All of us at Dagley & Co. have filed away our October 15 extended tax deadline clients, and now we’re looking at finishing the year off strong. Now is a great time to make sure you have your accounting up-to-date, as it sure will make “tax season” easier for everyone!
If you’re in need of a an accountant for your personal or business finances, think about setting an appointment with Dagley & Co. Don’t just take our word for it: read all of our glowing reviews from our clients over the last two years!
Solid tax savings can be realized by taking advantage of tax breaks that are still on the books for 2015.
For individuals and small businesses, these include:
- Capital Gains and Losses – You can employ several strategies to suit your particular tax circumstances. If your income is low this year and your tax bracket is 15% or lower, you can take advantage of the zero percent capital gains bracket benefit, resulting in no tax for part or all of your long-term gains. Others, affected by the market downturn earlier this year, should review their portfolio with an eye to offsetting gains with losses and take advantage of the $3,000 ($1,500 for married taxpayers filing separately) allowable annual capital loss allowance. Any losses in excess of those amounts are carried forward to future years.
- Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.
- Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the value of those assets may have declined due to this summer’s market drop; and, as a result, you will end up paying more taxes than necessary on the higher conversion-date valuation. However, you may undo that conversion by recharacterizing it, which is accomplished by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA. This must be done via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.
- Don’t Forget Your Minimum Required Distribution – If you have reached age 70 1/2, you must make required minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.
- Take Advantage of the Annual Gift Tax Exemption – Although gifts do not currently provide a tax deduction, you can give up to $14,000 in 2015 to each of an unlimited number of individuals without incurring any gift tax. There’s no carryover from this year to next year of unused exemptions.
- Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2015, the expensing limit is $25,000. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Note: There is a good chance the Congress will increase that limit before year’s end and after this newsletter has gone to press, so watch for further developments.
- Self-employed Retirement Plans – If you are self-employed and haven’t done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2015, even if the contributions aren’t made until 2016. You may also qualify for the pension start-up credit.
- Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2015, you may want to increase your investment in the entity so you can deduct the loss, which is limited to your basis in the entity.
Also keep in mind when considering year-end tax strategies that many of the tax breaks allowed for calculating regular taxes are disallowed for alternative minimum tax (AMT) purposes. These include deduction for property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for mortgage interest, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, accelerating payment of these expenses that would normally be made in early 2016 to 2015 should – in some cases – not be done.
We hope you will consider Dagley & Co. as the tax season approaches. You’ll find our contact information at the bottom of this screen.
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With the internet, businesses going global and worldwide travel being so easy,more and more often we see marriages occurring between a U.S. citizen or U.S. resident alien and a resident of another country. These marriages trigger significant tax consequences, but it’s nothing a CPA like Dan Dagley can’t fix!
First, let’s get the lingo straight: U.S. resident aliens are individuals who have become permanent U.S. residents but are not U.S. citizens. To be classified as a U.S. resident alien, the individual must be a “green card” holder or meet a “substantial presence test” that is based on time spent in the U.S in the current and prior two years. For U.S. income tax purposes, a resident alien is treated the same as a U.S. citizen and is taxed on worldwide income.
Being married to a nonresident alien complicates the selection of a filing status for U.S. tax return purposes and requires the couple to make one of two possible elections:
- Married Filing Jointly –For a citizen/resident to file a joint return with a nonresident spouse, the taxpayers must include and pay U.S. taxes on the worldwide income of both spouses on their joint U.S. tax return, or
- Married Filing Separately – If they choose not to file jointly, then the citizen/resident spouse files a married separate return without the income of the non-resident spouse and pays U.S. taxes on only his or her worldwide income. If the non-resident spouse has U.S. source income, the non-resident spouse may also have to file a U.S. income tax return using the married filing separate status on that return.
The choice of filing status has significant tax implications. If filing jointly, the taxpayers enjoy the lower tax rates of the married filing jointly filing status, have a higher standard deduction ($12,600 for 2015, as opposed to $6,300 for married individuals filing separately), and are able to claim the $4,000 personal exemption for both spouses. On the other hand, if the non-resident spouse has significant income, especially non-U.S. source income, it may be a better choice for the U.S. citizen/resident to file married filing separately without the non-resident spouse’s income.
Higher income taxpayers with investment income are subject to a 3.8% surtax on net investment income; this surtax has an income threshold of $250,000 for married taxpayers filing jointly and $125,000 for those filing as married filing separately. However, individuals filing as non-resident aliens are not subject to this surtax. Therefore, when weighing the pros and cons of making the election to treat a non-resident alien spouse as a U.S. resident, the effect of the 3.8% tax on the couple’s total tax picture must be analyzed.
Another issue to consider is that when one spouse is a non-resident alien, the earned income tax credit can only be claimed on a joint return.
To make the election to file jointly, both parties must make the election by attaching the required statement, signed by both spouses, to the joint return for the first tax year for which the choice applies. Generally this will require obtaining an individual taxpayer identification number (ITIN) for the non-resident spouse because the non-resident spouse generally will not qualify for a Social Security number.
Determining your best course of action for tax purposes when married to a non-resident alien can be complicated. If you need assistance in making the decision of whether or not to treat your non-resident spouse as a resident and/or obtaining an ITIN for your spouse, please get in touch with us at Dagley & Co.
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Did you know that your age can affect your tax liability? That’s right – depending on the number of candles on this year’s birthday cake, you may get a gift from Uncle Sam when you file your tax return. In some situations, the gift may not be because you reached a certain age, but will be the result of the age your dependent(s) or spouse turned this year. Unfortunately, not all of Uncle Sam’s gifts will be welcomed, because some birthdays mark the end of eligibility for certain credits or exclusions of income and others signal the start of needing to include retirement benefits in income.
Under common law, a person attains a given age on the day before his or her birthday, which can impact the taxpayer’s return for certain age-related tax issues. For example, a taxpayer whose 65th birthday is on January 1 is considered to be age 65 as of December 31 of the prior year, and eligible for an additional standard deduction amount for the prior year. However per an IRS ruling on several tax provisions—which are discussed in this article—involving children, the child attains a given age on the actual date the child was born, instead of the day before.
If you or someone in your tax family attains one of the following ages this year, here’s how your tax return may be impacted:
Age 0 – Well, OK, zero isn’t really an age; but, if your dependent is born in 2015, you can claim a $4,000 exemption allowance for the child. Exemptions are subtracted from your gross income to determine your taxable income, and your taxable income determines your marginal tax bracket. So, for example, if you are in the 25% tax bracket, each exemption allowance reduces your tax by $1,000.
Age 13 – If you qualify to claim a credit for child care expenses that you pay so that you (or if married filing a joint return, you and your spouse) can work or look for work, and the qualifying child who is your dependent turns 13 years old in 2015, only the expenses for care up to the date of the child’s 13th birthday will be eligible for the credit. Similarly, if you receive dependent care benefits from your employer, the value of those benefits is excludable from your income only for care before the child turns 13. An exception to the age limit applies if the dependent child is not physically or mentally able to care for himself or herself.
Age 17 – One of the requirements for the child tax credit is that the qualifying child be younger than 17 at the end of the tax year. Thus, if your child turns 17 during 2015, you will not be allowed to claim the child tax credit for this child for 2015 or any future year. The amount of the credit is $1,000 per eligible child, subject to a phase-out based on your adjusted gross income (AGI).
Age 18 – To claim an adoption credit for expenses you paid to adopt a child, the child must have been younger than 18 at the time you paid or incurred the expenses. A child turning 18 during the year is an eligible child for the part of the year he or she was younger than 18. The age limitation does not apply if the person you adopted is physically or mentally unable to take care of himself or herself.
Age 19 – To be a qualifying child for dependency purposes, the child must be younger than 19 as of the end of the year (or younger than 24 if a full-time student). So, if your child’s 19th birthday was in 2015 and he or she is not a full-time student for some part of at least 5 months during the year, you can’t claim the child as a dependent under the definition of a qualifying child. (Once again, the age limitation does not apply for a child who is unable to physically or mentally provide self-care.) Depending upon both the child’s income and who provided the majority of the child’s support, you may be able to use a different definition to claim the dependency.
Age 24 – If you’ve been claiming your older-than-18 child as a dependent based on the child being a full-time student who doesn’t provide more than half of his or her own support, you won’t be able to claim the child’s dependency under that rule starting in the year the child has his or her 24th birthday. Depending on the child’s gross income and other factors, you may still be entitled to the dependency exemption, but under the “other” dependent rules and not the “qualifying child” rules.
Age 25 – If you are a lower-income taxpayer who is at least 25 years old before the end of the year, and you do not have a qualifying child, you may be eligible for the earned income credit. If you are married, and file a joint return, either you or your spouse must meet the age requirement. This age requirement for the earned income credit does not apply if you have a qualifying child.
Age 27 – There are various provisions of the Patient Protection and Affordable Care Act that apply to a child younger than 27 (i.e., one who has not had his or her 27th birthday) as of the end of the year. For example, your younger-than-27 child may be included on your health insurance plan, even if the child is not your dependent. If you are self-employed, the premiums you paid for the health insurance coverage of a child younger than 27 can be included as part of the above-the-line deduction of health insurance costs you may be able to deduct.
Age 50 – If you are a qualified public safety employee, such as a police officer or fireman who separates from service after age 50 and takes a distribution from your government employer’s defined benefit pension plan, the 10% early withdrawal penalty will not apply.
Age 55 – If you take a distribution from your employer’s qualified retirement plan after separation from service in or after the year you reach age 55, the distribution is not subject to the 10% penalty that usually applies when distributions are taken before age 59 1/2. To qualify for this exception to the penalty, you must be age 55 or older, and then separate from employment. This provision does not apply to IRAs.
Age 59 1/2 – Once you’ve reached age 59 1/2, distributions from your qualified retirement plans and traditional IRAs are no longer considered to be early distributions and, therefore, are not subject to the 10% early withdrawal penalty. However, in most cases, all of the distribution amount is includible in your income and will be taxed.
Age 62 – Many individuals opt to start receiving their Social Security benefits – albeit at a reduced amount than if they had waited until they reached full retirement age – when they first become eligible to receive the payments, generally at age 62. If this is your first year for collecting SS benefits (whether at age 62 or another age), you may be surprised to learn that part of the benefits may be taxable. Depending on your other income and filing status, 50% to 85% of the benefits may be taxable.
Age 65 – As mentioned above, starting with the year you reach age 65, you are eligible for an additional standard deduction amount. For 2015, the extra amount is $1,550 for a taxpayer filing as single or head of household or $1,250 for those filing married joint, married separate or a qualifying widow(er). There is no extra deduction if you itemize your deductions. If you file a joint return, you and your spouse, if he or she is also age 65 or older, are each allowed the additional amount.
Through 2016, if you itemize deductions and either you or your spouse – if filing a joint return – is age 65 by the end of the year, you need to reduce your medical expenses by only 7.5% of AGI instead of the 10% reduction rate that applies to other taxpayers. If you are subject to the alternative minimum tax, only medical expenses exceeding 10% of your regular AGI are deductible for the AMT computation.
If you’ve been claiming the earned income credit without having a dependent child, you will no longer be eligible for the credit starting in the year you turn 65.
Contributions to a health savings account (HSA) are not permitted once you are entitled to benefits under Medicare, meaning you are eligible for and have enrolled in Medicare. Most individuals become Medicare eligible and enroll at age 65. Contributions to the HSA may continue until the month you are actually enrolled in Medicare.
Age 70 1/2 – If you turned 70 1/2 in 2015, distributions from your traditional IRA must begin by April 1, 2016; otherwise, a minimum distribution penalty can apply. You must continue to take distributions annually. Not only must you take distributions after turning 70 1/2, the law specifies how the minimum distribution is to be calculated. You may take a larger distribution, but the amount in excess of the required minimum distribution amount cannot be used to reduce future required distributions. You are considered age 70 1/2 on the date that is 6 calendar months after the 70th anniversary of your birth.
In general, if you are or were an employee whose employer has a qualified plan, distributions from the qualified plan must begin no later than April 1 of the year following the year in which you attain age 70 1/2 or (except if you are a 5 percent owner), if later, you retire. This “retirement, if later” exception does not apply to IRAs.
If you were required to take your first distribution in 2015 but delay the withdrawal until April 1 of 2016, you will then have two distributions to include in your 2016 income, since the regular 2016 distribution must be taken by December 31 of that year.
You cannot make a contribution to a traditional IRA for the year in which you reach age 70 1/2 or for any later year. Contributions to Roth IRAs, however, are allowed regardless of age provided you have wages, self-employment income or alimony income.
If you or a member of your tax family celebrated a milestone birthday (or half-birthday) this year and you have questions as to how the tax implications of that event will affect your return, please get in touch with us at Dagley & Co.
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If you purchase health insurance for yourself or your family through the federal or a state government health insurance marketplace and are receiving an advance premium tax credit (subsidy of premium available to those with low to moderate income) to help you pay the cost of that insurance, you should make sure you report changes in family income and family size – as they occur – to the marketplace through which you purchased your insurance.
Changes in either family income or family size can have a significant impact on the amount of the advance premium tax credit (APTC) to which you are entitled. Reporting the changes as they occur allows the marketplace to adjust the APTC to the amount to which you are entitled.
Here are some changes in circumstances that you should report to the marketplace:
- An increase or decrease in your income
- Marriage or divorce
- The birth or adoption of a child
- Starting a job that provides you with or access to health insurance
- Gaining or losing your eligibility for other health care coverage
- Changing your residence
You can estimate (using the IRS estimator) the effect that changes in your family circumstances and income may have upon the amount of premium tax credit that you can claim.
Reporting these changes to the marketplace will help you avoid getting too much or too little advance payment of the premium tax credit. Getting too much APTC means you may owe additional money or get a smaller refund when you file your taxes for this year. Getting too little APTC could mean missing out on premium assistance to reduce your monthly premiums.
Repayments of excess premium assistance may be limited to an amount between $300 and $2,500, depending on your income and filing status. However, if advance payments of the premium tax credit were made, but your income for the year turns out to be too high to receive any amount of premium tax credit, you will have to repay all of the premium subsidies that were made on your behalf — with no limitation. Therefore, it is important that you report changes in circumstances that may have occurred since you signed up for your plan.
You should also be aware that married individuals filing separate returns are generally not allowed a premium tax credit and that any advance credit will have to be fully repaid. There are exceptions for abused or abandoned spouses and for those who meet the requirements to file as head of household.
If you have questions related to the APTC or how it may affect your particular circumstances, please get in touch with us at Dagley & Co. You’ll find our information at the bottom of this page.
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Last week, we covered the October 2015 tax due dates for individuals – and now we’re giving you the deadlines for businesses this month. Be sure to get in touch with us at Dagley & Co. if you need any of these deadlines clarified.
October 15 – Electing Large Partnerships
File a 2014 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 16 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.
October 15 – Social Security, Medicare and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in September.
October 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in September.
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