Anderson ZurMuehlen Blog

Turning Next Year’s Tax Refund into Cash in Your Pocket Now

 

Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.

Reasons to modify amounts

It’s particularly important to check your withholding and/or estimated tax payments if:

  • You received an especially large 2016 refund,
  • You’ve gotten married or divorced or added a dependent,
  • You’ve purchased a home,
  • You’ve started or lost a job, or
  • Your investment income has changed significantly.

Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.

Making a change

You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.

While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.

If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us.

©2017

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Do You Know the Tax Implications of Your C Corp.’s Buy-Sell Agreement?

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand.

Buy-sell basics

A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used.

Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.

Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares.

Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.

C corp. tax consequences

A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger corporate alternative minimum tax.

Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.

Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.

Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so.

For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.

©2017

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Individual Dax Calendar: Key Deadlines for the Remainder of 2017

While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

  • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
  • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15

  • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2

  • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 16

  • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
  • Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
  • File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.

Contact us today.

©2017

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Update on Home Mortgage Interest Deductions

If you own a home with a mortgage, you should receive an IRS form from your lender each year with information that is used to claim an itemized deduction for qualified residence interest. For 2016, that form should include additional information that could trigger unwanted attention from the IRS. Here’s what you should know about the IRS rules that apply to home mortgage interest deductions and the changes in the IRS mortgage interest reporting form.

IRS Rules for Deducting Home Mortgage Interest

Unlike most other types of personal interest, home mortgage interest that meets the definition of “qualified residence interest” can be claimed as an itemized deduction on your federal income tax return. Here’s a closer look at the terminology underlying this deduction.

A qualified residence includes your principal residence and up to one additional personal residence. If you own two or more additional residences, you can specify which one is treated as the second residence for each tax year for the purpose of applying the qualified residence interest rules.

Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”

Acquisition debt is debt that is:

  • Incurred to acquire, construct, or substantially improve a qualified residence, and
  • Secured by a qualified residence.

Home equity debt is debt (other than acquisition debt) that is secured by a qualified residence. Unlike acquisition debt, the proceeds from home equity debt can be used for any purpose without affecting the deductibility of the interest under the regular tax rules. However, interest on home equity debt is deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence.

Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.

Basic Reporting Requirements

By law, home mortgage lenders must provide certain information each year to borrowers on Form 1098, “Mortgage Interest Statement.” The IRS also receives a copy of this form, which includes the following information:

  • The name and address of the borrower,
  • The amount of interest received by the lender from the borrower during the previous calendar year, and
  • The amount of mortgage points received by the lender from the borrower during the previous calendar year and whether such points were paid directly by the borrower.

The IRS also may require additional information to be reported on Form 1098. For instance, IRS regulations require Form 1098 to include the borrower’s taxpayer identification number (TIN), which is the borrower’s Social Security Number if he or she is a citizen.

Recent Legislation Adds New Requirements

For Forms 1098 issued to payers after December 31, 2016, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 added the following new information reporting requirements:

  • The mortgage origination date,
  • The outstanding principal balance, and
  • The address of the property that secures the mortgage (or a description if the property doesn’t have an address).

Home mortgage lenders must report the amount of the outstanding mortgage principal as of the beginning of the calendar year for which the Form 1098 is provided. Knowing the outstanding mortgage principal balance allows the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt.

Knowing the address of the property securing the mortgage allows the IRS to more easily identify taxpayers who attempt to claim mortgage interest deductions for more than two residences.

Effect on 2016 Tax Returns

Your mortgage lender should have included this additional information on the 1098 forms that were issued to you earlier this year. Those forms report information for calendar year 2016, and the IRS can use the additional information to check home mortgage interest deductions claimed on your 2016 federal income tax return. Those deductions present a potentially enticing audit target, because they cost the federal government over $300 billion of tax revenue each year.

Based on the additional information reported on your Form 1098 for 2016, the IRS will know if you claim mortgage interest deductions for more than two residences or interest deductions for more than $1.1 million of combined acquisition debt and home equity debt. These issues could trigger an audit — and result in an unfavorable outcome.

You also may raise a red flag if the amount of your qualified residence interest deduction differs from the combined mortgage interest reported on your Form(s) 1098. This sometimes legitimately happens if, for example, you have more than $1.1 million of combined acquisition debt or own more than two homes.

Get It Right

The bottom line is that the IRS now has the information to monitor qualified residence interest deductions more closely than in previous years. So, it’s important to understand the rules and calculate your deduction carefully.

Your tax advisor can help you comply with the IRS rules, including amending previous returns that may have been filed with incorrect information. Although the rules on qualified residence interest may seem straightforward, there are some lesser-known nuances that could affect the amount you can write off.

©2017

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A Timely Postmark On Your Tax Return May Not Be Enough to Avoid Late-Filing Penalties

Because of a weekend and a Washington, D.C., holiday, the 2016 tax return filing deadline for individual taxpayers is Tuesday, April 18. The IRS considers a paper return that’s due April 18 to be timely filed if it’s postmarked by midnight. But dropping your return in a mailbox on the 18th may not be sufficient.

An example

Let’s say you mail your return with a payment on April 18, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared.

You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

Avoiding penalty risk

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

  • DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope,
  • FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
  • UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.

Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.

Another option

If you’re concerned about meeting the April 18 deadline, another option is to file for an extension. If you owe tax, you’ll still need to pay that by April 18 to avoid risk of late-payment penalties as well as interest.

If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.

We can help you determine if filing for an extension makes sense for you — and help estimate whether you owe tax and how much you should pay by April 18.

 

©2017

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Saving Tax with Home-Related Deductions and Exclusions

 

Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:

Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

©2017

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Remember the New FBAR Filing Deadline

Do you have an interest in — or authority over — a foreign financial account? If so, the IRS wants you to provide information about the account by filing a form called the “Report of Foreign Bank and Financial Accounts” (FBAR).

The annual deadline for filing FBARs has been changed. It now coincides with the tax filing deadlines for individuals, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. So, for accounts held in 2016, you must generally file FBARs by April 18, 2017. (Formerly, the deadline was June 30, excluding weekends and holidays.)

Important note: If you fail to meet the annual FBAR due date, the Financial Crimes Enforcement Network (FinCEN) will grant an automatic extension to October 15. Accordingly, specific requests for this extension aren’t required.

Reporting Requirements

FBARs are not filed with federal tax returns. Each year, citizens and resident aliens of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file an FBAR form electronically with the FinCEN if:

1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts, and

2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

An individual who jointly owns an account with a spouse may file a single FBAR report as an individual. FBARs may be required even if the foreign account doesn’t produce any taxable income.

Taxpayers also may be subject to FBAR compliance if they file an information return related to certain foreign corporations, foreign partnerships, foreign disregarded entities, or transactions with foreign trusts and receipt of certain foreign gifts. Some individuals are exempt, however.

Exceptions to the Rules

FBAR filing exceptions are available for the following U.S. taxpayers or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses,
  • United States persons included in a consolidated FBAR,
  • Correspondent/nostro accounts,
  • Foreign financial accounts owned by a governmental entity,
  • Foreign financial accounts owned by an international financial institution,
  • IRA owners and beneficiaries,
  • Participants in and beneficiaries of tax-qualified retirement plans,
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account,
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust), and
  • Foreign financial accounts maintained on a United States military banking facility.

Important note: Filers living abroad may coordinate FBAR filing with their tax return deadline (June 15, 2017).

Penalties for Noncompliance

Take the FBAR requirement seriously. Failing to file an FBAR can result in the following penalties if assessed after August 1, 2016, and associated violations occurred after November 2, 2015:

  • An inflation-adjusted civil penalty of as much as $12,459 per violation, if the failure wasn’t willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of: 1) 50% of the account, or 2) $124,588 per violation, if the failure to report was willful.
  • Criminal penalties and time in prison.

The IRS states that the FBAR “is a tool to help the U.S. government identify persons who may be using foreign financial accounts to circumvent U.S. law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.”

Beyond FBARs

Another initiative to combat tax fraud using offshore accounts is the Foreign Account Tax Compliance Act (FATCA). It led to the creation of Form 8938, “Statement of Specified Foreign Financial Assets.” This form must be attached to your federal income tax return each year if your specified foreign financial assets exceed these reporting thresholds:

  • For unmarried taxpayers living in the United States, the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • For married taxpayers filing a joint income tax return and living in the United States, the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
  • For married taxpayers filing separate income tax returns and living in the United States, the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Different reporting rules and limits apply for taxpayers living abroad. Form 8938 covers an expanded list of foreign assets not covered by FBAR. And filing Form 8938 does not exempt you from having to file an FBAR.

The penalty for failing to file Form 8938 is $10,000, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to a transaction related to the nondisclosed assets can also be imposed.

For Assistance

Consult with a tax professional if you have an interest in — or authority over — a foreign account. Your tax advisor can ensure you meet the requirements for reporting foreign accounts and help avoid penalties for noncompliance.

©2017

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2017 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

Contact us with questions.

©2017

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Who Can — and Who Should — Take the American Opportunity Credit?

 

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

©2017

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2016 IRA Contributions — It’s Not Too Late!

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

 

©2017

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