Tax Planning 2017

For those of you who read the title of this post and thought “Jay, it’s too early in the year to think about tax planning!”, my response is “some stores already have Christmas decorations out, and it’s not even Halloween yet…isn’t that too early?!”  As someone who plans out lunch and dinner while eating breakfast, I say it’s never too early to think about tax planning!

The reality is that you should’ve started thinking of 2017 tax planning at the same time that you filed your 2016 tax returns, in fact, there are instances when you can even plan for the following year, if there are circumstances that you know will be changing, such as a marriage.  I’m a big proponent in people knowing ahead of time what the tax consequences will be for certain things, rather than waiting until tax time (when it’s too late) and finding out that there’s a balance due of thousands of dollars.  So let’s take a look at a few things to consider, when planning out the rest of 2017.

Withholding and estimated taxes – did you have a large balance due or overpayment on your 2016 tax returns?  Did you sell a stock or mutual fund for a big gain?  Did you start a new business and are anticipating a big net income or net loss?  There are many other examples, but large balances due or large refunds are indications that you paid in too little or too much tax in the prior year.  If this is the case and you’d like to get closer to a break even this year, consider raising or lowering your withholding and/or estimated tax payments.  Similarly, large gains on securities sales or net income/loss from a new business can have effects on your taxable income, and could be reasons to increase or decrease your withholdings and/or estimates.  Think about your 2016 results and anything happening in 2017 that could have more than a minimal impact on your 2017 results, and adjust accordingly.

Alternative Minimum Tax – I could write an entire article just about Alternative Minimum Tax (AMT), but let me just say here that as taxable income rises, there’s a higher likelihood of winding up in the AMT, which could substantially increase your tax bill.  You can search for AMT worksheets to crunch your numbers to see if you’ll be there for 2017.

Marital Status – as I alluded to above, getting married (and on the flip side, getting divorced) will have an impact on your taxes.  Your tax filing status is determined by your marital status as of the last day of the tax year (Dec. 31), so if your marital status changed in 2017, think about how that will affect your taxes.  And if you plan to get married or divorced in 2018, you can start planning now for the changes next year.

Gifts – any taxpayer can make a gift of up to $14,000 per tax year to another taxpayer.  Property that is generating taxable income to you can incur less tax on that income when it’s gifted to somebody in a lower tax bracket, which is why parents will make gifts to their kids.  So consider making gifts to family members (or your favorite CPA, ha!)

Ordinary income vs capital gains – interest income (such as bank accounts, CDs, corporate bond funds) is taxed at your marginal income tax rate.  Based on current tax law, that rate can be as high as 39.6%.  If that same income was “qualified dividend” income, the tax rate on that income would be 15%, which is the same rate as long-term capital gains (for those in the 39.6% top ordinary tax bracket, the rate is 20%).  So for somebody in the top marginal tax bracket, converting ordinary interest income to qualified dividend income would halve the amount of tax charged (20% vs 39.6%).  Similarly, when considering selling appreciated securities, if the security is held a year or less (short-term), the tax will be at the marginal tax rate, while long-term gains (over a year) are taxed at the 15%/20% rate.  So if your holding period is nearing a year, think about holding it a few more days, to get the gain taxed at long-term rates.

These are just a few ideas to consider, when planning out the rest of the year’s taxes.  If you want to do some tax planning before the end of the year, but think it’s too complicated to do, remember to ask your favorite CPA (as in Jay the ___)  for help!

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Trumped on Taxes

One era ends and a new one begins, which is a happy or sad thing, depending on which side of the aisle you sit on.  Regardless of where you stand (or sit) on the prospect of Donald Trump becoming our next president on January 20th, one thing will be sure; he’s going to look to shake up the tax code.  Depending on how much he gets his way, your 2017 tax picture could look very different from your 2016 one.  Let’s take a quick look at some possibilities.

Tax Rates – whether it’s Mr Trump or Congress, the Republican majority will look to cut tax rates in some fashion.  Lower tax rates mean that any deductions you have will get less bang for the buck, in the form of income tax savings.  For example, if you’re in a 25% marginal tax bracket and have itemized deductions of $10,000, the deductions will save you $2,500 in federal tax (deduction amount times the tax rate).  If tax rates are reduced and you drop to a 20% marginal bracket (I’m just making up that rate), your same $10,000 of deductions will only save you $2,000 in tax.  The bottom line is that for those of you who claim itemized deductions for charity, state & local taxes, and mortgage interest, a reduction in tax rates means that you’ll save less in income tax.

Charitable contributions – because tax rates could go down (and your income tax savings for making charitable contributions could be reduced), you might want to consider accelerating any donations that you were going to put off to 2017, and make them before the end of 2016.  If you have any securities that have appreciated in value, making a donation of the appreciated securities is a great way to avoid the potential capital gain income on a sale, and get a deduction for the current value of the security.

State & local taxes – I’ve personally seen less people get a tax benefit for these, as more of my clients have wound up in the Alternative Minimum Tax (AMT).  In the AMT computation, state & local taxes are disregarded as a deduction.  If you’re not in the AMT, prepaying by December 31 any state estimated tax payment that you’d otherwise make by January 15 would save a few dollars in 2016, and with possible lower rates in 2017, you’d have lower income tax savings in 2017 anyway.

Capital gains – while Mr Trump’s plan would retain the current long-term capital gains rates of 0%, 15%, and 20%, the threshold for hitting the top rate would be reached a lot faster, which means that long-term gains would be taxed at 20% starting at about $225K of taxable income on a joint return (vs about $467K now) and $112K of taxable income on a single return (vs about $415K now).  This would seem to indicate that if you’re considering selling any investments at a long-term gain, and expect to have a pretty high taxable income, it would be better to sell before the end of 2016. But…the other consideration is the current 3.8% net investment income tax, which is a tax on interest and dividend income, and capital gains.  If adjusted gross income is above certain levels, this tax kicks in.  Mr Trump and Congress both want to eliminate the net investment income tax.  It then becomes an exercise of figuring out whether gains will net out a higher total of capital gain + net investment income taxes in 2016, or possibly only capital gain tax (potentially at a higher rate) in 2017.  You gotta admit, isn’t this fun stuff?!

These are just a few points to ponder, while you’re slugging it out and standing in line at the mall this holiday season.  As always, if you need some tax number crunching done, consult your favorite CPA!

Tax Planning 2016

The election’s over, we’ll have a new president come January, and there’s uncertainty at every turn.  You know what won’t change?  The need to do tax planning before the end of the year!  Certain deductions that were set to end in 2015 or prior were extended by The Protecting Americans from Tax Hikes Act of 2015 (or PATH Act…who comes up with these acronyms?!).  With the passage of the PATH Act, there are deductions that will still be in play for 2016, so let’s look at a few of them.

Teachers’ classroom expenses – elementary and secondary school teachers can take an “above the line” deduction of up to $250 for out-of-pocket classroom expenses.  The above the line aspect is important, because it can directly reduce adjusted gross/taxable income, even if a taxpayer does not itemize deductions.  The PATH Act expanded the deduction to allow “professional development” expenses, so the cost of any courses that the teacher takes (that relate to the curriculum that the teacher teaches) can be deducted.

Qualified tuition and fees – another above the line deduction is allowed for qualified tuition and fees paid for post-secondary education.  There is a maximum amount allowed as a deduction, and this is subject to an adjusted gross income phase-out.  The tax savings from this deduction should also be compared to the tax savings for taking an education credit, to see which yields the better benefit.

Mortgage insurance premiums – while this is an itemized deduction (and not an above the line deduction like the two above items) the tax savings for the ability to deduct mortgage insurance premiums (a/k/a PMI) as mortgage interest can help offset the cost of paying the premiums.  As an itemized deduction, it’s subject to its own adjusted gross income phase-out.

Cancellation of mortgage debt – for taxpayers who are underwater on their mortgages and are able to have some of that debt forgiven, the Act extended the ability to not have to reflect the cancelled debt as income on a tax return.  This provision is primarily geared toward mortgage debt on a taxpayer’s primary/principal residence, and there are limits on the amount that can be excluded.

Code Section 179 expensing – for businesses, the Section 179 expensing limit will remain at $500,000, which means that businesses will be able to deduct up to that amount for major capital purchases in year one, rather than have to depreciate those purchases over 5, 7 years or longer.

These are just a few things to consider before the end of the year.  As always, if you’re unsure of how to plan for your own taxes before 2016 ends, you should contact your favorite tax professional (like JayTheCPA!)

My Yelp Review of Myself

Jay is a great guy; professional, smart, funny, serious, down-to-earth, empathetic, helpful, responsive, and I give him ten stars!

O.K., I admit it, I’m reviewing myself. Well, to be perfectly honest, I’m using this “review” to write a personal letter to my fellow Yelpers. I decided that now is a good time to do this. First, it’s after the April 15th filing deadline (so I have a little bit of breathing room now), and second, I’m really bugged by the one-star Yelp reviews that I’ve received over the last few years, all of which were during tax season. I think that the people who wrote those reviews (and not a single one has ever been a client) had unrealistic expectations and/or really don’t understand what CPAs go through between January 1 and April 15. Since you probably got to this “review” while doing your research to find somebody to help you with something tax related, I want to give you a little information that will hopefully save you some time.

One of my “five-star” clients wrote in his Yelp review “Jay is direct and to the point in emails”. Understand that when you contact me, you don’t get an assistant, or a staff person, or somebody screening my calls or emails, you get me. And keep in mind that especially between January 1 and April 15th, I’m responsible for a lot of people all at one time, and it’s quite a job to keep everybody happy, and also field inquiries on top of everything else. I have loads of clients, friends, and contacts who tell me that they don’t know how I do it. So if you contact me, and I’m direct and trying to get to an answer really quickly without endless rounds of emails, don’t take it personally, it’s the nature of my biz, especially during tax season.

A very important thing to know about me is that I don’t do “interviews”. I’ve been in the public accounting profession since 1981, and I’ve been in practice for myself since 1992, and after all this time I know what I’m doing, and I have a file in my desk that’s stuffed with testimonials and happy thank you notes from clients, attesting to that. So if you want to come to my office for the sole purpose of meeting me to decide if you want to work with me, I’m really not interested, sorry. If you have tax questions or issues that you need help with, you can schedule a paid consultation, and you’ll be able to see me in action, which will be all the ‘interview’ you’ll need.

From a procedural point of view, I bill clients by the hour for all work that I do, and for tax returns there’s a minimum time/fee charge. As I mentioned above, consultations are paid, and are an hour minimum. I don’t do fixed fees, and having been burned over the years by people trying to hold me to estimates I gave them when I had no idea what I was walking into, I’m very hesitant to give estimates. The bottom line here is that I’m not interested in “shoppers”, that is, people who are just looking for a price. Please don’t take what I’m saying as being conceited or anything like that. To me, the important factors are experience, knowledge, and the ability to help solve problems, and for people who seek me out for those reasons, we’ll get along just fine. For those who place price ahead of knowledge and experience, we’re just not gonna be a good match, sorry.

What all of the people who gave me one-star reviews don’t understand (since none of them ever came in the door as clients) is how I go out of my way to be as helpful and responsive to my clients’ needs as a one-person-firm can be. For people who send me inquiries, I try to be friendly, helpful, and responsive too, but understand one thing; this is a two-way process. If you’re nice when you contact me, I’ll be a lot more responsive and helpful than if you act like a jerk, and you wouldn’t believe some of the words and tone of email inquiries I’ve received over the years, some of which were from the people who gave me the one-star reviews. There are a lot of badly behaved people out there. Remember too that I’m not required to accept as clients everybody who contacts me. Taxes are very personal and there’s a lot of close work between my clients and me, and if we don’t have a good working chemistry, it’s going to be painful for you and me both.

Please keep in mind that I’m not saying any of this to be mean, snotty, rude, or anything, but as I alluded to earlier, based on my minimum fee, I’m just not cost efficient for people with comparatively simple returns, so I try to point those people elsewhere. I’m just trying to save them time and money, not just trying to stuff money in my pocket.

So that’s a little bit about the person behind the picture on the Yelp profile and the website. If you can deal with a “tough love” New Yorker who’s going to be honest and blunt with you, smack you over the head when it needs smacking, push you when you need to be pushed, and will take a kick on the ass himself when it’s deserved, I’m the guy. If you’re looking for somebody who’s going to say “how high” when you say “jump”, or will agree that the world revolves around you, I’ll save you the time of having to write a one-star Yelp review.

My fellow Yelpers, thank you for your time and interest, and I look forward to helping those of you who value a professional’s experience and time!

Mistakes Small Business Owners Make That Can Cost Them…DOH…The Sequel

O.K., I lied. Two weeks ago, when I did the first part of this discussion, I said that I’d post part 2 the following week. I’m a week late, but I’ve had other things on my mind, like tax season, and keeping my clients happy. I think I have a good excuse.

Anyhow, if you recall, a couple of weeks ago, I started talking about ways that small business owners can get themselves into hot water, and how to avoid it. The following are a few more things…

1-Filing tax returns late: When tax returns are filed late, penalties and interest will be computed on any tax due. This is applicable for payroll tax returns, sales tax, income tax, pretty much any tax that can be levied. Don’t be under the wrong idea that filing an extension for any tax return will keep you safe. An extension only gives you more time to file the return itself; it’s not an extension of time to pay any tax. The late filing penalty will cost you 4 ½% per month, late payment is ½% per month, and interest is 3%. Additionally, pass-through entities (S corporations, partnerships, LLCs), while paying no tax of their own, can be assessed a penalty of $195 for each late filed K-1.

“DOH!” Just take care of filing all of your tax returns on time, and you can avoid all of these charges. It’s so easy!

2- Penalties: While I’m discussing the above, let me tell you about other penalties that you can owe, when you deviate from the straight and narrow. To name a few-failure to deposit taxes, negligence, substantial understatement, accuracy related, failure to have JayTheCPA prepare your return…April Fool’s, just kidding about the last one!

“DOH!” The point I do want to make here is that you really don’t want to mess around with tax preparation, or fall behind in tax filings. The additional charges can add up really quickly, and all of them are completely avoidable, by taking care of things timely.

3-Home office deduction: Over the years I’ve had many clients tell me that they don’t want to claim a home office deduction for their business, because they think it’s a red flag for an audit. It’s not necessarily a red flag but the rules for claiming a home office deduction are specific, in particular the rule that the area in your house/apartment must be used “regularly and exclusively” for business. What this means is that if you’ve got a desk set up in the den, which your family also uses to watch TV, or you work at the dining room table, where the family also takes meals and entertains, that’s not regular and exclusive use.

“DOH!” If your work space fits into IRS’s requirements, not only will your home office deduction save you on income tax, but it’ll save you on self-employment tax too, which is currently about 13 percent. It’s a completely legitimate deduction that should be taken, when applicable.

4-Not using a CPA: It’s my blog, and I’m allowed just a little bit of self-promotion, right? Let me start this with a statement; I don’t know much about I.T., printing, banking, law, or medicine. Or lots of other things, for that matter. I’m not qualified to do any of those. How about you; what qualifies you to be a bookkeeper/accountant/CPA/tax preparer? Probably not much, which is why you should have a CPA as part of your professional team.

“DOH!” You can pay a CPA more later, to clean up the mess that you made with your taxes or your books, or you can pay less now to have a qualified bookkeeper help you with the books, and a CPA help you with the returns. You can try to use Google to research things yourself, but do you really have the time? Can you keep up to date with tax laws? Kids, don’t try this at home!

I hope you’ve found this and the prior installment of “DOH!” moments helpful. Please pass this information along to somebody who might benefit by these sage words of wisdom, so you don’t wind up looking like this little guy, after you’ve been spanked by IRS with penalties!

Year End Tax Planning…It’s Not Too Late

At this time of the year, I know that tax planning is first and foremost on peoples’ minds. O.K., maybe the second thing. The reality is that in the thick of your holiday shopping and family-get-together-planning, there’s still time to do some tax planning before the end of 2011. Is that cool or what?!

Selling investments at a loss-it’s the ultimate acceptance of defeat, and something for which denial is a strong factor. That investment you made in a stock or a mutual fund has tanked in value since you bought it. It hurts; I know, I’ve been there too. But the paper loss can save you money on taxes when you sell it. Capital losses in excess of capital gains can be deducted against other income on your tax return, up to $3,000 per year. For a person in a 25% marginal federal tax bracket, that means Uncle Sam will “subsidize” $750 of that loss, which could help take some sting out of it.

Retirement accounts-it’s still not too late to sock away money in a 401(K) or IRA, and get a tax deduction for 2011. Business owners can still set up certain retirement plans before 12/31/11 and fund the plan early in 2012.

Accelerate deductions-for taxpayers who are not expecting to fall into the Alternative Minimum Tax (AMT) in 2011, there’s still time to bunch deductions into 2011 for added tax savings. Making the 4th state estimated payment by 12/31/11 (instead of the due date of 1/16/12) can add to itemized deductions for 2011, as well as work related expenses (as a miscellaneous itemized deduction), or even elective medical costs. There are certain ‘adjusted gross income’ thresholds to consider for these, but if the numbers work, you can save a few bucks in tax.

Charitable contributions-cash contributions or even contributions of “appreciated securities” can give you a good bang for the tax deduction buck, and can still be done before year end. While we’re on this topic, I’d like to take a moment for a shameless plug, on behalf of my non-profit clients, and other organizations to which I have a connection (in alphabetical order, to downplay any favoritism!)

Darfur Peace & Development http://www.darfurpeace.org
Doorways For Women & Families http://www.doorwaysva.org
Habitat for Humanity of Northern Virginia http://www.habitatnova.org
Homeward Trails Animal Rescue http://www.homewardtrails.org
NOVAM http://www.novam.org

College savings-if you need to save money for a child’s college education, establishing a 529 plan in the state in which you live will result in a state income tax deduction for amounts contributed to the plan.

I hope you found this information helpful, and please pass it along to anybody you know who can benefit from the information. If you make charitable contributions to any of the organizations I mentioned above, please let them know I pointed you in their direction.

Uncle Sam Owes You!

The other day, IRS announced that it has $153.3 million in undelivered tax refund checks.  There are 99,123 taxpayers who are due refund checks that couldn’t be delivered because of mailing address errors.  These undelivered checks average out to $1,547 per check, which (in my mind) isn’t chump change!

How the heck does this happen, you ask?  The usual culprit is IRS having an old expired address on record, and no address to forward to.  They will always deliver to the last known address that they have on record, and if you’re no longer there (and any post office forwarding order has expired), that refund check will be sent back.   If you believe that Uncle Sam owes you a tax refund that you haven’t received, go to IRS’s home page (IRS.gov) and click on the “Where’s My Refund” link.  You’ll need to enter information about the return that you believe you’re due a refund on (don’t worry, it’s a secure web page), and you’ll be informed of the status of that refund.

IRS suggests a couple of ways to make sure you always get the refund due you.  The first is to notify them when you move, by updating your address on Form 8822 (Change of Address), which can be found at http://www.irs.gov/pub/irs-pdf/f8822.pdf .  Alternatively (and preferred by IRS) you should file your tax return electronically, and choose to have your refund directly deposited into the bank.  You can speak with your favorite CPA about all of this.

In the same announcement, IRS also reminded taxpayers that they do not contact taxpayers by e-mail about pending refunds, and do not ask about personal or financial information through e-mail.  If you ever receive an e-mail from a sender professing to be the Internal Revenue Service, do not reply, do not open any attachments, and do not click on any links; it’s a phishing scam.  So be careful!

Please pass this article along to everybody who’s a taxpayer (probably everybody you know), because you never know who could use an extra $1,547 (average) in their pocket, or bank account.  Do you have any good stories about undeliverable or misplaced IRS refunds or correspondence?  Please leave a comment, and also let me know if you have any topic you’d like to see me write about in the future.