Tax Insight–July 2017

Mid-Year Tax Planning

When your circumstances change, your tax situation may also change. If you’ve had (or are expecting) any life changes, such as a change in marital status, buying or selling a house, having a baby or changing jobs, please contact me so we can avoid any unpleasant surprises come tax season.

 

Deducting Auto Expenses
If you use your automobile for business, you may be entitled to tax deductions. Unless your car is used exclusively for business, you cannot claim a 100% business deduction.

 

Deducting auto expenses requires diligent recordkeeping. There are two methods available for calculating your auto deductions—the standard mileage rate or actual expenses. These methods are available regardless of whether you own or lease your vehicle.

 

Taxpayers who wish to use the standard mileage rate in lieu of actual expenses for computing deductible vehicle expenses must elect to do so in the first year of business use. Switching to the standard mileage rate in a later year is not an option. You can, however, switch from using the standard mileage rate to the actual expense method in a later year.

 

The actual expense method is exactly as it sounds. Actual expenses, such as the cost for gas, oil, insurance, repairs, maintenance, tires, washing, licenses and depreciation or lease payments, are all eligible.

For the standard mileage rate method, instead of tracking the above expenses, you track the business mileage you incurred and use a standard rate, which is 53.5 cents per mile in 2017.

 

You’ll need to keep accurate records of the miles driven for business, dates of business use, destinations and the business purpose. Also, you’ll need to note the odometer reading at the beginning and end of the year to determine the total miles for the year for all uses. It’s important to maintain accurate records. The IRS may disallow a deduction for mileage if you are unable to substantiate the miles driven or the business purpose.

 

It’s important to note that you cannot deduct commuting mileage (mileage from your home to your regular job). It’s necessary to determine your tax home. If you are self-employed and maintain an eligible home office that is your principal place of business, you can deduct the mileage between your home office and your client’s or customer’s place of business, as well as mileage between job locations. As an employee, you can deduct mileage between jobs or mileage to and from a temporary work assignment. If you do not have a regular place of business, you can only deduct your transportation expenses to and from a temporary work location outside your general area of employment.

 

Quote Corner
“And so with the sunshine and the great bursts of leaves growing on the trees, just as things grow in fast movies, I had that familiar conviction that life was beginning over again with the summer.” ~F. Scott Fitzgerald, The Great Gatsby

Did You Know?
The average American eats around 51/2 gallons of ice cream a year. July is National Ice Cream Month because that’s when the most ice cream is sold.

Tax Insight–June 2017

 

Quick Numbers

  • For 2017, the annual gift tax exclusion is $14,000 to each person; the gift tax exemption amount is $5,490,000.
  • The eligible expenses for the child and dependent care credit is capped at $3,000 for one child and $6,000 for two or more children.
  • For 2017, the maximum wage amount subject to social security tax is $127,200.

 

Hire Your Children for the Summer
One advantage of operating your own business is hiring family members. Not only is this a great way to teach your kids work ethics and money-management skills, but there are tax saving benefits to hiring your children as well.

 

When your children are under age 18, you are not required to withhold social security and Medicare taxes from their wages. You are not required to pay federal unemployment taxes on their wages either until they reach age 21.

 

Your children (or grandchildren) must be legitimately involved in the business—not just simply doing family chores. You should keep records of the time worked and make sure their wages are reasonable.

 

If you are a self-employed business owner, you can take advantage of this underutilized tax-saving strategy. Partnerships are also included in this category if the parents are the only partners. If your business is incorporated, no special rules apply, and your children are subject to normal payroll taxes regardless of their age.

 

Quote Corner
“How did it get so late so soon? It’s night before it’s afternoon. December is here before it’s June. My goodness how the time has flewn. How did it get so late so soon?” ~Dr. Seuss

Did You Know?
Dr. Seuss was not a doctor. His real name was Theodor Seuss Geisel and he used several pen names in addition to Dr. Seuss, including Theo LeSieg (“Geisel” spelled backwards) and Rosetta Stone. On Dr. Seuss Day, also known as National Read Across America Day, schools throughout the country celebrate Dr. Seuss’ birthday to promote literacy.

Deadline Approaching for Undoing a 2015 Roth IRA Conversion

If you converted a traditional IRA to a Roth IRA in 2015 and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (re-characterize) your conversion. You have until October 17, 2016, to undo your 2015 conversion.* A re-characterization can help you avoid paying income tax on IRA assets that have lost value since the conversion. When you re-characterize, your conversion is treated for tax purposes as if it never happened.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2015. Further assume that your Roth IRA is now worth only $60,000. If you don’t undo the conversion, you’ll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you re-characterize, your IRA administrator will make a direct transfer of the assets from your Roth IRA back to your traditional IRA. For tax purposes, you’ll be treated as though the conversion never happened, and you’ll wind up with no resulting tax bill (or a tax refund if you’ve already filed and paid taxes on the conversion).

(Note: Your Roth IRA doesn’t need to sustain losses in order for you to re-characterize your conversion. You can do so for any reason. For example, you may simply have changed your mind and no longer wish to pay the additional conversion taxes in/for 2015.)

If you re-characterize your 2015 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”), but you must wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you re-characterized (and any earnings) is subject to a 30-day waiting period, any additional amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time. If you reconvert in 2016, then all taxes due as a result of the conversion will be included on your 2016 federal income tax return.

(You can also re-characterize a 2016 Roth conversion. However, the deadline for doing so isn’t until October 16, 2017.)

Whether it makes sense to re-characterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA and your expectations of where the markets may be headed.

*If you already paid your taxes for 2015, you’ll need to file an amended return to obtain a refund for any taxes paid on the conversion. An amended return can generally be filed as late as three years after the original return was filed. Consult your tax professional.

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IRS Releases Dirty Dozen Scam List: Don’t be a Victim

Each year, people fall prey to tax scams. That’s why the IRS sends a list of its annual “Dirty Dozen.” Stay safe and be informed – don’t become a victim.

If you get involved in illegal tax scams, you can lose money or face stiff penalties, interest and even criminal prosecution. Remember, if it sounds too good to be true, it probably is. Be on the lookout for these scams:
Identity theft. Identity theft, especially around tax time, is at the top of the “Dirty Dozen” list again this year. The IRS continues to aggressively pursue criminals who file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front. Remain vigilant to avoid becoming a victim.

Telephone scams. Threatening phone calls by criminals impersonating IRS agents remain an ongoing threat. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation, license revocation and more. These con artists often demand payment of back taxes on a prepaid debit card or by immediate wire transfer. Be alert to con artists impersonating IRS agents and demanding payment.

Phishing. Phishing scams typically use unsolicited emails or fake websites that appear legitimate but are attempting to steal your personal information. The IRS will not send you an email about a bill or tax refund out of the blue. Don’t click on strange emails and websites that may be scams to steal your personal information.

Return Preparer Fraud.
About 60 percent of taxpayers use tax professionals to prepare their returns. While most tax professionals provide honest, high-quality service, there are some dishonest ones who set up shop each filing season to perpetrate refund fraud, identity theft and other scams. Be on the lookout for unscrupulous tax return preparers. Choose your preparer wisely.

Offshore Tax Avoidance.
Hiding money and income offshore is a bad bet. If you have money in offshore banks, it’s best to contact the IRS to get your taxes in order.

The IRS offers the Offshore Voluntary Disclosure Program to help you do that.

Inflated Refund Claims.
Be on the lookout for anyone promising inflated tax refunds. Also be wary of anyone who asks you to sign a blank return, promises a big refund before looking at your tax records or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via trusted community groups to find victims.

Fake Charities.
Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. If you are making a charitable contribution, you should take a few extra minutes to ensure your hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools you need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally-known organizations.

Falsely Padding Deductions on Returns.
Don’t give in to the temptation to inflate deductions or expenses on your tax return. Think twice before overstating deductions such as charitable contributions, inflating claimed business expenses or including credits that you are not entitled to receive, such as the Earned Income Tax Credit or Child Tax Credit. Complete an accurate return.

Excessive Claims for Business Credits.
Don’t make improper claims for fuel tax credits. The credit is generally limited to off-highway business use, including use in farming. It is generally not available to most taxpayers. Also avoid misuse of the research credit. If it doesn’t apply to your business and you don’t meet the criteria, don’t make the claim.

Falsifying Income to Claim Credits.
Don’t invent income to erroneously claim tax credits. A scam artist may try to talk you into doing this. You should file the most accurate tax return possible because you are legally responsible for what is on your return. Falling prey to this scam may mean you have to pay back taxes, interest and penalties. In some cases, you may even face criminal prosecution.

Abusive Tax Shelters.
Avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. Be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, seek an independent opinion regarding these complex situations or offers. Most taxpayers pay their fair share, and so should you.

Frivolous Tax Arguments.
Using frivolous tax arguments to avoid paying taxes can have serious financial consequences. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying taxes. The law is crystal clear that people must pay their taxes. For decades, the federal courts have consistently upheld the tax laws. The penalty for filing a frivolous tax return is $5,000.

Tax scams can take many forms beyond the “Dirty Dozen.” The best defense is to remain alert. Additional information about tax scams is available on IRS social media sites, including YouTube and Tumblr, where people can search “scam” to find all the scam-related posts.

 

Obtaining and Claiming a Health Coverage Exemption

The Affordable Care Act requires you and each member of your family to have minimum essential coverage, qualify for an insurance coverage exemption, or make an individual shared responsibility payment for months without coverage or an exemption when you file your federal income tax return.

You, your spouse or your dependents may be eligible to claim an exemption from the requirement to have coverage and are not required to make a payment. .For any month that you do not qualify for a coverage exemption, you will need to have minimum essential coverage or make a shared responsibility payment.

You can claim most exemptions when you file your tax return. However, you must apply for certain exemptions in advance through the Health Insurance Marketplace, You may be exempt if:

  • The minimum amount you must pay for the annual premiums is more than 8.05 percent of your household income
  • You have a gap in coverage that is less than three consecutive months
  • You qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement

Claiming an exemption when you file

You will claim or report coverage exemptions on Form 8965, Health Coverage Exemptions, and attach it to Form 1040, Form 1040A, or Form 1040EZ. You can file each of these forms electronically.

If your income is below your filing threshold and you are not required to file a tax return, you are eligible for an automatic exemption and you do not have to file a tax return to claim it. You do not need to file a return solely to report your coverage or to claim a coverage exemption.

However, if you choose to file a tax return, you will use Part II, Coverage Exemptions for Your Household Claimed on Your Return, of Form 8965 to claim a health coverage exemption. You should not make an individual shared responsibility payment if you qualify for this exemption because your income is below the filing threshold.

You can claim other IRS-granted coverage exemptions on your tax return using Part III, Coverage Exemptions for Individuals Claimed on Your Return, of Form 8965.  For a coverage exemption that you qualify to claim on your tax return, all you need to do is file Form 8965 with your tax return.  You do not need to contact the IRS to obtain an exemption in advance.

Reporting Marketplace granted exemptions

If you are granted a coverage exemption from the Marketplace, they will send you a notice with your unique Exemption Certificate Number or ECN. You will enter your ECN in Part I, Marketplace-Granted Coverage Exemptions for Individuals, of Form 8965 in Column C.

If the Marketplace hasn’t processed your exemption application before you file your tax return, complete Part I of Form 8965 and enter “pending” in Column C for each person listed. If you can claim the exemption on your return, you do not need an ECN from the Marketplace.

Six Tips on Whether to File a 2015 Tax Return

Most people file a tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. Here are six tips to help you find out if you should file a tax return:

  1. General Filing Rules.Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and under age 65 you must file if your income was at least $10,300. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Go to gov/filing to find out if you need to file.
  2. Premium Tax Credit. If you enrolled in health insurance through the Health Insurance Marketplace in 2015, you may be eligible for the premium tax credit. You will need to file a return to claim the credit. If you chose to have advance payments of the premium tax credit sent directly to your insurer during 2015 you must file a federal tax return. You will reconcile any advance payments with the allowable premium tax credit. You should receive Form 1095-A, Health Insurance Marketplace Statement, by early February. The form will have information that will help you file your tax return
  3. Tax Withheld or Paid.Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
  4. Earned Income Tax Credit.Did you work and earn less than $53,267 last year? You could receive EITC as a tax refund, if you qualify, with or without a qualifying child. You may be eligible for up to $6,242. Use the 2015 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return to claim it.
  5. Additional Child Tax Credit.Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.
  6. American Opportunity Tax Credit.The AOTC is available for four years of post-secondary education and can be up to $2,500 per eligible student. You, your spouse or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe any taxes, you still may qualify. You must complete Form 8863, Education Credits, and file it with your return to claim the credit. Use the Interactive Tax Assistant tool on IRS.gov to see if you can claim the credit. Learn more by visiting the IRS’ Education Credits Web page.

The instructions for Forms 1040, 1040A or 1040EZ list income tax filing requirements. You can also use the Interactive Tax Assistant tool on IRS.gov. Look for “Do I need to file a return?” under general topics to see if you need to file. The tool is available 24/7 to answer many tax questions. Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and and the IRS’s obligations to protect them on IRS.gov.

Getting Ready to File Your Tax Return: Health Coverage Reporting Requirement

It’s always a good idea to prepare early to file your federal income tax return. Like last year, certain provisions of the Affordable Care Act affect your federal income tax return when you file this year.

Here are two things you should know about the health care law’s coverage and reporting requirements that will help you get ready to file your tax return.

  • The Affordable Care Act requires that you and each member of your family havequalifying health insurance coveragefor each month of the year, qualify for an exemption from the coverage requirement, or make an individual shared responsibility payment when filing your federal income tax return.
  • Most taxpayers will simply check a box on their tax return to indicate that each member of their family had qualifying health coverage for the whole year. No further action is required. Use the chart on IRS.gov/acato find out if your insurance counts as qualifying coverage.

You or your tax professional should consider preparing and filing your tax return electronically. Using tax preparation software is the easiest way to file a complete and accurate tax return. There are a variety of electronic filing options, including free volunteer assistance, IRS Free File for taxpayers who qualify, commercial software, and professional assistance.

For more information about the Affordable Care Act and your 2015 income tax return, visit IRS.gov/aca.

Who Can Represent You Before the IRS?

Many people use a tax professional to prepare their taxes. Tax professionals with an IRS Preparer Tax Identification Number (PTIN) can prepare a return for a fee. If you choose a tax pro, you should know who can represent you before the IRS. There are new rules this year, so the IRS wants you to know who can represent you and when they can represent you. Choose a tax return preparer wisely.

Representation rights, also known as practice rights, fall into two categories:

  • Unlimited Representation
  • Limited Representation

Unlimited representation rights allow a credentialed tax practitioner to represent you before the IRS on any tax matter. This is true no matter who prepared your return. Credentialed tax professionals who have unlimited representation rights include:

  • Enrolled agents
  • Certified Public Accountants
  • Attorneys

Limited representation rights authorize the tax professional to represent you if, and only if, they prepared and signed the return. They can do this only before IRS revenue agents, customer service representatives and similar IRS employees. They cannot represent clients whose returns they did not prepare. They cannot represent clients regarding appeals or collection issues even if they did prepare the return in question. For returns filed after Dec. 31, 2015, the only tax return preparers with limited representation rights are Annual Filing Season Program Participants.

The Annual Filing Season Program is a voluntary program. Non-credentialed tax return preparers who aim for a higher level of professionalism are encouraged to participate.

Other tax return preparers have limited representation rights, but only for returns filed before Jan. 1, 2016. Keep these changes in mind and choose wisely when you select a tax return preparer.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.