Here’s a quick review of some of the rules you can expect to encounter when you get ready to prepare your 2016 federal income tax return.
Income tax rates.For 2016, ordinary federal income tax rates range from 10% to 35% unless your taxable income exceeds $415,050 when you’re single or $466,950 if you’re married filing jointly. The rate on income above those amounts is 39.6%.
Tax breaks that are now permanent.Three tax breaks you’ll be able to take on your 2016 return, and on future returns: 1) The optional deduction for state and local sales tax in lieu of state and local income tax; 2) the $250 deduction for classroom supplies if you’re an educator; and 3) IRA-to-charity transfers of up to $100,000 when you’re 70½ or older.
Itemized deductions and personal exemption phase-outs.For 2016, itemized deductions and personal exemptions are limited when you file as single and your adjusted gross income (AGI) is above $259,400. The limitation begins with AGI above $311,300 for married couples filing jointly.
Alternative minimum tax.The exemption amount for 2016 is $53,900 for singles and $83,800 for married filing jointly.
Capital gains and dividends.Long-term gains are generally taxed at 15%. The rate is zero percent if you’re in the 10% and 15% ordinary income brackets, and 20% when you’re in the 39.6% ordinary income bracket.
Affordable Care Actsurtaxes. You’ll pay a Medicare surtax of 0.9% on wages and self-employment income exceeding $200,000 when you’re single and $250,000 when you’re married filing jointly. For unearned income, you’ll pay the 3.8% net investment income tax when you’re single and your modified AGI exceeds $200,000. If you’re married filing jointly, the net investment income tax is imposed when your modified AGI exceeds $250,000.
If you have questions about your 2016 tax return, please call our office and we’ll help you find the answers you need.
For 2017, the wage base for withholding social security tax from wages has increased to $127,200, up from $118,500 in 2016. The “wage base” is the amount of wages on which employers and employees must pay the 6.2% social security tax. The increased wage base means an additional $8,700 of your income is taxed.
The wage base does not affect the 1.45% Medicare payroll tax. Medicare tax is assessed on all wages and net income from self-employment, including amounts above the base. The 0.9% Additional Medicare Tax is not affected either. That tax applies to your compensation in excess of $250,000 when you’re married filing jointly ($200,000 when you’re single).
The federal payroll tax rate for employers and employees remains 7.65%, with social security tax withheld and paid at 6.2%, and Medicare tax withheld and paid at 1.45%.
Losses can be hard to take, so if you think your S-corporation will show a loss for 2016, now’s the time to plan to make sure you’ll get the full tax benefit.
The problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S-corporation stock and certain corporate debt. This is true even if the loss reported to you on Schedule K-1 is greater than your basis.
Here’s how basis works. Typically, stock basis in an S-corporation begins with the capital contribution you make to get the company started. Note that when you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.
At the end of each taxable year, your stock basis is adjusted to reflect your business’s operating results. Taxable income increases your basis, while losses reduce it. Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That’s the basis you have in loans you make to your company. However, once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. You can generally take suspended losses in future years, when you again have basis.
The solution. You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.
Please call to discuss how basis affects your individual income tax return. We can guide you through the rules.
An important part of our service to you is helping you identify actions you can take before year-end to minimize your personal 2016 federal income tax bill. Accelerating or delaying income and deductions, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. Here’s a checklist to help you get started.
Max out your 401(k) before year-end. For 2016, you can set aside $18,000 if you’re under age 50. If you’re 50 or older, you can contribute $24,000.
Get your investment planning in order. Year-end sell decisions, either to rebalance your portfolio at the lowest tax cost or to offset gains and losses, are only one aspect of investment planning. Another is keeping good records for the reinvested dividends of stocks you sell in 2016. Reinvested dividends add to your cost basis and reduce taxable gain or increase the deductible loss on the sale. Finally, consider the wash sale rule. This rule disallows a current-year loss when you purchase substantially identical securities within a 61-day period. If you plan to sell stocks to secure a loss, and intend to buy the stock back, don’t wait until the last moment.
Make gifts before year-end. The use-it-or-lose-it tax-free gifting allowance is $14,000 per donee for 2016. Remember, gifts to individuals are not tax-deductible.
Contribute to your Health Savings Account. Within limits, contributions are tax-deductible and can be used tax-free to pay unreimbursed medical expenses.
Keep an eye on the “kiddie tax.” This tax on your dependent child’s unearned income in excess of certain limits applies when your child is under age 19 (under age 24 if a full-time student).
We have more planning strategies that can save you tax dollars, depending on your individual situation. Contact us for a year-end review to make sure you’re taking advantage of all the ways you can to reduce your 2016 tax liability.
As the end of the year approaches, turn your attention to ways you can reduce your 2016 tax liability. Here are some suggestions that can add up to a lower tax burden next April:
Business equipment.Take advantage of end-of-year sales on business equipment. For 2016, a maximum Section 179 deduction of $500,000 and 50% bonus depreciation are generally available for qualified property placed in service anytime during the year. Be aware that special limits apply to vehicles.
Business trips.When you travel to wrap up year-end business deals, you can write off your expenses – including airfare, lodging and 50% of the cost of meals – if the primary motive of the trip is business-related. Costs attributable to personal side trips are nondeductible. If you travel by car, deduct actual business-related auto costs or a flat rate of 54 cents per mile (plus tolls and parking fees).
Entertainment and meals.Generally, you can deduct 50% of the cost of entertainment and meals that precede or follow a “substantial business discussion.” For example, you might treat a client to dinner and drinks after completing a contract earlier in the day. In this case, you can include 50% of the expenses for the client and yourself, as well as for spouses and significant others.
Company outings.Generally, deductions for business entertainment and meals are limited to 50% of the cost. However, if you throw a company-wide holiday party before year-end, you might be able to deduct 100% of the cost when you meet certain requirements, such as inviting your entire staff.
Hire your child.Does your teenaged child want a job to help pay for holiday gifts? If you hire your child, reasonable wages paid for actual services rendered are deductible, the same as wages of other employees. The wages will be taxable to your child at your child’s tax rate, which may be lower than your rate or that of your business.
Job credits.When your business hires workers from certain “targeted groups,” such as veterans and food stamp recipients, you may be able to claim the Work Opportunity Tax Credit. The maximum credit is generally $2,400 per qualified worker.
Depending on your situation, there may be other steps you can take now to reduce the taxes you’ll pay for 2016. Please call our office to schedule a year-end tax planning consultation.
Do you regularly monitor your company’s cash accounts? Being aware of where your cash is going can help prevent theft or improper expenditures, which are among the chief sources of loss for small companies.
What can you do to reduce the risk of losses? The textbook answer is to implement “internal controls.” Internal controls are standard procedures for assuring the integrity of your financial processes. For example, segregation of duties, such as having more than one person involved in preparing, signing, and reconciling checks, is an internal control
Utilizing internal controls and other cash monitoring strategies can minimize the chances of your business losing money unnecessarily. Here are a few suggestions for safeguarding your company’s cash:
Make sure all invoices have an approval signature before being paid.
Personally verify that new vendors exist.
Require sign-off of employee expense reports by a higher-level employee.
Don’t permit the person who prepares a company check to sign that check.
Consider requiring two signatures on checks.
Maintain a list of void checks and compare them to your bank statement.
Use a bank stamp to endorse checks immediately upon receipt.
Personally open bank statements and other mailings from the bank.
Review and reconcile your bank statement regularly.
