• April 2017 Business Due Dates

    3 April 2017
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    April is a busy month for business owners, accountants, accounting departments, CFOs and more. As Tax Day is quickly approaching, plan out your month in advance with these business due dates:

    April 18 – Household Employer Return Due

    If you paid cash wages of $2,000 or more in 2016 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.

    April 18 – Corporations

    File a 2016 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 5-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.

    April 18 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in March.

    April 18 – Corporations

    The first installment of 2017 estimated tax of a calendar year corporation is due.

    April 18 – Partnerships

    Last day file 2016 calendar year fiduciary return or file an extension.
    Contact Dagley & Co. with any questions, or if you’d like to schedule your last-minute tax refund meeting.

     

     

     

     

     

     

     

     

     

     

     

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  • Tax Benefits for Single Parents

    7 December 2016
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    Are you a single parent? If so, we all know that working and raising a family can become extremley difficult on your own. For your benefit, Dagley & Co. has found a number of tax benefits/issues that you should be aware of. Please carefully read and understand the following:

    Filing Status – Just because you are single or widowed does not mean you have to file your tax returns using the single filing status. Tax law provides two far more beneficial filing statuses that you might qualify for. These statuses provide higher standard deductions and more beneficial tax rates:

    Head of Household – If you are unmarried and pay more than half the cost of maintaining a household that is the principal place of abode for your qualified child or children for more than one-half of the year, then you qualify for the head of household status. Qualified children generally include your children, grandchildren, foster children or stepchildren under the age of 19 or a full-time student under the age of 24 who is not self-supporting.  This is true even if you allow the other parent to deduct the dependency exemption for the child.

    Qualified Widow – If you are widowed, you may qualify for the head of household status discussed just above.  However, if your spouse passed away in one of the two prior years, you have a child or stepchild (not including a foster child or grandchild) whom you can claim as a dependent and who lived with you the whole year, and you paid more than half the cost of keeping up the home, you can use the higher standard deduction for married individuals filing jointly. In comparison, in 2016, the standard deduction for marrieds filing jointly is $12,600, which is twice the amount for a single individual.

    Child Support – Any child support you receive from the non-custodial parent is tax-free to you. Child support is also not included in household income for the purposes of determining the premium tax credit if you are otherwise qualified and obtain your health insurance through a government marketplace.

    Alimony – In most cases alimony payments received from your former spouse must be included in your income and are subject to tax. However, you can treat the alimony as earned income for purposes of making an IRA contribution of as much as $5,500 ($6,500 for those age 50 and over).

    Exemptions – You are entitled to an exemption allowance of $4,050 for yourself and each of your children and others whom you claim as dependents on your tax return. Generally, the custodial parent will be the one eligible to claim a child’s exemption allowance. The value of the exemptions you claim is subtracted from your gross income when you are figuring out the amount of your taxable income. For example, if you are in the 25% tax bracket, each exemption allowance you deduct saves you $1,013 of tax. However, if you allow the non-custodial parent to claim the exemption of a qualified child, then you forego the $4,050 exemption allowance for that child.

    Releasing the exemption of a child to the noncustodial parent must be done in writing and to IRS’s specifications as to required information. The noncustodial parent must then attach the written form to his or her return. The release can be for one year, for specified years or for all future years. If the exemption for the child is released, then the noncustodial parent will be able to claim the child tax credit (discussed below). Note: If a child is older and attending college, keep in mind when relinquishing the child’s exemption that the partially refundable tuition credit goes to the one who claims the child.

    Child Care Credit – If your child or children are under age 13, and you are working or attending school, you may qualify for the non-refundable child and dependent care credit, which is based upon the amount of your earnings from working (or imputed income if attending school) and the amount of child care expenses, up to $3,000 for one child and $6,000 for two or more children. The credit can be as much as $1,050 for one child and $2,100 for two.

    Child Tax Credit – You are also entitled to a non-refundable tax credit of $1,000 for each child under the age of 17 that you claim as a dependent. However, this credit begins to phase out for those filing as head of household with incomes in excess of $75,000. Some taxpayers with lower income may qualify for some portion of this credit to be refundable.

    Earned Income Tax Credit (EITC) – If you are working, you may also qualify for the EITC. This refundable credit is available to lower-income taxpayers and is based on your income and the number of children you have, up to three. The maximum credits for 2016 are $506 with no children, $3,373 with one, $5,572 with two, and $6,269 with three or more. The credit is totally phased out at incomes of $14,880 with no children, $39,296 with one, $44,648 with two, and $47,955 with three or more.

    As you can see, there are a number of tax benefits that apply to single parents. As always, please contact Dagley & Co. with any questions or issues. If you are a custodial parent, before releasing your child’s exemption to the noncustodial parent, you may wish to contact Dagley & Co. so the tax impact on your return(s) can be determined.

     

     

     

     

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  • Understanding the Fine Points of Capital Gains and Losses

    13 April 2016
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    The fine points of capital gains and losses may sometimes be hard to understand. There is a category of income resulting from the sale of capital assets that receives special treatment for tax purposes.

    A capital asset is defined to include property of any kind, whether held for business or personal use. Capital assets include all kinds of property, tangible and intangible; examples include land, buildings, plants and machinery, vehicles, furniture, jewelry, goodwill, tenancy rights, patents, trademarks, stocks and securities, mutual funds and homes.

    Capital Gains – Generally, capital gains receive special tax rates if you have owned the capital asset for over a year, referred to as long-term capital gains. These special rates are 0%, 15% and 20% and are based on your regular tax bracket.

    Thus: To the extent your regular tax bracket is less than 25%, the capital gains tax is zero. To the extent your regular tax bracket is 25% but less than 39.6%, the capital gains tax is 15%. To the extent your regular tax bracket is 39.6% or greater, the capital gains tax is 20%.

    However, if the capital asset was held less than a year and a day, referred to as short-term capital gains, the gains are taxed at regular tax rates.

    Capital Losses – For capital assets used personally, such as your car, home, jewelry, household items, etc., no losses are allowed. Business and investment losses are allowed and can offset gains but can only produce a maximum net loss for the year of $3,000 ($1,500 if filing as married separate). Any losses not allowed because of the annual net loss limit are carried forward to the next year.

    Gains and Losses – These are determined by subtracting the capital asset’s basis from the proceeds from sale, net of selling expenses. The basis of an asset is generally what you paid for it, but there are exceptions, and they are as follows:

    Gift – If the asset was a gift, your basis will be the giver’s basis at the time of the gift.

    Inherited – If you inherit an asset, your basis generally is the fair market value of the asset on the date of the decedent’s death.

    Business – The basis of a business asset is its “adjusted basis,” which is the cost adjusted for depreciation, improvements and casualty losses. In addition, there may be an element of ordinary income as a result of recaptured depreciation or reduction of basis due to cancellation of debt.

    Investments – Your original basis of shares of stock will need to be adjusted for events such as stock splits, spin-offs and dividend reinvestments.

    Personal Use – Even the basis of personal use property may be adjusted because of improvements, casualty losses and cancellation of debt.

    Other Issues:

    Net Investment Income – The Affordable Care Act included an additional tax on net investment income for higher-income taxpayers. This 3.8% tax applies to net investment income of individuals with modified adjusted gross incomes in excess of:

    $200,000 for unmarried taxpayers,

    $250,000 for married taxpayers filing jointly,

    $125,000 for married taxpayers filing separately.

    Home Sale Exclusion – Where you have a gain from a primary residence you used and owned for 2 of the 5 years preceding the sale, married couples filing jointly can generally exclude $500,000 of the gain, and others can exclude $250,000. There are numerous special rules associated with home sales; call for additional information.

    Wash Sales – To prevent taxpayers from selling a stock or security to produce a tax loss and then immediately buying it back, the tax code includes wash sale rules that prevent the loss from being claimed if the stock is repurchased 30 days before or after the sale resulting in the loss.

    There are numerous other issues not covered in this article that can come into play depending upon your particular circumstances. If you are anticipating the sale of an asset that will result in a substantial gain or loss, you are encouraged to contact Dagley & Co. to the transaction to ensure you get the maximum benefits of the tax laws.

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  • April 2016 Due Dates

    5 April 2016
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    April 2016 Individual Due Dates

    April 1 – Last Day to Withdraw Required Minimum Distribution

    Last day to withdraw 2015’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2015. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2015 were required to make their 2015 IRA withdrawal by December 31, 2015.

    April 11 –  Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 11. 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.

    April 18 –  Individual Tax Returns Due

    File a 2015 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.

    Caution: The extension gives you until October 17, 2016 to file your 2015 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call Dagley & Co. to discuss your individual situation if you are unable to file by the April 18 due date.

    Note: the normal April 15 due date is a federal holiday in the District of Columbia, so for almost all individuals their 2015 Form 1040 returns aren’t due until the next business day, which is Monday, April 18 (except residents of Massachusetts and Maine, who have until April 19 to file).April 15 – Household Employer Return Due

    April 18 – Estimated Tax Payment Due (Individuals)

    Estimated Tax Payment Due (Individuals)
    It’s time to make your first quarter estimated tax installment payment for the 2016 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include: Payroll withholding for employees; Pension withholding for retirees; and Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors: The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call Dagley & Co. as soon as possible. 

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call Dagley & Co. for particular state safe harbor rules.

    April 18 – Last Day to Make Contributions

    Last day to make contributions to Traditional and Roth IRAs for tax year 2015.

    April 2016 Business Due Dates

    April 18 – Household Employer Return Due 

    If you paid cash wages of $1,900 or more in 2015 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2014 or 2015 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call Dagley & Co.

    April 18 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in March.

    April 18 – Corporations

    The first installment of 2016 estimated tax of a calendar year corporation is due.

    April 18 – Partnerships

    File a 2015-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.

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  • Household Help: Employee or Contractor?

    3 February 2016
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    A lot of the time, individuals or firms are hired to provide services at a taxpayer’s home. Because the IRS requires employers to withhold taxes for employees and issue them W-2s at the end of the year, the big question is whether or not that individual is a household employee.

    Whether a household worker is considered an employee depends a great deal on circumstances and the amount of control the person hiring has over the job and the hired person. Ordinarily, when someone has the last word about telling a worker what needs to be done and how the job should be done, then that worker is an employee. Having a right to discharge the worker and supplying tools and the place to perform a job are primary factors that show control.

    Not all those hired to work in a taxpayer’s home are considered household employees. For example, an individual may hire a self-employed gardener who handles the yard work for a taxpayer and others in the taxpayer’s neighborhood. The gardener supplies all tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee and the person hiring him/her isn’t responsible for paying employment taxes. The same would apply to the pool guy or to contractors making repairs or improvements on the home.

    Contrast the following example to the self-employed gardener described above: The Smith family hired Lynn to clean their home and care for their 3-year old daughter, Lori, while they are at work. Mrs. Smith gave Lynn instructions about the job to be done, explained how the various tasks should be done, and provided the tools and supplies; Mrs. Smith, rather than Lynn, had control over the job. Under these circumstances, Lynn is a household employee, and the Smiths are responsible for withholding and paying certain employment taxes for her and issuing her a W-2 for the year.

    If an individual you hire is considered an employee, then you must withhold both Social Security and Medicare taxes from the household employee’s cash wages if they equal or exceed the $2,000 threshold for 2016.

    The employer must match from his/her own funds the FICA amounts withheld from the employee’s wages. Wages paid to a household employee who is under age 18 at any time during the year are exempt from Social Security and Medicare taxes unless household work is the employee’s principal occupation.

    Although the value of food, lodging, clothing or other noncash items given to household employees is generally treated as wages, it is not subject to FICA taxes. However, cash given in place of these items is subject to such taxes.

    A household employer doesn’t have to withhold income taxes on wages paid to a household employee, but if the employee requests such withholding, the employer can agree to it. If income taxes are to be withheld, the employer can have the employee complete Form W-4 and base the withholding amount upon the federal income tax and FICA withholding tables.

    The wage amount subject to income tax withholding includes salary, vacation and holiday pay, bonuses, clothing and other noncash items, meals and lodging. However, meals are not taxable, and therefore they are not subject to income tax withholding if they are furnished for the employer’s convenience and on the employer’s premises. The same goes for lodging if one additional requirement applies—that the employee lives on the employer’s premises. In lieu of withholding the employee’s share of FICA taxes from the employee’s wages, some employers prefer to pay the employee’s share themselves. In that case, the FICA taxes paid on behalf of the employee are treated as additional wages for income tax purposes.

    Although this may seem quite complicated, the IRS provides a single form (Schedule H) that generally allows a household employer to report and pay employment taxes on household employees’ wages as part of the employer’s Form 1040 filing. This includes Social Security, Medicare, and income tax withholdings and FUTA taxes.

    If the employer runs a sole proprietorship with employees, the household employees’ Social Security and Medicare taxes and income tax withholding may be included as part of the individual’s business employee payroll reporting but are not deductible as a business expense.

    Although the federal requirements can generally be handled on an individual’s 1040 tax return, there may also be state reporting requirements for your state that entail separate filings.

    If the individual providing household services is determined to be an independent contractor, there is currently no requirement that the person who hired the contractor file an information return such as Form 1099-MISC. This is so even if the services performed are eligible for a tax deduction or credit (such as for medical services or child care). The 1099-MISC is used only by businesses to report their payments of $600 or more to independent contractors. Most individuals who hire other individuals to provide services in or around their homes are not doing so as a business owner.

    Please call Dagley & Co. if you need assistance with your household employee reporting requirements or need information related to the reporting requirements for your state.

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  • Take Advantage of the Earned Income Tax Credit

    18 January 2016
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    If you don’t think about your taxes and haven’t filed them, then you’re probably leaving money on the table – and that’s why you haven’t heard from the IRS.

    The Earned Income Tax Credit (EITC) is a tax benefit for working people who have low to moderate income. It provides a tax credit that is treated like tax withholding: it goes to pay an individual’s tax liability, and any excess is paid to the individual in the form of a tax refund. We can help you collect this refund!

    Qualifications for the credit are based upon the amount of the filer’s earned income, the spouse’s earned income if the filer is married, and the number of qualified children on the tax return. Any child must either be under the age of 19 or be a full-time student under the age of 24 at the end of the year. Low-income earners between the ages of 25 and 64 who don’t have a qualifying child may also qualify.

    Earned income generally means income from working, such as W-2 wages and self-employment income.

    The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases until it reaches a plateau, where it remains constant (at the maximum amount) until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage; if income exceeds the top of the phase-out range, no credit is allowed.

    Computing the credit, like all things tax, is complicated, and the credit is actually determined using IRS tables that reflect the dollar amounts at which phaseout begins and ends. However, the chart below can help approximate the credit for 2015.

    Earned Income Tax Credit EITC 

    Example: A married couple with two children has earned income of $20,000 and a modified AGI of $21,000. If we multiply their earned income by their credit percentage ($20,000 x .40), we come up with $8,000. However, that exceeds the maximum credit of $5,548 for a married couple with two children, so their credit before any phaseout is $5,548. Since their modified AGI is less than the phaseout threshold, then their EITC is $5,548. Had their earned income been $10,000, then their credit would have been $4,000 ($10,000 x .40). If either their earned income or their modified AGI had exceeded $49,974, their EITC would have been totally phased out and they would not have gotten any credit.

    There is also a limit on investment income a taxpayer can have and qualify for the EITC. For 2015, that limit is $3,400. Thus if a taxpayer qualifies for EITC but has investment income in excess of $3,400, the taxpayer will not receive any EITC.

    Individuals that claim either the foreign earned income or foreign housing exclusion also will not qualify for the earned income credit.

    Members of the military can elect to treat all or none of their nontaxable combat pay as earned income for the purposes of computing the EITC. The calculation providing the larger EITC benefit can be used.

    Because the potential payout of this credit is so generous, it is the constant target of scammers, and in 2014 the government paid out nearly $18 billion in improper EITC payments. Besides scammers, the qualification for EITC is frequently contested between divorced parents who are both attempting to claim the same child in an effort to qualify for the EITC.

    The IRS is authorized to ban taxpayers from claiming the EITC for two years if it determines during an audit that they claimed the credit improperly due to reckless or intentional disregard of the rules. Last year, there were more than 67,000 two-year bans in effect. The ban lasts 10 years if credit was claimed in an earlier year due to fraud.

    The government wants those who are entitled to the credit to claim it, and so the IRS widely promotes the credit. However, the rules are quite complex and best addressed by a tax professional.

    If you have questions about how the EITC might apply to you, please get in touch with us for additional information. Please understand that a taxpayer who might not normally be required to file a return might still benefit from filing to claim the EITC.

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