Grossbach Zaino & Associates, CPA's, PC


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When Your Gift Gives Back

Your donation to a tax-exempt organization supports two good causes: the charity’s mission and your wallet (in the form of a charitable tax deduction). Just be careful at tax time.

 

If you receive something of value in return for your donation — dinner, goods or services, tickets to an event, etc. — only the net amount is deductible. Example: If you donate $100 and receive dinner worth $40, the deductible amount is $60.

 

There are some exceptions. In 2016, you can deduct the full amount if:

 

> The items you received were free, you did not order them, and the cost was no more than $10.60.

 

> Your gift was at least $53 and you received only token items with the charity’s logo (e.g., bookmarks, key chains, calendars, etc.) that cost no more than $10.60.

 

> The benefits received are worth less than 2% of your contribution and no more than $106.

 

Charities are required to acknowledge in writing the value of goods or services provided for contributions of more than $75.


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Who’s the Boss?

Do you have someone come in to help around the house, such as a housekeeper, nanny, or gardener? If so, that person may qualify as a household employee, which makes you an employer. On the other hand, if the worker is an independent contractor, then you’re not an employer. It’s an important distinction because employers have obligations under the federal employment tax laws.

 

You May Be an Employer

 

It all depends on who gives the orders. Independent contractors control how they do their work and usually use their own tools and provide services to the general public. However, if you control both the work and how it’s done, the worker is your employee.

 

And a Tax Collector

 

You are responsible for withholding and paying FICA taxes (Social Security and Medicare taxes) for a household employee if the wages you pay the employee reach or go over an annual limit ($2,000 in 2016). FICA taxes generally are split down the middle, with the employer and employee paying equal shares. Alternatively, you can pay the whole amount from your own pocket.

 

You’re not obligated to withhold federal income tax, although you can — and your employee may request that you do. Federal unemployment tax (FUTA) may also apply, depending on how much you pay your household employees.

 

If household employment taxes apply, they’ll be added to your federal income-tax bill. So you might want to start making (or increasing) quarterly estimated tax payments or having more taxes withheld from your paycheck. Otherwise, you may get hit with an underpayment penalty.


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Don’t Expect a Card

From a tax standpoint, some birthdays are more important than others. Here are some notable tax milestones.

 

Birth. You generally can start claiming a dependency exemption for your child in the year he or she is born. In 2016, the exemption is $4,050, subject to phaseout for higher income taxpayers. For married taxpayers filing jointly, the phaseout begins with an adjusted gross income (AGI) of $311,300, and the credit is completely phased out with an AGI of $433,800.*

 

  1. The child care credit is available to eligible working parents until the year their child turns 13. The credit is 20% to 35% of employment-related child care expenses, depending on income. The maximum amount of expenses eligible for the credit is $3,000 for one qualifying child and $6,000 for two or more. As a general rule, qualifying expenses are limited to the earned income of the spouse who earns the lesser amount (no earned income, no child care credit).

 

  1. A child tax credit is available until the year a child turns age 17. The maximum credit is $1,000 per qualified child, and it is phased out above certain income amounts.

 

  1. Your child may continue to qualify as your dependent until the year he or she reaches age 19. If your child is enrolled as a full-time student for some part of five calendar months during the year, then he or she can qualify as your dependent until age 24.

 

59½. You won’t have to worry about the 10% penalty tax on early withdrawals from tax-deferred retirement accounts and traditional individual retirement accounts (IRAs) once you reach age 59½.

 

  1. If you claim the standard deduction instead of itemizing your deductions, you can celebrate your 65th birthday with an additional standard deduction. For 2016, the additional standard deduction is $1,250 for a married individual (filing jointly or separately) or a surviving spouse and $1,550 for a single or head-of-household taxpayer.

 

70½. After you reach age 70½, annual required minimum distributions (RMDs) from traditional IRAs and employer retirement plans generally must start — and they represent taxable income. (Your plan may allow you to delay RMDs if you are still working for the company sponsoring the plan and you are not a 5% owner.)

 

* The 2016 AGI phaseout range for single taxpayers is $259,400 to $381,900. It’s $285,350 to $407,850 for heads of household.


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Is That Degree Deductible?

The answer to this question is tricky, even by tax law standards. Here are the basic rules.

 

The cost of job-related education is deductible if the education maintains or improves skills required in your existing job, trade, or business or is required (by law or by your employer) to keep your position, job, or salary. The cost of education is not deductible if the education is required to enter a field or qualifies you for a new trade or business. Got that?

 

A Tax Court Example

 

This recap of a Tax Court case* might help clarify. A 2007 college grad bounced around a bit before landing a job selling pharmaceuticals in the spring of 2009. That same year, he enrolled in an MBA program (with a concentration in finance).

 

The young man claimed education costs of over $17,000 as unreimbursed employee expenses on his 2009 tax return. But the IRS and the court didn’t allow the deduction because he was not established in a trade or business when he enrolled. Nor did his employers require him to get an MBA.**

 

* Hart, TC Memo. 2013-289

 

** If the education expenses had qualified for a deduction, it would have been a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income floor.


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Investor Tax Tips

Income taxes probably aren’t your main consideration when you’re choosing investments. But when you’re investing outside of a retirement or other tax-deferred account, taxes are one of many factors to consider. Here are some points to keep in mind.

 

Mutual Funds

 

Mutual funds distribute the capital gains that are earned on investment transactions to their shareholders, typically during the last quarter of the year. Gains are accounted for in the fund’s share price before the distribution, so buying shares just before a fund goes ex-dividend means you’re essentially paying for the distribution you’re about to receive. You then have to report the “gain” on your tax return. So it’s wise to check on a fund’s distribution date before making a purchase.

 

Another thing to watch for, particularly in actively managed mutual funds, is high turnover rates. Trades generate transaction costs and commissions and, in some cases, result in short-term gains (which are taxed as regular income at rates as high as 39.6% in 2016, plus the 3.8% investment income surtax if applicable). So high turnover rates could signal higher costs and higher taxes.

 

Selecting tax-managed mutual funds may help you in your battle to reduce the impact of income taxes. The managers of these funds use strategies (such as low turnover and tax loss “harvesting”) to help lower taxes.

 

ETFs

 

Exchange traded funds (ETFs), like mutual funds, typically make distributions of interest and/or dividend income, which will be taxable if shares are held in a taxable account. Capital gains distributions, though less frequent, are also taxable. (Capital gains could result if an ETF sells securities to match the index it tracks.)

 

Given the increased tax rates imposed on the capital gains and other investment income of higher income taxpayers that started in 2013, it is more important than ever to make tax-smart investment decisions.


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Capitalizing on a Tax Holiday

Net long-term capital gain is generally taxed at a relatively low 15% or 20% rate in 2016. But low-bracket taxpayers enjoy an even better deal: Their net capital gain is tax free (i.e., the tax rate on the gain is 0%) to the extent it would have been taxed at the 10% or 15% rate if it had been ordinary income instead of capital gain.

 

Are tax-free capital gains out of your reach if your marginal tax rate is higher than 15%? Maybe not. Here are a couple of family gifting strategies that could save you tax.

 

Gift to parent. If you’re helping your folks financially, a gift of appreciated stock might be a tax-smart way to do it. As long as your parents’ taxable income stays below $75,300* in 2016, they can sell the stock and a 0% rate would apply to the capital gain.

 

Gift to child/grandchild. Until children reach age 19 (24 if they’re full-time students), the 0% rate generally would apply to only a limited amount of capital gain because of the “kiddie tax” rules.** But these rules aren’t an issue for older children (or for children ages 18-23 who have earned income exceeding one half of their support).

 

You can make tax-free gifts of up to $14,000 (per recipient) in 2016 without using up any of your $5.45 million estate- and gift-tax exemption amount.

 

 

* Substitute $37,650 for $75,300 if your parent is a single taxpayer. These figures represent the top of the 15% bracket for single and married-joint taxpayers, respectively.

 

** Under the kiddie tax rules, children pay tax at their parents’ highest rate on unearned income over $2,100 (in 2016).


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Gifts That Give Back at Tax Time

’Tis the season for charitable giving. Nonprofits generally send out appeals this time of year in the hope that people will (a) feel charitable around the holidays and (b) want to make a contribution before the tax year ends on December 31.

 

If you plan to make a donation, review the following so you don’t miss out on the charitable contribution tax deduction.

 

  • The charitable contribution deduction is available only if you itemize deductions on your return.

 

  • Assuming all requirements are met, donations to qualified organizations are deductible on your 2016 tax return if you charge them on your credit card or mail the checks by December 31, 2016.

 

  • You must be able to substantiate your donations for tax purposes. For monetary gifts, you need a written acknowledgment from the charity or a bank record that shows the name of the charity, the amount donated, and the date.

 

  • If you receive a benefit from the organization (dinner at a fundraising event, for example) in exchange for a contribution of more than $75, the charity must provide a written statement indicating the actual value of the benefit. You’re generally required to subtract that value from the amount you contributed to figure your deduction.

 

  • When you make a single donation of $250 or more, you need a written acknowledgment from the charity indicating how much cash you contributed and/or a description of any property you gave.

 

  • If the amount of your deduction for all noncash gifts is more than $500, you’ll need to file Form 8283 (Noncash Charitable Contributions). A gift of property valued at over $5,000 generally requires a professional appraisal. (Additional rules apply.)

 

  • If your charitable gift is serving as a volunteer, the value of your time is not deductible. However, out-of-pocket costs related to your services may be. Keep reliable records so you can substantiate expenditures.