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: firstname.lastname@example.org.
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February 1 – 1099s Due to Service Providers
If you are a rental property or business owner read along. If paid $600 or more for the services of individuals (other than employees) during 2015, you are required to provide Form 1099 to those workers by February 1. “Services” can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 29, 2016 (March 31, 2016 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call Dagley & Co. for preparation assistance.
Payments that may be covered include the following: Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish, Compensation for workers who are not considered employees (including fishing boat proceeds to crew members), Dividends and other corporate distributions, Interest, Amounts paid in real estate transactions, Rent, Royalties, Amounts paid in broker and barter exchange transactions, Payments to attorneys, Payments of Indian gaming profits to tribal members, Profit-sharing distributions, Retirement plan distributions, Original issue discount, Prizes and awards, Medical and health care payments, Debt cancellation (treated as payment to debtor), and Cash payments over $10,000.
February 1 – W-2 Due to All Employees
All employers need to give copies of the W-2 form for 2015 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.
February 1 – File Form 941 and Deposit Any Undeposited Tax
File Form 941 for the fourth quarter of 2015. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
February 1 – File Form 943
All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2015. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 1 – W-2G Due from Payers of Gambling Winnings
If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2015.
February 1 – File Form 940 – Federal Unemployment Tax
File Form 940 (or 940-EZ) for 2015. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 1 – File Form 945
File Form 945 to report income tax withheld for 2015 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 10 – Non-Payroll Taxes
File Form 945 to report income tax withheld for 2015 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.
February 10 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the fourth quarter of 2015. This due date applies only if you deposited the tax for the quarter in full and on time.
February 10 – Certain Small Employers
File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2015. This due date applies only if you deposited the tax for the year in full and on time.
February 10 – Federal Unemployment Tax
File Form 940 for 2015. This due date applies only if you deposited the tax for the year in full and on time.
February 16 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in January.
February 16 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in January.
February 29 – Payers of Gambling Winnings
File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2015. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to March 31. The due date for giving the recipient these forms was February 1.
February 29 – Informational Returns Filing Due
File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2015. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see February 1.)
February 29 – All Employers
File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2015. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to March 31. The due date for giving the recipient these forms was February 1.
February 29 – Large Food and Beverage Establishment Employers
File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to March 31.
February 29 – Farmers and Fishermen
File your 2015 income tax return (Form 1040) and pay any tax due. However, you have until April 18 to file if you paid your 2015 estimated tax by January 15, 2016.
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If you’re struggling with your money, then no doubt you may be excited about your upcoming potential tax refund.
However, that excitement may be premature if you have outstanding federal or state debts. The Treasury Department’s Bureau of the Fiscal Service (BFS) issues federal tax refunds, and Congress authorizes BFS to reduce your refund through its Treasury Offset Program (TOP) to pay:
- Past-due child and parent support;
- Federal agency non-tax debts;
- State income tax obligations; or
- Certain unemployment compensation debts owed to a state.
If you owe a debt that’s past due, it can reduce your federal tax refund and all or part of your refund may go to pay your outstanding federal or state debt if it has been submitted for tax refund offset by an agency of the federal or state government.
If you have an outstanding debt and want to be proactive, you can contact the agency with which you have a debt to determine if your debt was submitted for a tax refund offset. You may call BFS’s TOP call center at 800-304-3107 or TDD 866-297-0517, Monday through Friday, 8:30 a.m. to 6 p.m. EST.
If your debt was submitted for offset, BFS will reduce your refund as needed to pay off the debt and send it to the agency you owe. Any portion of your remaining refund after offset is issued in a check or is direct deposited as originally requested on the return.
If you choose to wait and see what happens when you file your return, BFS will send you a notice if an offset occurs. If you wish to dispute the amount taken from your refund, you will have to contact the agency that submitted the offset claim. It will be shown on the notice you will receive from the BFS.
If you filed a joint tax return, and only one spouse is responsible for the debt, the other spouse may be entitled to part of or all the refund. To request the refund of the spouse that is not responsible for the offset, you can file Form 8379, Injured Spouse Allocation. The benefits provided under the injured spouse allocation will generally not apply if you reside in a community property state.
Please contact Dagley & Co. if have you have questions about refund offsets. You’ll find our information at the bottom of this page.
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When it comes to saving for your children’s education, the tax code provides two primary advantages. We frequently get questions about the differences between the programs and about which program is best suited for a family’s particular needs.
The Coverdell Education Savings Account and the Qualified Tuition Plan (frequently referred to as a Sec 529 Plan) are similar; neither provides tax-deductible contributions, but both plans’ earnings are tax-free if used for allowable expenses, such as tuition. Therefore, with either plan, the greatest benefit is derived by making contributions to the plan as soon as possible—even the day after a child is born—so as to accumulate years of investment earnings and maximize the benefits. However, that is where the similarities end, and each plan has a different set of rules.
Coverdell Savings Accounts only allow a total annual maximum contribution of $2,000. The contributions can be made by anyone, including the beneficiary, so long as the contributor’s adjusted gross income is not high enough to phase out the allowable contribution. (The phase-out threshold is $190,000 for married contributors filing jointly and $95,000 for others.) Unless the beneficiary of the account is a special needs student, the funds must be withdrawn prior to age 30. The funds can be used for kindergarten through post-secondary education. Allowable expenses generally include tuition; room, board, and travel expenses required to attend school; books; and other supplies. Tutoring for special needs students is also allowed. Funds can be rolled over from one beneficiary to another in the same family. Although the funds can be used starting in kindergarten, the chances are that not enough of earnings will have been accumulated by that time to provide any significant benefit.
On the other hand, state-run Sec 529 plan benefits are limited to postsecondary education, but they allow significantly larger amounts to be contributed; multiple people can each contribute up to the gift tax limit each year. This limit is $14,000 for 2015, and it is periodically adjusted for inflation. A special rule allows contributors to make up to five years of contribution in advance (for a total of $70,000 in 2015).
Sec. 529 Plans allow taxpayers to put away larger amounts of money, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.
Which plan (or combination of plans) is best for your family depends on a number of issues, including education goals, the number and ages of your children, the finances of your family and of any grandparents or other relatives willing to help, and a number of other issues. For assistance in establishing education savings plans, please get in touch with us at Dagley & Co.
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Each year, the IRS reports about $1 billion in unclaimed refunds for individuals who did not file a tax return. The plot thickens: If you are one of the over 1 million individuals who received an Obamacare health insurance premium subsidy last year and haven’t yet filed your 2014 tax return, you are risking your opportunity to receive a subsidy in 2016. That’s right: Doing your taxes can mean more money in your pocket!
The subsidy, which is paid by the government to your insurer to reduce the premiums you owe, is actually an advance payment of the premium tax credit (PTC) based upon your “estimated” income for the year. Your actual PTC is based on your “actual” income as determined on your tax return. If the advance PTC (subsidy) was less than the actual PTC as determined on your tax return, you are entitled to the difference. On the other hand, if your actual PTC is less than the advance amount, you may owe Uncle Sam some or all of the difference.
Whether you are entitled to additional PTC or owe some back cannot be determined without filing your return. The IRS estimates that 710,000 individuals who received an advance PTC have yet to file a 2014 return or did not file an extension. Add that to the approximately 360,000 taxpayers who received an advance PTC and have filed an extension, and there are over 1 million individuals who need to reconcile their 2014 PTC who have not yet filed.
Because the Marketplace will determine eligibility for advance PTC for the 2016 coverage year during the fall of 2015, if you haven’t filed your 2014 return yet, you can substantially increase your chances of avoiding a gap in receiving this help if you file your 2014 tax return as soon as possible, even if you have an extension until October 15th.
Navigating the complicated Obamacare forms developed by the IRS is difficult for many taxpayers, and most seek professional assistance. The IRS is currently sending letters to individuals who received advance PTC subsidies and have yet to file. The letter encourages taxpayers to file within 30 days of the date of the letter in order to avoid a gap in receiving advance payments of the PTC in 2016.
It is never a good idea not to file, even if you owe and can’t pay. The IRS will get more aggressive as time goes on. So whether you don’t feel you can do your own return, are afraid you may owe some of the PTC back, or think you may be subject to penalties for failing to have health insurance coverage, we encourage you to get in touch with us at Dagley & Co so we can try our best to straighten everything out for you. There are penalty exceptions for being uninsured, or if you owe a PTC repayment there’s a possibility it can be reduced, and it may all work out OK. Procrastinating isn’t going to change the outcome and could put your 2016 advance PTC at risk.
Who knows; you may even be entitled to more PTC and a refund.
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