To Our Clients and Friends:
As we approach year-end, it’s again time to focus on last-minute moves you can make to save on taxes this upcoming filing season. This letter presents a few ideas to get you started. Also included in this letter is a list of tax provisions that congress made permanent or extended through 2016 that you can now confidently incorporate in your tax planning strategy. As always, you can call on us to help you sort through the options and implement strategies that make sense for you. In addition, you will find pertinent information regarding 2016 implementation of the Affordable Care Act and new tax return due dates that will affect many individuals and businesses alike.
General Strategies for Possible Tax Savings
Postpone income to 2017 and accelerate deductions into 2016. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2016 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postposing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
This strategy may be especially useful to those higher-income earners whose itemized deductions and personal exemptions could be limited or reduced to nothing due to one’s adjusted gross income. We can help you determine if or what amount of income to postpone in order to fully take advantage of your deductions.
Defer a bonus. It may be advantageous to try to arrange with your employer to defer until 2017 a bonus that may be coming your way.
Contribute to an HSA. If you are eligible to contribute to an HSA, these contributions are a deduction to your adjusted gross income. For the calendar year 2016, a HSA holder can choose to save up to $3,350 for an individual and $6,750 for a family (HSA holders 55 and older can contribute an extra $1,000).
Review amounts contributed to an FSA. Increase the amount you set aside for next year in your employer’s health flexible spending account if you set aside too little for this year. Although, keep in mind that if you don’t use amounts contributed to your FSA on qualifying expenses during the plan year you are not permitted to roll them forward to a following year.
Harvest capital losses. There are a number of year-end investment strategies that can help lower your tax bill. Perhaps the simplest is reviewing your securities portfolio for any losers that can be sold before year-end to offset gains you have already recognized this year or to get you to the $3,000 ($1,500 married filing separate) net capital loss that’s deductible each year. Don’t worry if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years. Be mindful, however, of the wash sale rule when you jettison losers—your loss is deferred if you purchase substantially identical stock or securities within the period beginning 30 days before and ending 30 days after the sale date.
Use of credit cards for deductions. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2016 deductions even if you don’t pay your credit card bill until after the end of the year.
Pay state and local income taxes earlier. If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2016.
Bunch medical expenses and miscellaneous itemized deductions. In 2016 unreimbursed medical expenses are deductible (if you itemize deductions) to the extent they exceed 10% of your AGI. If you have a shot at exceeding the 10% floor this year, you may want to accelerate into this year discretionary medical expenses, such as prescription glasses and sunglasses or elective, but deductible, medical or dental procedures not covered by insurance. For those who are age 65 or older this strategy may be more useful to you now as the 2016 floor is 7.5% of your AGI but is expected to increase to 10% unless congress acts to change the rules. Similarly, you can apply this strategy to certain miscellaneous itemized deductions such as unreimbursed employee expenses, tax preparation fees, and certain other expenses that are deductible (if you itemize deductions) to the extent they exceed 2% of your AGI.
Avoid underpayment penalties. For taxpayers who expect to owe at least $1,000 in tax, make sure that you have had enough federal income tax withheld throughout the year or you may be subject to an underpayment penalty. In addition, certain higher-income earners who are subject to the 0.9% additional Medicare tax will want to review their tax position to ensure that they have had enough withheld to cover the additional surtax.
In order to avoid the penalty you must pay the lesser of 90% of current year tax or 100% of prior year tax. For higher earning individuals you must pay the lesser of 100% of current year tax or 110% of prior year tax to avoid the penalty. If you believe that you have under-withheld, you can increase your withholding from earnings between now and the end of the year by filing a new Form W-4 with our employer. In addition, you may want to consider taking an eligible rollover distribution from a qualified retirement plan before the end of 2016 if adjusting your withholding from wages will not sufficiently cover your tax liability. If done properly, no part of the distribution will be included in 2016 income but any withholding taken on the distribution will count as being paid evenly throughout 2016. Before attempting to implement this strategy please contact our office.
Convert a traditional IRA to a Roth IRA. If you are eligible to convert a traditional IRA to a Roth IRA, consider converting traditional IRA money invested in beaten-down stocks or mutual funds into a Roth IRA. This can be a valuable tax planning strategy for you if you expect your income tax rate to be higher at retirement age than it is now. Keep in mind that a conversion of traditional IRA funds to a Roth IRA will increase your income for the year. If you are currently in a low-income period this might be a good time to utilize this strategy.
If you have already made this conversion and the assets within your Roth IRA have since declined you can back out of the transaction by re-characterizing the conversion. By transferring the converted amount plus earnings or minus losses from the Roth IRA back to a traditional IRA you can avoid paying a higher tax than is necessary.
Manage net investment income and/or adjusted gross income. Higher income earners with investment income may want to utilize some of the ideas presented earlier in this letter to minimize overall gross income and/or investment income to potentially reduce or eliminate the additional 3.8% net investment income tax on unearned income.
For a trust, the additional 3.8% surtax will apply to the lesser of: (1) undistributed net investment income or (2) the amount of AGI in excess of the threshold for the top trust federal income tax bracket ($12,400 for 2016). Many trusts may be exposed to the surtax and it may be beneficial to shift unearned income held in trust to individual beneficiaries if possible.
Tangible Property Regulations
Now is a great time to discuss your capitalization policy with us to make sure that you are taking advantage of the relatively new regulations for the depreciation or expensing of tangible property for 2016 as well as future years. In many situations, items that you were accustomed to depreciating over several years may be expensed in the current year if you have the necessary capitalization policy and make the proper annual election.
Tax Provisions Extended or Made Permanent
Congress has made permanent many popular tax provisions that in the past were routinely retroactively extended. In addition, other tax provisions were temporarily extended through 2016 and 2019. Because we are not anxiously waiting on congress to extend these provisions for 2016 you can confidently pursue a tax planning strategy that relies on these provisions.
Extended Through 2019
Extended Through 2016
Affordable Care Act
Affordable Care Act for businesses. In 2016 there is no longer transition relief for employers who are subject to the employer shared responsibility provisions of the Affordable Care Act. Please be aware that employers with 50 or more full time equivalent employees are required to offer minimum essential health care coverage that is affordable and that provides minimum value to their full-time employees and their dependents. These employers will be subject to additional reporting requirements. Additionally, employers who have self-insured health insurance programs will be subject to additional reporting requirements. While employers with less than 50 full time equivalent employees are not required to provide health care coverage for their employees, if they choose to do so, their plan must comply with the employer shared responsibility provisions of the Affordable Care Act. If you are unclear about whether or not you might be subject to additional reporting please contact our office so we can discuss your individual situation in more detail.
Affordable Care Act for individuals. Unless you are covered by an exemption, you are required to maintain basic health insurance coverage (known as minimum essential coverage) for yourself and any of your dependents, or pay a penalty. The penalty in 2016 is calculated one of 2 ways. If you or your dependents do not have health insurance that qualifies as minimum essential coverage you’ll pay the greater of $695 per uninsured adult and $347.50 per uninsured child or 2.5% of your household income, capped at the national average premium for a bronze plan. If you’re uninsured for just part of the year, 1/12 of the yearly penalty applies to each month you’re uninsured. If you owe the penalty, it will be assessed on your 2016 income tax return which is due April 15, 2017. For years after 2016 the penalty will be adjusted for inflation.
If you had health insurance in 2016 your insurance provider, employer, or state health exchange should provide you with Form 1095-A or 1095-B which reports information to the IRS for each individual to whom the reporting entity provided minimum essential health insurance coverage as required by the Affordable Care Act.
New Tax Return and Form Due Dates
There are several new due dates for tax returns and certain information returns effective this filing season (tax years beginning after December 31, 2015). The table below lists the updated due dates. Dates that have changed are in bold, for your reference we have included the dates under prior law in parentheses.
|Due Date||With Extension|
|C-Corporation Income Tax Return (Form 1120) – Calendar Year End||April 15
(Originally: March 15)
|C-Corporation Income Tax Return (Form 1120) – Fiscal Year End||15th day of the 4th month following the close of the corporation’s fiscal year
(Originally: 15th day of the 3rd month after year end)
|15th day of the 10th month following the close of the corporation’s fiscal year
(Originally: 15th day of the 9th month after year end)
|C-Corporation Income Tax Return (Form 1120) – June 30 Year End||September 15||April 15
(Originally: March 15)
|S-Corporation Income Tax Return (Form 1120-S)||March 15||September 15|
|Partnership Income Tax Return (form 1065)||March 15
(Originally: April 15)
|Individual Income Tax Return (form 1040)||April 15||October 15|
|Trust and Estate Tax Returns (form 1041)||April 15||September 30
(Originally: September 15)
|Exempt Organization Tax Return (form 990)||May 15||Single Extension-November 15
(Originally: 1st Extension-August 15 and 2nd Extension-November 15)
|Information Returns (W-2s and 1099s)||To IRS-January 31
(Originally: To IRS-February 28)
|Report of Foreign Bank and Financial Accounts (FinCEN Form 114)||April 15
(Originally: June 30)
|Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts (Form 3520)||March 15||September 15|
As 2016 draws to a close, there is still time to make the most of these strategies that can help reduce your tax bill and allow you to reap other potential financial benefits. Please contact us at your earliest convenience to discuss ways in which you can utilize some of the information presented in this letter. We are here to help you develop an individualized tax strategy designed to address your unique financial situation and are glad to set up a planning meeting or assist you in any other way that we can.
Very truly yours,
CLAUSEN & COMPANY