• Thinking of Tapping Your Retirement Savings? Read This First

    22 May 2017
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    Before you start tapping into your retirement savings, you may want to read this first:

    If you are under age 59½ and plan to withdraw money from a qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax on any previously un-taxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.

    The following exceptions may help you avoid the penalty:

    • Withdrawals from any retirement plan to pay medical expenses—Amounts withdrawn to pay unreimbursed medical expenses are exempt from penalty if they would be deductible on Schedule A during the year and if they exceed 10% of your adjusted gross income. This is true even if you do not
    • IRA withdrawals annuitized over your lifetime—To qualify, the withdrawals must continue unchanged for a minimum of 5 years, including after you reach age 59½.
    • Employer retirement plan withdrawals—To qualify, you must be separated from service and be age 55 or older in that year (the lower limit is age 50 for qualified public-service employees such as police officers and firefighters) or elect to receive the money in substantially equal periodic payments after your separation from service.
    • Withdrawals from any retirement plan as a result of a disability—You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activities because of a physical or mental condition. A physician must certify your condition.
    • IRA withdrawals by unemployed individuals to pay medical insurance premiums—The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You also must have received unemployment compensation for at least 12 weeks during the year.
    • IRA withdrawals to pay higher education expenses—Withdrawals made during the year for qualified higher education expenses for yourself, your spouse, or your children or grandchildren are exempt from the early-withdrawal penalty.
    • IRA withdrawals to buy, build, or rebuild a first home—Generally, you are considered a first-time homebuyer for this exception if you had no present interest in a main home during the 2-year period leading up to the date the home was acquired, and the distribution must be used to buy, build, or rebuild that home. If you are married, your spouse must also meet this no-ownership requirement. This exception applies only to the first $10,000 of withdrawals used for this purpose. If married, you and your spouse can each withdraw up to $10,000 penalty-free from your respective IRA accounts.

    You should be aware that the information provided above is an overview of the penalty exceptions and that conditions other than those listed above may need to be met before qualifying for a particular exception. You are encouraged to contact this office before tapping your retirement funds for uses other than retirement. Distributions are most often subject to both normal taxes and other penalties, which can take a significant bite out of the distribution. However, with carefully planned distributions, both the taxes and the penalties can be minimized. Please call Dagley & Co. for assistance.

     

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  • ACA Repeal & Replacement Bill Passes in House

    15 May 2017
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    On May 4th, the House of Representatives passed the proposed American Health Care Act (AHCA). This would repeal and replace several arrangements of the Affordable Care Act (ACA).

    Exact details are not available, but, we have found some details from the original draft legislation published on March 6 to give you an idea of the how this will function (please keep in mind that some provisions were modified with respect to existing conditions in order to obtain enough Republican votes to pass the bill).

     

    GOP’s March Version of the AHCA

    The American Health Care Act would repeal and replace the Affordable Care Act (ACA). In general, the GOP’s plan would continue the ACA’s premium tax credit through 2019 and then replace it in 2020 with a new credit for individuals without government insurance and for those who are not offered insurance by their employer. However, most of the ACA’s insurance mandates and penalties would be repealed retroactive to 2015. Other provisions will be overturned periodically through 2019.

    • Repeal of the Individual Mandate

    Background: Under the ACA, individuals are generally required to have ACA- compliant health insurance or face a “shared responsibility payment” (a penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.

    AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.

    • Repeal of the Employer Mandate

    Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.

    AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.

    • Recapture and Repeal of the Premium Tax Credit

    Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.

    AHCA Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.

    • Catastrophic Insurance

    Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.

    AHCA Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.

    • Refundable Tax Credit for Health Insurance

    Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the AHCA legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and unsubsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.

    The credit is determined monthly and ranges from $2,000 a year for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.

    • Health Savings Accounts

    Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, nonqualified distributions are taxable and generally subject to a 20% penalty.

    AHCA Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:

    • Allow both spouses to make catch-up contributions (applies to those age55 through 64) beginning in 2018.
    • Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently, expenses qualify only if they are incurred after the HSA is established).
    • Lower the penalty for nonqualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).
    • Medical Deduction Income Limitation

    Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.

    AHCA Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).

    • Repeal of Net Investment Income Tax

    Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 ($250,000 for married taxpayers filing jointly).

    AHCA Legislation: The new legislation would repeal this tax after 2017.

    • Repeal on FSA Contribution Limits

    Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.

    AHCA Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.

    • Repeal of Increased Medicare Tax

    Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 ($250,000 for married couples filing jointly).

    AHCA Legislation: The new legislation would repeal this surtax beginning in 2018.

    • Other Provisions
    • Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, the legislation as introduced would require individuals to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.

    Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.

    • Small Business Health Insurance Tax Credit– Repealed after 2019
    • Medical Device Tax– Repealed after 2017
    • Tanning Tax– Repealed after 2018
    • Over-the-Counter Medication Tax– Repealed after 2017

     

    Questions? Contact Dagley & Co.

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  • Tax Deductions for Owner-Operator Truckers

    8 March 2017
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    If you are in the trucking industry, many times your tax situation is unique. More specifically, if you are an “owner-operator” in the trucking industry, you have many tax benefits to take advantage of. You are allowed special allowances for meals and you are allowed very large write-offs for the tractors, trucks and other equipment needed to run your business. On the other hand, you must pay for permits and any additional taxes that may be involved. Dagley & Co. realizes you may also have special reporting requirements on your tax return, so if you or someone you know have any questions, feel free to reach out to us. To help with this, the following is an overview of tax issues that may apply to owner-operators:

    • Meals Away from Home – As an owner-operator trucker, you may deduct the actual cost of your meals; this requires you to save your receipts. Alternatively, you can deduct the IRS’ standard meal allowance for the transportation industry, using your logbooks as substantiation. For 2016 and 2017, amount for meals and incidental expenses is $63 per day. Whether you use the actual-expense method or the standard method, only 80% of the total for the year is deductible. Even though only 80% is deductible, keep track all expenses for tax purposes, as the 80% adjustment is made during the tax-return preparation process

    Meals are deductible if you need to stop for substantial rest in order to properly perform your duties while traveling on business.

    • Lodging – Lodging expenses are deductible. Unfortunately, there is no standard allowance for lodging; thus, you must keep a receipt for each lodging expense. Generally, to deduct lodging expenses, you must be away from home overnight.

    One issue that could result in the disallowance of lodging and other travel expenses is not having a regular place of business or place of residence. In this case, you would be considered an itinerant (or transient), and your home for tax purposes would be wherever you work. As an itinerant, you would not be able to claim a deduction for lodging and meals because you would never be considered to be away from home.

    Other On-The-Road Expenses – Generally, to be deductible, items must be both ordinary and necessary to your job. For truckers, these expenses include laundry (when away overnight), gloves, logbooks, maps, cell phones, CB radios, tools, safety gear, cargo straps, and any other incurred expenses that are ordinary and necessary in the business. Generally, receipts are required, but if the business expense is less than $75, a receipt is not necessary, provided that you record all of the information in a diary in a timely manner.

    • Vehicle (Tractor) Cost Write-Offs – The current tax code provides several options for writing off the cost of a vehicle, including immediate expensing of up to $510,000 (as of 2017) during the year the property is put into service; first-year depreciation equal to 50% of the vehicle’s cost; normal deprecation; or a combination of all three. These options allow owner-operators to pick almost any amount of write-off to best suit their particular circumstances. For normal depreciation, the IRS allows a recovery period of 3 years for over-the-road tractor units and of 5 years for trailers, trailer-mounted containers and heavy-duty trucks (13,000 pounds or more).
    • Vehicle (Tractor) Operating Expenses – Of course, vehicle operating expenses – including fuel, licenses, taxes, maintenance and insurance – are deductible. Depending on the nature and cost, some expenses may have to be depreciated.
    • General Business Expenses – Owner-operators can usually deduct the following expenses: trucking-industry and business-related subscriptions, association dues, computers and software, Internet service, cleaning supplies, business interest, office supplies, DOT physicals, drug testing, sleep apnea studies, postage and other business-related expenses.
    • Heavy Highway Vehicle Use Tax – The heavy highway vehicle use tax (Form 2290) applies to highway vehicles weighing 55,000 pounds or more. The due date for this form is based on when (during the annual filing period) the vehicle is first used on a public highway. For the period of July 1, 2016, through June 30, 2017, Form 2290 is due by the end of August 2016 for vehicles first used on a public highway in July 2016. For vehicles first used on a public highway after July, the use tax is prorated, and the form is due by last day of the month following the month of first use. See when to file for more details. The use tax ranges from $100 to $550 per vehicle for a full year, depending on the vehicle’s weight. You will need to have an employer ID number to file the Form 2290; your Social Security number cannot be used as the ID number.
    • Subcontractor Payments – If you paid an individual for services during the year, that person was most likely a subcontractor. Payments of $600 or more to subcontractors must be reported to the government by filing Form 1099-MISC. This form requires the subcontractor’s name, address and tax ID number as well as the payment amount. There are penalties for failing to file this form, for filing it late and for filing it without the tax ID number. All these penalties can be avoided by (1) having contractors complete Form W-9 before you pay them and (2) filing the 1099-MISC forms by January 31 of the subsequent year.

    Some expenses are not deductible; those with limited knowledge of trucker expenses may take these deductions, potentially triggering IRS inquiries and audits. One example is deducting the cost of street clothing. For clothing, only the cost of uniforms or protective clothing is allowed as a deduction.

    Another example is deducting lost income:

    • For time you spend repairing or maintaining your own equipment,
    • As a result of a deadhead, or
    • Because of downtime.

    Lost income is already accounted for, as you do not have to report the income on your tax return in the first place.

    If you have any questions related to trucking and taxes, please call Dagley & Co. This office is knowledgeable regarding the drivers’ and owner-operators’ tax issues, and are here to help you eliminate the stress of accounting and tax filing. Our phone number is 202-417-6640.

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  • Don’t Overlook Tax Deductions for Home Ownership

    20 February 2017
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    As a homeowner, you should be aware of the many tax benefits that go along with ownership. At Dagley & Co., we compiled a list of tax benefits that will be helpful for the current and next year’s tax season:

    Mortgage Interest Deduction – Although it may seem that you will never get that mortgage paid off, keep in mind that unmarried taxpayers and married couples can deduct, as an itemized deduction, the interest on up to $1 million of acquisition debt plus $100,000 of equity debt on their first and second homes, provided the loans are secured by the homes. A married taxpayer filing separately is limited to deducting the interest on $500,000 of acquisition debt and $50,000 of equity debt.

    Home Improvement Loan Interest Deduction – If you took out a loan secured by your home to make improvements on your main or a second home, that mortgage is treated the same as home acquisition debt, and the interest you pay on that loan is deductible as acquisition debt, so long as the combined total acquisition debt of the two homes does not exceed the $1 million limit on acquisition debt. Even if it does exceed the $1 million limit, the excess interest on up to the $100,000 equity debt limit may still be deductible. However, if you used the loan money to make repairs rather than improvements, the debt would only qualify as equity debt.

    Equity Debt – If you used the equity in your home to borrow money to buy a car, take a vacation, or for another use, interest paid on that debt is deductible up to the $100,000 equity debt limit. That is why it is sometimes better to finance large purchases with a deductible home equity loan rather than a non-deductible consumer loan.

    Property Tax Deduction – If you itemize your deductions, you can deduct the property taxes you paid during the year on your home. However, be careful; generally property taxes are billed on a fiscal year basis, so the amount billed may cover parts of two years. You can only deduct what you actually paid during the year. If you have an impound account (sometimes called an escrow account) with your mortgage lender, the amount paid will be included on the lender’s annual statement. Also be aware that if you are subject to the alternative minimum tax (AMT), a deduction for taxes is not allowed when computing the AMT.

    Private Mortgage Insurance Premiums – Generally when home buyers are unable to make a 20% down payment when purchasing a home, the lender will require them to obtain private mortgage insurance (PMI) and the insurance premiums that go along with it. To be deductible, the insurance contract must have been issued after December 31, 2006. Those premiums are deductible if incurred for the purchase of your first or second home, and they are not limited by the $1 million limitation on home acquisition debt.

    The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000). If AGI is over $109,000 ($54,500 married separate), the deduction is totally phased out.

    Congress failed to extend this deduction, and thus 2016 is the last year for it. If you are stuck with a PMI and your equity in your property has grown to be greater than 20% (you’ve paid down the mortgage balance to 80% of the home’s original appraised value), you may want to contact your lender about removing the PMI, refinancing to get rid of it, or obtaining an updated appraisal. When the balance drops to 78%, the mortgage servicer is required to eliminate PMI. (These rules generally don’t apply if your loan is guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).)

    Solar Energy Credits – Through 2021, taxpayers can get a tax credit on their federal tax return for purchasing and installing solar electric or solar water heating systems. The credit is 30% of the cost through 2019, at which time it begins to phase out and the credit is reduced to 26% for 2020 and 22% for the final year of 2021.

    The credit is nonrefundable, which means it can only be used to offset a taxpayer’s current tax liability, but any excess can be carried forward to offset tax through 2021. Both the solar electric and the solar water systems qualify for credit if installed on a taxpayer’s primary and secondary residences. However, no credit is allowed for heating water for hot tubs and swimming pools.

    Impairment-Related Home Expenses – If you, your spouse or a dependent living in your home has a physical handicap and you make modifications to the home or install special equipment to alleviate that disability, those costs may be deductible as a medical expense. The portion of the cost of permanent improvements that increases the value of the home is not deductible, but the difference can be included as a medical expense. However, home modifications made to accommodate a home for an individual’s handicap generally do not increase the value of the home and can be included in full with your medical deductions. These improvements include, but are not limited to, the following items:

    • Constructing entrance or exit ramps for the home,
    • Widening doorways at entrances or exits to the home,
    • Adding handrails, support bars and grab bars,
    • Lowering or modifying kitchen cabinets and equipment, and
    • Installing porch and stair lifts.

    Points Deduction – Points are a form of prepaid interest; one point is equal to 1% of a loan amount. Points are often labeled “loan origination fees,” “premium charges,” etc. At times, certain loan charges may be called points but are really amounts lenders charge for setting up a loan. Such “service charge points” aren’t normally deductible.

    Generally, prepaid interest must be amortized (deducted) over the life of a loan; however, tax law carved out a special rule that allows points incurred for purchase of a primary residence to be fully deducted on the return for the year in which they are paid. This special rule also applies to loan points incurred for home improvement loans.

    Home Office Deduction – If you are self-employed, you may qualify for a deduction for the business use of your home, commonly known as the home office deduction. You may also qualify if you are an employee and the use of the home is for the convenience of the employer. In either case the portion of the home used for business qualifies for the deduction only if it is used exclusively for business.

    There are two methods that can be used to determine the deduction: (1) the actual expense method, where you prorate the home expenses such as utilities, insurance, maintenance, interest, taxes and depreciation, or (2) a simplified deduction, which is $5 per square foot of office space, with a maximum square footage of 300. If the latter method is used, mortgage interest and real property tax deductions may be claimed as usual as part of itemized deductions, but a proration of other home-related expenses isn’t deductible. In either case, the deduction is limited to the income from the business activity.

    If you have questions about any of these tax related home ownership deductions/issues, give Dagley & Co. a call. Or, are you considering purchasing a home? Dagely & Co. will help you to understand how the home ownership will impact your taxes.

     

     

     

     

     

     

     

     

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  • December 2016 Individual Due Dates

    1 December 2016
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    Happy Decemeber! The busiest and most wonderful time of year has finally begun. With this, means your end of year planning must start ASAP. Before you get overwhelmed, plan out your Decemeber month calander TODAY. We’ve provided some indiviudal dute dates to make it a smoother process. As always, contact Dagley & Co. with any year-end questions regarding tax, business, or individual planning.

    December 1 – Time for Year-End Tax Planning

    December is the month to take final actions that can affect your tax result for 2016. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2016 should call for a tax planning consultation appointment.

    December 12 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    December 31 – Last Day to Make Mandatory IRA Withdrawals

    Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2016. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.

    December 31 – Last Day to Pay Deductible Expenses for 2016

    Last day to pay deductible expenses for the 2016 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2016). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information).

    December 31 –  Last Day of the Year

    If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.

     

     

     

     

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  • Time to Start Thinking About Year-End Tax Moves

    21 November 2016
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    With 2017 just around the corner, it is time to think about actions you can take to improve your tax situation from 2016. In our opinion, this is something you probably want to get out of the way before the holiday season arrives. Dagley & Co. is always here to help in anyway possible in terms of your tax situations for both present and upcoming years.

    There are many steps that you can take before January 1 to save a considerable amount of tax. Here are a few that we gathered:

    Maximize Education Tax Credits – If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2016. If it is not the maximum allowed for computing the credits, you can prepay 2017 tuition as long as it is for an academic period beginning in the first three months of 2017. That will allow you to increase the credit for 2016. This technique is especially helpful when a student has just started college in the fall.

    Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting some or all of your traditional IRA into a Roth IRA. The lower income results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount.

    Don’t Forget Your Minimum Required Distribution – If you are over 70.5 years of age and have not taken your 2016 required minimum distribution from your IRA or qualified retirement plan, you should do that before December 31 to avoid possible penalties. If you turned 70.5 this year, you may delay your 2016 distribution until the first quarter of 2017, but that will mean a double distribution in 2017 that will be taxed.

    Advance Charitable Deductions – If you regularly tithe at a house of worship or make pledges to other qualified charities, you might consider pre-paying part or all of your 2017 tithing or pledge, thus advancing the deduction into 2016. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next. If you are age 70.5 or over, you can also take advantage of a direct IRA-to-charity transfer, which will count toward your RMD and may even reduce the taxes on your Social Security income.

    Maximize Health Savings Account Contributions If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions earlier in the year. This opportunity applies even if you first become eligible in December.

    Prepay Taxes – Both state income and property taxes are deductible if you itemize your deductions and you are not subject to the AMT. Prepaying them advances the deductions onto your 2016 return. So if you expect to owe state income tax, it may be appropriate to increase your state withholding tax at your place of employment or make an estimated tax payment before the close of 2016, and if you are paying your real property taxes in installments, pay the next installment before year-end.

    Pay Tax-deductible Medical Expenses – If you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 10% of AGI floor for deducting medical expenses, or if adding the payments would put you over the 10% threshold. You can even use a credit card to pay the expenses, but if you won’t be paying off the full balance on the card right away, do so only if the interest expense on the credit card is less than the tax savings. You might also wish to consider scheduling and paying for medical expenses such as glasses, dental work, etc., before the end of the year. See the “Seniors Beware” article if you or your spouse is age 65 and over.

    Take Advantage of the Annual Gift Tax Exemption – You can give $14,000 to each of an unlimited number of individuals without paying gift tax each year, but you can’t carry over unused amounts from one year to the next. (The gifts are not tax deductible.)

    Avoid Underpayment Penalties – If you are going to owe taxes for 2016, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters.

    There are many different factors that go into each of the steps above. We  encourage all of our clients to contact Dagley & Co. prior to acting on any of the advice to ensure that you will benefit given your specific tax circumstances. Our phone number is: (202) 417-6640 and email: info@dagleyco.com.

     

     

     

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  • Hobbies and Income Tax

    12 September 2016
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    Hobbies and Income Tax

    Millions of U.S. taxpayers engage in hobbies such as collecting coins or stamps, refurbishing old cars, crafting, painting or breeding horses.

    Some hobbies will actually generate income, or  even evolve into businesses.  The tax treatment of hobbies with income is quite different than that of a trade or business, and making the distinction can be rather complicated.  The main issue here is that the IRS does not want taxpayers to write off hobby expenses under the guise of trade or businesses expenses.

    The first question to ask yourself is whether the activity is a hobby, trade or business. The tax law doesn’t really provide a bright-line definition of the term “trade or business,” probably because no single definition will apply in all cases.  But certainly, to be considered a trade or business, an activity must be motivated by the taxpayer’s profit motive, even if that motivation is unrealistic. Along with a profit motive, the taxpayer must carry on some kind of economic activity.

    Factors to determine profit motive – The IRS uses a series of factors to determine whether an activity is for profit.  No one factor is decisive, but all of them must be considered together in making the determination.

    • Is the activity carried out in a businesslike manner?
    • How much time and effort does the taxpayer spend on the activity?
    • Does the taxpayer depend on the activity as a source of income?
    • Are losses from the activity the result of sources beyond the taxpayer’s control?
    • Has the taxpayer changed business methods in attempts to improve profitability?
    • What is the taxpayer’s expertise in the field?
    • What success has the taxpayer had in similar operations?
    • What is the possibility of profit?
    • Will there be a possibility of profit from asset appreciation?

    Presumption of profit motive – There is a presumption that a taxpayer has a profit motive if an activity shows a profit for any three or more years during a period of five consecutive years.  However, if the activity involves breeding, training, showing or racing horses, the period is two out of seven consecutive years.  An activity that is reported on a tax return as a business but has had year after year of losses and no gains is likely to eventually come under scrutiny by the IRS.

    Tax Treatment of Hobbies – While trades or businesses can have losses without restriction, if the activity is deemed to be a hobby, then special rules – frequently referred to as “hobby loss” rules – apply.  Under these rules, any income from the hobby is reported on the face of the tax return, and the expenses are only deductible if a taxpayer itemizes their deductions on Schedule A.  In addition, hobby expenses are limited by category as follows:

    Category 1: This category includes deductions for home mortgage interest, taxes, and casualty losses.  They are reported on the appropriate lines of Schedule A as they would be if no hobby activity existed.

    Category 2: Deductions that don’t result in an adjustment to the basis of property are allowed next, but only to the extent that gross income from the activity is greater than the deductions under Category 1.  Most expenses that a business would incur, such as those for advertising, insurance premiums, interest, utilities, wages, etc., belong in this category.

    Category 3: Business deductions that decrease the basis of property are allowed last, but only to the extent that the gross income from the activity is more than the deductions under the first two categories.  The deductions for depreciation and amortization belong in this category.

    Additional limit Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A, which are subject to the 2% AGI reduction; as a result, they are not deductible for alternative minimum tax purposes.

    Hobby loss rules can be complicated.  Need assistance determining whether your activity qualifies as trade or business, or whether it is subject to the hobby loss rules? Give Dagley & Co. a call at (202) 417-6640 or email at info@dagleyco.com.

     

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  • New Business? First-Year Deduction Strategies

    29 August 2016
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    Planning a new business start-up? Incurring some expenses? You probably anticipate deducting those expenses in the first year of the business’s operation. Unfortunately it is a little more complicated than that. At the beginning of a new business, expenses  can include equipment purchases, vehicle purchases and use, leasehold improvements, organizational costs and start-up expenses, and each receives a different tax treatment.

    • Equipment – The equipment you buy can’t be deducted until it is placed in service. For that reason, you can’t make any equipment deductions until the business is actually functioning. However, deductions for most equipment purchases are very liberal. For most small businesses, this means the entire cost of equipment and office furnishings can generally be written off in the year of purchase, if that is also the year when the equipment is put into service, using the Sec 179 expensing election. However, the deductible amount is limited to taxable income from all the taxpayer’s active trades or businesses (including a spouse’s active trades or businesses if married and filing jointly). Income from trades also includes W-2 income.

    Sometimes it may not be appropriate to write off the entire cost in the first year, in which case the equipment can be depreciated over its useful life (according to recovery periods established by the IRS). Most office furniture, fixtures and equipment are assigned a 7 year recovery period, but the depreciable period for computers is 5 years. The recovery period of equipment may vary depending on the type of business activity. There is also a 50% bonus depreciation election for the first year the equipment is placed in service.

    • Vehicles – Automobiles and small trucks that are purchased for use by the business are treated like equipment, as above, except their recovery period is 5 years and they are subject to the so-called luxury auto rules. These rules limit the depreciation to a maximum of $3,160 ($3,560 for light trucks and vans) for the first year. If bonus depreciation is elected, add $8,000 to the first-year maximum.
    • Leasehold Improvements – Generally, leasehold improvements are depreciated over 15 years. But through 2019, bonus depreciation may be elected, allowing between 30% and 50% of the cost of interior qualified improvements to non-residential property after the building is placed in service to be deducted in the first year. In addition, the Sec 179 expense deduction is allowed for qualified leasehold property, qualified restaurant property and qualified retail improvements.
    • Start-Up Costs – Taxpayers can elect to deduct up to $5,000 of start-up costs in the first year of a business. However, the $5,000 amount is reduced by the amount of the start-up costs in excess of $50,000. If the election is made, the start-up costs over and above the first-year deductible amount are amortized over 15 years. If the election is not made, the start-up costs must be capitalized, meaning the expenses can only be recovered upon the termination or disposition of the business. Start-up costs include:
    • Surveys/analyses of potential markets, labor supply, products, transportation, facilities, ;
    • Wages paid to employees, and their instructors, while they are being trained;
    • Advertisements related to opening the business;
    • Fees and salaries paid to consultants or others for professional services; and
    • Travel and related costs to secure prospective customers, distributors and suppliers.
    • Organizational Expenses – If the new business involves a partnership or corporation, the business can elect to deduct up to $5,000 of organization expenses in the first year of a business. This is in addition to the election for start-up expenses. Like start-up expenses, the $5,000 amount is reduced by the amount of the start-up costs in excess of $50,000. If the election is made, the start-up costs over and above the first-year deductible amount are amortized over 15 years. If the election is not made, the start-up costs must be capitalized. Organizational expenses include outlays for legal services, incorporation fees, temporary directors’ fees and organizational meeting costs, etc.

    Major decisions need to be made that can have a lasting impact on the new business. We encourage you to consult with our office for additional details and assistance in preparing a tax plan for your new business. Give us a call a 202-417-6640.

     

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