Grossbach Zaino & Associates, CPA's, PC

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Can You Deduct a Good Time?

Wouldn’t it be great to be able to take a tax deduction for your vacation? Combine vacation with a business trip and maybe you can. But, for expenses to be tax deductible, they must meet certain requirements. It’s a good idea to know what those requirements are before you plan your travel.

Add It on

If the primary purpose of your trip is business, you can deduct the cost of your transportation to and from your destination, even when you’ve tacked on a few vacation days. However, with certain exceptions, you’ll be able to deduct food and lodging costs only for days you actually spend on business.

Bring the Crew

While you can’t deduct food, lodging, or airfare for your family, you’re still entitled to your own write-offs for a trip that combines business and pleasure. That includes the single-occupancy rate for lodging on days when you’re conducting business. And, if you travel by car, you can deduct the full cost of transportation, just as you would if you were traveling alone.

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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 record-keeping 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.

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Tax Exempt? Not Always

Public charities and other nonprofits count on being exempt from federal income taxes. However, even after the IRS has formally recognized a nonprofit’s tax exemption, the organization could have a tax liability if it has “unrelated business income.” The purpose of the tax on unrelated business income is to prevent tax-exempt nonprofits from gaining an unfair competitive advantage over commercial businesses that are conducting similar enterprises.

When the Tax Can Apply

The tax is triggered when a nonprofit generates income from a trade or business activity that it regularly carries on, and the activity is not substantially related to the purpose that forms the basis for the organization’s tax exemption. The tax can apply even if the organization uses the profits from the activity to further its mission.

Income-producing activities that should be carefully scrutinized for unrelated business income potential include:

  • Sales of souvenirs, prepackaged foods, tee shirts, or other merchandise (but see When the Tax Doesn’t Apply for exceptions)
  • Joint ventures with for-profit partners
  • Sales of commercial advertising
  • Travel tours

Where the potential for unrelated business income exists, it may be possible to sidestep a tax problem by structuring an arrangement differently, altering a product lineup, or making other changes to bring the activity within the scope of the organization’s mission.

When the Tax Doesn’t Apply

As in most areas, the tax law contains exceptions that allow certain activities to escape the reach of the unrelated business income tax. Among them:

  • Volunteer efforts in which substantially all of the work is conducted by volunteers
  • n Selling donated merchandise
  • n Hospital gift shops operated for the convenience of employees, patients, and visitors
  • n Agricultural fair and exposition entertainment and recreational activities
  • n Certain trade shows

Nonprofits are constantly looking for new ways to keep their missions alive by expanding their revenues. Understanding the unrelated business income rules and how the tax can be avoided will help ensure that the IRS does not share in those revenues.

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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.

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Claiming the Saver’s Tax Credit

You may be eligible to claim the “saver’s credit” on your federal income-tax return when you contribute to your employer-sponsored retirement plan. A tax credit reduces your tax liability dollar for dollar.

Your income must fall within a certain range to qualify for the saver’s credit. The range depends on your tax filing status (see chart). The credit is for 50%, 20%, or 10% of up to $2,000 of qualified retirement savings contributions. If you are married and file a joint return, you and your spouse each may be able to claim the credit on up to $2,000 of contributions.

To claim the credit, you must be age 18 or over and not a full-time student, and you can’t be claimed as a dependent on another person’s return.

2016 Saver’s Credit Adjusted Gross Income Ranges*

Credit         Married Filing Jointly      Head of Household                    Single,

Married Filing Separately

50%                 $37,000 or less               $27,750 or less                    $18,500 or less

20%              $37,001 – $40,000          $27,751 – $30,000              $18,501 – $20,000

10%              $40,001 – $61,500          $30,001 – $46,125                $20,001 – $30,750

0%                    over $61,500                   over $46,125                              over $30,750

* Income ranges are for 2016, and amounts may be adjusted for inflation in future tax years.

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Comparing Yields

For investors in the higher income-tax brackets, tax-exempt municipal bonds (munis) can represent an attractive investment. Municipal bond interest is generally exempt from federal income tax and often is exempt from state (and possibly local) income tax in the state of issuance.

Taxable Equivalent Yield

 If you are looking at potential bond investments, you’ll want to figure out whether you will do better after taxes with a muni or a taxable security. Calculating the taxable equivalent yield — the interest rate in your tax bracket that is equivalent to the rate being paid on the tax-exempt bond you are considering — will help you make a useful comparison.

Example. Jay is in the 35% federal income-tax bracket. He wants to know how much a corporate bond would have to yield someone in his tax bracket to match the 1.8% yield on a tax-exempt muni investment he is considering. He subtracts .35 from one and divides the result (.65) into 1.8%. The answer: 2.77%. On an after-tax basis, a taxable bond yield of 2.77% is equivalent to a 1.8% tax-exempt yield. (Only federal taxes are considered in this example.)

Is AMT a Factor?

 State and local governments and their agencies issue the majority of municipal bonds. However, nonprofit organizations, airports, certain housing agencies, and other “private activity” issuers also issue munis. Although exempt from regular income tax, the interest on most private activity bonds is taxable for alternative minimum tax (AMT) purposes. You’ll want to assess your potential exposure to AMT before investing in private activity bonds.

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Consider Taxes in a Divorce

Tax planning is an important step in finalizing a divorce agreement. Here are some issues divorcing couples may want to consider.

What’s in a Name?

Alimony and child support both involve one spouse making payments to the other, but that’s where the similarity ends. Alimony payments are tax deductible to the payer and taxable to the recipient. Child support is not deductible and can be received tax free.

Dependent — or Not?

Generally, the custodial parent claims the dependency exemption, although couples can make other arrangements. Parents with more than one child may decide to split the exemptions between them. Parents might also decide to alternate claiming the exemption.

Who Gets the Credit?

The parent who claims the child as a dependent typically is entitled to claim tax credits such as the child tax credit and the credit for higher education expenses. However, a custodial parent paying work-related child care expenses can claim the child care tax credit even if the other parent claims the dependency exemption.

 Assets To Transfer?

No taxes are owed on the transfer of assets between spouses. However, when dividing assets, it’s important to consider how taxes, such as capital gains, may come into play in the future.

How About Retirement Benefits?

Where retirement plan benefits have been made payable to a former spouse under a court-issued qualified domestic relations order (QDRO), subsequent distributions will be taxable to the former spouse.