New Law Extends and Enhances Numerous Tax Breaks

Transcription

1 220 Market Ave. S., Suite 700 Canton Ohio Winter 2016 Vol. 12, Issue 1 New Law Extends and Enhances Numerous Tax Breaks At the end of last year, the Protecting Americans from Tax Hikes Act of 2015 was signed into law. Known as the PATH Act, it does more than just extend expired and expiring tax provisions for another year. The new law makes many temporary tax breaks permanent. This provides some stability in planning. When it comes to certain deductions and credits, taxpayers will no longer have to wait for Congress to pass a temporary tax extenders law often at the end of the year in order to plan tax-saving strategies. Here s an overview of how individuals and businesses can benefit from the latest tax package. Tax Breaks for Individuals American Opportunity education credit. Eligible taxpayers can take an annual credit of up to $2,500 for various tuition and related expenses for each of the first four years of postsecondary education. The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation. The new law makes this credit permanent. Tuition and fees deduction. The new law extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn t exceed $80,000 ($160,000 for joint filers). Small business stock gains exclusion. The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business. The law also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes. Charitable giving from IRAs. The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRAs to qualified charitable organizations up to $100,000 per tax year. If you take advantage of this opportunity, you can t claim a charitable or other deduction for the contributions, but the amounts aren t considered taxable income and can be used to satisfy your required minimum distributions. To qualify for the exclusion from income for IRA contributions for a tax year, you need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31. Donor-advised funds and supporting organizations aren t eligible recipients. (Continued on page 2) Inside this issue: New Law Extends and Enhances Numerous Tax Breaks 1-2,4-5 Law Closes Loopholes Involving Social Security Benefits but Some May Still Be Able to Take Advantage Important Tax Figures for HK in the News 5,7 3

2 Volume 12, Issue 1 Page 2...Numerous Tax Breaks...(cont. from pg. 1) Transit benefits. Do you commute to work via a van pool or public transportation? The law makes permanent the requirement that limits on the amounts that can be excluded from an employee s wages for income and payroll tax purposes be the same for parking benefits and van pooling / mass transit benefits. For 2015, the monthly limit is $250. Before the PATH Act, the 2015 monthly limit was only $130 for van pooling / mass transit benefits. (The $250 limit increases to $255 for 2016.) State and local sales tax deduction. Taxpayers can take an itemized deduction for state and local sales taxes, instead of for state and local income taxes. This tax break is now permanent. The deduction is especially valuable for individuals who live in states without income taxes and those who purchase major items, such as a car or boat. Energy tax credit. The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energyefficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel. The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500. Mortgage-related tax breaks. Under the new law, you can treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through However, the deduction phases out for taxpayers with AGI of $100,000 to $110,000. In addition, the PATH Act extends through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modifies the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it s granted pursuant to a written agreement entered into in Educator expense deductions. Qualifying elementary and secondary school teachers can claim an abovethe-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses. Tax Breaks for Businesses Section 179 deduction. Tax law allows businesses to elect to immediately deduct or expense the cost of certain tangible personal property acquired and placed in service during the tax year. The Section 179 deduction is in lieu of recovering the costs more slowly through depreciation deductions. Keep in mind the election can only offset net income it can t reduce it below $0 to create a net operating loss. There are also other restrictions. The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively. The new law makes the higher limits permanent and indexes them for inflation beginning in It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property. Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units. Bonus depreciation. Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases. (Continued on page 4)

3 HK Bulletin Page 3 Law Closes Loopholes Involving Social Security Benefits but Some May Still Be Able to Take Advantage A law passed last year closes loopholes in the Social Security rules that have allowed married couples to receive more benefits over their lifetimes by following certain strategies. The Bipartisan Budget Act of 2015 shuts down loopholes that Congress said will "prevent individuals from obtaining larger benefits than Congress intended." However, while the loopholes will soon close, people in certain situations can still take advantage of them. Here's a brief description of the strategies that have been used by some married couples. It has been estimated that a couple using one of these strategies could receive tens of thousands of dollars more than if they hadn't used it: 1)File and suspend. Under this method, a higher-earning spouse claims benefits at his or her full retirement age, (currently age 66). However, this spouse then immediately suspends the benefits until a later date (for example, age 70). This allows the individual's Social Security credits to continue growing. (More credits mean a higher benefit later on.) Meanwhile, the lower-earning spouse claims Social Security benefits based on his or her spouse's life time earnings record, which is higher and will amount to more than the benefits based on his or her own earnings record. The new law eliminates the file-and-suspend strategy for claims filed after April 30, 2016, which is 180 days after enactment. If you've been using this method, you won't be affected. Or if you're eligible and want to claim benefits using this method until April 30, 2016, you still can. But after that date, the method will be unavailable. 2)Restricted Application. The new law also eliminates the restricted application strategy, which is sometimes called the "claim some benefits now, claim more later" method. Under this approach, a spouse reaching full retirement age who is eligible for both spousal Social Security benefits (based on his or her spouse's earnings) and retirement benefits (based on his or her own earnings) can file a restricted application for only spousal benefits. Then, the spouse delays applying for retirement benefits based on his or her own earnings record (up until age 70) and his or her Social Security credits keep growing. For those who turn 62 after 2015, the new law abolishes the ability to file a restricted application for only spousal benefits. If you're age 62 or older in 2015, you're still able to use the restricted application strategy for only spousal benefits upon reaching full retirement age. Filing for Social Security benefits can be a complicated process. While the new law closed these loopholes, there are still various options for claiming benefits. You can still earn Social Security credits, and thus receive higher amounts in the future, by waiting past the full retirement age to claim benefits. Maximizing your Social Security benefits has been more important in recent years because inflation increases have been small or nonexistent. For example, the Social Security Administration announced there won t be a Cost of Living Adjustment this year because there was no increase in the Consumer Price Index from the third quarter of 2014 to the third quarter of Based on information provided by the government, the average monthly benefit for retirees is expected to be $1,341 in Retired couples where both spouses are eligible for benefits are expected to receive an average monthly benefit of $2,212 in Consult with your HK adviser about how to proceed in your situation to maximize your lifetime payout.

4 Volume 12, Issue 1 Page 4...Numerous Tax Breaks...(cont. from pg. 2) Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leaseholdimprovement property. Beginning in 2016, qualified improvement property doesn t have to be leased to be eligible for bonus depreciation. Accelerated depreciation of qualified real property. The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (building alterations to suit the needs of a tenant), qualified restaurant property and qualified retail-improvement property. These expenditures are now exempt from the normal 39-year depreciation period. This is beneficial for restaurants and retailers because they tend to remodel periodically. If eligible, they may first apply Section 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Section 179 limit. Research credit. This valuable credit provides an incentive for businesses to increase their investments in research. However, the temporary nature of the credit deterred some businesses from pursuing critical innovations. The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against AMT liability, and certain start-ups (generally, those with less than $5 million in gross receipts) that haven t yet incurred income tax liability can use the credit against their payroll tax. Work Opportunity tax credit. Employers that hire individuals who are members of a target group can claim this credit, which has been extended through The new law also expands the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more. The credit amount varies depending on: The target group of the individual hired; Wages paid to the employee; and Hours worked by the new hire during the first year of employment. The maximum credit that can be earned for each qualified adult employee is generally $2,400. The credit can be as high as $9,600 per qualified veteran. Employers aren t subject to a limit on the number of eligible individuals they can hire. You must obtain certification that an employee is a member of a target group from the appropriate State Workforce Agency before claiming the credit. The certification must be requested within 28 days after the employee begins work. For 2015, the IRS may extend the deadline as it did for 2014, when legislation reviving the credit for that year wasn t passed until late in the year meaning that the 28-day period had already expired for many covered employees hired in Food inventory donations. The PATH Act makes permanent the enhanced deduction for contributions of food inventory for non-corporate business taxpayers. Under the enhanced deduction (which is already permanently available to C corporations), the lesser of basis plus one-half of the item s appreciation or two times basis can be deducted, rather than only the lesser of basis or fair market value. Beginning in 2016, the limit on deductible contributions of inventory increases from 10% to 15% of the business s AGI per year. S corporation recognition period for built-in gains tax. S corporation income generally is passed through to its shareholders, who pay tax on their pro-rata shares. If a C corporation elects to become an S corporation, the newly created S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election and recognized during the recognition period. Generally, this period is 10 years. But, under the new law, it s only five years, beginning on the first day of the first tax year for which the corporation was an S corporation. (Continued on page 5)

5 HK Bulletin Page 5...Numerous Tax Breaks...(cont. from pg. 4) Commuting benefits. The PATH Act makes permanent the provision that established equal limits for the amounts that can be excluded from an employee s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for Without the parity extension, the limit for van-pooling / mass transit would be only $130. Tax Planning with More Certainty Many of these tax breaks may seem familiar, because they're continuations from previous years. Under the PATH Act, there are now significant tax planning opportunities for individuals and businesses. The permanent extensions of some valuable tax breaks will make it easier for taxpayers to plan ahead. Keep in mind that this article only touches on some of the new law s provisions. There may be extensions and enhancements that can benefit you as an individual taxpayer and your company if you re a business owner or executive. Contact your HK tax advisor to determine how you can make the most of this tax relief. HK in the News HK is excited to announce that Supervisor, Seth Turner, CVA, will serve as the 2016 chairman of ystark! s executive committee. Seth joined ystark! three years ago and immediately became engaged in a full range of activities and quickly became the membership chair before moving to vice chairman in 2015 and chairman in Seth, a supervisor at Hall, Kistler has been with the firm for twelve years and practices in all areas of tax and accounting with a specialty in the area of business valuations. He graduated from Stark State College of Technology in 2004 with an associate of applied business degree in accounting (with distinction). Congratulations to our Director of Marketing, Jolene Colant! She is a recipient of the Achievements in Excellence Award. It will be presented to her at the 44th Annual National Sales & Marketing Executives (NSME) Accent on Excellence Event on February 23rd at Tangier s in Akron. The NSME Achievements in Excellence awards was established to recognize the best in the sales and marketing profession. The honorees have demonstrated the highest levels of professionalism during their careers in diverse sales and marketing roles. Winners are selected by NSME leaders, based on nominations from local professionals, questionnaire responses provided by the nominees and publicly available information. Criteria include community and civic involvement, professional experience and demonstrated performance.

6 Volume 12, Issue 1 Page 6 Every year, the dollar amounts allowed for various federal tax benefits are subject to change based on inflation adjustments and legislation. Here are some important tax figures for 2016, compared with Many of the dollar amounts are unchanged or have only changed slightly due to low inflation. Other amounts are changing due to legislation. Social Security/Medicare Social Security Tax Wage Base $118,500 $118,500 Medicare Tax Wage Base No limit No limit Employee portion of Social Security 6.2% 6.2% Individual Retirement Accounts Roth IRA Individual, up to 100% of earned income $5,500 $5,500 Traditional IRA Individual, up to 100% of earned Income $5,500 $5,500 Roth and traditional IRA additional annual "catch-up" contributions for account owners age 50 and older $1,000 $1,000 Qualified Plan Limits Defined Contribution Plan limit on additions on Sections 415(c)(1)(A) $53,000 $52,000 Defined Benefit Plan limit on benefits (Section 415(b)(1)(A)) $210,000 $210,000 Maximum compensation used to determine contributions $265,000 $265, (k), SARSEP, 403(b) Deferrals (Section 402(g)), & 457 deferrals (Section 457(b)(2)) $18,000 $18, (k), 403(b), 457 & SARSEP additional "catch-up" contributions for employees age 50 and older $6,000 $6,000 SIMPLE deferrals (Section 408(p)(2)(A)) $12,500 $12,500 SIMPLE additional "catch-up" contributions for employees age 50 and older $3,000 $3,000 Driving Deductions Business mileage, per mile 56 cents 57.5 cents Charitable mileage, per mile 14 cents 14 cents Medical and moving, per mile 19 cents 23 cents Business Equipment Maximum Section 179 deduction $500,000 $500,000 Phase-out for Section 179 $2 million $2 million Domestic Employees Threshold when domestic employers must withhold and pay FICA for babysitters, house cleaners, etc. $2,000 $1,900 Kiddie Tax Net unearned income not subject to the Kiddie Tax $2,100 $2,100 Estate Tax/ Annual Gift Exclusion Important Tax Figures for 2016 Federal estate tax exemption $5.45 million $5.43 million Maximum estate tax rate 40% 40% Amount you can give each recipient $14,000 $14,000

7 HK Bulletin Page 7 HK in the News...(cont. from pg. 5) Congratulations to our own Administrative Professional, Mary Jo Gowins-Scott! She recently earned a bookkeeping certificate from Stark State College of Technology. Mary Jo has served as an administrative professional for the firm since 1982 and now will have additional responsibilities as she joins our bookkeeping staff helping clients with payroll and bank reconciliations. Way to go Mary Jo! 2016 is a special year for Hall, Kistler & Company. This September we will observe our seventy-fifth anniversary! As we progress through our seventy-fifth year, we will continue to give outstanding service to our clients and community and in September we will showcase our commitment to both. Stay tuned Karen M. Brenneman, CPA, MT Managing Partner John J. Skakun, CPA Partner S. Franklin Arner, CPA Partner Keith A. Arner, CPA, CVA Partner Follow us online at :