Happy Holidays! Year-End Tax Saving Tips to Spend or Save for the Holidays

It looks like the end of the year is coming, and we are pretty sure many of you are still frantically shopping for gifts for your family and friends. Do you ever wish you had more money to spend for your friends and family, but just could not figure out how you can save more money?

Well have no fear! We are an Orange County CPA firm who will be here to provide tips on how you can cut tax spending to save or have more money to spend for you your loved ones.

Capital Gains and Dividends. The tax rate on qualified capital gains (net-long term gains) and dividends range from 0 – 20%, depending on the individuals income tax bracket.

STRATEGY:  Spikes in income, whether capital gain or other income, may push gains into either the 39.6 percent bracket for short-term gain or the 20% capital gains bracket. Spending the recognition of certain income between 2016 and 2017 may help minimize the total tax paid for the 2016 and 2017 tax years.

State and local sales tax deduction. The PATH Act made permanent the itemized deduction for state and local general sales taxes. That deduction may be taken in lieu of state and local income taxes when itemizing deductions.

STRATEGY: Generally IRS tables based upon federal income levels and a taxpayer’s number of departments are used for this optimal deduction. Taxpayers who wish to claim more than the table amounts must provide adequate substantiation.

Tuition and fees deduction. The PATH Act extended the above-the-line deduction for qualified tuition and related expenses for two years, for expenses paid before January 1, 2017. The maximum amount of the tuition and fees deduction is $4,000 for an individual whose AGI (Adjusted Gross Income) for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2000 for other individuals who’s AGI does not exceed $80,000 ($160,000 in the case of a joint return)

STRATEGY: Payments by year-end 2016 may be particularly critical to taking this deduction. There is some – but not unlimited – flexibility regarding the deductibility of tuition paid before a semester begins. As with the AOTC, the deduction is allowed for expenses paid during a tax year, in connection with an academic term beginning during the year or the first three months of the next year.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable non business energy property credit allowed to individuals, making it available or qualified energy improvements and property placed in service before January 1, 2017.

STRATEGY: Several overall limitations apply. A credit amount for qualified energy efficiency improvements equals 10 percent of the amount paid or incurred during the tax year and 100% of the amount paid or incurred for qualified energy property during the tax year. The maximum credit amount for qualified energy property varies depending on the type of property, further all nonbusiness energy property carries a $500 maximum lifetime credit cap.

Individual Shared Responsibility Payments. For 2016, the individual shared responsibility payment is the greater of 2.5% of house-hold income that is above the tax return filing threshold for the individual’s filing status or the individual’s flat dollar amount, which is $695 per adult and 347.50 per child, limited to a family maximum of $2,085, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2016.

STRATEGY: Open enrollment for coverage through the Health Insurance Marketplace for 2016 has closed. However, some qualifying life events may make an individual eligible for non-filing season special enrollment.

Medical expense deduction. Taxpayers who itemized deductions (for regular tax purposes) may claim a deduction for qualified reimbursed medical expenses to the extent those expenses exceed 10% of adjusted gross income (AGI), unless the tax payer falls within an age-based exception. Taxpayers (or their spouses) who are aged 65 or older before the close of the tax year, may apply the old 7.5% threshold for tax years but only through 2016.

STRATEGY: Tax payers who are age 65 or older may consider accelerating medical costs into 2016 if they want to itemize deductions since the AGI floor for deductible expense rise from 7.5% to 10% in 2017. For deductions by cash-basis taxpayers in general, including for purposes of the medical expense deduction, a deduction is permitted only in the year in which payment for services rendered is actually made.

 

A Smart Business Decision Maker = A Successful Entrepreneur

Many successful business leaders all share a common skill that most people do not posses. Although this skill comes in all forms and is dependent on the amount of opportunities given to them, they all still have to undergo a process whether it takes a long time to process or a very short amount of time. That skill, my fellow entrepreneurs is: Smart Business Decision-making. Every day people from all over the world make decisions. You may not realize it but you, the reader, just made the decision to read this article (Thanks by the way!). However, let’s take it to a business perspective; business leaders, (including yourself) “make dozen of decisions a day” that creates an impact to the success of their company while creating an influence factor to employees as well. “Developing such a skill requires a combination of education, experience, and intuition.”

Marci Martin, author of Business News Daily who wrote the article “How to Make Effective Business Decisions” has stated a great quote: “There are many things that influence how an individual makes decisions. They include emotions, perceived personal and professional risks and rewards, preparation through experience or education, deadlines, stress and a host of others. It is important to mitigate the irrational and embrace the rational.”

Many decisions always comes with a process, as mentioned above, there are many factors that come into play before coming up with a conclusion. Some of those decisions usually come from a “gut feeling” while others come from undergoing a long process of asking others, and a more common form would be the opportunity cost (Is it more beneficial to me than the cost?). As Martin mentioned, the “bottom line is that being an effective decision-maker requires practice.”

Gayle Abott, President of Strategic Alignment Partners, a human consulting firm, has implemented a four- point strategy to deploy whenever you must act:

–          Identify the problem.

–          Analyze the possible solutions

–          Evaluate the possibilities that are likely to bring you closer to your goal.

–          Make the decision.

However, as easy as this 4 point system sounds, this type of strategy does not come easily for any beginner. As Abott has said in Business News Daily, it takes years of practice to master this skill. Many people who have become masters did not simply start off as talented decision makers, they made many mistakes in the past, learned from them, and simply moved on. The most crucial part in any decision making in a business, is the ability to learn from them. It is not easy as you think it is because people still make the same mistake, whether it’d be motivated by an emotion, by influence, or by stubbornness. The reality is that, it will not be easy to become a smart business decision maker until you have made enough decisions to consider yourself a smart business decision maker. 

IRS eyes payroll tax avoidance tactics via S corporations

Payroll tax collection continues to vex the Internal Revenue Service despite several court cases that have resulted in rulings favorable for the IRS regarding unreasonably low compensation. A recent high profile case was David E. Watson, P.C. v. United States on which the Eighth Circuit ruled in 2012. Watson was an indirect partner in a CPA firm, practicing through an S corporation that paid him $24,000 of salary per year and between $175,000 and $203,000 in profit distributions. The court adjusted his compensation to $93,000.

It isn’t hard to see why shareholders of S corporations attempt to justify wage levels below what the IRS considers “reasonable compensation” (assuming the understated compensation is below the FICA wage base). Both the S corporation and employee save the 7.65% FICA and Medicare taxes on the wages not reported.

IRS finds widespread noncompliance by colleges and universities

The IRS published its final report concerning its Colleges and Universities Compliance Project, finding compliance issues related to unrelated business taxable income (UBTI) and compensation practices. The IRS conducted the study to find out why colleges and universities had so much unrelated business activity but owed so little tax and to examine their compensation practices. The IRS examined tax returns from 34 colleges and universities it selected from among 400 it surveyed by questionnaire. The examined schools were divided almost evenly between private and public institutions, with about two-thirds reporting enrollments greater than 15,000 students.

Unrelated business taxable income. An exempt organization, including exempt colleges and universities, must pay tax on income from an unrelated trade or business, defined as an activity not substantially related to the accomplishment of the organization’s exempt purposes, even if the income from the business is used to support those purposes. Losses from one activity can offset income from another; however, continuing losses can indicate a lack of profit motive, which would disqualify the activity’s losses from the netting process.

The IRS found that UBTI was underreported at 90% of the institutions examined, with a total understatement of more than $90 million from 30 unrelated activities. The majority of the activities with unreported UBTI were fitness and recreation centers, sports camps, advertising, facility rentals, arenas, and golf courses. Nearly half of the institutions had adjustments to UBTI from advertising and/or facility rentals, and about one-third had adjustments from fitness and recreation centers and sports camps, arenas, and/or golf courses. The report identified four primary reasons for understated UBTI: (1) lack of profit motive, (2) improper expense allocation, (3) misclassification of certain activities as exempt, and (4) miscalculated or unsubstantiated net operating losses.

Former H&R Block Manager Sentenced to Year in Prison for Identity Theft

Dubose, the former manager of an H&R Block outlet, pleaded guilty in March to one count of wire fraud and one count of filing false claims with the Internal Revenue Service. The court sentenced him to 12 months and one day on each count of the conviction, to be served concurrently

According to documents filed with the court, while working as a manager of an H&R Block Preparation store in Van Nuys, Calif., Dubose used his access to H&R Block records to obtain the personal identifying information, including the names, dates of birth and Social Security numbers, of H&R Block clients. Dubose then used the information to create and submit to the IRS at least 12 false and unauthorized 2011 tax returns, generating fraudulent tax refunds of at least $48,593.

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