IRS 2017 Mileage Rates

The mileage rates are going down for 2017 from 2016. Business miles are going from 54 cents a mile to 53.5 cents per mile. Medical or moving mileage is going to 17 cents per mile from 19 cents for 2016. The charitable rate is unchanged at 14 cents per mile and is set by statute so it rarely changes. Taxpayers have the option of using actual costs  of using their vehicles including depreciation rather than the standard mileage rates. In my opinion it usually is not worth the effort to keep up with actual costs except when you use your vehicle over 50% for business.

Funding a Health Savings Account (HSA)

You can make a one time nontaxable transfer of funds from your IRA to your HSA. It has to be made directly by the trustee of the IRA to the HSA. On the tax return you report the IRA distribution on line 15a and 0 (the taxable part) on line 15b and write HFD next to line 15b.

Tax Debts Over $50,000

At a seminar recently I learned that you will be stopped at the airport and your passport taken away if you owe over $50,000 to the IRS. So clear up any tax debts before you decide to go on an international trip.

12 Ways to Reduce Your Taxes for 2016 Right Now

What can you do this month to lower your 2016 income taxes? Time is running out but you can still take the following actions:

1. Make donations of clothing and household items to Goodwill. Keep the receipt and a record of items donated and use the valuation guide at salvationarmyusa.org to value the donation.
2. Organize your tax documents and deductions in one file folder for the year.
3. If you have a business on the cash basis, delay mailing bills until late December so that the payments won't be received until 2017. Pay your January business rent in December and buy office supplies. Buy and place into service office equipment.
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 12/31/16.
7. Increase your 401(k) contributions. This year workers can contribute up to $18,000 and $24,000 if you are at least 50.
8. Consider taking cash from your Roth if you need funds instead of from your pretax retirement account.
9. Invest in a conservation easement. It may be possible to get up to a 4 to 1 charitable contribution write off of the amount invested.
10. Donate appreciated stock to charity.
11. Do a qualified direct contribution of your required minimum distribution from your retirement account to charity.
12. If you are 62, house rich, and cash poor, consider a reverse mortgage to provide a source of tax free funds.

Trump's Tax Plan

President elect  Trump discussed several changes to our taxes while he was campaigning. Below are some of the highlights: 1. Top individual rate of 33% 2. Top capital gains rate of 20% 3. Top corporate rate of 15% 4. Repeal of estate tax 5. Eliminate AMT 6. Increase standard deductions to $15,000 single and $30,000 joint 7. Eliminate personal exemptions 8. Cap itemized deductions at $100,000 single and $200,000 joint and 8. deduction for childcare and eldercare.

2017 Social Security Wage Base

The wage base subject to the 6.2% social security withholding payroll tax for employees has increased to $127,200 from the 2016 amount of $118,500.

Advance Payments of Obamacare Health Insurance

If you have received the health insurance subsidy, then you have to reconcile that amount with what you are eligible for using form 8962 based on your actual income for the year. The amount of your advance is shown on form 1095-A on a monthly basis and needs to be provided to your tax preparer.  You have to pay back any excess premium credit received or you may be due an additional credit. You will get a notice from the IRS if this calculation on form 8962 is not attached to your tax return.

Investment Expenses

When can you deduct these expenses? The IRS tells you can deduct them if they are ordinary and necessary for the production of income or management, conservation or maintenance of income producing property. Some examples are: my favorite- tax preparation fees, investment advisory fees, retirement plan custodial fees if paid with funds outside of the plan, safe deposit box fees, the cost of maintaining estate real property until distribution, depreciation on your computer used for online investing, lunch with your broker if you pay for it, and books and  newspapers like the WSJ dealing with investments. You cannot deduct the broker's commissions on stock trading as that cost is added to the basis of the investment. You also cannot deduct the cost of investment seminars or conventions.

IRS Penalties

You won't get an IRS penalty waived or reduced unless you ask. If this is the first time you have been hit with a penalty, the IRS will  give you a break as a first time offender. If there is a reasonable cause then the penalty can also be waived. What is a reasonable cause? If you can show that you exercised ordinary care and prudence through facts and circumstances but still could not comply with the tax law, then  your penalty will usually be waived. For instance the following circumstances can establish reasonable cause: death, illness, fire, natural disaster, undue hardship, and unavoidable absence.

Why You Shouldn't Wait Until the Last Minute To File Your Tax Return

If you are due a refund, then you didn't get the money earlier like you could have. If you owe tax, then you have to pay penalties and interest on the past due amount. It may be too late to make a retirement plan contribution. Your current year estimated payments may be off and you may be subject to underpayment penalties.  There is a longer time for the bad guys to file a return using your social security number. And the final reason you shouldn't procrastinate is that it stresses out your tax preparer.

New 2017 Filing Deadlines for 2016 Calendar Year Tax Returns

2016 W2's and 1099's with non-employee compensation now are due by January 31, 2017 instead of February 28. The two pass through tax returns Partnership and S-Corp returns are due by March 15, 2017. Calendar year Partnership returns used to be due by April 15. C-Corp tax returns are now due April 17, 2017. C Corps get an extra month because there is no pass through of revenue and expenses to other taxpayers.

Court Case on Deducting Business Mileage

In Sam D Kilpatrick (T.C. Memo 2016-166) the court held that the taxpayer lost his deduction for business mileage. The taxpayer produced a record  prepared two years after the fact using a calendar with days marked business travel and mapquest. Nice try. The rules require that you keep a contemporaneous record of business mileage, total mileage, the date of each business use and the business purpose. One thing that might have gotten the taxpayer in more trouble with the court was that he was a CPA.

Can you Depreciate Antiques?

Probably not. The IRS allows businesses to take depreciation deductions for the costs of assets over their useful life if they are expected to last more than one year. The IRS looks at antiques as assets that don't wear out with use or get used up over time so think twice before you redesign your office with that 200 year old partner desk.

Can You Make an IRA Contribution?

Well it depends. You have to have earned income such as wages or self employment income greater than or equal to the contribution amount which maxes out at $5,500 or $6,500 if 50 or older. You also must be under the age of 70 and 1/2 at the end of the year to do a traditional IRA contribution. If you are covered by an employer retirement plan, then there are adjusted gross income limitations for the deductible contribution amount. For 2016, the deduction phases out between $184,000 and $193,999 for those filing joint with only one spouse covered by a company retirement plan. For those filing single the phase out is $61,000 to $70,999. You can still do a Roth IRA if you are older than 70 and 1/2 and have earned income. Roth contributions are not tax deductible but grow tax free. IRA contributions have to be made by the due date of the return not including extensions.

Getting Your Tax Info Ready

I recommend that you have a folder that you put any tax related items in during the year such as 1099's, W-2's, closing statements on real estate transactions, charitable contribution acknowledgements, non cash contribution receipts, K-1's, property tax statements, health insurance coverage 1095 forms, and mortgage interest paid for the year on form 1098. If you sold stock during the year and the broker doesn't have your cost basis, then you need to track it down and also put that in the folder. Value your non cash contributions just once a year before you submit to your tax preparer by using the valuation guide per item donated at the Salvation Army website. Keep up with your business mileage and your total mileage to support any deductions for business travel or charitable organization travel. It is a lot easier if you have just one place to store tax records during the year.

Related Party Transactions

Don't sell property to your siblings (whole or half blood), children, parents, grandparents or spouse and try to deduct a loss on the sale. The IRS doesn't allow you to recognize the loss. If the relative you sold it to sells it to an unrelated party, they use your basis to determine the taxable gain or loss. The disallowed loss is ignored. For example, if James sells stock with a basis of $5,000 to his sister Jane for $4,000, the $1,000 loss is disallowed. If Jane then sells the stock for $6,000 to an unrelated party, then her recognized gain is only $1,000 instead of $2,000. Cousins, aunts, uncles, stepparents, or in laws are not considered related parties for this purpose.

Georgia Interest Rate on Past Due taxes

Georgia just changed its long standing ridiculous annual 12% interest rate on past due taxes to 6.5% beginning July 1, 2016. In the future the rate will be based on the Federal Reserve prime rate plus 3 percent and may be updated in January of each year. The current IRS rate on past due federal taxes is 4 percent so it is still better to pay off GA first.

Real Estate Professionals

If you qualify as a real estate professional you get to deduct rental real estate losses as nonpassive losses so you don't get ensnared by the restrictive passive loss rules. If your rental activities produce income, you don't want to be a real estate professional as the income can offset passive losses from other passive activity losses. To qualify you have to satisfy two conditions: 1. You have to work over 750 hours in real estate trades or businesses, and 2. More than 50% of your personal services are performed in real estate trades or businesses. Real estate trades and businesses are businesses where you materially participate and involve real property development, construction, acquisition, rental, operation, management, or brokerage. Mortgage brokers do not qualify. If you are a full time employee in a non real estate activity and have a lot of rental real estate, you have the burden of proof to keep records showing that your time spent in real estate activities exceeds the 750 hours and 50% test in a given year.

Failure to File Partnership and Sub S Tax Returns

These tax returns for 2015 are due 9/15/2016. If you miss the due date, then there is a $195 penalty per partner or shareholder per month or part of a month for up to 12 months. The IRS really wants you to file these returns on time since individual returns are affected by these pass through entities. If you have a reasonable cause for late filing, you can get out of the penalty.

Work Clothes

Can you deduct work clothes on your tax return? Well it all depends. Professional athletes, firefighters, police, nurses, and some rock stars can deduct their clothing and uniforms. Also safety items such as safety glasses, hard hats, special heavy boots, and gloves can qualify for a deduction. If the clothing is suitable or adaptable for everyday wear, then you can't deduct it. The clothing must also be required as a condition of employment. You take the deduction as an itemized deduction subject to the 2% of adjusted gross income floor.

Georgia Wills

What determines a valid will under Georgia law? There are four requirements: the maker of the will must be over the age of 14. the will must be written, the will must be signed by the maker or on his behalf  and witnessed in writing by at least two credible persons over the age of 14 who are not beneficiaries, and the maker of the will has to have the capacity to do a will. Capacity means that the person has the ability to understand the process and is not being forced to make the will. This last requirement is frequently litigated.

Georgia Path2College 529 Plan

Georgia has just passed a new law to double the state deduction for joint filers for section 529 plan contributions from $2,000 per beneficiary to $4,000 per beneficiary beginning with the 2016 tax year. This will be a help to families trying to save for their children and grandchildren's college education costs. Contributions to other state plans do not qualify for the Georgia deduction.

Change of Address

If you are moving this summer, you may want to fill out form 8822  to inform the IRS of your new address. This is important if you are getting a refund mailed to you or if you expect any IRS notices. It is a one page form that can be obtained online at irs.gov. It can take the speedy IRS 4 to 6 weeks to process the form.

The 0% Capital Gain Rate

Long term capital gains on sales are subject to more favorable tax rates than ordinary income like wages. If your 2015 taxable income was under $74,900(filing joint) or $37,450(single), then all of your capital gains were taxed at 0%. It is possible for a capital gain to be taxed at various rates depending on how much ordinary income you have. For example, if you (filing single) have no ordinary income, a capital gain of $500,000,  and taxable income of $493,700 after the standard deduction and exemption deduction, then the tax at capital gain rates would be: $37,450 at 0%, $375,750 at 15%, and $80,500 at 20% for a total of $72,463.  The marginal  income tax rate would be 39.6% or $151,874 in regular tax if it was $500,000 in ordinary income.

Reverse Mortgages

This is a way to get tax free money out of the equity you have in your home if you need the cash. Also it does not increase your medicare payments like taxable payments out of your retirement accounts might. One disadvantage is that it reduces your children's inheritance since when a reverse mortgage comes due when the homeowner dies or sells the home the lender gets his loan back plus interest. The homeowner can receive benefits this way as a lump sum, monthly payments over his lifetime, monthly payments for a specified period, or as a line of credit. It is very flexible. You usually can't get 100% of your equity but some smaller percentage like 50%.  You still have to pay property taxes and homeowners insurance.

Georgia Refunds for the 2015 Tax Return

Georgia is taking longer to pay out refunds this year in order to try to prevent the bad guys from getting fraudulent refunds. It may take up to 90 business days from the filing date to get your refund. You can call to check the status of your refund at 1-877-423-6711.

$500,000 Tax Free Income and it is Legal

You can sell your personal residence and exclude up to $500,000 in gain on the sale of the residence if you are married and file a joint return. You can even get this exclusion every two years if you want to move that much and have a good eye for appreciable property. You do not have to reinvest the proceeds into a new home which was the rule about twenty years ago. What a good deal.

Political Contributions

Individuals and businesses cannot deduct contributions to political groups, candidates for public office, or groups who lobby for changes in the law.

Adjusting Your Social Security Earnings Record

What do you do if  your social security earnings record is not correct? It is important because your benefit is based on the highest 35 years of earnings over your work career. If you worked less than 35 years, then the zeros for those years reduce your benefits. A member of my family has been in an epic struggle for two years to change earnings for 2010 from 0 to their self employment income for that year. We started off calling the national social security office and sending in the tax return for that year showing the self employment income to the local social security office. Nothing happened. Then the family member visited the local office to present the papers in person. After a 3 hour wait, the papers were presented and the family member was told to wait 90 days for the papers to be processed. Nothing happened. After another meeting at the local office, the agent said to get the tax transcript certified by the IRS. We learned after a visit to the IRS, that they don't do certifications and the transcript should have been ok as is. At the third meeting at the local social security office, the agent said she would call after she talked to her supervisor. There has been no call. That is where we are now. There are several lessons to be learned from this: the problem has to be fixed at the local social security office, you need a tax transcript to prove your W-2 or self employment income, they won't call you back, and keep copies of all the documents that you give to social security. We are thinking now of trying another local social security office and not leaving until the problem is fixed or they tell us what is wrong.

Double Taxation on Excess 401k Deferrals

If you move from one employer to another and both have 401k plans, you may end up with more than the current $18,000 (additional $6,000 if age 50 or older) maximum deferral for the calendar year. If you don't have the excess withdrawn by the non extended due date of the return, you have to pay taxes twice, once in the year of the excess and then in the subsequent year when the excess is given back to you. This is one of the few places in the tax code where they tax you twice on the same income. Don't let this happen to you.

The Jimmy Carter Rule

President Jimmy Carter thought that business executives were getting away with too much by deducting all of  their business meals so the 50% deduction was born back in the 70's. He was upset about the 3 martini lunch. So now if you take clients out to dinner or pay for meals on business trips only 50% of it can be deducted from  business income. There are exceptions to this rule though that allow a 100% deduction. Some of which include employee parties for the benefit of the rank and file employees, company outings for employees and their guests, meals served in the employer's office for the convenience of the employer, and snacks or beverages provided to employees at the office.

Income Tax on Inheritance

Most assets such as cash, stocks, real estate, and life insurance you inherit from a decedent are tax free unless you live in a state that taxes inheritance. Georgia does not. Some items which create taxable income if you inherit them are most retirement accounts like regular IRAs and 401k plans that have no basis, annuities, final wages, and investment income paid after death.

Social Security Claiming strategies for Married Couples

If you are married and at full retirement age which is currently 66, then you can take advantage of two strategies: file and suspend and filing a restricted application for spousal benefits only. The file and suspend method which just expired on April 29 allowed the higher income spouse to suspend their benefit and earn an 8% premium per year until age 70. The lower earning spouse could then immediately get 1/2 of the higher income spouse's benefit. The second strategy is filing a restricted application for spousal benefits only. This method allows one spouse to get benefits from the other spouse's account while deferring benefits on their own account earning the 8% premium per year until age 70. At age 70, they would switch to their own account. Sometimes it is called get some now and then get more later. The restricted application is available to all those born January 1, 1954 or before. Social security is a very important source of cash flow in retirement.

Reporting the Basis of Stock Sold

Since 2010 brokers have been tracking your cost basis and reporting it to the IRS when you sell corporate stock. No problem there. What about stock you acquired prior to 2010? You have to keep records proving the basis of these stocks. The IRS says that if you can't prove basis, then the basis is zero which means all of your gross proceeds are taxable gains. What about if you sell less than your entire holding of a corporate stock? There are only two methods to determine basis of stock sold under this circumstance: first in first out (FIFO) which means the stock is considered to be sold in the order it was purchased, and the specific identification method where the seller tells the broker the exact stock to be sold by certificate number.

Phone Calls from the IRS

Just recently one of my clients got a threatening phone call from  an IRS official saying she owed $40,000 in taxes and had to report to federal court within 72 hours. She also was given an option to pay the tax immediately which I think was the point of the scam. In a weak moment she gave the official her social security number. She then realized it was a scam but the damage had been done. These criminals may also sell social security numbers to others. She is now considering getting an identity pin number from the IRS and freezing her credit. Don't let this happen to you. The IRS will not ever call to demand immediate payment, threaten to arrest you, or ask you to verify tax return information. If some one calls and says they are from the IRS, don't give them any information and hang up immediately. Call TIGTA at 800-366-4484 or the IRS at 800-829-1040 to report the phone number of the call.

Starting a Business

One of the biggest questions you first face is what type of business entity do you want to be. You have 5  choices: sole proprietorship, C corp, S corp, partnership, or LLC. There are advantages and disadvantages to each type which are too complex to really get into in this short blog. All of the choices except the sole proprietorship require separate tax forms each year, fees to set up, and annual state registration fees of usually $50. In other words there is a lot of annual care and feeding that goes into the more complex structures. I recommend that for most start ups you go with the simplest structure, the sole proprietorship and move on from there if you survive and get bigger .  With the sole proprietorship you just file a schedule C with your form 1040 each year. My philosophy is to keep it simple if at all possible.

Another Obamacare Penalty

This one is a business killer. Beginning July 1, 2015, any small business that directly reimburses their employees for health insurance or medical bills can be hit with a $100 penalty per day per employee up to $500,000. This penalty can hit employers with as few as two employees. The purpose of the penalty is to force employers to set up company group health insurance plans or drive employees to the health exchanges. It is beyond belief that employers are being punished for trying to help their employees with health insurance. I haven't heard of any enforcement actions yet on this issue, but watch out.

1099-B The Toughest Tax Form

This is the form where brokers report to you and the IRS the sales of stock , bonds and other investments. Basis in your investments is also reported for most of the transactions now. Why is the form so tough? It comes late in the tax season, mid February and beyond,  and is subject to revision. It can be hundreds of pages long for those that are into buying and selling frequently. You have to watch for wash sales and other basis adjustments when reporting the sales. Sales have to be divided between short and long term and covered and noncovered. Covered means the basis was reported to the IRS. Compensation basis has to be added back to the stock basis in the case of employees selling their own company stock obtained with nonqualified stock options.

Why Should I Fill Out the Tax Organizer?

I provide you a tax organizer with the prior year's amounts filled in for guidance and a list of questions designed to bring up tax issues that need to be addressed. Why should you help me help you by preparing the organizer? In short this allows you to maximize your deductions and minimize your problems by efficiently considering all of the amounts and issues that go into a tax return in an organized way. I think it can save you time and money. You also can make your tax preparer very happy.

Donation Acknowledgement Letters

To support a cash donation of $250 or more the IRS requires you to have an acknowledgement (ack) letter from the charity which indicates the total amount of the contribution less the fair market value of anything you received back from the charity like a dinner or gift. All charities are required to give you such a letter so now is the time to request one for a 2015 donation if you don't have it. If you get audited 3 years from now and don't have the ack letter, the deduction will be denied. The IRS will still deny the deduction even if you get an ack letter at the time of the audit since the ack letter must be received by the date the original tax return was filed.

Filing Requirements for Children for the 2015 Tax Return

A return is required if the child has over $6,300 in earned income such as wages or unearned income like interest , dividends, and capital gains over $1,050.

Receipts

Income and deductions on tax returns should be supported by receipts that you keep in your files for at least 3 years. To do your tax return, I generally only need those items that are sent in to the IRS like 1099's and W-2's. I keep a computer record of those so that I can more easily help you with any future IRS inquiry. For most deductions, I just want you to give me amounts and totals instead of the receipts. Keep a file of receipts and tax documents by year including a copy of the return. After 3 years, throw away the receipts and supporting documents, but keep the copy of the tax return.

Calling the IRS

One of the more frustrating things in life is needing help from the IRS to solve a problem. You need to set aside about an hour to wait on the phone before you can talk to a person. Get a good book to read while you wait. You also have to prove who you are by giving them your social security number, adjusted gross income for the tax return in question, and  your date of birth. Don't call on a Monday or a Friday. Mid week is probably best. I can't help you unless I get a power of attorney from you so they will talk to me.

Due Date for the 2015 Individual Income Tax Return

The due date for your 2015 individual tax return is Monday April 18, 2016, three days later than normal due to a Washington DC holiday on the 15th. An extension can let you wait another six months until October 17, 2016 to file your return. You still have to pay all taxes due by April 18 or pay interest of 3% on an annual basis and .5%  late payment penalty per month on any unpaid tax. I urge you to file your 2015 return as soon as you can and avoid penalties, interest and uncertainty. I'm here to help you meet that goal.

2016 Standard Mileage Rates

The IRS has reduced the mileage rates in 2016. The rate for business mileage is now 54 cents per mile which is down from 57.5 cents per mile for 2015. Medical and moving mileage is now 19 cents per mile and charitable mileage is 14 cents per mile. The business mileage rate can be used for checking on rental properties too. Keep track of your trips to Goodwill to drop off donations of clothing and household goods and church volunteer work as the mileage is deductible at 14 cents per mile.

2016 Obamacare Penalty

If you don't have health insurance coverage in 2016, the penalty just increased to the greater of 2.5% of your household income or $695 per adult plus $347.50 per child limited to a family maximum of $2,085. The numbers in 2015 are 2% of household income and $325 per adult and $162.50 per child with a family maximum of $975. The penalty is calculated on your tax return on line 61.