Grossbach Zaino & Associates, CPA's, PC


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Nanny Tax Threshold Rises

The earnings threshold for withholding and paying Social Security and Medicare (FICA) taxes for a household employee has risen to $2,000 for 2016. If you hire domestic help, that person may qualify as your employee for tax purposes.

 

Workers who may qualify as employees are nannies, housekeepers, gardeners, drivers, health aides, and babysitters, among others. A worker is not considered to be your employee when only the worker or an agency, and not you, controls how the work is done.

 

You are responsible for paying (and withholding the employee’s share of) FICA taxes if you pay your household employee $2,000 or more in cash wages. The dollar amount applies separately to each employee in your household. Generally, wages paid to someone under age 18 won’t be subject to FICA tax if the work isn’t the person’s “principal occupation.”


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Is a Roth Conversion on Your Radar?

Wouldn’t it be nice to withdraw money from your individual retirement account (IRA) without paying income taxes? If you had a Roth IRA, you’d be able to do just that. Roth contributions are made with money that has already been taxed, so you’re not taxed again when you withdraw them. And all withdrawals from a Roth IRA — including any earnings — are income-tax free as long as certain conditions are met.

 

Another Roth Perk

 

And that’s not the only benefit of a Roth IRA. Unlike a traditional IRA that requires you to begin taking annual minimum distributions at age 70½ or face a stiff penalty, you aren’t required to make withdrawals from a Roth IRA during your lifetime. That means you can pass a Roth IRA intact to your heirs if you don’t need the money.

 

It’s Not Too Late but . . .

 

If the benefits of a Roth IRA appeal to you, you might consider converting your traditional IRA to a Roth IRA. But conversion isn’t the right move for everyone. Keep these points in mind as you make your decision.

 

On the negative side:

 

◆ You’ll pay income taxes on any previously tax-deferred amounts you convert.

 

◆ You may need many years to recoup the conversion taxes.

 

◆ A conversion generally isn’t a good idea if retirement is close.

 

You might benefit from a conversion if:

 

◆ The investments in your traditional IRA have lost money or your account balance is low.

 

◆ You have sufficient funds outside of your IRA to pay the taxes on the conversion.

 

◆ You have many years before you’ll need the money in your account.

 

Your financial professional can help you weigh the pros and cons of a Roth conversion.


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Investment Income and Taxes

It’s great to earn money on your investments. Uncle Sam thinks so, too. How much of your investment income will be taxed generally depends on the type of investment.

 

Here’s a brief look at the tax treatment of some common income-producing investments.

 

Dividend-paying Stocks

 

Companies pay dividends to shareholders out of the company’s earnings and profits. The tax treatment for “qualified” dividends is based on the stockholder’s income-tax bracket, as follows:

 

◆ 0% for individuals in the 10% and 15% tax brackets

 

◆ 15% for individuals in tax brackets above 15% but below 39.6%

 

◆ 20% for individuals in the 39.6% tax bracket*

 

Typically, the same tax treatment applies to qualified dividends of both common and preferred shares.

 

Bonds

 

Different types of bonds may have different types of tax exposure.

 

Corporate bonds — interest is subject to federal and state income tax at your ordinary income-tax rate.*

 

Treasury bills — the difference between what you pay for a Treasury bill and the amount you receive at maturity is interest that is subject to federal — but not state and local — income tax.*

 

Treasury Inflation-Protected Securities (TIPS) — interest payments and increases in the principal are subject to federal — but not state and local — income tax.*

 

Municipal bonds — interest generally is exempt from federal — and possibly state and local — income tax.

 

* A 3.8% Medicare surcharge on investment income may apply to higher income taxpayers. 


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Net Operating Losses Provide Tax Benefits

For many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

 

Who May Use an NOL?

 

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use “passed through” losses on their own returns.

 

How Is an NOL Applied?

 

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may use a three-year carryback period.

 

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

 

How Is an NOL Calculated?

 

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are limited.


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Standard Mileage Rates for 2016

If you use a car for business purposes and figure your tax deduction using the IRS’s standard mileage rate, you won’t be able to deduct as much for the miles you drive in 2016 as you could in 2015.

 

New Rates

 

As of January 1, 2016, the IRS set the standard mileage rate for business use of an owned or leased auto at 54¢ per mile (3.5¢ lower than the 2015 rate). Other IRS optional standard mileage rates for the use of a car (or van, pickup, or panel truck) are:

 

> 19¢ per mile for medical purposes

 

> 19¢ per mile for moving purposes

 

Additionally, a rate of 14¢ per mile, which is set by statute, applies to the use of a vehicle for charitable purposes.

 

Some Details

 

The standard mileage rates are used to calculate the deductible costs of operating an auto for business, charitable, medical, or moving purposes. Alternatively, taxpayers may claim deductions based on the actual costs of using a vehicle. However, use of the standard mileage rate is simpler because it does not require the taxpayer to keep track of specific costs for maintenance, repairs, tires, oil, insurance, etc.

 

Many employers have an “accountable plan” in place to reimburse employees for their business expenses on a tax-free basis. The standard mileage rate may be used to reimburse employees who use their personal autos for business.


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Federal Tax Breaks Restored

Individual and business taxpayers can benefit from a variety of federal tax breaks that were extended or made permanent by the Protecting America from Tax Hikes (PATH) Act and the Consolidated Appropriations Act, 2016. Here are selected highlights.

 

State and local sales tax deduction. The law gives individuals who itemize their deductions the option of deducting state and local sales taxes instead of state and local income taxes. Taxpayers who elect to do so may deduct the actual amount of sales taxes paid during the year or a preset amount from an IRS table. This provision has been made permanent.

 

Nontaxable IRA transfers to charities. Taxpayers age 70½ or older who directly transfer up to $100,000 annually from their individual retirement accounts (IRAs) to qualifying charities can exclude these contributions from gross income. If all qualifications are met, these contributions will still count toward the taxpayer’s required minimum distribution for the year. This provision has been made permanent.

 

Increase in expensing limits. The law permanently extends the increased Section 179 expensing limit, allowing eligible businesses to expense, rather than depreciate, up to $500,000 per year of the cost of equipment and other eligible property placed in service during the tax year. The election is subject to a dollar-for-dollar phaseout as the cost of expensing-eligible property rises from $2 million to $2.5 million. The IRS will adjust the 179 limits for inflation.

 

First-year bonus depreciation. Eligible businesses may claim bonus depreciation for qualifying property acquired and placed in service during 2015 through 2019. The available bonus depreciation percentage depends on the year the property is placed in service: 50% for 2015 through 2017, 40% for 2018, and 30% for 2019. For certain longer-lived and transportation property, these percentages apply one year later than indicated, and bonus depreciation will be available through 2020.

 

Increase in “luxury auto” limits. The new law increases the dollar limits on depreciation deductions (and Section 179 expensing) by $8,000 for vehicles placed in service after 2015 and before 2018. The limits are increased by $6,400 for vehicles placed in service in 2018 and by $4,800 in 2019.


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What About Taxes?

When you hold mutual fund shares in a taxable account, failing to keep track of the details could result in a bigger income-tax bite. Here are some things to remember.

 

Your Cost Basis. Distributions of capital gains and dividends generally are taxable, even if you use them to purchase additional shares. So, when you’re figuring gains and losses, don’t forget to add reinvested income and capital gains to your original cost basis. Forgetting to add them to your cost basis means you’ll pay taxes on them twice, since those distributions have already been taxed.

 

The Ex-dividend Date. Pay close attention to investing in a fund around its ex-dividend date. Investing right before distributions are made (generally near year’s end) means that part of your investment will be immediately returned to you as a taxable distribution. Check with the fund company to find out approximately when year-end distributions will occur.

 

You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.