A. GET THE INFORMATION YOU NEED TO MAKE A DECISION ON HEALTH INSURANCE COVERAGE FOR 2017
Determine whether your existing coverage is renewable for 2017.
Check for changes from 2016:
- Health Savings Account options
- Coinsurance percentages
- In network
- Out of network
Go to healthcare.gov and get the same information for 2017 policies.
Talk to your healthcare providers and nd out if they are in-network for specific policies.
Check your history of medical expenses. An important factor in your policy choices is your expected annual medical expenses. If the amount is low, you should consider a high deductible paired with a HSA contribution. If your medical expenses are high and recurring, you would lean towards a low deductible policy.
Estimate your 2017 medical expenses, and classify for each policy.
- In network
- Out of network
B. IF YOUR CURRENT HEALTHCARE COVERAGE HAS BEEN CANCELLED, APPLY FOR A NEW POLICY
You cannot activate a policy at any time. You must get this done during the open enrollment period which begins on November 1, 2016. Here are the application submission dates and the dates of effective coverage:
To 12/15/2016 12/16/2016 – 1/15/2017 1/16/2017 – 1/31/2017
Date of Coverage
1/1/2017 2/1/2017 3/1/2017
Open enrollment ends on 1/31/2017. Individual states may set their own enrollment periods, but absent state action, the federal guidelines are in effect by default.
The only exception to open enrollment requirements are for “qualifying events.”
- Loss of essential coverage (such as from loss of employment)
- Change in family structure (marriage, divorce, etc.)
- A move to a new location
- When a child covered under a family plan turns 26
If you don’t act during the open enrollment period, you will have to buy a short-term policy. If you don’t like the pricing in the public risk pools, it’s likely that you will like the cost of short-term policies even less.
C. HEALTH INSURANCE PENALTY FOR NOT HAVING HEALTH INSURANCE IN 2017
The Affordable Care Act levies penalties on individuals who do not have health insurance coverage. The penalty calculation for 2017 is identical to 2016’s calculation.
The penalty is calculated two different ways: You will either pay the penalty based on a percentage of your household income, or a per person penalty. Both are capped with a maximum figure for the year.
Percentage of household income:
- 2.5% of household income. Individuals only calculate income that is above the yearly tax ling threshold.
- The penalty calculation under the percentage of household income is capped at the cost of the national average premium for a bronze level health plan – $2,676.
- $695 per adult
- $347.50 per child under 18
- Maximum penalty under the per person method is $2,085.
- The penalty is only paid for each person in your household who does not have health coverage.
If you only have coverage for part of the year, the penalty is calculated for only those months you do not have coverage. If you are uncovered for only 1 or 2 months of the year you will not have to pay the penalty when ling your 2016 tax return.
D. HEALTH INSURANCE DOCUMENTATION FOR 2016 TAX FILINGS
The Affordable Care Act increased tax reporting requirements on individuals, employers, and insurance companies. Individuals who don’t have healthcare coverage may be subject to a penalty (see above).
In 2016, insurance companies and employers will report coverage with monthly coverage details on forms 1095-B and 1095-C. There may be multiple policies, and coverage may not be uniform throughout the year.
When gathering your 2016 tax documents make sure to obtain form 1095-A, 1095-B, or 1095-C.
E. YEAR-END TAX SELLING
There is a graduated capital gains tax rate. Gains are taxed at:
- 0% if in the 10% or 15% federal brackets,
- 20% if in the highest federal bracket (39.6%), and
- 15% for brackets in between (25%, 28%, 33%, and 35%)
A 3.8% surtax on investment income is added on gains that are part of modified adjusted gross income is excess of $200,000 for a single filer, and $250,000 for joint filers. Add in state income taxes, and the tax on capital gains can exceed 30%.
A situation you want to avoid is paying tax on capital gains in 2016, but having non-deductible losses in 2017 because losses exceed gains. Taking capital losses to offset capital gains can also avoid the surtax on investment income.
- Review portfolios before year-end for tax selling opportunities.
- Look into spreading gains over two years to avoid the maximum 20% rate or 3.8% surtax.
- Take long-term gains if you are in the 0% or 15% tax bracket.
F. REPORTING FOREIGN BANK ACCOUNTS
In efforts to end the disconnect between the ling date for FBAR and income tax returns, the due date for FinCEN Report 114 will now be April 15th. A six-month extension is allowed. These are required to be e- led separately from the e- ling of the individual income tax return.
As a reminder, U.S. persons are required to file an FBAR if:
- They have financial interest in or signature authority over at least one financial account located outside the United States
- They have financial foreign accounts with an aggregate value which exceeds $10,000 at any time during the calendar year.
Individuals with foreign bank accounts should download the tax organizer in January and ll out the page related to FBAR reporting.
2016 Year End Items of Note
1. The exclusion for direct charitable donations from IRAs was made permanent
In late 2015 the Protecting Americans from Tax Hikes Act (PATH Act) passed. One of the key items was the permanent exclusion from gross income any charitable distributions from an individual aged 70 1⁄2 or older up to $100,000. The exclusion covers distributions received from traditional or Roth IRAs. If filing a joint return each spouse can exclude $100,000 in charitable distributions.
Individuals can make charitable contributions from IRAs to meet minimum required
distributions (MRD). Individuals aged 70 1⁄2 should review their distributions from their IRAs,
and depending on your tax situation, it may be advantageous to make a charitable distribution by year- end. Please review your tax estimates or get in touch with us to discuss.
2. American Opportunity Tax Credit was made permanent
Prior to the passage of the PATH Act, the American Opportunity Credit had been an annual extender. Now that it is a permanent tax planning can be done accordingly without waiting for Congress to pass last minute extenders.
The American Opportunity Credit is equal to 100% of the first $2,000 of qualified tuition and related expenses, plus 25% of the next $2,000 of qualified tuition and related expenses. A maximum of $1,000 (40% of the total $2,500) of the total credit can be refundable. The credit is phased out if your modi ed adjusted gross income is over $90,000 for single filers or $180,000 for joint filers.
Starting in 2016 individuals who do not possess a valid Form 1098-T are prevented from claiming the American Opportunity Credit.
3. Relief for late rollovers from retirement plans
On August 24th the IRS issued Revenue Procedure 2016-47 that explained how eligible taxpayers, en- countering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. The procedure also includes a sample self-certification letter that the taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.
Prior to the revenue procedure, individuals did not qualify for a tax-free rollover if they failed to con- tribute the rollover to another IRA or workplace plan by the 60th day after it was received. Taxpayers that failed to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.
Now, with Rev. Proc. 2016-47, an individual will qualify for a waiver if one or more of a set of 11 circumstances are met. They include:
- an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
- the distribution, having been made in the form of a check, was misplaced and never cashed;
- the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
- the taxpayer’s principal residence was severely damaged;
- a member of the taxpayer’s family died; and
- the taxpayer or a member of the taxpayer’s family was seriously ill.
The self-certification is not a waiver by the IRS of the 60-day rollover requirement. However, the taxpayer can report the contribution as a valid rollover unless later informed otherwise by the IRS. Under the course of an examination the IRS can consider whether a taxpayer’s contribution meets the requirements for a waiver.
If you attempted a rollover after August 24, 2016 from a retirement plan to another plan or an IRA and you missed the 60-day window due to the listed circumstances above, you may find relief under this new procedure.
4. Per Taxpayer Mortgage Deduction
The IRS acquiesced the ruling in Voss, 2015-2 USTC 50,247, in which the Ninth Circuit Court of Ap- peals found that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit provisions under Code Sec. 163(h)(3) apply per taxpayer, not for residence.
This ruling allows each unmarried co-owner of the qualified residence to have their own separate $1.1 million mortgage debt limit, instead of each co-owner having to share the $1.1 million debt limit as de ned in Section 163(h)(3). This applies even if the co-owners share the same mortgage debt.
5. Individual Tax Identification Numbers (ITIN) Expiring
Under the PATH Act, many individuals who had previously been issued an ITIN will be required to renew the document, which they can do by ling Form W-7. Taxpayers who already have an ITIN is- sued prior to 2013 will likely need to renew their ITIN since all ITINs issued before 2013 will begin to expire this year. If the taxpayers have not used their ITIN during the last three tax years (2015, 2014, and 2013), then they must file for a new ITIN starting on October 1, 2016.
6. The New Due Dates: Corporation and Partnership Returns
New federal due dates for S Corporations, C Corporations, and partnerships apply to 2016 tax returns (2017 ling season) and beyond:
March 15 (Extensions Until Sept. 15)
- Form 1065, U.S. Return of Partnership Income; and
- Form 1120S, U.S. Income Tax Return for an S Corporation.
Note: This is the due date for the tax return and also for the Schedules K-1 that the entity must provide to its owners.
- Form 1120, U.S. Corporation Income Tax Return (extensions until Sept. 15)
2016 Year End Tax Planning: Routine Follow-ups
1. REVIEW YOUR 2016 TAX ESTIMATES
Update what 2016 will look like, and do the following:
- Estimate your marginal tax rates (income tax rate on the next dollar of income).
- Determine whether your wage or self-employment income will be above the FICA limit ($118,500 for 2016).
- Determine whether the Alternative Minimum Tax will apply.
2. DEVELOP STRATEGIES FOR TAKING 2016 DEDUCTIONS
Know where additional deductions will produce little or no tax benefit.
- If your childcare expenses are already above the tax credit or salary reduction limits.
- If your rental losses are already blocked by the passive loss rules.
- If your losses or deductions will throw you into a 0%, 10%, or 15% tax bracket.
- If you won’t have enough deductions to itemize and instead will use the standard deduction (Single = $6,300; Married Filing Jointly = $12,600).
- If you don’t have more medical deductions than 10% of Adjusted Gross Income, or miscellaneous itemized deductions greater than 2% of Adjusted Gross Income.
If any of these situations exist, it may be preferable to delay taking the deduction until 2017.
3. LOOK FOR SITUATIONS WHERE TAKING INCOME IN 2016 WILL RESULT IN NO ADDITIONAL TAX BEING DUE
- Realizing capital gains where you will have excess (non-deductible) capital losses. Realizing passive income where you have blocked passive losses.
- Realizing investment income where you have blocked investment interest deductions. Where you are in a zero or low (10% or 15%) income tax bracket.
- Making a Roth IRA conversion.
4. MAKE SURE THAT YOU ARE MAKING MAXIMUM USE OF THE FOLLOWING TAX BENEFITS
- $3,000/year capital loss deduction allowance.
- $25,000 rental loss allowance for owners with active participation in the ownership and management of rental real estate. (Warning: This bene t is phased out as Adjusted Gross Income increases from $100,000 to $150,000.)
- $5,000 per year dependent care exclusion or the $3,000 per individual childcare expenses qualifying for the child care tax credit (maximum $6,000).
- Deductible IRA contributions (maximum $5,500 per individual). Individuals over age 50 are able to make an additional “catch-up” contribution of $1,000. Non-working spouses may have deductible IRA’s available if AGI tests are met. Note that deduction phase-out ranges are being increased annually for individuals who have pension coverage. The AGI phase-out point for individuals with pension coverage is $61,000 for single filers and $98,000 for joint filers with pension coverage. The phase-out point for spouses without pension coverage starts at $184,000 of AGI when the other spouse has pension cover-age.
- $100,000 per year exclusion of charitable distributions from IRA accounts by individuals aged 70 1⁄2 or older.
- The Section 179 expensing allowance for personal property used in a trade or business. The maximum deduction is $500,000 and the phase-out-threshold is $2 million of asset additions. Off-the- shelf software also qualifies for this allowance.
- The optional standard mileage reimbursement rate for 2016 is 54 cents per mile.
5. INDIVIDUALS SHOULD MAKE SURE THAT TAX DEPOSITS ARE ADEQUATE
- To avoid underpayment penalties, your total withholding plus estimated tax deposits must exceed the lesser of: (a) 2015’s tax or (b) 90% of your eventual 2016 tax.
- Don’t forget to review estimated taxes for your children, unless they are under 19 (or under 24 if they are full-time students) and you intend to include their income on your return. (This inclusion is only al- lowed where the child has only interest and dividend income, and in total it is less than $10,000.)
- If your Adjusted Gross Income for the year is above $150,000, you will avoid underpayment penalties if you deposit 110% of 2015’s tax. Taxpayers with incomes up to $150,000 can avoid penalties by depositing 100% of the prior year’s tax as noted above
6. REVIEW YOUR TAX BASIS IN PARTNERSHIPS AND S-CORPORATIONS
- Losses from S-corporations can be non-deductible if a shareholder does not have tax basis in either the stock or debt of the company. Partnership losses can be limited if losses allocated exceed the tax- payer’s basis in the partnership.
- Partners and shareholders of these entities that are projected to have pass-through losses should review their basis in the investment to make sure that the desired amount of loss will, in fact, be deductible. Making additional investments before year-end to increase basis may be necessary to make this happen.
7. PAY ATTENTION TO FINANCIAL HOUSEKEEPING
If you are married to a foreign national, make sure your spouse has an ITIN (Individual Tax Identification Number). E- ling is not allowed without one.
- Apply for Social Security numbers for dependents.
- Change Social Security name records for name changes due to marriage or divorce. (Note: Names used on tax returns must agree exactly to the spelling used by the Social Security Administration, including the use of abbreviations and initials.)
- Obtain documentation for charitable contributions. Gifts of $250 or more must be substantiated by a written acknowledgment from the donee organization.
- Obtain appraisals for non-cash contributions exceeding $5,000.
- Get auto usage records compiled. Businesses should make sure that the personal use value of company autos is included in the employee’s W-2.
- Make sure that documentation for entertainment expenses is adequate to withstand an IRS audit. Do not dispose of the year’s appointment book if you intend to rely on it to support business deductions.
- Get taxpayer ID numbers for 1099 and W-2 recipients (including daycare providers) by having them complete Form W-9.
- Document participation in business activities if you feel that this may be an issue in applying the passive loss rules. The general cutoff point for material participation is 500 hours per year. The cutoff for status as a Qualified Real Estate Professional is 750 hours.
- Update your tax basis records for investments, especially for mutual funds with dividend reinvestment. Also update basis records for improvements done to real estate.
- If you have received any gifts of investment property during the year, ask the donor for the carryover basis information.
- Get business activities segregated into separate bank accounts for 2017.
- If your deductions will change radically in 2017, be sure to adjust your withholding accordingly using Form W-4.
- Shareholders who have advanced money to their incorporated businesses should evidence the transaction with a note and should charge an adequate rate of interest.
- The value of health insurance paid on behalf of 2%+ S corporation shareholders should be included in W-2 totals as wages.
Clean out the basement!!!! Financial records that relate to tax years more than three years prior can generally be disposed. (The big exception relates to the cost of assets. Keep asset basis records for as long as you own the property).
8. REVIEW 2017 BENEFIT PLAN OPTIONS WITH YOUR EMPLOYER
- 401(k) plan contribution rate and investment choices. (Don’t forget to elect the bonus contributions if you’re 50 or older.)
- Non-qualified deferred compensation plan elections.
- Dependent care salary reductions.
- Compensation paid in the form of mass transit passes.
- Medical reimbursement plan salary reductions.
- Health insurance deductible options
- Health savings account contributions
- Flex spending account contributions
Having health insurance coverage with a high deductible policy entitles you to make contributions to a Health Savings Account (HSA). Minimum qualifying policy deductibles are $1,300 for single coverage or $2,600 for family coverage. The maximum HSA contribution for 2017 is $3,400 for single coverage (or $6,750 for family coverage). Bonus contributions of $1,000 will be allowed for those individuals age 55 or more. Individuals eligible for Medicare cannot make HSA contributions.
The maximum annual contribution limit for a flex spending account for 2017 is $2,600. Participants can carry over up to $500 in unspent contributions if the plan has not adopted the 2 1⁄2 month grace period rule. (This allows 2 1⁄2 months after year-end to spend unused funds.) The $500 carryover will not re-duce the current year’s FSA contribution. Caution: Taking advantage of the carryover rule will prevent HSA contributions.
If you plan on making HSA contributions for 2017, clear out the flex spending account before year-end.
9. DISCUSS CHANGES TO EXPENSE REIMBURSEMENT ARRANGEMENTS WITH YOUR EMPLOYER BEFORE YEAR-END
- Expense allowance arrangements where actual business expenses are not reported to the employer are not considered to be qualified expense reimbursement arrangements. Instances where the employee documents expenses to the employer, but is not required to return excess reimbursements are also not
- qualified reimbursement arrangements. All of these expenses are taken as itemized deductions subject to a 2% of Adjusted Gross Income floor before they become deductible.
- Taxpayers should discuss changing to qualified reimbursement arrangements.
10. RESTRUCTURE YOUR DEBTS WHERE POSSIBLE TO ENSURE DEDUCTIBILITY AND REDUCE FINANCIAL RISK
- Replace consumer debt with either home equity debt or business debt. Replace passive activity debt with home equity debt if passive activity losses are limited.
- Lock in xed rates.
11. ZERO OUT PERSONAL SERVICE CORPORATION INCOME WITH EXPENSE PAYMENTS AND BONUSES AT YEAR END
- When taxable income is retained in a Personal Service Corporation (PSC), it is subject to a 35% income tax. Corporations that have not elected S status must zero out income to avoid this tax.
12. S-CORPORATION OWNER/EMPLOYEES SHOULD REVIEW HOW THEIR COMPENSATION IS SPLIT BETWEEN SALARY AND DIVIDENDS
- S-Corporations can avoid some payroll taxes by paying out income to shareholder employees in the form of dividends instead of salary. However, the formalities of setting salary levels and declaring divi- dends should be strictly observed to avoid potential reclassi cation by the IRS.
13. MAKE SURE THAT ALL INVESTMENT ACCOUNTS HAVE A PROPER SOCIAL SECURITY NUMBER AND ARE NOT SUBJECT TO BACKUP WITHHOLDING
- The backup withholding rate is 28%. The existence of backup withholding can cause the ling of a child’s individual return, instead of simply having the parents include the income on their tax return.
14. C-CORPORATIONS THAT PLAN TO RETAIN EARNINGS SHOULD MAKE ESTIMATED TAX DEPOSITS EVEN IF NO TAX WAS INCURRED IN 2015
- Underpayment penalties are usually avoided if a taxpayer at least matches the prior year’s tax with estimated tax payments. This penalty exception does not apply if a corporation has no tax liability in the prior year.
15. IF YOU MAINTAIN AN IRREVOCABLE LIFE INSURANCE TRUST, MAKE SURE THAT CRUMMEY POWER DOCUMENTATION IS KEPT IN YOUR FILE AND IS UP TO DATE
- In the absence of this documentation, the IRS can apply the transfer of funds to the trust against your unified estate and gift tax credit.
Looking On to 2017
Traditional tax planning includes looking ahead to assess and plan for future tax liabilities. With a new admin- istration taking the helm, which includes full Republican control of the White House and Congress, we believe tax law changes will likely be made in 2017. The magnitude of these changes are unknown, and at this time we will not speculate. This leaves tax planning a little more challenging than prior years. You can be certain that as soon as we do know the extent of these law changes we will have that information for you to make your plans accordingly.