Be aware of these four IRA rules

If you have an individual retirement account, you’re aware of how complicated the rules can get. Here are four to remember as you prepare your 2015 federal income tax return.

1. Are you searching for one more tax deduction? It’s not too late to contribute to your IRA and claim a deduction for 2015. Under current tax rules, you can establish and contribute to your IRA up until April 18, 2016 (April 19 if you live in Maine or Massachusetts). If the IRA is the traditional, tax-deductible kind, you can deduct that contribution on your 2015 federal income tax return. If you’re under age 50, the maximum contribution is $5,500. If you were 50 or older by December 31, 2015, you can contribute up to $6,500.

2. You can make a contribution to a traditional IRA and convert it to a Roth later. Although a conversion now will generate taxable income that’s reportable on next year’s federal tax return, qualifying withdrawals from the Roth will be tax-free when you retire. If your circumstances change, you can choose to “recharacterize” your new Roth as a traditional IRA by moving the funds back within a specified period. You also have the opportunity to “reconvert” the funds to a Roth again after a recharacterization.

3. If you turned 70½ in 2015, you’re now required to take an annual minimum distribution from your IRA (and, unless you’re still working, from other retirement plans also). If you chose to delay taking your first distribution last year, April 1, 2016, is an important deadline. That’s the last day you have to take your initial distribution or you’ll be subject to a 50% penalty on the amount you should have taken.

4. The age of 70½ also lets you benefit from the now-permanent tax break for making charitable contributions from your IRAs. While it’s too late to make a contribution for 2015, you can exclude direct transfers of up to $100,000 from your gross income this year. The donation counts as part of your required minimum distribution.

For more tax breaks related to IRAs and other retirement plans, contact our office.

Use taxes to reduce your tax

Are you planning to itemize on your 2015 federal income tax return? If so, you can claim a deduction for taxes paid. According to IRS statistics, taxes are the most frequently claimed itemized deduction, as well as the largest. But what kind of taxes can you deduct on your personal return?

State and local income taxes or general sales tax. You can choose whichever gives you the most benefit.

Real estate taxes. Deductions include taxes you pay on your home or other real property you own (including property owned in a foreign country). Remember to check closing statements when you buy or sell property. You can claim the portion of current real estate taxes you’re responsible for. However, if you agree to pay delinquent taxes the seller owed at the time of closing, that expense is considered part of your basis in the property.

Personal property taxes. These taxes are imposed annually on the value of property other than real estate. Certain motor vehicle registration fees fit this description.

Foreign income taxes. Caution: Instead of deducting these taxes, you have the option of taking a credit, which will reduce your tax bill dollar-for-dollar and may offer more benefit.

Federal estate tax. If you inherit certain assets and are required to report the income from those assets on your personal return, you may be able to deduct a portion of the federal estate tax paid.

Some taxes, such as self-employment taxes, are deductible elsewhere on your return. Other taxes are not deductible at all. Examples include marriage licenses, gift taxes, and Medicare taxes (including the 3.8% net investment income tax). Feel free to contact us if you have questions about the deductibility of a tax you paid during the year, or if you received a refund of a tax you deducted in a prior year. We’re here to help.

Do you have enough emergency savings?

A December 2015 survey by a consumer financial services company showed that 36% of the people who participated said they dealt with their most recent unexpected expense by using savings. Would you be part of that group? Here are tips for starting your “rainy day” fund.

Define how much emergency savings is enough. A good starting point is to plan for your emergency fund to cover three to six months of expenses. Another good starting point: Ask yourself how much you’ll need to cover minimum monthly expenses without resorting to credit cards or lines of credit. Your assessment of an adequate balance will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks, so the one-earner family generally will need to set aside more for emergencies.

Track how much you already have set aside. Include all sources in your accounting. For instance, some companies provide payment for accrued vacation and/or sick leave to laid-off employees. If your company provides this benefit and you maintain significant balances, you may not need as much in an emergency fund to help you weather an unexpected layoff.

Decide whether to pay off bills first. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns a much lower rate of interest.

Keep your funds liquid. Emergency money should be easy to get at. You don’t want to have to sell investments at a potential loss or pay withdrawal penalties in order to cover an unexpected hit to your finances. Look into savings or money market accounts as places to accumulate cash.

We can help you estimate how much to stash away in your emergency fund. Give us a call for help establishing a savings goal for those stormy days.

No need to itemize to claim these deductions

Are you part of the approximately 68% of taxpayers who IRS statistics say claim the standard deduction instead of itemizing? If so, you can still deduct some expenses on your 2015 federal income tax return.

  • Individual retirement account (IRA) contributions – For 2015, you may qualify to deduct up to $5,500 in contributions to a traditional IRA. That increases to $6,500 if you’re age 50 or older. Income limitations may apply in some cases. The same limits apply to Roth IRA contributions, which are not deductible.
  • Health Savings Account (HSA) contributions – HSAs are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you withdraw the money tax-free to pay unreimbursed medical expenses. The HSA contribution limit for 2015 is $3,350 for individuals and $6,650 for families. You can contribute an additional $1,000 when you’re age 55 and older.
  • Student loan interest and tuition fees – Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents. For 2015, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
  • Self-employment deductions – If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
  • Other deductions – Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Educators can deduct up to $250 for classroom supplies purchased in 2015.

Contact our office for more information on these and other deductions you may be entitled to claim on your 2015 return.

Depreciation breaks boost tax deductions

Did you buy equipment or other business assets during 2015? Here are the current rules for maximizing your tax deduction.

● Section 179. Under code Section 179, you can expense many types of otherwise depreciable property used in your business. Both new and used assets qualify for Section 179.

For 2015, the maximum amount you can expense is $500,000 of the cost of qualifying property you began to use during the year. The $500,000 is reduced when the cost of the property you purchased during the year exceeds $2,000,000. Your deduction may also be limited by the amount of your business income.

Planning tip: The Section 179 amounts are now permanent. Beginning in 2016, both will be adjusted annually for inflation.

● Bonus depreciation. In addition to Section 179, you can benefit from the 50% bonus depreciation deduction for tangible personal property that you purchased and placed in service during 2015. Bonus depreciation is generally available for new assets that have a useful life of 20 years or less.

Planning tip: The December “extenders” tax law made bonus depreciation available through 2019, though the deductible amount will decrease in 2018 and 2019.

Please contact us about the latest depreciation breaks available to your business.

Who can be your dependent?

You might believe a “dependent” is a minor child who lives with you. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you. Here’s an overview of the dependency exemption.

Exemptions and your taxable income. Each dependent deduction is worth $4,000 on your 2015 federal income tax return, and reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2015, the phase-out begins at $309,900 when you’re married filing jointly and $258,250 when you’re single.

Definition of a dependent. A dependent is a qualifying child or a qualifying relative. While there are specific rules, very broadly speaking, a dependent is someone who lives with you and who meets several tests, including the support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply.

Who can’t be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.

Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.

Three positive steps to financial well-being

While you’re gathering information to prepare your 2015 tax return, set aside time for a financial review. Here are steps to get started.

  • Compile a year-end list of your assets and debts and compare the list to last year. Are you gaining or losing ground? What actions can you take to improve your financial situation in 2016?
  • Review your insurance. Do you have disability insurance to replace take-home pay if you become incapacitated? What about life insurance – will the benefit provide enough cash to pay your family’s expenses in the event something happens to you or your spouse? Is your home protected with replacement value property insurance? What about insurance for automobile accidents or lawsuits?
  • Update your will and estate plan. What changed during 2015? Did you marry? Divorce? Have a child? Move to a new state? Receive an inheritance? All of these events can affect your planning. This year, you can leave up to $5,450,000 to your heirs with no federal estate tax liability. But that doesn’t mean you can ignore estate planning, which includes expressing your wishes for who will make decisions for you in times of emergencies as well as who will receive your assets.

For more suggestions, call us. We’re here to help.

Three tips to start the tax filing season

  • Check whether your children need to file a 2015 tax return. They’ll need to file if wages exceeded $6,300, self-employment income was over $400, or investment income exceeded $1,050. When income includes both wages and investment income, other thresholds apply.
  • Consider whether you’ll contribute to a Roth or traditional IRA. Since you have until April 18 to make a 2015 contribution (April 19 if you live in Maine or Massachusetts), you can schedule an amount to set aside from each paycheck for the next few months. The maximum contribution for 2015 is the lesser of your earned income for the year or $5,500 ($6,500 when you’re age 50 or older). Be sure to tell your bank or other trustee that these 2016 contributions are for 2015 until you reach the 2015 limit. You can then deduct these 2016 amounts on your 2015 tax return for a quicker tax benefit.
  • Do you need to file a gift tax return? For 2015, you may need to file a return if you gave gifts totaling more than $14,000 to someone other than your spouse. Some gifts, such as direct payments of medical bills or tuition, are not subject to gift tax. Gift tax returns are due at the same time as your federal income tax return.

Call us for more tips on getting ready for filing your 2015 income taxes.

Tax breaks extended retroactively; some are permanent

In mid-December, Congress renewed a long list of tax breaks known as “extenders” that have been expiring on an annual basis. This year many of the rules are retroactive to the beginning of 2015. You may be able to benefit from some of them as you prepare your 2015 federal income tax return.

In addition, the Protecting Americans from Tax Hikes Act of 2015, which was signed into law on December 18, 2015, makes some of the rules effective through December 31, 2016. Others are effective through 2019, and some are effective permanently. Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning for 2016 and future years.

Here’s an overview of selected provisions.

  • The rule allowing tax-free distributions from IRAs to charities is now permanent. When you’re age 70½ and over, this break lets you make a qualified distribution of up to $100,000 from your IRA to a charity.
  • If you or a family member is an eligible student, you may be able to claim a tuition and fees above-the-line deduction for qualified higher education expenses for 2015 and 2016.
  • The deduction for up to $250 of out-of-pocket educator expenses is now permanent. It will be indexed for inflation beginning with 2016 tax returns. You claim this deduction “above the line,” meaning it’s available even if you don’t itemize.
  • The optional itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes is now permanent.
  • The maximum Section 179 deduction for qualified business property, including off-the-shelf software, is now permanently set at $500,000 (subject to a taxable income limitation). The deduction is phased out above a $2,000,000 threshold.
  • The additional first-year depreciation deduction, known as “bonus depreciation,” is generally extended through 2019 when you buy qualified business property. You can claim this deduction in conjunction with Section 179.

Please call for additional information about the new law.

New rules relax ABLE account requirements

Are you planning to set up an “Achieve a Better Life Experience” (ABLE) account? A recent IRS notice and changes enacted in a tax law passed in December 2015 can help ease the administrative requirements. ABLE accounts are tax-advantaged accounts designed to help you build savings to care for yourself or a loved one with disabilities while maintaining eligibility for benefit programs such as Medicaid. Generally, you’ll qualify for an ABLE account if your disability occurred before age 26.

Call us for details about the latest changes.