“Do I have to file a tax return?” is a question heard a lot during this time of year. The answer to this popular question is a lot more complicated than many would think. To understand, one must realize the difference between being required to file a tax return vs. the benefit of filing a tax return even when it’s not required to file. We’ve put together a comprehensive description for your better understating:
When individuals are required to file-
- Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any).
- Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
- Taxpayers are also required to file when they are required to repay a credit or benefit. For example, if a taxpayer acquired health insurance through a government marketplace and received advanced premium tax credit (APTC) they are required to file a return whether or not they are otherwise required to file. A return is required in order to reconcile the APTC with the premium tax credit they entitled based upon their household income for the year. So generally if you receive a 1095-A you are required to file.
- Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2016 – Filing Thresholds
Filing Status Age Threshold
Single Under Age 65 $10,350
Age 65 or Older 11,900
Married Filing Jointly Both Spouses Under 65 $20,700
One Spouse 65 or Older 21,950
Both Spouses 65 or Older 23,200
Married Filing Separate Any Age 4,050
Head of Household Under 65 $13,350
65 or Older 14,900
Qualifying Widow(er) Under 65 $16,650
with Dependent Child 65 or Older 17,900
When it is beneficial for individuals to file-
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
- Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior over-payment. The only way to recover the excess is to file a return.
- Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
- Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child.
- American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of post-secondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
- Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.
For more information about filing requirements and your eligibility to receive tax credits, please contact Dagley & Co. for more information. We recommend not procrastinating, no matter what your stance on filing may be!
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Are you a small business owner, or work within a small business’s accounting department? We have your rundown of some changes that need to be considered when preparing your 2016 and 2017 returns. As of December 2015, legislation passed the “Protecting Americans from Tax Hikes” Act which extended a number of business provisions and made some permanent changes. As you start to file 2016’s taxes, please be aware of these provisions, as they can have a significant impact on you business’s taxes:
Section 179 Expensing – The Internal Revenue Code, Sec. 179, allows businesses to expense, rather than depreciate, personal tangible property other than buildings or their structural components used in a trade or business in the year the property is placed into business service. The annual limit is inflation-adjusted, and for 2017, that limit is $510,000, which is unchanged from 2016. The limit is reduced by one dollar for each dollar when the total cost of the qualifying property placed in service in any given year exceeds the investment limit, which is $2,030,000 for 2017, a $20,000 increase from the 2016 amount.
In addition to personal tangible property, the following are included in the definition of qualifying property for the purposes of Sec. 179 expensing:
- Off-the-Shelf Computer Software
- Qualified Real Property – The term “qualified real property” means property acquired by purchase for use in the active conduct of a trade or business, which is normally depreciated and is generally not property used for lodging except for hotels or motels. Qualified retail property includes:
- Qualified leasehold improvement property,
- Qualified restaurant property, and
- Qualified retail improvement property.
Bonus Depreciation – Bonus depreciation is extended through 2019 and allows first-year depreciation of 50% of the cost of qualifying business assets placed in service through 2017. After 2017, the bonus depreciation will be phased out, with the bonus rate 40% in 2018 and 30% in 2019. After 2019, the bonus depreciation will no longer apply. Qualifying business assets generally include personal tangible property other than real property with a depreciable life of 20 years or fewer, although there are some special exceptions that include qualified leasehold property. Generally, qualified leasehold improvements include interior improvements to non-residential property made after the building was originally placed in service, but expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework of the building do not qualify.
In addition, the bonus depreciation will apply to certain trees, vines and plants bearing fruits and nuts that are planted or grafted before January 1, 2020.
Vehicle Depreciation – The first-year depreciation for cars and light trucks used in business is limited by the so-called luxury-auto rules that apply to highway vehicles with an unloaded gross weight of 6,000 pounds or less. The first-year depreciation amounts for cars and small trucks change slightly from time to time; they are currently set at $3,160 for cars and $3,560 for light trucks. However, a taxpayer can elect to apply the bonus depreciation amounts to these amounts. The bonus-depreciation addition to the luxury-auto limits is $8,000 through 2017, after which it will be phased out by dropping it to $6,400 in 2018 and $4,800 in 2019. After 2019, the bonus depreciation will no longer apply.
New Filing Due Dates – There are some big changes with regard to filing due dates for a variety of returns. Many of these changes have been made to combat tax-filing fraud. The new due dates are effective for tax years beginning after December 31, 2015. That means the returns coming due in 2017.
- Calendar Year: The due date for 1065 returns for the 2016 calendar year will be March 15, 2017 (the previous due date was April 15).
- Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year partnerships).
- Calendar Year: 2016 calendar year 1120-S returns will be due March 15, 2017 (unchanged).
- Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year S Corps).
- Calendar Year: The due date for Form 1120 returns for the 2016 calendar year will be April 18, 2017 (the previous due date was March 15). Normally, calendar-year returns will be due on April 15, but because of the Emancipation Day holiday that is observed in Washington, D.C., the 2017 due date is the 18th.
- Fiscal Year: Due the 15th day of the 4th month after the close of the year, a month later than in the past (exception: if fiscal year-end is June 30, the change in due date does not apply until returns for tax years beginning after December 31, 2025).
- Extension: 6 months. (Exceptions:  5 months for any calendar-year C corporation beginning before January 1, 2026, and  7 months for June 30 year-end C corps through 2025.) Thus, the extended due date for a 2016 Form 1120 for a calendar-year C Corp will be September 15, 2017.
W-2s, W-3s and 1099-MISC reporting non-employee compensation –
- Due Date: For 2016 W-2s, W-3s, and Forms 1099-MISC reporting non-employee compensation, the due date for filing the government’s copy is January 31, 2017 (the previous due date was February 28 or March 31 if filed electronically). The due date for providing a copy to the employee or independent contractor remains January 31.
- Extension – The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases in which the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances
Work Opportunity Tax Credit (WOTC) – Employers may elect to claim a WOTC for a percentage of first-year wages, generally up to $6,000 of wages per employee, for hiring workers from a targeted group. First-year wages are wages paid during the tax year for work performed during the one-year period beginning on the date the target-group member begins work for the employer.
This credit originally sunset in 2014, but the PATH Act retroactively extended the credit for five years through 2019.
- Generally, the credit is 40% of first-year wages (not exceeding $6,000), for a maximum credit of $2,400 (0.4 x $6,000).
- The credit is reduced to 25% for employees who have completed at least 120 hours but fewer than 400 hours of service for the employer. No credit is allowed for an employee who has worked fewer than 120 hours.
- The legislation also added qualified long-term unemployment recipients to the list of targeted groups, effective for employees beginning work after December 31, 2015.
Research Credit – After 21 consecutive years of extending the research credit year by year, the PATH Act made it permanent and made the following modifications to the research credit:
- For years after December 31, 2015, small businesses (average of $50 million or less in gross receipts in the prior three years) can claim the credit against the alternative minimum tax.
- For years after December 31, 2015, small businesses (less than $5 million in gross receipts for the year the credit is being claimed and no gross receipts in the prior five years) can claim up to $250,000 per year of the credit against their employer FICA tax liability. Effectively, this provision is for start-ups.
What is in the future?
With the election of a Republican president and with a Republican majority in both the House and Senate, we can expect to see significant tax changes in the near future. President-elect Trump has indicated that he would like to see the Sec. 179 limit significantly increased and the top corporate rate dropped to 15%. Watch for future legislation once President-elect Trump takes office this Friday.
Contact us at Dagley & Co. if you have any questions or concerns regarding your 2016’s tax returns.
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Did your business utilize an independent contractor in 2016? Did you pay him/her $600 or more during the calendar year? If so, you are required to issue him/her a Form 1099-MISC. The purpose of this form is to avoid penalties and the possibility of losing the deduction for his/her labor and expenses in an audit. Different from last year, the IRS moved up the filing due date to January 31, 2017.
In addition to being used to report payments to independent contractors, Form 1099-MISC is also used to report payments made by a business for rents and royalties and to attorneys for legal services, among others. If there are no independent contractor payments to report, the 2016 1099-MISC issued for other payments continues to be due to the IRS by the normal due date of February 28, 2017. However, where both independent contractor and other payments are being reported, the January 31 due date should be observed so that late filing penalties are avoided regarding the independent contractor payments.
It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual that you need to file the 1099-MISCs for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.
IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file 1099s for your vendors. It also provides you with verification that you have complied with the law in case the vendor gives you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 before you engage in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalty for failure to file the required informational returns is substantial and is $260 per informational return. The penalty is reduced to $50 if a correct but late information return is filed not later than the 30th day after the January 31, 2017, required filing date, or it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2017. If you are required to file 250 or more information returns, you must file them electronically.
Please note: To avoid penalties, all forms must be sent to the IRS by January 31, 2017.
Dagley & Co. is here to prepare your 1099 for submission. We recommend using this 1099 worksheet to provide us with the information needed to prepare your 1099.
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The Internal Revenue Service announced the adjusted optional standard mileage rates for 2017. These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. For those who do not know, the change in rates year-over-year is due to inflation.
Standard mileage rates for the use of a car (or a van, pickup or panel truck) are:
- 53.5 cents per mile for business miles driven (including a 25-cent-per-mile allocation for depreciation). This is down from 54.0 cents in 2016;
- 17 cents per mile driven for medical or moving purposes. This is down from 19 cents in 2016; and
- 14 cents per mile driven in service of charitable organizations.
The standard mileage rate for a business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by congressional action) and has been 14 cents for over 15 years.
Important Consideration: The 2017 rates are based on 2016 fuel costs, which were at a historic low. On top of that, OPEC has decided to cut production in an effort to drive up fuel costs. The Automobile Club has predicted an increase in fuel prices in the near future. Based on the potential for substantially higher gas prices in 2017, it may be appropriate to consider switching to the actual expense method for 2017, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that option is available for 2017.
Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension of the bonus depreciation though 2019 may make using the actual expense method a worthwhile consideration in the first year the vehicle is placed in service. The bonus depreciation allowance adds an additional $8,000 to the maximum first-year depreciation deduction of passenger vehicles and light trucks that have an unloaded gross vehicle weight of 6,000 pounds or less.
However, the standard mileage rates cannot be used if the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) has been used in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.
Employer reimbursement – Where employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.
Employees whose actual employment-related business mileage expenses exceed the employer’s reimbursement can deduct the difference on their income tax return as a miscellaneous itemized deduction subject to the 2%-of-AGI floor. However, an employee who leases an auto and is reimbursed using the mileage allowance method can’t claim a deduction based on actual expenses unless he does so consistently beginning with the first business use of the auto.
Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the luxury auto depreciation limit rules; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $25,000) and the bonus depreciation (the Section 179 deduction must be applied first and then the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle early, before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.
If you have questions related to your vehicle or the documentation required, please give Dagley & Co. a call. We are located in Washington, D.C. but our clients are around the world.
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JANUARY 2017 INDIVIDUAL DUE DATES
January 3 – Call for Your Tax Appointment –
It’s the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so ASAP.
January 10 – Report Tips to Employer –
If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.
January 17 – Individual Estimated Tax Payment Due –
It’s time to make your fourth quarter estimated tax installment payment for the 2016 tax year.
January 17 – Farmers & Fishermen Estimated Tax Payment Due – If you are a farmer or fisherman whose gross income for 2015 or 2016 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2016 using Form 1040-ES. You have until April 18, 2017 to file your 2016 income tax return (Form 1040). If you do not pay your estimated tax by January 17, you must file your 2016 return and pay any tax due by March 1, 2017 to avoid an estimated tax penalty.
Contact Dagley & Co. with any questions, or concerns about January’s due dates.
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2017 green light alert! Congress has approved the 21st Century Cures Act, a provision allowing small employers to reimburse their employees for medical expenses under a health reimbursement arrangement (without being liable for the draconian, $100 per day penalty for violating the Affordable Care Act’s rules).
Background: Stand-alone HRAs do not meet two key requirements of the ACA, as they:
- Limit the dollar amount of the insured person’s annual benefits and
- Fail to provide certain preventive-care services without requiring cost-sharing.
As a result, under the IRS’ interpretation of the ACA, employers are subject to a $100 per day (maximum $36,500 per year) excise tax penalty per employee.
New Law: Effective January 1, 2017, under the 21st Century Cures Act, qualified small employers that have an average of fewer than 50 full-time employees (including full-time-equivalent employees) and that maintain a qualified small-employer HRA will be exempt from the penalty. Under this act, a qualified small employer is one that:
- Employs an average of fewer than 50 full-time employees (including full-time-equivalent employees) and does not offer a group health plan to its employees. The number of full-time-equivalent employees is determined by adding up all the hours that part-time employees worked in a given month and dividing by 120.
- Provides the HRA on the same terms to all eligible employees. Eligible employees all those except:
- Those who have not completed 90 days of service,
- Those who have not attained the age of 25,
- Part-time workers (generally those working an average of less than 30 hours per week),
- Seasonal workers (generally those employed for 6 months or fewer during the year),
- Those covered by a collective bargaining unit, and
- Certain nonresident aliens.
- Entirely funds the HRA (i.e., no salary-reduction contribution is made to the HRA).
- Only reimburses the employees after being provided with proof of their medical expenses.
- Limits reimbursements to $4,950 ($10,000 where the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016.
Any medical-expense reimbursements that an employee receives from a qualifying HRA are excluded from that employee’s income.
If you have questions regarding this new topic effective January 1, 2017, please give Dagley & Co. a call at 202-417-6640.
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Your last day you may make a tax-deductible purchase, pay a tax-deductible expense or make tax-deductible charitable contributions for 2016 is this Saturday, Dec. 31.
That still gives you time to make charitable contributions, pay deductible taxes, and make business acquisitions before year-end. However, making a last-minute purchase of business equipment isn’t enough to be able to deduct the cost of the equipment – you also must place that equipment into service before year’s end. This means you can’t take a deduction on your 2016 return if you take delivery of the equipment after the end of the year, even if you paid for the item in 2016.
A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. Contributions you make by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution.
If you pay your taxes by check and your financial institution honors the check, the day you mail or deliver the check is the date of payment. If you use a pay-by-phone account (such as electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of the tax payment.
Purchases, tax payments or contributions charged to your credit card are deemed purchased when the charge is made, regardless of when you pay the credit card company.
Wishing you a happy holidays and a happy New Year. At Dagley & Co., we are looking forward to assisting you with your tax preparation needs during the coming tax season.
As always, give us a call at (202) 417-6640 with any questions.
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Like most people realize, taking ownership of a stock comes with its ups and downs. Occasionally, you might pick one that unfortunately declines in value. There’s nothing really we can do about this. Sometimes even, when the issuing company goes out of business, a security can become worthless. Dagley & Co. advises you to take notice of all stock shares you own before the end of the year.
Gains and losses for securities are not recognized for tax purposes until the securities are sold or become worthless. If the security is sold for a loss, the date of loss is easily determined since it is the sale date. However, for worthless stocks, it is not that easy to determine the date of loss, and taxpayers cannot just pick the year they want to take the loss.
The IRS says a stock is worthless when a taxpayer can show that the security had value at the end of the year preceding the deduction year and that an identifiable event caused a loss in the deduction year. Just because an issuing company has filed bankruptcy does not necessarily mean its stock is worthless in that year. The company could be in reorganization, or the stocks might not be worthless until a later year.
Whatever you do, don’t wait until it’s too late to take your loss. If the IRS challenges the loss and the security is found to have become worthless in an earlier year, the current year’s loss will be denied. Your only recourse at that point is to amend your prior year’s returns to claim your loss, provided the three-year statute of limitation has not expired. If the loss is claimed too early, the IRS will also deny it (making you wait until a subsequent year when the stock actually becomes worthless).
Talk to your broker before the end of the year if you have holdings that have lost all, or nearly all, of their value and you want to be able to claim your investment in them as a loss on your 2016 return. Most brokerage firms will purchase worthless stock for a nominal amount (one cent) just to provide closure for their clients. This is probably the best solution for tax purposes. The sale will appear on Form 1099-B issued by the broker, and then you won’t have to debate with the IRS over when the stock became worthless.
As a reminder, losses from sales of capital assets such as stock are first used to offset any capital gains on the return for the year of the sale. If the amount of the gain isn’t enough to absorb all of the losses, up to $3,000 ($1,500 if married filing separate) can be used to offset other types of income. If there is still capital loss remaining, it is carried forward to the next tax year and, if necessary, to future years, until it is used up.
If you have questions related to the tax treatment of stock sales, please contact Dagley & Co. at (202) 417-6640.
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