2017 Mileage Rates – New mileage rates announced by the IRS
2017 Mileage Rates – New mileage rates announced by the IRS
Here are the standard mileage rates for 2017
2017 Mileage Rates
The IRS recently announced mileage rates to be used for travel in 2017. The Business mileage rate decreases by 0.5 cents while Medical and Moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.
2017 New Mileage Rates
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Here are 2016 rates for your reference as well.
2016 Mileage Rates
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Remember to properly document your mileage to receive full credit for your miles driven.
Research Your Preferred Charities
Research Your Preferred Charities
Often during an audit, what you thought was a qualified deduction to a charitable organization is ruled non-deductable
Research Your Preferred Charities
November and December seem to be the months we are rained upon with charitable organization solicitations. Some of the groups, such as the American Red Cross, the Salvation Army, United Way, and the American Cancer Society are household names. Others are less known. Here are some tips on how to research these organizations prior to donating funds.
1. Charitable organization efficiency. For every dollar you donate, only a percentage of it is actually used to fund programs. Much of your money is used for fundraising and administrative costs. So how do you know which charitable organization is using your contribution most effectively? Here are three websites that can help you assess potential charities.
2. Avoid Fraudulent Solicitations. It is often best to avoid donating over the phone or via email solicitations. These are two common ways thieves target their victims. Instead of reacting to a phone call or email, a better idea is to pro-actively plan who you wish to give money to each year. An additional benefit of this approach is that you avoid the fees paid to these middlemen fundraisers out of your donations.
3. Confirm the Deductibility. Many smaller organizations will represent themselves as a qualified charitable organization, but have not kept their non-profit status up-to-date. If unsure whether your desired charity has kept their records up-to-date, you can check the IRS website for a full list of qualified organizations. Here is the link:
4. Needing a receipt. Remember cash donations $250 or more require a written confirmation from the charitable organization of your donation in addition to your canceled check or bank receipt. If you are not sure whether a confirmation will be forthcoming, limit your deduction to some amount under this $250 threshold.
Those Darn Kids – The risk of having kids file their own tax returns
Those Darn Kids – The risk of having kids file their own tax returns
One of the worst surprises you can have at tax time is discovering a dependent files their own tax return. It can create a tax filing mess. Here’s why
Those Darn Kids
If you have children younger than 19 years old (or 24 if a full-time student) coordinate the filing of their taxes with yours. How they file is a matter of tax law.
The problem
Your child is away for college. You try to file your tax return on April 14th after finally receiving all the required documentation. Unfortunately, your e-filed tax return is rejected because your college student filed their own tax return and received a nice refund. Now you have a mess on your hands. You must file an extension, file an amended tax return for your child, return a refund, and paper file your tax return.
A matter of law
The dependency rules and kiddie tax laws are clear and must be followed. If you have a dependent child as determined by the tax code, you will need to conduct the tax calculations to determine what is taxed at your child’s tax rate and what will be taxed at your higher rate. The same is true for which tax return receives exemptions and standard deductions. This requires coordination of your tax filings with that of your dependent children.
Suggestions
- Remind your independent minded kids to hold off filing their tax return until consulting with you.
- Claiming oneself as a dependent is not a choice, it is a matter of law. Remind your child there are rules that must be followed before making this tax decision.
- Plan for a dependency shift. Sometimes arranging for a shift in dependent from a parent to a student makes financial sense. If you think this might be true, conduct a tax planning exercise prior to making the change.
Consider using the tax filing process to introduce your young adult to the benefits of tax planning. You never know, it could save you money as well as the hassle of undoing an improperly filed tax return.
Senior Gift Giving Tips – Make your year-end gifts tax efficient
Senior Gift Giving Tips – Make your year-end gifts tax efficient
When a tax year winds down, seniors with funds make donation and gift moves as part of estate management. Being tax-efficient with your moves makes sense. Here are some ideas.
Senior Gift Giving Tips
One of the potential benefits of your retirement years is having funds available to help others work through the challenges of life. As you consider gift giving prior to the end of the year, here are some tips to make your giving strategy more tax efficient.
Know the annual gift limits. If providing funds as a gift you are limited to $14,000 in 2016 (and 2017) before the gifts need to be reported to the IRS. This limit is per individual, so both you and your spouse can provide $14,000 (total of $28,000) per person per year. But you need to proceed with caution, a birthday or holiday gift can accidently cause an excess gift total if given in addition to an annual gift of cash.
Direct contributions to charities. With the passing of the PATH act in late 2015, seniors who are age 70 ½ or older may make direct contributions to charities from qualified retirement plans like a Traditional IRA. There is an annual limit of $100,000. If you plan to give to a charity why not consider this alternative. It may create other tax benefits depending on your situation.
Helping pay for college. Consider donating to a grandchild’s college directly or through a college savings plan like a 529 plan. Using the gift limits mentioned earlier, you can donate up to $14,000 per year per individual. Are you a new grandparent? Get your child to open the 529 plan for their newborn so you can make deposits to the account over time.
Avoid the tax torpedo. When you reach 70 ½ years old, you will trigger the annual minimum distribution requirements on many of your retirement plans. Know which ones will be triggered and determine if pulling some funds out of these plans now can be more tax efficient, versus when you are required to do so at an older age. This planning can save thousands of unwanted taxes and provide tax efficient gifts for others.
These are but a few ideas to use as tax-efficient gift giving strategies as you get older. There are many others, so it often makes sense to set up an appointment to review your options.
Avoiding the 10% IRA Early Withdrawal Penalty – What every Traditional IRA owner should know
Avoiding the 10% IRA Early Withdrawal Penalty – What every Traditional IRA owner should know
While it is not a good idea to tap retirement accounts prior to retirement age, sometimes it cannot be avoided. What can often be avoided, however, is the punitive 10% penalty for early fund distributions. Outlined here are exceptions to the 10% penalty rule for Traditional IRAs
Avoiding the 10% IRA Early Withdrawal Penalty
It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA during retirement, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. There are cases when funds needed prior to retirement can avoid this early withdrawal penalty. Here are ten of them.
- Medical insurance premiums if unemployed. If you have been receiving federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
- Qualified higher education expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA. Just be aware of the potential impact this may have on financial aid and other educational tax benefits.
- Medical expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 10% of your Adjusted Gross Income you may do so penalty-free.
- First-time homebuyer expenses. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. The $10,000 is a lifetime limit per individual and not per home purchased. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. Even better, to qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
- Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.
- You’re the beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
- Qualified reservist. If you were called to active duty for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.
- Annuity distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life (or your life expectancy)”. This option is complicated and must use an IRS-approved distribution method to qualify.
- Permanently disabled. There is no penalty for early withdrawals if you become permanently disabled.
- Age 59 1/2. Of course, there also is no longer an early withdrawal penalty when you reach age 59 1/2.
Some final thoughts
- While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
- While generally the same, the 10% early withdrawal penalty rules are slightly different for other defined contribution plans like 401(k)s and other types of IRAs.
- Before taking any action, call to have your situation reviewed.
Sharing Economy Now in IRS Spotlight – 40% are unaware of their tax responsibilities
Sharing Economy Now in IRS Spotlight – 40% are unaware of their tax responsibilities
UBER – A vast number of workers taking part in the new Shared Economy are making numerous tax mistakes. So whether you or someone you know is driving for Uber or renting out their home for income, there is now help to navigate this confusing landscape.
Sharing Economy Now in IRS Spotlight
- 40% of the workers in the Sharing Economy are unaware of their tax responsibilities.
- Over 60% of the service provider companies are not training their new workers on their tax responsibilities.
Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.
Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has recently launched a new “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.
The Sharing Economy
The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:
- Cab services: use your car
- Delivery services: use of your car
- Short-term rentals: use of rooms, apartments, and homes
- Home services: use of your personal tools and supplies
Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.
Key Tax Responsibilities
If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.
Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.
Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.
Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.
Other taxes. You may be subject to other taxes including unemployment taxes.
Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.
Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.
The tax rules for those in the new service economy are complex and confusing. Ask for help before it gets out-of-hand or visit www.irs.gov and search “Sharing Economy Tax Center.”
Understanding Tax Terms: Unearned Income – Not all income is the same in the eyes of the tax code
Understanding Tax Terms: Unearned Income – Not all income is the same in the eyes of the tax code
What’s in a name? If it is defining different types of income, it can mean more income tax obligations. Here are some things to know
Understanding Tax Terms: Unearned Income
The tax code uses jargon that can be confusing for the unwary. One of them that impacts most of us is the term “unearned” income. Unearned income is often defined as anything that is not “earned” income. If you find this kind of definition a little too vague, here is some clarity.
Tax code definition
Before providing the definition of unearned income, take a quick look at what is typically included in both earned and unearned income.
Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Employees will typically see this recorded in an annual W-2 tax form.
Unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Much of this income is often (but not always) recorded using 1099 tax forms.
Why does it matter?
If the tax code was simple, it would not matter one bit whether your income was earned income or unearned income. But this is not the case. Here are some things to consider:
Different tax rates. While most earned income is subject to ordinary income tax rates up to 39.6%, unearned income can be subject to different tax rates. Long term capital gains and certain dividends, for instance, are generally subject to lower capital gains tax rates. These tax rates can max out at 20% prior to applying Affordable Care Act tax provisions.
Kiddie tax rules. The tax code limits the amount of unearned income that can be taxed at your dependent’s, usually lower, income tax rate. Amounts over this limit are taxed at the parent’s rate. The amount is $2,100 in 2016.
Tax benefit limits. Many tax credits and deductions will limit the amount of unearned income you may have and still qualify for a tax break. As an example, the Earned Income Tax Credit, limits disqualified (unearned) income to $3,400 in 2016.
Timing matters. Sometimes the timing of an event can shift unearned income from ordinary income tax rates to preferential gain tax rates. This is the case with investment sales. Hold an investment for one year or less before selling it and your unearned investment gain is taxed as ordinary income. Hold it longer than one year and the unearned income is taxed at capital gains tax rates.
It is all in the details
It is important to understand how all elements of income apply to different aspects of the tax code. This is where working with someone familiar with the code can help
Still Time to Make These Tax-Saving Moves – Action you can take before time runs out
Still Time to Make These Tax-Saving Moves – Action you can take before time runs out
Five last-minute tax savings ideas
Still Time to Make These Tax-Saving Moves
Here are five tax saving ideas that can be used by most taxpayers. But act soon, there are only a few months until our tax year comes to an end.
| 1 | Make a late-year charitable donation. Even better, make the donation with appreciated stock you have owned over one year. You can often receive the higher value donation without paying capital gain taxes. |
| 2 | Make final contributions to your qualified retirement plan AND take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high. |
| 3 | Take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your ordinary income. |
| 4 | Gather up non-cash items for donation, document the items, and give those items in good or better condition to your favorite charity. You should receive an acknowledgement from the charity and take a photo of the items donated. |
| 5 | Consider making any final gifts to dependents. You may provide gifts of up to $14,000 per year. Remember all gifts given (birthday, holiday and cash) count towards this total. This can provide a future source of possible investment income for your kids. While the “kiddie tax” may require applying your tax rate to your children’s earnings, there is an amount of unearned income ($2,100 in 2016) that is taxed at your child’s tax rate. |
2017 Social Security Changes Announced
2017 Social Security Changes Announced
The Social Security Administration recently announced their 2017 Cost-of-Living Adjustment (COLA) changes. Here is what you need to know
2017 Social Security Changes Announced
The Social Security Administration recently announced monthly social security and supplemental security income benefits (SSI) will increase slightly in 2017. This increase is based upon the Consumer Price Index over the past 12 months ending in September 2016. On the other hand, the potential maximum payment to Social Security goes up a whopping 7.3%. A recap of the key amounts is outlined here:
2017 Key Social Security Benefits
What does it mean for you?
- Up to $127,200 in wages will be subject to Social Security Taxes (This is up $8,700 from 2016). This amounts to $7,886.40 (up 7.3% versus 2016) in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.
- For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,360/mo. in 2017.
- SSI (Supplemental Security Income) is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
- A full-time student who is blind or disabled can still receive Supplemental Security Income (SSI) benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.
Social Security & Medicare Rates
After temporary payroll tax rate cuts that ended in 2012, the rates do not change from 2016 to 2017.
Note: The above tax rates are a combination of 6.20% Social Security and 1.45% for Medicare. There is also a Medicare .9% wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please recall that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.
To Amend or Not Amend? – Is it always a good idea to amend your tax return?
To Amend or Not Amend? – Is it always a good idea to amend your tax return?
Oops. You find an error or omission on last year’s tax return. What should you do? Is it always a good idea to file an amended tax return? Here are some things to consider.
To Amend or Not Amend?
There’s usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.
Errors in the IRS’ favor
Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a 1099 form or W-2 reported income. Why? This information is being reported to the IRS and matching programs will typically catch the error. The sooner you amend your return and pay the tax the lower the possible interest and penalties.
Errors that result in lower tax
If correcting the error or omission results in a large additional refund the answer is usually obvious. File the amended return. But this is not always the case.
- Your tax return is now open for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute adding two to five years of possible review based upon the date of the latest tax return refund.
- The amended return may become examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that could trigger individual examination when amended returns are requested. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner. Do you have the necessary records to substantiate your amended tax return?
- Amending one tax return, may require amending a number of them. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?
- Don’t forget other taxing authorities. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor on the federal level will necessarily be in your favor on the state/local level.
- Don’t expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.
- Timing is important. Remember there is also a time limit to request a change in your tax return and receive an additional refund. This is typically set to three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.
- You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.
While finding an error or omission on your tax return can be unsettling, rest assured there are ways to fix the problem, but it is often worth taking a balanced approach to determine the best solution.