Year End Tax To-Do’s

What things might you do before the year ends that will benefit you when you file your 2016 tax returns? The following will break down some winning actions you could take. Or they may give you some ideas for next year.

Let’s start with investments!

Call us to find out what your capital loss carryforward is if any. Your net gains up to the carryover amount won’t be taxed- this is a definite to-do.

Any losses you’ve incurred can be carried to next year in order to offset future capital gains. This can also reduce the 3.8% Medicare surtax.

Be careful of the wash sale rule. If you sell a position for a loss but then buy it back within 30 days your broker will report that as a “wash sale” – this prevents you from selling a loser (and taking the capital loss) in December and then buying it back in January.

Consider donating stocks or mutual funds with a low cost basis and high current values.

If the stock or mutual fund you have has appreciated and you’ve owned it for a year or more, donate it to a qualified charity, you will never pay taxes on the appreciation and you will take a charitable deduction for the fair market value on the donation date.

Did You Save Energy?

In 2016 did you finally install those energy efficient windows, insulation, roofs and or doors? No doubt your energy bill has been making you smile. How about a tax credit to add to that? Yes that’s a maximum of $500 or 10% credit if you haven’t already taken advantage of this in prior years. Any deduction you’ve previously taken will count against the $500 maximum.

Let’s talk IRA’s and Plans

If you are 70 ½ years or older, your required IRA distribution must be made by the end of 2016. If you missed this, be prepared to pay a penalty of 50% of what should have been distributed. How do you determine what you should have paid? As of December 31, 2015, the balance in your IRA must be divided by the factor for your age. Where do you find that number? You find it here! Keep in mind a higher factor is used for if you are 10 years older than your spouse. There are similar rules for 401K plans. Are you 70 ½ years old or more and still working? And do you own 5% or less of a company? You can delay these payouts until you retire. Taking the minimum required distribution from each retirement plan is required however.

Did you know that IRA owners can transfer up to $100,000 annually from their IRA’s directly to charities? This transfer counts as part of your required distribution. These gifts are not added to your taxable income. This means they will not reduce the value of your itemized deductions, personal exemptions or result in a Medicare premium surcharge. However this donation cannot be deducted. It is a great way to donate to the charity of your choice and fulfill your required minimum distribution.

Roth IRA earnings are tax free. You may want to convert a traditional IRA to a Roth IRA. This transfer will incur taxes but remember: Roth earnings are tax free! Depending on what you expect to make in this year, converting a portion of your IRA to push your 2016 income to the top of that tax bracket may be beneficial as well.

Do you have money left over in your health flexible spending account? It should have been cleaned out by December 31st. Perhaps your employer is giving you the 2 ½ month grace period or allowing you to carry $500 over. That would be great. If not, though, you’ll lose any money you had in that account.

Let’s Mind Your Business-

Your business taxes that is! What ways can your business save? Did you purchase any assets this past year? For example: machinery, land improvements and equipment that has a life expectancy of 20 years or less can be deducted by half of their worth. Any improvements made to the interiors of commercial reality are eligible for deduction as well.

Did you purchase a new SUV for your business? Up to $25,000 of the cost of an SUV weighing over 6,000 pounds can be deducted as well as 50% of what’s left. In addition the remainder may qualify for regular 5 year depreciation. That amount can be figured out in this publication. Large pickup trucks that weigh 6,000 pounds or more can be fully deducted if the cargo bed is 6 feet or longer and is not accessible from the cab.

Gifting It

Did you give up to $14,000 in gifts to someone? You are spared gift taxes! Your spouse may have also given $14,000 or less to the same someone and this is also tax free. Any amount you didn’t give within that bracket (up to $28,000 for a couple) is gone forever.

You may have a few questions at this point. A CPA Accounting firm, such as Alfano & Company, will be happy to help you understand how you can truly benefit from the above. We hope you take advantage of some of these tax breaks. Happy filing this year!

 

David Alfano CPA, PFS, CGMA

 

What to do in an IRS audit

Don’t you feel special?

According to data from the IRS, very few income tax returns actually get audited each year. In fact, the IRS reports that it audited only 0.84% of all 2014 individual income tax returns filed (according to the most recent data available at the time of writing, found here).

But somehow you beat the odds and now the IRS wants to audit your tax return (You received a “Your return has been selected for examination” letter). It’s very rare that the IRS examines only one or two items that are straightforward and easy to defend; more likely there will be some areas of the examination where the tax law either isn’t abundantly clear or maybe, just maybe, you might have made a mistake. What do you do now? Here are a few suggestions to help you get started:

  1. Check your records. The IRS will state exactly which return (or returns) it is examining, and which items on those returns it has particular interest in. Compile and Assess the quality of the records you kept, can you substantiate all your deductions? Are your records mostly good but with a few holes? Did you even keep any records?
  2. Perform your own “Shadow Audit”. To the best of your ability, get inside the mind of an IRS agent and take a hard look at the documentation you have. Familiarize yourself with the relevant tax code and try to find reasons to disallow your deductions. Maybe Mr. IRS doesn’t think that this expense was really “necessary” for your business, or maybe Mr. IRS thinks you received something back in return for your charitable contribution. Try to pick your defense apart and hand yourself a big bill… can you do it? If you can, was it easy?
  3. Comply but don’t be overly helpful. Ever heard the phrase that an attorney who represents himself has a fool for a client? A similar principle applies to IRS examinations. You do want to have ready answers to the questions the IRS is likely to ask but be careful, it’s very easy to accidently give too many details or sow some seeds of doubt in an agent’s mind and see a simple examination become a very complex one. For example: suppose you defend a deduction by telling the agent you’ve always taken it in the past and it’s never been questioned. Guess what? Now the agent is recommending the IRS audit the last few years of your returns. Oops.
  4. Get help (and quickly). The stakes are high with an audit, so paying a professional to take care of it for you is always worth considering and (from my perspective) is usually the right call, especially if you’re unclear about a section of the tax law or if there is a substantial sum of money involved. Whether you’re just looking for some help preparing for the audit or if you’d prefer a professional to go in your place, reach out to me and I can help you with the process. Until then, stay safe out there.
Mike Haydin, EA

 

P.S. In an audit it is especially important that you act quickly and don’t panic. If that isn’t your strong suit or if you aren’t sure how to move forward contact me for a free consult.