Last Wednesday, the U.S. House of Representatives voted to renew more than 50 expired tax breaks for individuals and businesses through the end of 2014. With an overwhelming pass of 378-46 for the one-year retroactive renewal, it now moves on to the Senate, who is increasingly likely to follow suit.
Among the biggest breaks for businesses are a tax credit for research and development, an exemption that allows financial companies such as banks and investment firms to shield foreign profits from being taxed by the U.S. and several provisions that allow businesses to write off capital investments more quickly.
The biggest tax break for individuals allows people who live in states without an income tax to deduct state and local sales taxes on their federal returns. Another protects struggling homeowners who get their mortgages reduced from paying income taxes on the amount of debt that was forgiven.
Many people are watching this bill as we are in the heart of tax planning season and a lot of these provisions could benefit business owners and individuals. The 10-year cost of the one-year bill is about $42 billion.
By: Amy Slates, CPA
Posted in Tax
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As many of you know the estate tax exemptions and rates have been all over the board in recent years. For many Americans, this isn’t an issue. However, when you begin amassing a large enough estate this becomes a huge concern. Historically, passing away with a large enough estate has imposed upwards of 55% tax. For 2014, this rate is at 40% with a $5,340,000 personal lifetime exclusion. Below are 5 strategies you can use now to help mitigate any future tax burden you should incur.
1. Start gifting smaller amounts
There is an annual gift exclusion of up to $14,000 per person per year. Meaning a married couple could collectively gift 28,000 per year per person without eating into any of their lifetime estate tax exclusion.
2. Gift highly appreciable assets now
Gifts of over $14,000 will still need to be reported on the federal Form 709 (and will consequently count against your lifetime limit) but gifting these assets now, instead of waiting, allows the appreciation to build with the recipient instead of counting against your lifetime limit later on.
3. Buy life insurance
Life insurance proceeds are not includible in your taxable estate and are, therefore, a good way of sheltering your net worth. Doing this essentially transforms taxable assets into non-taxable income once a death occurs (assuming the estate is not the beneficiary of the policy and the decedent is not the owner).
4. Use both exemptions
Currently, the tax code allows for the husband and wife to each claim a $5.34 million estate/gift exemption. If elected timely, any unused portion of a spouse’s estate can be transferred to the surviving spouse (called portability).
5. Take advantage of unlimited exemptions
When in doubt, be charitable! The IRS allows you to contribute an unlimited amount to the qualified charities of your choice. So if you are considering donating a portion of your estate and are over the exemption limitation this would be a terrific way of sheltering those dollars from taxation.
Courtney Elgin, CPA
Posted in Estate Planning, Tax
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There are only a few weeks left to make 401(k) and some other retirement plan contributions that will get you a tax deduction on your 2014 tax return. Retirees also need to be aware of deadline dates for distributions from your various retirement accounts.
You can make a contribution of up to $17,500 to your 401(k) plan in 2014. Workers age 50 and over can contribute an extra $5,500 to their account as a catch-up contribution for a total of $23,000. Income tax isn’t due on the amount deposited in a traditional 401(k) plan until the money is withdrawn. For self-employed workers, a couple good options are a solo 401(k) plan or a simplified employee pension (SEP). With a SEP, you can contribute up to 20% of your net self-employment income for a total limit of $52,000. The SEP contribution can be calculated before filing your taxes to minimize your tax bill. SEP contributions are not due until the due date of your tax return. That means for a 2014 deduction if you file an extension, your contribution would not be due until October 15, 2015.
Another option is an Individual Retirement Account (IRA). These contributions are not required to be made until April 15th to count toward your 2014 taxes and usually can be figured after your tax liability is determined. The IRA contribution limits are $5,500 or an additional $1,000 for people 50 and over for a total contribution of $6,500. Roth IRA’s have the same limits but are not pre-tax and will not decrease your tax bill, however, are also not taxable when distributed.
Retirees who have reached the age of 70 ½ have required minimum distributions from traditional 401(k)’s and IRAs and income tax will be due on each withdrawal. The date for making the distribution is April 1st after you have reached 70 ½ years of age. The penalty for missing a distribution is 50% tax on the amount that should have been distributed. It is best to consult William Vaughan Company or your financial advisor to make sure the amount required is computed correctly and done by the due date.
It’s probably also a good idea to start planning for the 2015 tax year. The amounts for 401(k) contributions will increase by $500 to $18,000 and $6,000 for the catch-up contributions. Increasing your percent contributed each year can make a big difference in the long run, especially if there is an employer match. There are many options when it comes to retirement plans, make sure you are doing what is best for you and in the necessary time frame to achieve the most benefit.
Diane Cook, Accountant
Posted in Tax
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The fantasy football season is in full swing as we are approaching the middle of the NFL season. For some, the season is going great and you are eagerly awaiting the playoffs, while others are all but eliminated from contention after drafting a team full of underachieving duds. For those of you lucky enough to be in the thick of the playoff hunt, remember that Uncle Sam is cheering you on. That is, he wants a cut of your winnings.
Some of you may be thinking, “why would the government care about fantasy football? It’s just a fun hobby and gives me something to talk about at the water cooler.” The truth is, fantasy football is a major industry and the IRS is very aware of such notion. According to an article from the Fantasy Sports Trade Association’s website, nearly 37 million people play fantasy football. According to the article, fantasy football players will spend an average of $111 per year. At 37 million players, that’s a staggering total of $4.1 billion each year. You better believe that Uncle Sam wants in on the winnings!
If your fantasy football skills earn you a payout of $600 or more, you will likely receive a 1099-MISC in the mail come January, which reports your winnings to the IRS. The amount of your winnings that are taxable can be reduced by entry fees, transaction fees, research materials (such as magazines) and losses from other leagues where you weren’t quite as lucky. So be sure to keep records of all your expenditures to support the information reported on your 1040.
Once you come to the net of all your winnings less all expenses, this amount will be reported as “other income” on line 21 of your 1040. Since the amount reported will not match the 1099-MISC you received, you will need to attach a statement to the return reconciling the 1099-MISC to the amount reported. Note that if you were in several fantasy football leagues where you lost money and one where you won, you will not be able claim a loss on your return and will just report income of $0.
So I hope everyone’s season is going well, but remember, Uncle Sam has a rooting interest in your team as well.
By: Mark Sawyer, CPA
Posted in Tax
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Each year there are individuals who are targeted for IRS audits based on minor decisions they may have made during the year. One goal during tax season, besides being on time, should be to completely avoid the IRS in an ethical manner. There are multiple ways that individuals may intentionally or unintentionally raise red flags, which makes them susceptible to an IRS audit.
While there are a number actions that may call for an IRS audit, here are some of the more common red flags:
Charitable donations. Who would have thought being generous could land you in hot water? The truth is, usually, it won’t. However, people who are audited in regards to charitable donations are the ones who over exaggerate the value of their donations, generally when dealing with non-cash items. Avoid the headache of dealing with the IRS and be realistic when it comes to pricing your donations. Also, remember to keep all of your charity receipts just to be safe.
Reported income. Failing to report income seems like an obvious red flag to most people, but you would be surprised to find out how many people honestly forget to report certain income. If you are an individual with multiple brokerage statements, it may be a good idea to create a checklist to keep on hand, ensuring each form of income is reported. Being organized will keep you safe and less stressed come tax time.
Being a millionaire. While the red flags associated with charitable donations and reporting income are ones that you may be able to avoid, there is one red flag that may be waving regardless of your action. Once you become a millionaire, your chance of being audited increases exponentially. While the current audit rate is at 1% on average, the rate climbs all the way up to 9% if you make $1 million. Just to give you an idea of how much the risk of being audited grows in relation to what you earn, people who bring in more than $10 million have a 27% percent chance of an audit. Let’s hope these individuals are reporting all of their income as well, because this percent does not have a limit!
Overall, there are some red flags that individuals will be able to avoid and some that should be expected. The goal should be to eliminate as many red flags as possible while being remaining. Make sure you keep donation receipts, record realistic values on donations and report all of your income. Hopefully, you will be on your way to a headache free tax season!
By: Jason Wenner, Staff Accountant
Posted in Tax
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The IRS has released its annual update of special per diem rates for use in substantiating certain business expenses taxpayers incur when traveling away from home in 2014 and 2015. IRS Notice 2014-57 includes rates for incidental-expenses-only deduction, special meals and incidental expenses in the transportation industry, and high-low substantiation method.
Rates for special meals and incidental expenses in the transportation industry are $59 for travel anywhere in the continental United States and $65 for travel outside of the continental United States. Regardless of whether you are traveling inside or outside of the continental United States, the per diem rate for incidental expense-only deduction will be $5 per day. The per diem rates for the high-low substantiation method have increased from $251 to $259 for travel to any high-cost locality and $172 for travel to any other locality in the continental United States. Out of the $259 high rate and $172 low rate, the amounts treated as paid for meals is $65 for travel to any high-cost locality and $52 to any other locality within the continental United States. A list of high-cost localities with a per diem rate of $216 can also be found in Notice 2014-57.
These new per diem rates went into effect on October 1, 2014 and are intended for any employee traveling away from home on or after that date.
By: Rachel Mossing, Accountant
Posted in Business Consulting
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