To all our valued clients: It s Our End of Year Newsletter!

Transcription

1 5111 US ROUTE 5 P.O. BOX 210 WESTMINSTER STATION, VT OFFICE: (802) FAX: ( Bright Ideas Shaping Futures! To all our valued clients: It s Our End of Year Newsletter! First, we offer each of you and your families our warmest wishes for a happy holiday season and a safe and prosperous New Year! We want to thank all of our clients for their business this year. We feel honored to have played a role in all of your financial lives. We wish all our clients continued prosperity well into the future, and we look forward to continuing to help you achieve your financial goals. We now have a new resource for you our website! Please take a few moments to visit our site at and experience the rich sources of information we have built for you, such as presentations, newsletters and videos on a variety of important financial topics. We also have a Tools menu listing all of our annual tax worksheets charitable contributions, rental and business expense worksheets, and many others for you to download and use as you gather your documentation for tax season. We have also developed an easy to use app! The links to download our CHS applet at the Apple Store and Google Apps can also be found on our website. We have a lot to share with you in this year s newsletter it is jam packed with information, and we have condensed it as much as possible to get the maximum amount of information to you. As usual, a number of tax breaks expired at the end of 2014, and although there is much talk in Congress about renewing them, there has been no action on them to date for We have also included details on the Affordable Care Act (ACA) and the potential effects of this legislation on the 2015 tax return as we enter the second year of its existence. We urge everyone to read this insert carefully. Lastly, both our annual Business and Personal Tax Item Checklists are included for your use as you gather your documents. We look forward to working with each and every one of you in the New Year! Catherine Harris and the Staff of CHS Wealth Management & CPAs, LLC

2 THE HIDDEN TAX COSTS OF THE OFFICE IN HOME DEDUCTION If you write off expenses related to your home office, be sure to take the home depreciation deduction. Why? You'll have to recapture that depreciation (i.e., pay taxes) when you sell -- even if you never took the deduction! Waste not, want not. Dealing with the depreciation The complication comes from that tricky tax factor known as office in home depreciation. This is the tax break allowed for the wear and tear over time on the portion of your home used for business. In simple terms, where we're talking about an office within the actual house. The home office depreciation that was taken on prior returns must be accounted for when you sell. In an ordinary home sale, you can have a gain that's often completely tax free -- up to $250,000 per person or $500,000 for married taxpayers who file joint returns. If you make a profit greater than your applicable limit, it will be taxed at the most favorable capital gains rates. Currently, that's typically 15% but could possibly be as low as zero percent or as high as 20% for those with very high incomes. But those rules don't apply to business property -- and a home office is considered business property! If you depreciate the office portion of your home, the amount of that write-off will reduce your property's basis. Lower basis will mean you made more profit. And this is separate from the home sale gain exclusion amounts of $250,000 or $500,000 mentioned above. Undermined by unrecaptured gain Even if you stay within these exclusion limits, you still could face some home office-related tax costs. The issue arises when the IRS "recaptures" the tax on the depreciation of any business use of a sold property. Essentially, Uncle Sam wants to make sure the Treasury gets back some of the depreciation benefits you claimed over the years. This recaptured depreciation is taxed regardless of whether your overall gain is more or less than your allowable home sale exclusion amount. And it's taxed at a rate that is higher than the typical capital gains rate with which most investors are familiar. Recapturing Section 1250 costs Section 1250 a special kind of taxable gain. Although you report it on Schedule D, the form used to detail all your capital gain transactions, it has its own more-costly tax treatment. This is a class of capital gains that is taxable at a maximum 25 percent rate rather than the standard lower capital gains rates that are available if you're selling stock or other assets. In essence, because you've mixed business and residential use of the property, the depreciation deduction you claimed over the years for that home office is really just a deferral of taxes into the year when you sell the home. And the 25% rate applies regardless of your ordinary income tax bracket. What if you didn't depreciate your home office? You wrote off the space and proportionate utility and maintenance costs, as well as a portion of your mortgage payment, but didn't bother with claiming depreciation on your tax return. Do you still have to recapture the Section 1250 costs? Unfortunately the answer is YES. This unrecaptured Section 1250 rule, according to IRS language, 'applies with respect to depreciation that is either allowed or allowable.' Basically, you get stuck with it if you're entitled to

3 take it, regardless of whether you've actually taken it. The way the rule reads, and this also is for rental real estate, that you have imputed depreciation deductions even if you don't take them. You must depreciate what you are claiming as business use. Because simply deciding against claiming the depreciation amount doesn't absolve you of owing taxes on it when you sell, you might as well go ahead and get the benefit of it while you're using your home office. The depreciable life of business space The depreciation life of your home office is 39 years because it is business related. The IRS has determined the costs associated with business real property must be spread out, i.e., depreciated, over that time period. As a reminder, you can't use depreciation (that you report on IRS Form 4562) to create or increase a loss for business. You then would have to carry forward that unused depreciation deduction into future business tax years, and that's where adequate records are so important. For example, if you experienced a $2,000 loss because your home-based business had a bad year, you could claim the $2,000 loss on your Schedule C. But if your company made just $1,000 and you claimed home office depreciation of $2,000, you can only use half of that depreciation to get your Schedule C income to zero; you can't use it to create a loss. In that case, you would carry the depreciation-created loss forward to the next or future years and use it to offset up to $1,000 of income when you have a better year. But if you never show a profit, you will never get to use these suspended losses. Is it really worth it to claim and office in home deduction? Everything comes with risk, but most tax experts agree that taxpayers should take every tax break to which they are legitimately entitled. The key is to make sure that the maneuvers actually reduce your tax bill. And in some cases, you need to consider not just your current year tax bill, but future ones. We provide an example for you below of the effects on the office in home depreciation: You bought your home in 2000 and set up your home office in a spare bedroom as soon as you got settled. Over the years, you wrote off various home office expenses, as well as claimed depreciation of $10,000 on the space. Last year, you sold your home and made a profit of $200,000. Because it was your primary residence for the IRSrequired time (at least two of the five years before it sold), you're eligible for the home-sale exclusion of up to $250,000. Since the IRS changed certain rules in 2002, the business use of your spare room is not a tax problem. As long as the office is within the house, rather than in a separate structure such as a guest house on the property, you no longer have to allocate the sale profits between residence and business as was the case before. All the home-sale gains are considered excludable from taxes. However, the depreciation component will cost you. You'll owe taxes at the 25 percent rate on that $10,000 you wrote off. So instead of no taxes due upon the sale of your home, you will owe Uncle Sam $2,500. BA-HUMBUG: THE IRS TAX SCAMMERS ARE IN FULL SWING OVER THE HOLIDAYS! Recently we have had several clients contact us to tell us that the IRS called them about owing the IRS money for back taxes. This is a scam! The IRS will NEVER make its initial contact by any other means than a letter mailed via the US Postal Service. The IRS will send a letter to each person named on the tax return, meaning

4 that if you file Married Filing Jointly, two identical letters will be mailed one to each person named on the tax return. We have alerted the local branch of the VT State Police about this matter. If you receive any kind of contact (phone, mail, , fax, etc.) from someone claiming to be the IRS, before doing anything else, please contact our office and provide us a copy of any documentation sent to you. Let us first make sure it s a legitimate matter, and then we can advise you further on how to proceed. A List of the most commonly used tax provisions THAT EXPIRED AS OF THE END OF We are still waiting to hear if the new Congress will renew some or all of these for Last year, Congress did not renew these deductions until December 19, and only for the 2014 season. Educator s Expenses Grades K-12 educators could deduct up to $250 of out of pocket expenses. Tuition and Fees Deduction Taxpayers could deduct up to $4,000 of qualified higher education expenses. Mortgage Insurance Premiums Taxpayers with AGI under $109,000 could treat qualified mortgage insurance premiums as home mortgage interest. State and Local Sales Tax Taxpayers could deduct state and local sales tax instead of state and local income tax if they qualified to itemize on Schedule A. Energy Efficient Homes Builders of energy-efficient homes were allowed a $2,000 credit per qualifying home they built. Personal Energy Property Credit A credit (subject to a $500 lifetime cap) was available for qualified energy efficiency improvements and expenditures to a taxpayer s principal residence. Section 179 Depreciation (Accelerated Depreciation) Expensing limit for qualified capital equipment and other qualifying property was reduced to a maximum $25,000 total deduction at the end of Bonus Depreciation Unless renewed, this provision is no longer available. Cancellation of Debt on the foreclosure or short sale of a primary residence of up to $2 million. There are many other expiring provisions, but these are the most commonly used. Provisions set to expire that have already been extended: Adoption Credit Made permanent. Non-refundable credit of up to $10,000 for qualified adoption expenses. Student Loan Interest Deduction -- Made permanent. Up to $2,500 of qualified student loan interest may be deducted. Qualified Dividends Made permanent. Allows capital gains rate tax treatment for certain dividends. American Opportunity Tax Credit Extended through For qualified college related expenses. Enhanced Earned Income Credit Extended through Allows certain taxpayers with income below a certain threshold to receive a refundable credit. Enhanced Child Tax Credit Extended through Credit amount of $1,000 per qualifying child (age 16 and under at end of tax year) and may be partially refundable for certain taxpayers. IMPORTANT DEADLINES TO REMEMBER: QUARTERLY ESTIMATED TAX PAYMENT DATES: APRIL 15th, JUNE 15th, SEPTEMBER 15th and JANUARY 15th ANNUAL SALES AND USE TAX RETURN FILING DEADLINE: JANUARY 26, 2016 LANDLORD CERTIFICATES FOR RENTER S REBATE FORMS: JANUARY 31, s and W-2s MUST BE MAILED TO EMPLOYEES AND SUBCONTRACTORS BY JANUARY 31, 2016 CORPORATE TAX RETURN (FORMS 1120 AND 1120S) FILING DEADLINE: MARCH 31, 2016 PERSONAL TAX RETURN (FORM 1040) & PARTNERSHIP RETURN (FORM 1065) FILING DEADLINE: APRIL 15, 2016

5 RESIDENTIAL SOLAR ENERGY CREDIT The Federal solar credit is available through The credit is equal to 30% of every dollar you spend on solar, with no upper limit. It is not a refundable credit, meaning that whatever you cannot use to offset your tax bill in the year you take the credit gets carried forward to use against taxes in future years. This credit is only usable if you own the property, and use it as either your primary residence or a second home. Rental or investment properties do not qualify. The installation does not need to be on your own property, but it must still benefit a property you own and use as either your primary residence or a second home in other words, buying into a community array will qualify for the credit if the energy is used for your primary residence or a second home. THE AFFORDABLE CARE ACT ( ACA OBAMACARE ) INDIVIDUAL INSURANCE MANDATE One of the primary objectives of the Affordable Care Act ( ACA ) is to dramatically expand health insurance coverage for individuals who are currently uninsured. Starting with 2014, ACA generally requires taxpayers to pay a penalty with their individual income tax returns, unless they have qualified health plan coverage for themselves and their dependents, or they meet a specific hardship exemption. During the preparation of your federal income tax return, the law now requires us to see evidence that every member of your household (adults and children dependents) included on your tax return is covered by a qualified health plan. 1. If you purchased your health insurance through the federal or state healthcare Marketplace, you should receive a Form 1095-A from the marketplace by January 31, If you are covered by a qualified employer sponsored health plan, you should receive a Form 1095-C from your employer by January 31, If you purchased your health insurance plan through a private insurance provider, you will receive a Form 1095-B by January 31, The ACA established exemptions from the individual insurance mandate penalty. Some exemptions are claimed on the tax return, while some require an application through the Marketplace. An exemption obtained through the Marketplace has a unique Exemption Certificate Number (ECN). This number is what we are required to report on the new Form 8965, Health Coverage Exemptions. There is no ECN electronic application. You will need to complete the application and wait to receive the ECN in the mail in approximately two to three weeks. You can obtain the ECN application at The ACA has placed many requirements on taxpayers, but the requirements do not stop there. As your tax professional, we are required by law to conduct sufficient due diligence to determine that your coverage is sufficient to not warrant the penalty assessment, or we as professionals may suffer substantial preparer-based penalties as well. Additionally, there are new healthcare forms that now a permanent part of your tax return. This means that your 2015 tax return will require additional time and computation with the possibility of more than six new tax forms added to your tax return requirements for 2015 forms that we will need to prepare for you. Without question, return preparation time will be impacted as we work to meet these new obligations on your behalf, resulting in small fee increases for this additional work. We understand that these new reporting requirements may be cumbersome during the implementation of the provisions of the ACA; should you have any questions concerning these new reporting requirements, we will be happy to discuss them with you during tax time. There are two major penalties that can affect taxpayers under the ACA: 1) An excise tax for failure to obtain adequate insurance coverage for the entire tax year.

6 2) A requirement to pay back part of the Premium Assistance Credit ( PAC ), which is more commonly referred to as the insurance premium subsidy, if actual 2015 income exceeds a taxpayer s estimate of their income at the time they applied for insurance through the Marketplace. This potential penalty only affects those who received their insurance through the Marketplace and received premium subsidies, called the Premium Tax Credit (PTC). The first penalty for failure to obtain insurance has several potential exemptions all of which require evidence to substantiate their claim. Some of these exemptions must be applied for through the Marketplace (for further details, see our Client Memo on the previous page), and others are included on the tax return. We offer a breakdown of these below to assist you: Exemptions Claimed Directly on the Tax Return: Coverage considered unaffordable (premium is more than 8% of your household income) Taxpayers with a short coverage gap of two months or less Citizens living abroad Household income below the filing thresholds Taxpayers enrolled in certain types of Tricare and Medicaid programs Exemptions That Must be Granted through the Healthcare Marketplace: Members of Federally-recognized Native American tribes Incarcerated taxpayers Members of certain religious sects This penalty is calculated based on either the Flat Dollar Amount or the Percentage of Income Amount, whichever is greater. In nearly all cases, it will be the Percentage of Income Amount. For 2015, The Percentage of Income Amount equals 2% of household modified adjusted gross income (MAGI), and will have to be calculated on an individual taxpayer basis. The second penalty involves potential payback of part of any PTC subsidy that was provided in 2015 as assistance with paying your insurance premiums. This subsidy was really in the form of an advance loan that may need to be partially paid back if actual income exceeded expectations (and we hope that the Marketplace explained that adequately to taxpayers when they offered it!). It is also possible that additional subsidy could be owed to the taxpayer at tax time if their actual income was below expectations, which would increase refunds. This penalty or additional refund amount will have to be calculated on a taxpayer by taxpayer basis when we complete your tax return. Together, these two penalties could have substantial negative impacts on a taxpayer s individual tax obligations or tax refund if there are lapses in insurance coverage or if there are differences in actual and expected income and the taxpayer received insurance premium subsidies from the government as part of their healthcare coverage package. Lastly we have provided our standard organizers at the end of this newsletter one organizer for business tax matters and another for personal tax matters. We wish you a joyous holiday season and a happy, healthy and prosperous New Year!

7 5111 US ROUTE 5, PO BOX 210 WESTMINSTER STATION, VT PHONE: (802) Fax: (802) BASIC CHECKLIST OF ITEMS REQUIRED FOR YEAR-END BUSINESS TAXES (This is not meant to be all-inclusive) A detailed Profit and Loss Statement for the entire year or a copy of your QuickBooks file on a flash drive (please give us a QuickBooks backup copy, and not an accountant s copy due to file conversion issues). Please remember to give us your QuickBooks password. A detailed General ledger for the entire year. A detailed Balance Sheet for the entire year (if applicable). Balance of cash on hand as of the last day of the fiscal year. All year end balances on notes and interest paid for the fiscal year. Copies of loan agreements for any new debt incurred during the year. Description of the activity affecting the officer s loan account with the company, if any. Details of any withdrawals by owners. A list of all depreciable equipment purchased during the fiscal year, including date and total cost. Or a copy of the purchase invoice along with payment details. A list of all depreciable equipment sold during the fiscal year, including date and total sales price. A list of all accounts receivable for customers that owed money at the end of the fiscal year. A list of all accounts payable that were not paid at the end of the fiscal year. An ending balance of inventory on the last day of the fiscal year. For company vehicles, beginning and ending odometer reading and business miles driven. Copies of all insurance invoices indicating annual premium and dates of coverage. Copies of all sales tax returns filed during the fiscal year. Copies of all rooms and meals tax returns filed during the fiscal year. Copies of all payroll tax returns for the fiscal year. 940, 941, W2, W3, and state forms. Copies of any IRS notices received during the tax year. If a new client, a copy of last year s tax return. A copy of state incorporation papers, partnership agreement or LLC articles of organization. If a new S Corporation, provide a copy of Form 2553 along with the acceptance letter from the IRS stating that the corporation can file as an S Corporation. Bank statements with cancelled checks for the twelve months of the fiscal year. A bank reconciliation for the last month of the fiscal year for all cash accounts.

8 5111 US ROUTE 5, PO BOX 210 WESTMINSTER STATION, VT PHONE: (802) Fax: (802) BASIC CHECKLIST OF ITEMS REQUIRED FOR YEAR-END PERSONAL TAXES (This is not meant to be all-inclusive) Social Security number and date of birth for you, your spouse and dependents (new clients only) Copy of last year s tax return with electronic filing pin (new clients only) Wages, Salary, Tips (Form W-2) from your employer(s) Interest and Dividends (Forms 1099-INT and 1099-DIV) Unemployment Compensation (Form 1099-G) Income of other adults and children in your home (for Vermont and NH residents) Capital Gains/Loss from sale of stocks, bonds, mutual funds, real estate, collectibles, etc. (1099 forms from broker) State and Local Tax Refund (Form 1099-G) Undistributed Capital Gains RIC s or REIT s (Form 2439) Social Security Statement (Form SSA ) Contributions and Distributions to: 401k, 403b, Roth IRA, Pensions, Keogh, SEP and SIMPLE Investment Expenses safe deposit box, investment advisory fees, custodial fees, and transaction costs Roth IRA Conversion amounts and statements Health Savings Account Contributions and Distributions (both Forms 1099 SA and 5498 SA) Gambling Winnings and Losses Alimony Income or Payments (Ex-spouse s full name, social security number and amount) Jury Duty pay Student Loan Interest paid (Form 1098 E) Rental Income and Expenses for rental properties Business or Farm Income and Expenses Partnerships, S Corps, Estates and Trusts Income (Form K-1) Mortgage Interest, Insurance and Points Paid (Form 1098) and HUD-1 Statement from closing Current Year Property Tax Bill Moving Expenses if related to move for a job over 50 miles from former employer, plus job hunting expenses Solar Energy Installation Expenses Charitable Donations if cash, then a receipt from Charity if over $250 (per charity); Personal Item Charitable Donations clothes, cars, household items (receipt from the charity and/or Form 8283; plus volunteer mileage College Education Expenses (Form 1098 T) Child and Dependent Care Costs (name, address, tax ID or Social Security number and amount paid) Adoption Expenses Social Security number of child, plus any legal and travel expenses Medical and Dental Expenses includes treatment, insurance premiums, doctor visits, and drug receipts Vehicle Registration Fees (for NH residents) Estimated Tax payments made, including copies of cancelled checks (Federal and State payments) Foreign Taxes (statement showing foreign taxes paid) Unreimbursed Employee Expenses travel, uniforms, union dues, education Casualty and Theft losses stolen or damaged property from accident, storm, fire, flood, etc. (police report, insurance claim, documents showing fair market value of item are necessary to claim losses) Legal Fees related to employment, business, divorce settlements or taxable income Teacher/Educator Expenses grades K-12 can deduct non-reimbursed supplies (with receipt) up to $250 Sales tax expense receipts (for big ticket items like a boat, car, home renovation, etc.)