Tax Tips For Individuals and Businesses
Write Offs for Equipment and Improvements in 2016 and 2017
You can take 50% bonus depreciation on new assets placed in service in 2016 and 2017. The remaining 50% gets depreciated over the useful life of the asset.
Property qualifying for the bonus must be new have a useful life of 20 years or less. This means all equipment, computer software, and qualified leasehold improvements. Qualified leasehold improvements are certain improvements that qualify for a 15yr recovery method.
Bonus depreciation has been extended through 2019, but gets reduced to 40% in 2018 and 30% in 2019.
If the equipment is used you can still get a write off by electing to expense the property under Section 179. For 2016 you could write off up to $500,000 and the amount of Sect 179 write off began to decrease if you purchase more than 2 million in assets and is unavailable after you hit 2.5 million. This limit is indexed for inflation starting in 2016. The $500,000 limit is applied at the taxpayer level, so if you have several partnerships or S-corporations, you have to be careful you don't exceed the $500,000 from all the entities combined. There is no limit in regards to bonus depreciation. Another important distinction between the two write offs is that bonus depreciation can actually create a loss. Section 179 deduction is limited to net income and cannot create a loss. However, businesses that fund equipment purchases with debt should think carefully before writing off the equipment in one shot. You may find yourself with future phantom income as you will be using cash flow to pay down debt without any offsetting depreciation deduction.
Health Saving Accounts Are A Good Deal
One of the best deals around is the HSA (Health Savings Account). Basically, if you have a high deductible health insurance plan, you can put money into a HSA account. You get an above-the-line deduction on your tax return for the contributions to your HSA. You can withdraw funds from the HSA to pay medical expenses that are not reimbursed by insurance.
Most taxpayers don't get a deduction for nreimbursed medical expenses, because in order to deduct as an itemixed deduction, the medical expenses have to exceed 7.5% of their adjusted gross income. So with an HSA you get the deduction for your medical expenses even if you don't itemize! Check the following website to review the crrent limits on how much you can contribute and the current high deductible requirement for your health insurance. http://hsacenter.com
Tax Credit for Providing Employee Health Insurance after 2013
Beginning in 2010, Congress passed a bill provides small businesses with a nonrefundable credit of up to 35% of the total premium cost of providing health care to their workers. If your business is considering starting a health care plan for your employees, this credit is meant to help ease the cost of starting a plan. To be eligible, the employer must contribute at least 50% of the total per employee premium cost of an employer-offered qualified health plan. For taxable years beginning in 2010 through 2013, employers with 10 or fewer employees and average annual wages of not more than $ 25,000 per employee are eligible for the full credit. Employers who employ between 11 and 25 full time employees with average annual wages between $ 25,000 and $ 50,000 per employee are eligible for a reduced credit based upon a sliding scare formula. The following employees are not eligible for the credit: a self-employed individual, a 2% shareholder of an S-Corporation, a 5% owner of an eligible small business, or an individual related to any of these three.
The small employer health insurance credit may only be claimed for two consecutive tax years beginning after 2013. The credit period is the two-consecutive-tax-year period beginning with the first tax year in which the employer offers one or more qualified health plans to its employees through a state-sponsored market exchange (i.e., through a Small Business Health Options Program (SHOP)) The credit period does not begin until the first year the employer files a return claiming the credit.No credit period is treated as beginning with a tax year beginning before 2014.
Changes For Kansas Taxpayers still in Effect (At least for now)
In May 22, 2012 Governor Brownback signed HB 2117, which dramatically changed how individuals will be taxed beginning in 2013. In summary HB 2117:
1. Lowers tax rates for all Kansas individual income taxpayers.
2. Exempts non-wage business income from Kansas taxation.
3. Repeals many of the credits (but not all) for Kansas individual income taxpayers.
As a result of this legislation many Kansas taxpayers that own businesses may pay no income tax on their business income, depending on the type of entity they have chosen to operate their business.
These dramatic changes reduced the amount of tax rvenue more than expected. By 2015, the Kanas legislators found ithemselves short by about $400 million when they prepared the budget for 2016. After much debate, a tax package was passed to address the shorfall. While it left most of the 2012 provisions unchanged it did provide for the following:
1. Increased the state sales tax rate to 6.5% begginning July 1, 2015 ($164.2 million)
2. Taxes guaranteed payments to partners retroactive to January 1, 2015 ($23.7 million)
3. Repaels the itemize deductions for medical and miscellaneous deductions ($97 million)
4. Reduces the itemized deuction for mortgage interest and taxes deduction by 50% retroactive to January 1, 2015
5. Increased the tax on cigaettes by 50 cents a pack ($40.39 million)
6. Exempts certian low income taxapayers from Kansas income tax
7. Implements an amnesty program for deliquent taxpayers (30 million)
The debate will continue as to the fairness of the policies and whether this will be enough to solve the revenue shortfall in the future.
Should You do a Roth Conversion
A common question is should I convert my traditional IRA to a Roth IRA. While I can come up with a few scenarios where this may be a good idea, remember why the government makes it easy for taxpayers to convert in the first place. It is to get you to pay taxes earlier than you would otherwise. You are making a decision to pay extra tax today based on assumptions that the tax code will be the same when you retire. That's a risky bet in my opinion.
Even if the rates stay the same are you necessarily ahead? Assume you are in a 25% tax bracket and convert a $100K traditional IRA to a Roth you will pay $25K tax and that leaves you with $75K. Let's say that doubles over the next ten years to $150K. Compare that to no conversion and the traditional IRA of $100K doubles over the same period to $200K. If you are in the same 25% tax bracket and you withdraw the IRA you pay $50K tax and net the same $150K.
Admittedly if you are young and in a low bracket now you may save money if your bracket is much higher when you retire. But now you are trying to predict what rates will be in 30-40 years out. I can't tell you with complete certainty what the tax rates will be next year, so to think we can predict what rates will be that far out is ludicrous.
Here's one rare situation where an individual can use the conversion rules to their advantage. If you are one of those few individuals that has no prior traditional IRAs and cannot make a Roth IRA contribution because your income is too high and you are already covered by a plan, then the following strategy is appropriate. In this case you make a "non-deductible" traditional IRA contribution and convert it to a Roth in the same year. As long as you do not have any traditional IRA or Simple IRA balances, then the conversion will be tax free. Assuming the rules stay the same as today, the earnings from the Roth IRA can be withdrawn tax free when you retire. If you leave it as a non-deductible traditional IRA then only the principle will be tax free when you make the withdrawal.
I'm not saying that there are no reasons to convert. Just be sure and talk to your tax professional before you make the move.
Beware of IRS Phone Scams
The IRS is warning taxpayers of a phone scam where the caller claims to be from the IRS and demands immediate payment of taxes by debit or credit card. Or they may claim you have a refund then ask for personal information that can lead to identity theft. To avoid becoming a victim of such scams you should know:
- The IRS will contact you by mail if you owe taxes, not by the phone
- The IRS never asks for immediate payment over the phone
- The IRS never insists that you use a debit or credit card to pay your tax
- Scammers will use fake names and fake badge numbers over the phone
- Scammers may know the last four digits of your social security number
- Scammers may send bogus emails to support the bogus call
- Scammers are typically abusive and threaten victims with jail time or revocation of their driver's license.
- Scammers may use fake caller id to make the victim think the call is real
If you get a call from someone alledging to be from the IRS hang up and report the incedent to the Teasury Inspector General for Tax Administration at 800-366-4484. If you do owe back taxes call the IRS at 800-829-1040 and they will help you work out a payment plan.