tax deductions

Tax law changes mean inflation adjustments

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

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In addition to making some temporary tax breaks permanent, 2 measures that became law on Dec. 18, 2015, also provide for annual inflation adjustments to the tax benefits.

The Protecting Americans from Tax Hikes, or PATH, Act dealt primarily with tax extenders, those tax laws that expire and must be renewed. PATH was rolled into the Consolidated Appropriations Act, or the fiscal 2016 spending bill, which also included some tax provisions.

3 tax laws that are permanently in the Internal Revenue Code thanks to those laws now require the Internal Revenue Service to calculate the effect of inflation and annually adjust the tax breaks accordingly.

The IRS has now done that. Here are the inflation-adjusted amounts for the 2016 tax year for educators’ classroom expenses, commuting costs for workers who use public transportation as well as a popular business write-off.

No 2016 increase for teachers’ deduction

Teachers and certain other elementary and secondary school employees can deduct some of their out-of-pocket costs for classroom items. When this above-the-line deduction, meaning you don’t have to itemize to claim it, was made permanent, the long-standing $250 deduction amount was set as the base.

The expense amount also was tweaked so that it will increase as inflation dictates. That’s good news for educators. But since inflation in 2015 was low, the IRS says that there won’t be any bump up for the 2016 tax year. The deduction stays this year at $250.

Public transit benefit bump

Employers can subsidize their workers’ commuting or parking costs with pretax dollars up to an allowable monthly limit. Previously, the amount allowed for parking benefits was greater than that given employees who commuted using public transit.

As part of the tax extenders, that disparity was evened out. And as part of the December tax law changes, parity between the two transportation options was made permanent.

In addition, the amount allowed for van pool and other transit options are now pegged to inflation. In 2015 that monthly amount was $250. For 2016, it goes to $255. The increase applies to parking benefits, too.

Enhanced business expensing

One way businesses can reduce their tax bills is to write off the costs of new equipment. In many cases, this requires spreading the costs over several tax years through depreciation.

But section 179 expensing allows for some costs to be deducted in one tax year. And at the height (or depth) of the great recession that began in 2008, Congress increased the expensing amount to help economically struggling businesses continue to operate and grow their companies.

With the December extenders and spending bills, lawmakers permanently set the maximum amount of newly acquired property costs that a business can expense, or deduct, in one year at $500,000.

Once a business exceeds a certain amount of qualifying equipment purchases in a tax year, the deduction is reduced. Under the new law, that phaseout starts at $2 million in purchases

Both of those limits now were indexed for inflation.

For 2016, low inflation means that the IRS did not hike the $500,000 deduction amount. However, the $2 million phaseout threshold increases this year to $2.01 million.

Now that the new permanent tax breaks are on the books, look for these adjustments to be included in the annual announcement of other inflation-affected tax provisions that the IRS releases each fall.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

 

Individual Year End Tax Planning Ideas

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

DeathtoStock_Simplify10As we approach year end, it’s time again to focus on last-minute moves you can make to save taxes — both on your 2014 return and in future years. Here are a few ideas.

Maximize the benefit of the standard deduction. For 2014, the standard deduction is $12,400 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,200. Currently, it looks like these amounts will be about the same for 2015. If your total itemized deductions each year are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so they are high in one year and low in the next. For instance, you might consider moving charitable donations you normally would make in early 2015 to the end of 2014. If you’re temporarily short on cash, charge the contribution to a credit card — it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2015. But, watch out for the alternative minimum tax (AMT), as these taxes are not deductible for AMT purposes.

Consider deferring income. It may be beneficial to defer some taxable income from this year into next year, especially if you expect to be in a lower tax bracket in 2015 or affected by unfavorable phase out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so forth) in 2014. By deferring income every other year, you may be able to take more advantage of these breaks every other year. For example, if you’re in business for yourself and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive payment for them until early 2015. You can also postpone taxable income by accelerating some deductible business expenditures into this year. Both moves will defer taxable income from this year until next year.

Secure a deduction for nearly worthless securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules for capital losses and the wash sale rules restricting the recognition of loss if the security is repurchased within 30 days before or after the sale).

Invest in tax-free securities. The most obvious source of tax-free income is tax-exempt securities, either owned outright or through a mutual fund. Whether these provide a better return than the after-tax return on taxable investments depends on your tax bracket and the market interest rates for tax-exempt investments. With the additional layer of net investment income taxes on higher income taxpayers, this year might be a good time to compare the return on taxable and tax-exempt investments. In some cases, it may be as simple as transferring assets from a taxable to a tax-exempt fund.

Again, these are just a few suggestions to get you thinking. Please call us if you’d like to know more about them or want to discuss other ideas.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

Weddings Mean Tax Changes & Small Business Resources

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!  

Weddings Mean Tax Changes

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It may not be as high on the wedding plan checklist as the venue, invitations and attire, but there are important tax issues created by a marriage that warrant some prompt attention following the wedding.

Name change. Anytime names are changed, it should be reported to the Social Security Administration (SSA). The name associated with an individual’s Social Security Number (SSN) should match the name on the tax return. To change a name with the SSA, file Form SS-5, “Application for a Social Security Card.” The form is available from www.ssa.gov, by calling (800) 772-1213, or from the local SSA office.

Address change. Let the IRS know about an address change by filing Form 8822, “Change of Address.” Also notify the U.S. Postal Service at www.usps.com to forward mail. You may also report the change at your local post office.

Change tax withholding. A change in marital status requires that a new Form W-4, “Employee’s Withholding Allowance Certificate,” be furnished to the employer(s). Combined incomes may move the taxpayers into a higher tax bracket. Search www.irs.gov for the IRS Withholding Calculator tool for help completing the new Form W-4.

Change in filing status. Marital status is determined as of December 31 each year. Spouses can choose to file jointly or separately each year. We can help you make that determination by calculating your tax liability both ways.

Change in circumstances. Taxpayers receiving an advance payment of the health care premium tax credit in 2014 should report changes in circumstances, such as a change in income or family size, to the Health Insurance Marketplace. Also, the Marketplace should be notified when you move out of the area covered by your current Marketplace to ensure you get the proper type and amount of financial assistance.

 

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.