Grossbach Zaino & Associates, CPA's, PC


Leave a comment

Don’t Wait To Lower Your Taxes

Don’t let the hustle and bustle of the holiday season keep you from exploring ways to minimize your 2015 income-tax liability. Waiting too long can prevent you from using planning moves that can help reduce your tax bite. Consider whether any of the following strategies are appropriate for you.

Save More, Pay Less

Increasing your pretax contributions to an employer-sponsored retirement plan may help you lower your tax bill. You don’t pay current income taxes on the money you contribute to your plan account, so deferring a greater amount of your pay means less money is withheld for taxes. If you’re age 50 or older and already contributing the maximum annual amount through salary deferral, find out if your plan allows catch-up contributions.

Contributing to a traditional individual retirement account is another option. Contributions made by April 18, 2016, may be deductible on your 2015 income-tax return. The contribution limit for 2015 is $5,500 ($6,500 if you’re age 50 or older). Your tax advisor can review the deduction requirements with you.

Your Charitable Side

You can donate to your favorite charities and increase your itemized deduction for charitable contributions by making 2016 gifts by the end of 2015. Donating with a credit card or with a check mailed by December 31 entitles you to a deduction on your 2015 income-tax return even though you won’t get your credit card bill or have your check processed until 2016. Check the charity’s tax-exempt status before you donate, and keep records of your donations. Deduction limits apply.

Look Over Your Losers

You may want to consider selling any investment that has lost value since you acquired it, especially if it has consistently under performed a benchmark and doesn’t show signs of improving. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Excess losses that you can’t deduct for 2015 can be carried over for deduction in future years, subject to the same limitations.

Time for Profits?

Have you been thinking about selling and taking your profits on appreciated stock you’ve held longer than one year? Favorable capital gain tax rates might make this a good time. Currently, long-term gains from the sale of stocks and other securities are taxed at 15% for most taxpayers, 0% for taxpayers in tax brackets below 25%, and 20% for taxpayers in the top regular tax bracket (39.6%). You can use any losses to offset your gains from the sale of appreciated securities.

Taxes should never be your only reason for holding or selling an investment. Look at the impact your decision would have on your overall portfolio before you make a move.

Bunching Expenses

You may be able to exceed the floor amount for medical deductions by scheduling and paying out-of-pocket medical costs before year-end. For 2015, medical expenses are deductible only in the amount that exceeds 10% of adjusted gross income (AGI) or 7.5% of AGI for taxpayers age 65 or older.


Leave a comment

Accountable Plan Advantages

Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an “accountable plan.” Having an accountable plan that meets tax law requirements can provide tax advantages.

Business Connection

Each expense reimbursed under an accountable plan must have a “business connection.” This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Other Requirements

Employees must adequately account for their expenses and return any excess reimbursements or allowances within a “reasonable period of time.” The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Tax Effects

Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.

If no accountable plan is in place, amounts paid to the employee count as taxable wages. The employee can potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. The employee’s deduction for employee business expenses and other miscellaneous expenses is limited to the amount that exceeds 2% of adjusted gross income.


Leave a comment

Tax-efficient Investing

When it comes to investment decisions, taxes should never be the deciding factor. But a smart investor looks to minimize taxes wherever possible.

Some Background

The following is a refresher on some basic tax and investing facts:

  • Generally, taxpayers may hold their investments in two types of accounts — taxable accounts, such as brokerage accounts, and tax-deferred accounts, such as an individual retirement account or a 401(k).
  • Bond interest is generally taxed at ordinary rates unless the investment is held in a tax-deferred account. The ordinary rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. A major exception is municipal bond interest, which is generally tax exempt.
  • Taxable capital gains are subject to lower rates if the gains are considered “long term” (generally, securities were held longer than one year). For most taxpayers, the long-term capital gains rate is 15%. For those in the 39.6% ordinary tax bracket, the rate is 20%; for those in the 10% or 15% brackets, the rate is 0% (gains are not taxed).
  • The same long-term capital gains rates apply to qualified dividends.
  • Capital gains on securities held one year or less (“short term”) are taxed at ordinary rates.
  • High-income investors may have to pay an additional 3.8% net investment income tax.
  • Withdrawals from tax-deferred accounts are generally taxed at ordinary rates, even if the withdrawn funds represent long-term capital gains or qualified dividends.

Strategies

There are several tax strategies you can use to minimize taxes on investments.

Maximize retirement contributions to tax-deferred accounts. By making tax-deductible or pretax contributions to IRAs or employer-sponsored retirement plan accounts, you delay the payment of income taxes. Investing the tax savings can boost returns.

Minimize turnover. Constant trading of securities within a taxable account turns unrealized (“paper”) gains and losses into realized gains and losses that are reportable for tax purposes. One way to minimize turnover is to avoid frequent trading. Another is to avoid mutual funds with high turnover ratios. Certain funds trade more frequently than others, and at the end of the year, they may distribute more taxable capital gains to their shareholders. Passively managed index funds trade relatively infrequently and tend to have lower tax costs.

Compare yields. Before choosing tax-exempt bonds, calculate whether they make sense for you. To determine how the yield on a taxable bond compares to the yield on a tax-exempt bond, subtract your marginal tax rate from one and divide the result into the yield on the tax-exempt bond.

Example. Laura is in the 33% federal income-tax bracket. She wants to know how much a taxable corporate bond would have to yield to match the 1.75% yield offered on a tax-exempt bond. She subtracts .33 from one and divides the result (.67) into 1.75% to arrive at 2.6%. Therefore, a taxable bond at that rate or above generally would be preferable.

Generally, the yield differentials between taxable and tax-exempt bonds make tax-exempts more suitable for higher bracket taxpayers.

Asset allocation. Because higher tax rates point toward tax deferral, a logical strategy is placing assets that are taxed at relatively low rates in taxable accounts and assets taxed at higher rates in tax-deferred accounts.


2 Comments

Writing Off Bad Debts

In any economic environment, businesses typically have a percentage of customers who don’t pay their invoices. Here are some tax guidelines.

Cut Your Loss

If a customer or client owes your business money you can’t collect, you might be able to claim a bad debt deduction on your business return. You must be able to show the debt is partially or totally worthless. This may be the case if you have taken reasonable steps to collect a debt and there is no longer any possibility you will receive payment. Business bad debts typically arise from credit sales to customers.

Timing Is Critical

The tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless. To ensure you don’t miss out on bad debt deductions this year, review your records carefully to pinpoint any potentially worthless receivables you may still be carrying on the books. Make sure you carefully document your failed collection efforts in case the IRS challenges the bad debt deduction.

Note that bad debt deductions generally aren’t available to businesses that use the cash method of accounting. To deduct a bad debt, you must have previously included the amount in your income. Since cash-method taxpayers don’t report income until payment is received, no deduction is allowed for uncollectible amounts, even if the money is owed to you for services you performed.


Leave a comment

Taxing Decisions

Do you use your car for business driving or maintain an office in your home? In either situation, you may have a choice of methods for figuring your tax deduction.

 

Car Expenses

 

When you use your car for both business and personal purposes, you have to keep track of your mileage so that your car expenses may be divided between the two purposes. Only the business portion is deductible. That much is a given. The choice involves whether to use the actual amounts you spend on gas, oil, repairs, insurance, etc., to figure your deduction or the IRS standard mileage rate. Usually, you will want to use actual expenses if it produces a larger deduction. But, if keeping receipts is a burden, the simpler standard mileage rate may be best. (Requirements apply.)

 

Home Office Expenses

 

There are strict requirements for claiming the home office deduction, but it can be a tax saver if you qualify for it. Assuming you do, you’ll have to decide between deducting actual expenses allocated to the home office (usually based on square footage) or using a simplified method (deducting $5 per square foot for up to 300 square feet of office space). Again, you will usually want to use the actual expense method if it produces a larger deduction. But, if you want to minimize recordkeeping and don’t want tax complications when you sell your home, you may lean toward the simplified method.*

 

* Capital gain attributable to depreciation of your home will be taxable. Unlike with the actual expense method, there is no depreciation claimed when using the simplified method.


Leave a comment

Documentation Counts

Recently, the U.S. Tax Court denied a taxpayer’s claimed deductions for over $27,000 of charitable contributions because the taxpayer had failed to properly document them.

Individual taxpayers and business owners claiming deductions must be able to substantiate them according to specific rules established by the IRS. Watch out for these common pitfalls.

Donations. Cash contributions of less than $250 require a bank record or written receipt indicating the name of the organization and the date and amount of the contribution. For noncash donations, you need a receipt and a record showing the donee’s name and a description of the gift. If the value of any gift equals $250 or more, you also need a contemporaneous written acknowledgment, a statement of whether the charity provided any goods or services in exchange for the gift, and, if so, a description and a good faith estimate of the value. Additional rules apply to contributions of noncash property of more than $500.

Hobbies. Deductions for hobby expenses are strictly limited. If you wish to claim the full extent of any expenses, you must be prepared to show that your activity qualifies as a business. The IRS will presume it’s a business if you can show a profit in three of the past five years. If that isn’t the case, then you should be prepared to produce evidence to satisfy a number of more subjective tests to avoid application of the tax law’s “hobby loss” restrictions.

Divorce. Alimony payments are tax deductible, but payments for child support are not. Taxpayers should retain their final divorce decree and any agreements for child support and/or separate maintenance in case the IRS questions claimed deductions. Also retain any agreements regarding who will claim exemptions for dependent children. For capital gains purposes, save cost records for both jointly owned and settlement property.

Business expenses for travel, meals and entertainment, and transportation. Generally, you must retain documentation to establish the amount, time, place, and business purpose for each expenditure. Specific expense categories may have additional requirements.

Business use of an automobile. Maintain records for the cost of the car and any improvements; the date you started using it for business; the mileage, destination, and business purpose for each trip; and the total mileage for the year. When you use the actual expense method rather than the IRS standard mileage rate, you also need records of your operating costs, such as gas, oil, repairs, maintenance, and insurance.

 

Home office. Be prepared to produce records that substantiate your claimed expenses and show regular and exclusive business use of that part of the home.


Leave a comment

Three Steps to Lower Taxes for the Self-employed

When you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes, which in 2015 will amount to 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

* Dollar limits apply to the deduction for long-term care insurance premiums.

** Although deductible for income-tax purposes, contributions to your own retirement plan account do not reduce earnings subject to self-employment taxes.