Year-end Tax Planning for Procrastinators

For real procrastinators, the end of 2016 is a long way off. December 31 is the last day to take action on this year’s income tax liability. It’s not the last minute yet, but it’s coming up! Soon, it will be too late to act and lower that tax bill.

 

Four potential tax-saving actions to take before the year ends are:

 

  1. Maximize Retirement Savings

Most retirement savings plans must be funded by December 31. A SEP IRA or a defined benefits plan must be established before year-end and funded before the returns are filed for that tax year. Contribution limits vary by plan type. Deductible amounts depend on taxpayer circumstances. Taxpayers over 50 can make higher “catch-up” contributions.

 

More details about plans and contribution limits are on the IRS website at: http://bit.ly/1UBjXJf

 

  1. Manage Gains and Losses

Overall, financial markets performed well in 2016. The gain on sales of appreciated stocks, mutual funds, or other assets are taxable. Selling assets for a lower price than the purchase price results in a tax loss. Losses can be used to offset taxable gains. Losses in excess of gains are deductible up to $3,000 ($1,500 for married filing separately).

 

  1. Charitable Contributions

Cash and non-cash contributions made to a qualified charitable organization are deductible for taxpayers who itemize their deductions. To be deductible, contributions must be made to organizations designated as tax-exempt by the IRS. Amounts of $250 or more are required to be acknowledged in writing using language specified by the IRS.

 

More details about qualified charities and deduction rules are on the IRS website at:     http://bit.ly/2g9VDPl

 

  1. “Use or Lose” Benefits

Changes in tax laws that impact tax-preferred benefits and other items occur regularly. Those changes often impact taxpayer liability. Examples include Health Savings Accounts and Residential Energy Credits. The IRS website is a great resource to learn about the impact of tax law changes by performing a word search at www.irs.gov.

 

With only a few weeks left in 2016, it’s almost time for Real Procrastinators to take action on that income tax bill. Don’t wait – 2017 is almost here.

Employee or Contractor?

Organizations add new workers for a variety of reasons – growth, seasonal spikes, or special projects. Regardless of the circumstances, it’s important to understand whether a new worker is classified as an employee or a contractor.

 

So what is “worker classification” and how is it determined?

 

Two common worker relationships are employees and independent contractors. The business relationship between the organization and the worker performing services must be defined before paying for services. The determining factor for worker classification relates to the amount of control over the worker and the services performed.

 

An organization’s control over a worker falls into three categories:

 

  1. Behavioral: Does the organization control or have the right to control what the worker does and how the worker does his or her job? For example, who establishes work hours and procedures?

 

  1. Financial: Are the business aspects of the worker’s job controlled by the organization? For example, who provides work space, tools, and supplies?

 

  1. Type of Relationship: Is the business relationship permanent or temporary? Is the work performed a key aspect of the business? Are employee-type benefits provided?

 

Classifying workers as contractors vs. employees can reduce organizations’ employment expenses. Employee compensation is subject to employment taxes, such as the employer portion of social security taxes and unemployment taxes. Independent contractors are responsible for paying all of her or his social security taxes on the net income from self-employment.

 

What happens if a worker is misclassified?
Organizations that classify an employee as an independent contractor to save on employment taxes may be held liable for that worker’s employment taxes. Past due taxes accrue daily interest and penalties, which can really add up. Accurately classifying workers avoid costly tax issues down the road.

Funding Business Growth

Business owners need funds to grow. Adding a service, product or program means investing in whatever it takes – materials, staff, space, marketing, etc. Most businesses don’t have extra funds piled up, waiting around to be spent!

 

So what options exist to fund business growth? Picking the best option depends on the circumstances, available resources, creditworthiness, and risk tolerance. How do you choose?

 

Start by considering these four funding options:

 

  1. Get a Line-of-Credit

Every business should have a line-of-credit, in addition to a business credit card. Get approval before you need the funds so you are ready to act when the time is right. No interest is charged until it is used, unlike a traditional loan. This option is attractive for business owners with a strong banking relationship and a good credit rating.

 

  1. Add a Partner or Investor

Involving a partner or investor could mean sharing ownership or decision making. With the right person and situation, it can be mutually beneficial. Adding a partner or investor requires a legal agreement that details each party’s responsibilities. It can also change tax reporting.

 

  1. Launch a Crowdfunding Campaign

Funding from a “crowd” does not involve giving up any ownership or control. Generally, successful campaigns are launched by those who know or have access to a large population of potential contributors. Avoid technology and compliance headaches by using a crowdfunding site vendor, who will charge a fee and/or a percentage of receipts.

 

  1. Tap your Personal Resources

Commingling business and personal finances is a bad idea. However, lending personal funds to your business could be a viable option, under the right circumstances. Treat it like any other business loan by documenting the details, charging interest, and setting up a payment schedule.

 

Business growth takes planning and funding. When it’s time to act on your plan, it’s crucial to have funds to invest. Having your funding options lined up and ready to go will help your business grow.

Medical Expense Tax Tips

This time of year, people everywhere are talking about medical costs. People can’t control medical cost increases. However, some people can take advantage of medical deductions and reduce their income tax liability. They just need to know which expenses are deductible, who qualifies, and the limits.

 

These four important tax tips help taxpayers know the what, when, and how of tax deductible medical expenses:

 

  1. What are the Allowable Expenses?

Only medical and dental expenses paid during the tax year are deducted, regardless of when the services were provided. Allowable costs include diagnosis, cure, mitigation, treatment, or prevention of disease rendered by medical practitioners. This includes equipment, supplies, and diagnostic devices needed for the primary purpose of alleviating or preventing a physical or mental defect or illness, not merely to benefit general health, such as vitamins or a vacation.

 

  1. Who Qualifies?

Generally, only taxpayers who itemize their deductions (vs. taking the standard deduction) can deduct medical and dental expenses only if they exceed 10% of AGI (7.5% if you or your spouse was born before January 2, 1951). Allowable expenses generally include medical expenses paid for the taxpayer, spouse, and qualified dependents.

 

  1. What about Insurance Premiums?

Medical expenses include the premiums paid during the year for insurance that covers the expenses of medical care, and the amounts paid for qualified long-term care services.  Insurance premiums paid and for which a credit or deduction is claimed cannot be deducted.

 

  1. What’s Different for Self-Employed?

Sole proprietors, general partners, and S corporation shareholders owning more than 2% with net income from self-employment may be able to deduct, as an adjustment to income, amounts paid for medical and qualified long-term care insurance for the taxpayer, spouse, and qualified dependents. The insurance plan must be established under the business.

 

Taxes, including medical deductions, are complicated. Don’t go it alone! Get more details at www.irs.gov or from a qualified tax professional.

Divorce and Taxes

Couples considering a divorce have a lot of decisions to make. Some of those decisions impact filing income tax returns during separation and after the divorce is final. Getting advice from a qualified tax professional helps couples and their attorneys understand the tax impact of their options and decisions.

 

Four important tax-related considerations in a divorce proceeding are:

 

  1. Child Custody

Decisions about primary child custody are significant. Custody drives which parent can take many child-related deductions and credits, the earned income tax credit, and the head-of-household filing status. Non-custodial parents have additional tax filing requirements.

 

  1. Child Support and Alimony

Legal documents must clearly state whether payments between divorcing parties constitute alimony or child support. Alimony is generally taxable for the recipient and deductible for the payer. Child support is neither taxable nor deductible.

 

  1. Filing Status and Timing

Filing status is defined by the IRS based on an individual’s legal status on the last day of the tax year. Couples whose divorces are not final by December 31 are considered married for the entire year. Talking to a tax professional about filing options can help avoid expensive mistakes, especially in community property states.

 

  1. Selling the Home

A married couple may be eligible to exclude up to $500,000 in home sale profit. A single taxpayer gets only one-half that amount. If neither spouse plans to keep the home, and it has greatly appreciated in value, it could make sense to sell before the divorce is final.

 

Divorce and taxes are both stressful topics on their own. Together, they are particularly fraught. Being armed with information reduces tension and helps both parties move forward without tax worries.