Grossbach Zaino & Associates, CPA's, PC


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Built-in Tax Benefits

Tax advantages are one of the built-in benefits of your employer’s retirement savings plan. Just by participating in the plan, you have the opportunity to make pretax contributions, which may enable you to benefit from tax-deferred compounding. Plus, you might qualify to claim a tax credit for your contributions. These tax advantages, combined with your plan’s other great features, can help you achieve your retirement goals.

 

Pretax Contributions

 

The amount you contribute pretax is deducted from your pay before federal (and, possibly, state and local) income taxes are taken out. Contributing on a pretax basis reduces the amount of income taxes you currently pay on your earnings. You won’t owe federal income taxes on your pretax contributions until you receive distributions from your plan. Increasing the amount you contribute to your plan will further increase your tax savings.

 

Tax-deferred Compounding

 

Any income you earn from investing your contributions is also tax deferred. Compounding can occur if your plan contributions generate earnings and those earnings are added to your balance and reinvested. Over time, tax-deferred compounding can have a big impact on your account balance.

 

Roth Distributions

 

Note that if your plan offers a Roth contribution option, such contributions don’t provide immediate tax savings. You will be taxed on that money in the year you earn it. The tax benefit that the Roth option offers is that qualified Roth distributions aren’t subject to any federal income taxes if you meet certain tax law requirements.

 

The Saver’s Credit

 

You may be eligible to claim the “saver’s credit” on your tax return for contributions to your employer’s retirement plan. Your income and tax-filing status determine whether you’ll qualify for this credit and your credit rate. If you do qualify, the credit is 10%, 20%, or 50% of your contributions up to $2,000 ($4,000 if married filing jointly). 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                        Head of                           Single,

                               Filing Jointly                 Household                  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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A Student Loan Tax Break

If you are paying interest on one or more student loans, you may be able to deduct up to $2,500 of the interest annually. The deduction is “above the line,” so you don’t need to itemize to claim it.

 

General Rules

 

To qualify, the debt must have been incurred by you, your spouse, or your dependent (as of the time the debt was incurred) for the sole purpose of paying tuition, room and board, and related expenses for post-high-school education. Certain post-graduate and vocational programs also qualify. The student must be a degree candidate carrying at least half the normal full-time course load.

 

The person claiming the deduction must be legally obligated to make the interest payments and not be another taxpayer’s dependent. Married couples must file jointly to claim the deduction. For 2016, the deduction is phased out if a couple’s adjusted gross income is between $130,000 and $160,000 ($65,000 and $80,000 for single filers).

 

Home Equity Loans

 

Taxpayers who choose to use a home equity loan for higher education expenses also may be able to deduct the interest on their loans. Generally, interest on a home equity loan may qualify for an itemized deduction if the underlying debt doesn’t exceed $100,000 ($50,000 for a married taxpayer filing separately) and all mortgages on the home do not exceed the home’s fair market value.


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Document Carefully When Making Donations

 

Individual taxpayers may deduct their charitable gifts as an itemized deduction for income-tax purposes. However, the IRS has very specific requirements when it comes to documenting contributions.

 

The Basics

 

You cannot deduct any contribution of cash, check, or other monetary gift unless you maintain, as a record of the contribution, a bank record or a written communication from the charity showing its name, plus the date and the amount of the contribution. For noncash donations, you need a receipt and a record showing the charity’s name and a description of the gift.

 

If the value of any gift equals $250 or more, you also need a contemporaneous written acknowledgement from the charity stating the amount of any donation made by cash (or check); a description of any property other than cash; and 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.

 

Noncash Contributions Greater Than $500

 

The general rules for noncash contributions are the following:

 

  • For contributions of $500 to $5,000, the donor must attach a description of the donated property to the tax return

 

  • For contributions of $5,000 to $500,000, the donor must attach a “qualified appraisal” to the tax return, along with additional information about the property and the appraisal

 

  • For contributions of more than $500,000, the donor must attach a qualified appraisal to the return

 

Additional rules apply for contributions of motor vehicles, boats, and airplanes if the donation’s claimed value exceeds $500.


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Filing as Head of Household

Filing as a head-of-household taxpayer may be more advantageous than filing as a single taxpayer. Why? Generally, it results in a lower income-tax liability.

 

To qualify, you generally must:

 

  • Be unmarried at the end of the tax year (certain married taxpayers living apart may qualify),

 

  • Not be a surviving spouse who qualifies for joint return rates,*

 

  • Not be a nonresident alien at any time during the tax year, and

 

  • Maintain a household that, for more than half the tax year, is the residence of at least one qualifying child or dependent relative or is the residence of your dependent parent(s), whether or not you reside there.

 

A qualifying child must meet all the requirements of being a dependent, with the exception that the custodial parent may have released the dependency exemption to another person.

 

* Generally, a widow or widower with a dependent child may qualify for joint return rates for two years following the year his or her spouse died.


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Long-term Care Insurance

Americans are living longer. Given the significant costs involved, the possibility that long-term care might be needed one day is a financial planning concern.

 

Long-term care insurance is designed to cover the cost of care for individuals who need assistance with “activities of daily living,” such as bathing and dressing. Medicare and supplementary health insurance policies generally do not cover long-term care services. And Medicaid coverage can only be accessed if an individual meets strict state and federal income and asset guidelines.

 

Some employers provide long-term care insurance as an employee benefit. Long-term care policies are also available to the public. Before making a decision to purchase a particular policy, individuals should compare pricing, costs, and features and investigate the insurer’s financial health.

 

Long-term care policies generally fall into two categories: indemnity and reimbursement. An indemnity-based policy pays a per diem or dollar amount of benefits for an insured’s long-term care expenses, regardless of the insured’s actual expenditures. For 2016, benefits of up to $340 per day (or the actual cost of long-term care services, if greater) are income-tax free.

 

A reimbursement policy, on the other hand, does not pay a set dollar amount. Instead, the insurer pays for long-term care expenses incurred up to the policy’s maximum benefit. Policy benefits are income-tax free.

 

Premiums paid for qualified long-term care contracts are deductible as itemized medical expenses, up to certain annual limits. Self-employed individuals may deduct the premiums as a business expense.

 

If you would like to discuss long-term care insurance or need help choosing a policy, please contact us.


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Make Gifts, Reap Tax Benefits

Your family, your other loved ones, your favorite charity — you can benefit them and receive tax benefits for yourself by making gifts of publicly traded stock that has appreciated in value since you acquired it.

 

Benefit an Individual

 

Every year, you can give gifts of money or other assets of up to $14,000* each to an unlimited number of individuals free of federal gift tax. If you’re married, your spouse can also give $14,000 per recipient. As long as you stay within these parameters, annual gifts won’t count against your federal gift- and estate-tax exclusion of $5.45 million (in 2016).

 

With gifts of appreciated stock, the recipient of the gift assumes your original cost basis in the securities. Since you haven’t sold the stock, you avoid a capital gains tax liability. Your gift could be even more valuable if the stock’s price continues to rise after you make the gift. A gift recipient who’s in the 10% or 15% income-tax bracket could sell the stock and pay no capital gains tax.

 

Benefit a Charity

 

Donating appreciated stock to a qualified charity offers a tax-efficient way to benefit the organization. If you’ve held the stock for longer than one year, you’ll be entitled to take a charitable tax deduction for the market value of the gift (certain income limits apply). This strategy may allow you to make a bigger donation and receive a larger tax deduction than if you had sold the stock, paid capital gains tax, and donated the net proceeds.

 

* This amount is periodically adjusted for inflation.


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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 2016 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, 2017, may be deductible on your 2016 income-tax return. The contribution limit for 2016 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 2017 gifts by the end of 2016. Donating with a credit card or with a check mailed by December 31 entitles you to a deduction on your 2016 income-tax return even though you won’t get your credit card bill or have your check processed until 2017. 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 underperformed 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 2016 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 2016, 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.