those with higher incomes and those that don't have the coverage deducted from their social security payments. About 30% of Medicare beneficiaries will pay the premium increase.

Late Filing Penalty

The IRS penalty for failure to file a return is pretty stiff. It is 5% of the amount of tax due per month or part of a month up to a maximum of 25%. If you don't owe any tax, then there is no penalty. If the return is more than 60 days late, then there is even a minimum penalty of $135 or tax due. The extended due date of the 2014 individual return is this Thursday October 15, and after that this penalty comes into play if you haven't filed a return for 2014.

Deducting Vehicle Expense

The IRS allows you to to take the greater of actual costs or the standard mileage rate which is 57.5 cents for 2015 for cars driven for business. Commuting is not considered business use per the IRS. I recommend that most business owners use the standard mileage rate since it is so much easier to keep up with if they are using their cars less than 50% for business or think that they may in the future. Once you pick the actual cost method for a car, you can't switch later to the standard mileage rate. The information needed to deduct vehicle expense each year under the standard mileage rate is total miles driven, total business miles, and date vehicle is placed in service. You need to keep some sort of contemporaneous record to track your business miles each year. I use a quickbooks function to keep up with mine. One of my clients just lost their entire deduction for business use of a vehicle because they didn't have any supporting records in a recent IRS audit.

Health Club Dues

Generally health club dues are not deductible. However if a doctor recommended an exercise program as treatment for a specific condition, then you could deduct it. Doctor recommended exercise programs just to improve your health won't work.

Section 179 Deduction

A taxpayer can expense certain property placed in service like equipment, furniture, and autos if they are used more than 50% in a trade or business. The property also has to be purchased from an unrelated party. Most rental property, buildings and their structural components, and  investment property do not qualify. The maximum deduction for 2015 is now $25,000. Congress may increase the maximum back to $500,000 before the end of the year like it did for 2014, but you can't count on it.

Self Rental

If you have a business and also charge rent to the business since you own the business office, then how does the IRS treat the rental income from the office property? You can deduct the rental expense on your business tax return but the rental income from the office, which is usually reported on schedule E, is considered non passive if you have a profit and passive if you have a loss. This is to prevent the taxpayer from creating passive income to offset other passive losses. In my opinion, the best way to handle this situation is to structure the rental rate to break even on schedule E.

Phone Calls from the IRS

Some of my clients have received phone calls from someone saying they are from the IRS asking for information or money. Hang up. This is a scam. They are trying to scare you into giving them what they want by mentioning dire consequences like jail if you don't cooperate. The IRS will not ever initiate a phone call directly with taxpayers to ask for information. They send letters instead which you should send to me to handle for you.

Nondeductible Personal Interest Expense

The following is a partial list of  non business nondeductible  interest : car loan interest, credit card interest, bank overdraft fees, interest paid on form 1040 tax owed, interest on home equity debt over $100,000, interest paid on life insurance loans, and interest paid on loans for personal expenditures.

Roth IRAs and the Surviving Spouse

A surviving spouse as beneficiary has the option of treating the decedent's Roth IRA as his or her own. If such treatment is elected, then there are no required minimum distributions.  The spouse can even combine the inherited Roth IRA with their own Roth IRA. This is a correction to last week's tax blog.

Roth IRAs and Required Minimum Distributions

Required minimum distributions (RMDs) are not required for Roth IRAs while the participant is alive. It is one of the major advantages of a Roth vs. a regular IRA. However at death distributions become required for the beneficiary under the inherited IRA rules. A spouse has the option of rolling over the Roth IRA to his or her own Roth IRA which is the best option since the RMDs can be smaller, because they are determined by the uniform lifetime table instead of the single life table. Beneficiaries of inherited IRAs other than the spouse must use the single life table. Any amount of an RMD which is not distributed is subject to a 50% excess accumulation penalty.

No Will

If you die without a will in Georgia, the spouse's share cannot be less than 1/3. It could be 1/2 if there is only one child. Also this only applies to items not passing by title (joint account) or beneficiary like in a retirement account such as an IRA.  This is a correction to my previous post.

No Will

If you don't have a will, the state decides who gets your assets, and it might not be what you want. Each state has different rules. Here is Georgia your spouse gets only one third of the estate if there is no will. The remainder of the estate is split up between other family members.

Form W-4- Employee's Withholding Allowance Certificate

You usually have to fill this out on the first day at a new job. This form tells the employer how much to withhold from your paycheck for federal taxes. It is a 2 page form which is actually pretty complicated especially if you are married and both spouses work, and many people don't understand it. The form calculates the number of allowances you are claiming. The more allowances you claim, the more take home pay you will receive in your paycheck because the federal withholding will be less. It is usually better for the higher paid spouse to claim all of the applicable allowances and the lower paid spouse to claim zero allowances. I recommend that if both spouses work, that you check the married box but withhold at the higher single rate. The goal is to try to break even when you file your tax return. You should consider completing a new form W-4 every year to fine tune your withholding.  I can prepare a W-4 along with your tax return if you request it.

Donating Appreciated Tangible Personal Property

Normally you get a deduction for the fair market value (FMV) of property donated to a charity. However if you donate appreciated tangible personal property like artwork or jewelry you will probably be only able to deduct your cost or basis in the property. You can deduct the FMV only if the charity uses the property for its exempt purpose, for example, if a church displays the artwork on its walls. If the charity just sells the item and uses the proceeds, then it doesn't qualify for a FMV deduction as the IRS says that is an unrelated use.

Taking Social Security at age 62

You should start getting social security at age 62 if you are single, not working, don't think you will make it to age 77, and you need the money for living expenses. Almost 80% of those persons turning 62 opt to take social security immediately so you will also be in the majority. If you don't fall into those categories, wait until age 70 to start social security and collect 71% more every month as long as you live. Your spouse will also get that 71% additional amount as a survivor's benefit  on your demise if it is greater than their social security payment.

Investment Travel

Trips to your broker, investment adviser, and to look after investment property are deductible. Be sure to keep track of your mileage and you can deduct 57.5 cents per mile for 2015. Costs to attend investment seminars or conventions and trips to attend stockholder meetings are nondeductible.

IRA Partnerships

In the last several years many of you have received K-1's from partnerships due to investments in your IRA account. The federal ID number is not your social security number but another entity number. Brokers have been putting funds in partnership investments to try to increase yields. The question is what do you do with these K-1's on your tax return. The short answer is that you do nothing on your own individual tax return. A form 990-T for tax exempt organizations needs to be filed if the code 20 V on the K-1 is greater than $1,000. Code V is for unrelated business income. Most of the K-1 code V's I have seen are much less than $1,000.

Estimated Tax payments

A common IRS notice that I have been seeing lately deals with differences in estimated tax payments between the taxpayer and the IRS. Estimated tax payments are due quarterly and I usually will calculate them in advance for the next year when I do the tax return. Sometimes the amounts paid in differ from what I set up or from what the taxpayer remembers when giving me info on the  tax organizer. One way to make certain differences don't come up is to have the estimated tax payments come out automatically from your bank account. I have been doing it this way on my return for years without any problems. The money comes out on the due date and will still be timely, and you don't have to write a check and mail it in. All I need to set up is your bank routing number and account number.

Medicare and Annual Wellness Visits

Medicare does not cover yearly physical exams, but it does provide for an annual wellness visit every 12 months which is not as extensive as an annual physical. Annual wellness coverage started in 2011 because of the Affordable Care Act, and includes measurement of weight and blood pressure, medical update history, a review of initial personal risk assessment, detection of cognitive impairment, a review of medications, an update of referral services, and an updated screening schedule.

How to Check on Your Refund

Go to www.irs.gov and click on where's my refund under filing and payment. You need your social security number, filing status and amount of the refund. Refunds are generally issued within 21 days of the IRS receiving your return. This process works much better than trying to call the IRS.

The Best Tax Deduction

Tax deductions make you happy. It is nice to get recognition for that business expense or charitable contribution and know that the money may be gone but it will save you on your taxes when you deduct it. What about a tax deduction that doesn't involve the money going away? The best tax deduction is the money you put away for retirement in a qualified plan like an IRA or a 401k. It reduces your taxable income, but it is still yours growing tax free in a retirement account. It is a tax free investment in yourself.

What Medicare Doesn't Cover

Medicare does not cover the following: hearing aids and exams, dental care, eye exams and eyeglasses, foot care, orthopedic shoes, yearly physical exams, and usually the most expensive of all- long term nursing home care.

Bond Premiums

If you purchase a bond at a higher amount than the maturity value, you have paid a premium which when amortized reduces the amount of interest income you have to report. There is a new line on the 2014 1099-INT (box 11)  where the bond premium is listed. Most brokers are amortizing the bond premium for you based on the constant yield method which will reduce your taxable interest income. If you hold the bond until maturity, then you will break even on the disposition.

Hobby Losses

Can you deduct the losses from a hobby? The  answer is no. Hobby is a bad word to the IRS, and if you are engaged in a hobby you are not intending to make a profit according to the IRS. If you can, you want to become a business where you can deduct the losses. To do so you have to show you intend to make a profit. This profit making intent is a facts and circumstances test that is determined by factors such as how professional are you in carrying out the activity. Do you keep good books and records? Did you get any required business licenses? Do you keep a separate checking account and credit card just for the business? How much time and effort goes into the business? The one that comes up a lot in litigation is whether the activity has elements of personal pleasure or fun.  The more fun it is the more the IRS will say it is a hobby. Hobby losses can be deducted to the extent of hobby income and disallowed hobby losses can't be carried forward.

How to Scare your Tax Preparer

If you want to put a scare into your tax preparer, bring him a shoe box full of receipts to sort and put on the tax return. We don't really need most receipts and would much prefer just the totaled amounts for items like medical expenses and business expenses. However the shoe box full of receipts is important to keep in case you ever get audited by the IRS. Then it comes in real handy. We do want copies of all documents that the IRS get a copy of like 1099s, W-2s, and K-1s so we can make sure the numbers we put on your tax return are the same.

The Three Greatest IRS Sins

The number three sin is not to respond to an IRS notice. Ignoring IRS letters can only get you into more potential trouble. Number two is failure to report income. The IRS knows about most income from W-2s and 1099s so not reporting income will get you automatic penalties, interest, and taxes.
They can also audit your bank deposits and review your standard of living to look for unreported income. The number one greatest IRS sin is to not file a tax return. The IRS can impose a 25% penalty on unpaid taxes and the statute of limitations remains open forever until you file.

Medical Expenses Paid for Others

You can deduct medical expenses paid for those where you provide for over half of their support but who don't qualify as your dependents such as parents or adult children whose income exceeds $3,950. You can always deduct medical expenses paid for your spouse and dependents.

Legal Fees

When can you deduct legal fees on your individual return? It is a little tricky, because it all depends on what the fees are for. If the fees are closely related to your taxable income, you can deduct them. If the fees arise from personal activities, then they are not deductible. For example, fees to collect alimony in a divorce are deductible, but fees related to child support are nondeductible personal expenses. Some more examples of nondeductible legal fees are the cost of preparing wills, non-tax estate planning, fighting a driver's license suspension, and establishing an irrevocable trust. It is always a good idea to have an attorney allocate his bill between tax matters and non-tax matters in estate planning and divorce situations so you can support your deduction.

IRAs

You can make an IRA contribution of $5,500 for 2014 plus an additional $1,000 if you are at least age 50. You must have earned income or compensation up to the amount of your contribution except if you are a spouse with little or no income. The IRS lets you count your spouse's earned income for your contribution. You also can't make a regular IRA contribution if you are 70 and 1/2 or older. A Roth has the same contribution limits but no age restriction. If your income level is over $181,000
or you are covered by an employer retirement plan, then you may want to consider a nondeductible IRA. A Roth and a nondeductible IRA both are made with after tax income but they grow tax free. IRAs are a great tool for retirement.

Start Up Costs

Basically start up costs are all of the expenses you have in creating or investigating a new business up until the time you get that first dollar of sales. The IRS allows you then to deduct up to $5,000 of start up costs and amortize any excess over 15 years beginning with the month of first sales. If your effort is unsuccessful and you are an individual, generally the costs are personal and nondeductible.

Standard Allowance for Business Mileage for 2015

The new business mileage rate has increased from 56 cents per mile to 57.5 cents per mile for 2015. The standard rate is determined by an annual study of all of the costs of operating an automobile including depreciation, and can used to determine the taxable deduction of using a vehicle for business. I find using the standard allowance the best and easiest way for most taxpayers. You have the option of using actual costs, but once you go that route you can't change back to using the allowance method.

Tax on Social Security

Up to 50% or 85% of social security benefits are taxable if your modified income is greater than certain amounts based on your filing status. If you have less than those amounts, then social security benefits are tax free. As you can see though the limits are very low. For single returns, income between $25,000  and $34,000 makes up to 50% of social security benefits taxable. Over $34,000 and up to 85% is taxable. For joint returns, income between $32,000 and $44,000 makes up to 50% of social security benefits taxable. Over $44,000 and up to 85% is taxable. To calculate the modified income you have to add tax exempt interest and one half of social security benefits to adjusted gross income before any social security benefits. You have to add certain other items of income but those two are the most common. Roth distributions do not have to be added so a Roth is a good source of funds in retirement which will not make more of your social security income taxable.

Statute of Limitations

The statute for tax examinations is the later of three years from the date the tax return is filed or due. There is no limitation for false returns or failure to file returns. If you leave out more than 25% of gross income, the statute of limitations is six years from the date the return was filed, whichever is later. To comply with these provisions, I usually tell clients to retain support for tax returns for the current year and the three prior years. That would mean at present you should retain your supporting records for 2011 through 2014 tax years. I would keep a copy of the tax returns themselves forever.