IRS Announces Business Vehicle Deduction Limits for 2017

The IRS has published depreciation limits for business vehicles first placed in service this year. These limits remain largely unchanged from 2016 limits. Because 50% bonus depreciation is allowed only for new vehicles, these limits are different for new and used vehicles.

  • For new business cars, the first-year limit is $11,160; for used cars, it’s $3,160. After year one, the limits are the same for both new and used cars: $5,100 in year two, $3,050 in year three, and $1,875 in all following years.
  • The 2017 first-year depreciation limit for trucks and vans is $11,560 for new vehicles and $3,560 for used vehicles. The limits for both new and used vehicles in year two are $5,700, in year three $3,450 (up $100 from 2016), and in each succeeding year $2,075.

For details relating to your 2017 business vehicle purchases, contact your tax professional.

 

Disability Insurance – What You Need to Know

Say “insurance” to most people and auto, health, home, and life are the variants that spring to mind. But what if an illness or accident were to deprive you of your income? Even a temporary setback could create havoc with your financial affairs. Statistics show your chances of being disabled for three months or longer between ages 35 and 65 are almost twice of those of dying during the same period.

Yet people with financial savvy often overlook disability insurance. Perhaps they feel adequately covered through their job benefits. However, such coverage can be woefully inadequate. The fact is, most individuals should consider disability insurance in their financial planning. When considering disability insurance, think in terms of long term and short term. Many employers provide long-term disability coverage for all employees. Find out if your employer does. If you have long-term disability insurance you need to consider short-term coverage to supplement during the period of disability before your long-term coverage begins. To get the right coverage for you, take the following steps.

Scrutinize key policy terms. First, ask how “disability” is defined. Some policies use “any occupation” to determine if you are fit for work following an illness or accident. A better definition is “own occupation,” whereby you receive benefits when you cannot perform the job you held at the time you became disabled.

Check the benefit period. Ideally, your policy should cover disabilities until you’ll be eligible for Medicare and Social Security.

Determine how much coverage you need. Tally the after-tax income you would have from all sources during a period of disability and subtract this sum from your minimum needs.

Decide what you can afford. Disability insurance is not inexpensive. Plan to forgo riders and options that boost premiums significantly. If your budget won’t support the ideal benefit payment, consider lengthening the elimination period (but be sure that accumulated sick leave, savings, etc., will carry you until the benefits kick in).

 

Four Tips for Working Beyond Retirement Age

 

Many people choose to work into their retirement years. If this is something you’re considering, here are some tips to make sure you get the greatest benefit from your efforts.

  1. Consider delaying Social Security. You can start receiving Social Security retirement benefits as early as age 62, but if you continue to work, it may make sense to delay as later as age 70. Your Social Security monthly benefit increases approximately 8 percent for every year you delay receiving them. These increases in monthly benefits stop when you reach age 70. Social Security benefits may be reduced or be subject to income tax due to your other income.
  2. Don’t get bracket-bumped. You may have multiple income streams during retirement that can bump you into a higher tax bracket and make other income taxable. For instance, Social Security benefits are only tax-free if you have less than a certain amount of adjusted gross income, otherwise up to 85 percent of your benefits are taxable. Required distributions from pensions and retirement accounts, which you are required to take at age 70-1/2, can also add to your taxable income. Be aware of how close you are to the next tax bracket and adjust accordingly.
  3. Be smart about health care. When you reach age 65, you’ll have the option of making Medicare your primary health insurance. If you continue to work, you may be able to stay on your employer’s health care plan, switch to Medicare, or adopt for a two-plan hybrid option that includes both. Consider these options to determine which makes the most sense.
  4. Consider your expenses. If you’re reducing your working hours or taking a part-time job in retirement, consider the cost of your extra income stream. The costs of parking every day, meals, clothing, dry cleaning, and other expenses should be considered in determining your pre-tax income.

These are just a few factors to consider. Contact your tax professional with questions or to discuss your particular situation.

IRS Releases Interest Rates for Second Quarter 2017

Interest rates charged by the IRS on underpaid taxes and applied by the IRS on tax overpayments will remain the same for the second quarter of 2017 (April 1 through June 30). Therefore, the rates will be the following:

For Individuals:

  • 4% charged on underpayments; 4% paid on overpayments.

For Corporations:

  • 4% charged on underpayments; 3% paid on overpayments.
  • 6% charged on large corporate underpayments.
  • 1.5% paid on the portion of a corporate overpayment exceeding $10,000.

Be Tax Wise When Withdrawing Your Retirement Savings

You’ve spend years saving for retirement, but now it’s time to plan the best way to manage your retirement savings withdrawals. Here is a potential method to help maximize your funds using a tax-advantaged strategy.

First, look at Social Security and pensions. You can use these funds for daily living much the same as you used your salary and wages when you were working. These monthly sources of cash are considered taxable income by the IRS and should be your “go to” funds for living expenses.

Second, consider your savings. If you have some cash or investment savings outside of tax-deferred retirement savings accounts, these are readily available for you without extraordinary tax implications beyond investment interest, dividends, and capital gains taxes.

Third, look at tax-deferred accounts. And now the tricky part, if you have traditional tax-deferred retirement savings accounts such as IRAs and 401(k)s where your savings grew with pre-tax contributions and tax-deferred earnings, you will want to withdraw these funds as tax-efficiently as possible. Withdrawals from these accounts will be taxed as ordinary income, penalized if withdrawn too early, and severely taxed if not taken as required minimum distributions (RMDs) after you reach age 70-1/2.

Fourth, consider tax-free retirement funds. You may have a tax-free retirement savings account such as a Roth IRA or Roth 401(k). These were built with your hard-earned “after tax” contributions. Those contributions and all the related earnings can be withdrawn tax-free. But more importantly, they can continue to grow tax-free with no RMDs after age 70-1/2. These tax-free retirement savings should be your last resort.

Your retirement savings withdrawal strategy can get complicated. Each year you’ll need to consider current tax rates, your overall taxable income, your age and your particular tax situation. Taxation of your Social Security benefits could be affected. Your available tax deductions and credits can change depending on your income tax bracket. Getting advice from a professional could prevent an unnecessarily taxing withdrawal mistake. Call your tax professional for help.

Alimony in the IRS Spotlight

A couple of years ago, the U.S. Treasury released a report highlighting a disturbing level of non-compliance in alimony reporting on tax returns. Since the report was released, the IRS has increased the scrutiny they place on tax returns with alimony claims. If you file a tax return involving alimony, make sure you know the facts so you can avoid any potential audit problems.

If you receive alimony. Report alimony as “received as income” on your tax return. If you receive income from an ex-spouse that you believe is child support, retain documentation to support this claim, as child support is not income to you.

Alimony payment requires proper reporting. You must report the Social Security number (SSN) or the tax identification number (TIN) of the person receiving the alimony you are paying. Failure to provide this identification will result in a $50 penalty.

Mismatch audits on the rise. The IRS has implemented audit filters that will catch alimony mismatches, so you should expect scrutiny or an audit  if there is a major alimony discrepancy. A quick discussion with your ex-spouse regarding claimed alimony will help you ensure your tax returns match up.

Documentation is crucial. Because you know your chances of an audit may be higher if there is alimony noted on your tax return, double-check your documentation. If you pay alimony, having it automatically deducted from your paycheck is one way to make it easier to accurately report and substantiate your payment amounts.

Double-check with an ex-spouse. Each year the IRS sees hundreds of millions of dollars in claimed alimony deductions that have no corresponding income tax returns filed reporting the alimony as income. These instances of non-reporting are an audit target by the IRS for both taxpayers.

If you have questions regarding the tax treatment of your alimony payments or receipts, be sure to contact your tax professional.

 

Tax Planning 2017: Inflation Adjusted Tax Numbers

Each year, certain tax figures are adjusted for inflation. While most figures are unchanged versus 2016, there is more than a 7% increase to the maximum earnings subject to social security tax. Take note of these numbers for use in your 2017 planning.

  • The maximum earnings subject to social security tax in 2017 is $127,200. The earnings limit for those under full retirement age increases to $16,920 for 2017.
  • The “nanny tax” threshold remains $2,000 in 2017. If you pay household employees $2,000 or more during the year, you’re generally responsible for payroll taxes.
  • The “kiddie tax” threshold remains $2,100 for 2017. If you have a child under the age of 19 (under age 24 for full-time students) who has more than $2,100 of unearned income, such as dividends and interest income, the excess could be taxed at your highest tax rate.
  • The maximum individual retirement account (IRA) contribution you can make in 2017 remains unchanged at $5,500 if you are under age 50 and $6,500 if you are 50 or older.
  • The maximum amount of wages employees can contribute to a 401(k) plan remains at $18,000, with an additional $6,000 if you are 50 or older. The 2017 maximum contribution for SIMPLE plans is $12,500 and an additional $3,000 if you are 50 or older.
  • The maximum you can contribute to a health savings account in 2017 is $3,400 for individuals and $6,750 for families. The catch-up contribution if you’re age 55 or older is $1,000.

Do You Need To Think About The Alternative Minimum Tax?

You may not have thought much about the alternative minimum tax, or AMT, since Congress passed a law that permanently fixed the exemption. But the tax, which you calculate separately from your regular tax liability, is still around. Here’s how the AMT might apply to your 2016 tax return.

Certain income and deductions, known as preference items, are added to or subtracted from the income shown on your federal income tax return to arrive at your AMT taxable income. For example, certain bond interest that you exclude from your regular taxable income must be included when computing income for the AMT. This is a “preference item” because tax-exempt interest gets preferential treatment under ordinary federal income tax rules.

AMT “adjustments” also affect whether you’ll owe the tax. These include personal exemptions and your standard deduction. In the AMT calculation, these taxable-income reducers are not deductible. Instead, they’re replaced with one flat exemption, which is generally the amount of income you can exclude from the AMT. For your 2016 return, the AMT exemption is $83,800 when you are married filing a joint return or are a surviving spouse, $53,900 when you file as single, and $41,900 if you’re married and file separately. The exemption decreases once your income reaches a certain level.

Finally, only some itemized deductions, such as charitable contributions, are allowed in the AMT calculation. Others, including medical expenses and mortgage interest, are computed using less favorable rules.

If you need help determining whether the AMT will apply to your 2016 tax return, be sure to consult with your tax professional.

Planning By The Numbers: Updates for 2017

Are you ready to get started on your 2017 tax planning? Here are the numbers to use to take full advantage of retirement and other tax-advantaged savings.

  • If you are under full retirement age, the social security earnings limit is $16,920. That means if you collect benefits before your full retirement age and earn more than $16,920 in 2017, your benefits will be reduced. After you reach full retirement age, your benefits will be recalculated to give you credit for the reduction. Once you reach full retirement age there is no earnings limit.
  • The “nanny tax” threshold is $2,000 for 2017. If you pay household workers more than $2,000 during the year, you’re responsible for payroll taxes.
  • The “kiddie tax” threshold is unchanged for 2017. If you have children under age 19 who have more than $2,100 of unearned income such as dividends and interest income during the year, the excess could be taxed at your highest rate. The threshold also applies to full-time students under age 24.
  • The maximum individual retirement account contribution you can make in 2017 is $5,500 if you’re under age 50 and $6,500 if you are 50 or older.
  • For 2017, the maximum amount of wages you can contribute to your 401(k) plan is $18,000, and the maximum allowed for SIMPLE plans is $12,500. If you are 50 or older, you can contribute up to $24,000 to a 401(k) and $15,500 to a SIMPLE.
  • For 2017, the maximum amount you can contribute to a health savings account is $3,400 for individuals and $6,750 for families. If you’ll turn 55 this year, or are already age 55 or older, you can make an additional $1,000 catch-up contribution.

New tax rules could change these and other tax numbers at any time. Before making important business and personal financial decisions this year, be sure to consult with your tax professional.

Don’t Let The “Wash Sale” Rule Ruin Your Tax Planning

As the end of another year approaches, you’re looking for ways to reduce your tax bill. You have a handful of stocks in loss positions. You like the stocks and expect the prices to rebound. Should you sell now at a loss to offset other capital gains, then buy the shares right back again?

Not so fast. A federal tax rule is designed to prevent such “wash sales.” Here’s what you need to know.

What is the wash sale rule? When you sell a security at a loss and buy a substantially identical security within 30 days before or after the day of sale, the loss is disallowed for current federal income tax purposes. Instead, you add the loss to the cost basis of the replacement stock.

The wash sale rule is not confined to calendar years. When you make December or January sales, you need to look forward or backward between tax years to determine if the wash sale rule applies.

What if you buy and sell securities from separate accounts? The wash sales rule applies per investor, not per account. Selling shares from one account and buying them in another is not a work-around. Brokers track and report wash sales within the same account and include the sales in the gain and loss report to the IRS. However, if the trades are in different accounts, you are responsible for tracking wash sales.

What if you repurchase the securities in your IRA? The loss on the sale is disallowed, and your basis in the IRA is not increased by the disallowed loss.

The bottom line? Avoiding and reporting wash sales can be complex. Contact your tax professional for assistance and planning advice that includes harvesting capital losses in a way that will keep you from getting hung out to dry by the wash sale rule.