More Ways to Lower Your Taxes

by  /  Tax Planning

Let us continue today with our discussion of more tax deductions, credits and reductions for our 2016 tax returns. In addition to the seven tactics we discussed last time, please consider the following:

Job Hunting Costs

  • If you are searching for a new job in the same field as your last job, whether or not you were successful in finding the new job in 2016, you can deduct job-hunting expenses as miscellaneous deductions if you itemize, subject to a floor of 2% of your adjusted gross income (“AGI”).
  • Deductible costs include:
    • Taxi fares, parking tolls, 54 cents per mile for self-driving, food and lodging for overnight trips
    • Employment agency fees
    • Costs of printing resumes, business cards and advertising
  • You can also deduct moving expenses to your first job location, even if you do not itemize, as long as it is at least 50 miles away from your old home.

Reinvested Mutual Fund Dividends

  • If you, like most investors, reinvest mutual fund dividends into additional shares, the mutual fund will send you a 1099 to remind you that the amount is taxable even though you received no cash. Remember that each new purchase increases your tax basis in that fund. Increased basis results in less capital gain when you sell the fund.
  • The reinvested dividend results in tax in the year of receipt, without the receipt of any cash to pay the tax [referred to as “dry income”], but at least the annual increases in basis from the dividends being reinvested reduces the ultimate capital gain upon a sale.

Amortizing Bond Premiums

  • If you acquired a bond with a higher than market interest rate and paid a premium to face value, you must either:
    • Amortize the premium over the remaining life of the bond, by subtracting each year’s share of the premium from the interest reported each year on your tax return, and reducing the cost basis by the amount of premium amortized; or
    • Ignore the premium until you sell or redeem the bond, when the basis added by the bond premium will reduce the taxable gain dollar for dollar.
  • Better to go through the hassle of amortizing annually, because it reduces ordinary income, rather than the lower-taxed capital gain.

Child or Dependent Care Credits

For a qualifying child (age 13 or younger) or dependent/spouse (who is physically or mentally incapable of caring for his/herself and shares the taxpayer’s principal abode for at least half of the year), two options are available:

  • An employer-sponsored child/dependent care reimbursement account allows deferral of up to $5,000, avoiding federal income taxes and 7.65% of social security tax; or
  • For two or more children or dependents, you can receive a tax credit for up to $6,000 of expenses for care that enable the taxpayer to work. The credit ranges from 20 to 35 percent of the qualifying expenses, depending on level of AGI.

Business Equipment Depreciation

Accelerated depreciation can prove very useful for businesses (even those run from a home), encouraging the acquisition of needed equipment.

  • Bonus depreciation of 50% is allowed for equipment placed into service in 2016 or 2017.
  • Perhaps even more favorable is the section 179 expense election, allowing the business owner to write off the full cost of qualifying assets in the year placed into service, up to $500,000. This phases out after you put more than $2 million worth of assets placed in service in a year. Think about that new computer or printer this year, before rates are lowered and deductions become less valuable.

Divorce and Legal Fees

  • Legal fees and court costs of a divorce are generally not deductible, as personal expenses.
  • However, if you itemize, you can deduct the portion of the legal fees for acquiring alimony, because that is taxable income, and tax advice. Be sure to get a detailed invoice separating out the various services.
  • This is deemed to be a miscellaneous expense deductible over 2 percent of AGI.

There are other deductions/credits that are more widely known and applied. These and last submission’s lists are some of the lesser known, yet still useful, tools to lower your tax liability.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Lower Your Taxes

by  /  Tax Planning

Last time we discussed the likelihood of tax revision/reduction passing in the Republican-controlled Congress early in the new Trump administration. In anticipation of lower tax rates next year, we should focus on deferring income and accelerating deductions/credits/reductions this year. It is worthwhile to mention a few tactics that are often overlooked, but could reduce your tax bill.

Tax Credits and Deductions

  • A tax credit is a more valuable dollar-for-dollar reduction of your tax due (if it is a refundable credit, it can generate a check back to you even if you owe no taxes, if it is non-refundable it can only decrease actual taxes you owe).
  • A tax deduction is less valuable because it lowers the amount you pay tax on, rather than directly reducing the tax.
  • If you are in the 28% tax bracket, a $1.00 deduction lowers your taxes by 28 cents, but a $1.00 credit lowers your taxes one dollar.

Tax Loss Harvesting

  • Sell your losing investments before year end to generate realized losses to offset other gains from sales or distributions from your mutual funds.
  • This is not a deduction, but is a quantifiable reduction in taxes.
  • Remember the wash sale rule and do not buy the securities you sell at a loss within thirty days before or after the loss sale.

Student Loan Interest Paid by Parents

  • If you are not claimed as a dependent on your parents’ tax return, but they pay back your student loans, you can deduct up to $2,500 of student loan interest each year, even if you do not itemize.
  • Your parents’ repayment is deemed to be a gift to you, followed by your payment.
  • Your parents will not mind, because, in addition to the fact that they love you, they could not deduct the interest anyway, as it is your debt.
  • Do not forget to deduct student loan interest you pay yourself, also included in the $2,500 maximum.

State Tax Paid with Last Year’s Return

When you list your 2016 state tax withholdings or estimated tax payments,  remember to include the amount you submitted last spring with your state tax return for taxes you owed from 2015.

American Opportunity Credit

  • For all four years of college you can receive a credit for 100% of the first $2,000 spent on qualifying college expenses and 25% of the next $2,000.
  • The credit phases out at a couple’s Joint Adjusted Gross Income (“AGI”) of $160,000.
  • This is a refundable credit, so if it reduces your taxes below zero, you can receive a check from the IRS for the difference.

Credits for Energy Savings Home Improvements

  • Up to $500 of eligible energy saving improvements, such as insulation, efficient HVAC systems and new windows, based on 10% of the cost.
  • Qualified residential alternative energy equipment, such as solar hot water heaters or wind turbines, get a credit of 30% of the cost, including installation, without the $500 limit.
  • These credits expire this year, unless renewed.

Out-of-pocket or In-kind Charitable Deductions

  • Charitable contributions in cash or by check are easy to remember, but do not forget other gift vehicles.
  • Gifts of appreciated property (stocks) can deliver the same dollar amount while also avoiding capital gains tax on the sale of the stock and the gift of the proceeds.
  • Assets with a loss should first be sold and then the cash proceeds donated to the charity.
  • Gifts of personal assets, such as clothing or other personal items, are deductible at thrift shop value.
  • If you drove your car for a charity, deduct 14 cents per mile, plus parking and tolls. You cannot deduct the value of your time, however.
  • Keep the receipts to substantiate your deduction and individual contributions over $250 need an acknowledgement from the charity as to the support you provided.

Medicare Premiums for the Self-employed

  • If you continue to run a business after you are eligible for Medicare and if you are not eligible for coverage on another employer’s or your spouse’s employer’s health care plan, you can deduct the premiums for Medicare Part B and Part D, plus a Medigap supplemental policy.
  • You need not itemize to claim this deduction and it is not subject to the 7.5% of AGI threshold for those over age 65, that increases to 10% of AGI after 2016.

Notice that some of these deductions/credits apply whether you itemize or claim the standard deduction on your return. Proposals for 2017 include increasing the standard deduction to $30,000 for a couple filing jointly.

The first partner I worked for out of law school shared with me what, in retrospect, has proved to be valuable tax advice: “Be sure you disclose every penny of income on your return, but be equally certain you have taken every penny of justifiable deduction from that income.”


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Trump Tax Plan

by  /  Tax Planning

Now that the election is final, let us review positions on tax planning that the President-elect Trump stated during the campaign, in hopes of preparing in advance of any legislation being passed. President-elect Trump’s Tax Plan is similar to that proposed in June by the House Speaker Paul Ryan and Republican leaders of Congress:

Individual Side

  • Reduce marginal income tax rates for all individuals and businesses.
    • 3 ordinary income tax brackets of 12, 25 and 33%.
    • Maintain current capital gains tax rates of 0, 15 and 20 percent.
  • Repeal personal exemptions and increase standard deduction amounts:
    • Increase from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married filing jointly.
  • Cap itemized deductions at $100,000 for single filers and $200,000 for married joint filers.
  • Repeal the individual and corporate alternative minimum taxes (“AMT”).
  • Repeal the 3.8 percent net investment income tax (“NIIT”).
  • Tax carried interest (from hedge funds) at ordinary income tax rates, rather than capital gains.
  • Repeal the estate, gift and generation-skipping transfer taxes, replacing them with carryover basis of appreciated assets (rather than the current step-up to date of death valuation), subjecting beneficiaries to capital gains tax on the built-in pre-death appreciation of inherited assets when they sell the inherited assets in the future. A capital gain exemption amount of $5 million for individuals and $10 million per couple filing jointly is proposed. Without this, taxpayers who were previously exempt from estate tax, would have to pay capital gains tax on imbedded pre-death gains.

Business Side

  • Reduce the corporate income tax rate from 35% to 15%, for businesses “that want to retain the profits within the business.” This sounds like C corporations, because S corporations and LLCs pass the taxes on to the shareholders.
  • Eliminate most corporate deductible tax expenditures except the research and development credit.
  • Impose a one-time 10% deemed repatriation tax on corporate profits held offshore, to entice corporations such as Apple to repatriate their profits and bring the cash back home.

Under the Trump Tax Plan 

  • Over the next ten years, federal tax revenue is reduced by $6.2 trillion, increasing the federal debt by approximately $7.2 trillion (with interest) on top of the current $20 trillion, if not offset by spending cuts.
  • Nearly all Americans would see a reduction in taxes in 2017:
    • $4,310 if you make between $143,100 and $292,100, and
    • $1.07 million if you are in the top 0.1 percent and make over $3.8 million.

Under the House GOP Plan 

  • Tax revenues would decrease and the national debt would increase, by about one-half of the Trump numbers.
  • Those with incomes under $292,100 would see a slight drop of $340, but the top 0.01 percent would see an average $1.2 million tax decrease in 2017.

Given the Republican-controlled White House and Congress, it is likely that some form of tax reform legislation will pass in 2017. The issue will be what terms will garner bi-partisan support for passage? The disproportionate benefits between the high and low-ends of the proposed income brackets may cause heartburn with the current proposals.

Something will pass, however, so what should we do today to prepare for a tax decrease in 2017?

  • The old adage is to defer income into 2017 and accelerate deductions into 2016.
  • Sell losing stocks in 2016 to maximize tax loss harvesting; delay selling winning stocks into January 2017, to enjoy any tax breaks. However, never allow tax planning to prevent you from making the correct investment decisions. It is always better to sell a day early than it is to sell a day late.
  • Bunch your deductions into 2016, as they will be worth less after a tax cut. If the standard deduction for a married couple increases to $30,000, many taxpayers will not need to itemize their deductions on Schedule B of Form 1040.
    • Accelerate elective medical expenses
    • Pay state income and property taxes early
    • Double–up your 2016 charitable contributions and possibly skip 2017.
    • Max-out your deferrals into your employer-based qualified retirement plan.
  • Defer bonuses and consultant invoices into 2017, if possible.

We are confronted with “A Good Problem.” Preparing for tax cuts is always more fun than preparing for tax increases.

In the words of Bobbie McFerrin, “Don’t Worry… Be Happy.”


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Year-End Tax Planning

by  /  Tax Planning

Some may think that this is the time of year for trick-or-treating, setting our clocks back one hour, and raking leaves. However to many, this is our last shot at lowering our 2016 income taxes. Our lives are somewhat easier this year because many of the various extender tax breaks were made permanent or renewed for 2-5 years in late 2015 with the passage of the Protecting Americans from Tax Hikes Act (PATH Act). Without this added suspense, let us consider some tax saving steps involved with investments:

Tax Loss Harvesting

  • If you sold multiple securities during 2016 it is likely that some transactions resulted in gains and others in losses, and that some were short-term (held for one year or less) and others long-term (held for more than one year).
    • First, net your short-term gains against short-term losses,
    • Then, net your long-term gains against your long-term losses,
    • Net short-term gains are taxed as ordinary income, and
    • Net long-term gains are taxed according to your income tax bracket
      • 0 percent up through a 15% tax bracket, then
      • 15 percent up through a 35 percent bracket, then
      • 20 percent in the 39.6% bracket
    • Net short or long-term losses of up to $3,000 can be deducted from ordinary income from whatever source, and above $3,000 can be carried forward indefinitely.
  • If you have a net short-term loss and long-term gain, or vice versa, net the two positions and pay tax or deduct the loss based on whichever is higher. Remember to first net short with short and long with long, then net short against long and handle whatever the net result is accordingly.
  • Harvesting losses proactively also helps dampen the effect of unexpected December mutual fund distributions of dividends and capital gains built up during the year, such payouts are taxable even if you reinvest them in additional shares. Remember that you have a taxable event when you sell mutual fund shares that you can control the timing of, but you cannot control the timing of annual distributions from the funds themselves, which are also taxable events.

Wash Sale Rule

  • If you sell a stock and reacquire “substantially identical securities” within thirty days before or after the loss (total of 61 days), that is a wash sale and the result is
    • The loss is disallowed currently,
    • The loss is added to the basis of the reacquired securities, deferring the loss until they are sold, and
    • The holding period of the sold securities carries over to the reacquired securities.
  • Because the wash sale need not be triggered intentionally, watch out for various managers holding the same security in your various accounts. Any buys or sells on your behalf can trigger the wash sale, even if you find out later on the various manager statements.
  • Wash sale also applies to a loss sale in a taxable account and a repurchase in an IRA.
  • Be careful in repurchasing mutual funds within the thirty day period, because whether the new fund is “substantially identical” to the one sold at a loss is a facts and circumstances test.

Worthless Stock

  • The general rule is that if a stock becomes worthless during the year, it is treated as if you sold it for zero on December 31, resulting in a capital loss.
  • You must be able to prove the stock is totally worthless, which is often not easy because companies exaggerate, so you might be inclined to wait for certainty.
  • But the rule is not optional. If the stock becomes worthless, you must deduct it in the year it first becomes worthless or not at all.
  • If you are too early, the IRS could disallow the loss. If you are too late the IRS can claim it was first worthless in a prior year.
  • On balance, it is probably better to claim the loss earlier, rather than later.
  • Alternatively, sell the stock for a penny to create an identifiable transaction. Practically, however, it can be difficult or expensive to sell any share for a penny through a broker.

Multiple Tax Lots

  • In any of these instances discussed above, if you acquired the stock in multiple purchases, it is important to identify the particular tax lot of the stock you wish to sell.
  • If you follow the rules properly, you can identify the particular tax lot to sell, either with lower or higher basis depending on whether you want a higher gain or loss.
  • The default rules depend on the custodian’s approach in booking the shares, but is generally FIFO (First In First Out).

Not every investment goes up every time period. Focusing on these matters can save you tax dollars. MORE TO COME NEXT SUBMISSION.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Presidential Candidate Estate Tax Proposals

by  /  Estate Tax, News, Tax Planning

It is timely to consider Mr. Trump and Secretary Clinton’s proposals regarding estate tax reforms to the “permanent” exemptions [$5 million + inflation] and rates [max of 40%] adopted in 2012. The televised presidential debates have centered on more lurid topics, but proposed tax changes may involve significant sums of money and are worthy of note.

Hillary Clinton

  • Restore 2009 estate tax exemption of $3.5 million.
  • Progressive estate tax rates on taxable estates:
    • 45% up to $10 million
    • 50% over $10 million
    • 55% over $50 million
    • 65% 0ver $500 million
  • Close the “step-up in basis loophole” that increases basis of appreciated assets to date of death value, avoiding accumulated capital gains taxes for the beneficiaries of the bequeath.
    • Treat bequests as “realization events,” forcing immediate income taxation of any built-in gains.
    • Exemptions are proposed to limit application of the new rule to only high-income families and to protect small and closely-held businesses, farms, homes, personal property and family heirlooms.
  • This could result in a top marginal transfer tax rate of 80%, the world’s highest:
    • 65% estate tax rate, plus
    • 4% income tax [39.6% marginal tax rate + 3.8% net investment income tax + 4% surtax on incomes over $5 million].

Donald Trump

  • Repeal the reviled “Death Tax.”
  • Stepped-up basis would be ended and built-in capital gains at death over $10 million would be subject to tax:
    • Small businesses and family farms exempted.
    • Contributions of appreciated assets into a private foundation established by the decedent or relatives would be disallowed (to prevent abuse).
  • Few details are enumerated, but presumably if the death tax were repealed:
    • Gift and generation skipping taxes would also be repealed, and
    • There would need to be an inferred carryover basis on inherited appreciated assets that would result in capital gains only upon a future sale or realization event. If not, there would be a deemed disposition tax similar to Secretary Clinton’s proposal, although at a lower 20% rate on assets held more than one year.

Ending “stepped-up” basis may be one of the few matters the two candidates agree upon. This is worthy of note because the loss of basis step-up of highly appreciated assets could result in capital gains tax higher than the estate tax. Depending on the final terms, it could apply to transfer assets in estates of all sizes, even if not subject to estate tax.

Internal Revenue Code Sec. 1014 currently provides for step-up in basis of assets to date-of-death fair market value. Carryover basis of assets (passing the capital gains tax along with the asset) was tried in 1976, but then repealed in 1980 due to the administrative mess of tracking and actually determining carryover basis. Your humble scrivener learned about these nightmares while studying estate tax in law school, only to have carryover basis repealed upon graduation. Perhaps our modern computer capacity will make such calculations more manageable for publicly traded securities where we know acquisition date and cost, but tracking basis of individual head of cattle on the family farm or individual nuts and bolts for the family hardware store might prove more bothersome.

More importantly, beneficiaries have historically received a stepped-up basis, avoiding pre-death capital gains taxes, and have been responsible for only after-death capital gains. Not only will substantial capital gains tax be owed, but this will apply to all estates, whether taxable [large] or not.

Our Democracy survived 2010, when there were temporarily no estate taxes in effect and executors could elect to use a modified carryover of basis rules. Perhaps we will be similarly fortunate with our next venture into carryover basis. What we need to be aware of, however, is that all beneficiaries may be paying capital gains taxes, no matter the size of the estate. We will go from a regime where incredibly few estates are taxable to a new regime where all estates may involve capital gains taxes. This would include portfolios of stocks and bonds, as well as the family homestead. This will turn out to be a much bigger deal than we will be informed of in advance…


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Doing Well By Doing Good

by  /  News, Tax Planning

If you have an interest in supporting your favorite charity, today we consider a charitable, yet tax efficient, use of your IRA assets.

  • Whether cash flow is needed or not, every IRA owner 70 ½ and older must take required minimum distributions (“RMDs”) from their IRAs each year, based on your life expectancy and the January 1 value of all of your IRAs. This is not due to the IRS’s concern for our having adequate retirement cash flows to ensure a satisfying lifestyle, but rather a desire to collect current ordinary income tax from IRA distributions, rather than allowing the tax deferral to continue indefinitely.
  • If you are fortunate enough not to need all of your RMDs to maintain your lifestyle, you have the opportunity to make a direct “Qualified Charitable Distribution (“QCD”)” from your IRA to any public charity of up to $100,000 each year, without including such transfer in your adjusted gross income (“AGI”).
  • QCDs may only be made unconditionally to public charities, and not “quid pro quo” donations (i.e., for better basketball tickets). The charity must be public, not a private foundation, donor-advised fund or supporting organization.
  • QCDs may be made from IRAs or Roth IRAs, but not from SEP, SIMPLE or inherited IRAs. As distributions from Roth IRAs are income tax-free, they are likely not the best alternative.

A QCD will satisfy the donor’s RMD, without increasing AGI, so less income tax will be due and good will be done.

Having a higher AGI due to an IRA distribution can be detrimental to you for reasons unrelated to your IRA. Many expensive results derive from higher AGIs:

  • Higher income taxes on social security.
  • Limitations on itemized deductions and personal exemptions due to “haircuts” of such items for those with higher AGIs.
  • Limitations on annual charitable deductions (e.g., limited to 50% of AGI) could restrict deductions for your current-year contributions (although currently non-deductible contributions can be carried forward and deducted for a period of up to five years).
  • Medicare insurance premiums and Medicare surcharges increase.

Because QCDs do not increase AGI, they do not exacerbate these adverse results.

The QCD is not taxable income, so it is not deductible.

  • QCDs allow the approximately two-thirds of taxpayers who take the standard deduction, without deducting charitable gifts, to now get the equivalent of a deduction.
  • Not being taxed on income is the equivalent of a tax deduction.

Making a QCD is painless:

  • Simply contact the charity to determine the proper payee name for the check.
  • Then instruct your IRA custodian or trustee to make a transfer from the IRA directly to the charity. Most custodians already have forms and procedures in place to make this transfer.
  • The check cannot be made payable to you, it must be to the charity. It cannot flow through a non-IRA account of yours as an intermediate step.
  • The check must go directly to the charity, which must then issue you a letter of acknowledgement.

Your assets flow in one of three directions during life and at death:

  1. Your family, friends and designees, or
  2. Charities of your choice, or
  3. The Government.

Why not choose who gets your assets, rather than defaulting them to the Government?

The QCD is a user-friendly and effective way to further the good works of your favorite charities. You really can do good while doing well on your tax planning!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.


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President Obama’s Last Budget Proposal

by  /  Estate Planning, Retirement Planning, Tax Planning

Last month, the President proposed his FY2016-17 budget request for the Federal government. Congress often considers these provisions while developing its own budget resolution, and they are recorded in Treasury’s Greenbook.  Intermittently, Congress actually passes a budget, as it did for the first time in seven years in December 2015. It is unlikely that any material tax legislation will be passed during this 2016 election year, so the President’s proposals are not likely to be approved. Nevertheless, the President’s proposals indicate what is on Washington’s “radar screen,” in terms of “crackdowns” or “loophole closers,” such as the ending of the file-and-suspend and restricted Social Security claiming strategies last fall.  Because we are always predicting the future implications legislation might have on our planning process, it is worthwhile to discuss some of the impacts of such proposals before they are about to be approved.


We plan to investigate the changing retirement landscape in detail in future submissions, but some of the budget proposals deserve mention here. There seems to be an overriding goal of limiting the use of common retirement planning tools by affluent taxpayers.

  • Prevent new retirement plan contributions for taxpayers with more than $3.4 million in account balances. The government will determine what we need in retirement plans, versus what must be in taxable investment accounts.
  • Eliminate “backdoor” Roth IRA contributions. Roth IRAs are an essential piece of the retirement planning puzzle that we will discuss at length in the future. The “backdoor” approach is merely a tactic for taxpayers whose adjusted gross income (“AGI”) exceeds limits for a normal Roth IRA contribution, to convert after-tax dollars into a Roth IRA.
  • Required Minimum Distributions (“RMDs”) required for Roth IRAs at age 70 1/2. Currently required only for traditional IRAs.
  • Eliminate Stretch IRA which require non-spouse beneficiaries to use the 5-year distribution rule, rather than their life expectancy.
  • Eliminate the preferred treatment of Employer stock liquidated in a retirement plan after retirement.


  • Reduce estate tax exemption from current $5.4 million to $3.5 million (the 2009 level).
  • Eliminate Step-Up in Basis at Death and replace with deemed-sale-at-death, resulting in significant capital gains taxes for beneficiaries.
  • Establish 10-year minimum term for GRATs, gutting the common tactic of using multiple short term GRATs. Discussion of use of GRATs to freeze estates is beyond today’s topic.
  • Similarly, requiring property sold to an Intentionally Defective Grantor Trust (“IDGT”) to be included in the taxpayer’s estate guts the tactic, but is for discussion another day.
  • Prohibit Dynasty Trusts, limiting their duration to 90 years.
  • Replace unlimited present interest gifts with “crummy” notices to get them under the annual gift exclusion with a new class of future interest gifts that are permitted up to $50,000 per year to trusts or of pass-through entity interests.


  • Increase maximum capital gains tax rate from 20% to 24.2%, which becomes 28% when the 3.8% Medicare surtax on net investment income is added.
  • Limit annual 1031 Like-Kind Exchanges of Real Estate to $1 million per year. Anything over would be taxable capital gain.
  • Apply the 3.8% Net Investment Income Medicare Surtax to S corporation distributions, limiting the tax advantage of pass-through S corporation treatment.
  • Require average cost for all stock sales (as has been the case for mutual funds), rather than specific lot identification (“cherry-picking”) for tax-loss harvesting purposes.

The provisions discussed above are used in income tax planning to a similar extent that the voided “file-and-suspend” tactic was used in retirement planning prior to its termination. Passage of these proposals will have a material impact on tax planning.  The outcome of the Presidential election is likely to have a significant influence on the ultimate passage of these ideas into law. STAY TUNED!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Health Care Law and Your 2015 Tax Return

by  /  Health Care, Tax Planning

We have previously discussed the impact of the Tax Extenders that were approved in December 2015 on preparation of our 2015 tax returns. Perhaps the single most impactful change between 2014 and 2015 tax returns involves the Affordable Care Act (“ACA”) and the requirements it places on all taxpayers. These provisions have phased in since ACA’s passage in 2010, but returns filed for 2015 will be the first for many Americans to be materially affected by the insurance coverage rules.

  • As of January 1, 2014, most Americans are required to have minimum essential health insurance– known as the Individual Insurance Mandate. This should have little impact on most tax filers.
    • If you had employer-provided insurance for most of 2015, or you purchased coverage through a private exchange or directly from an insurance company the Mandate should have no impact on your taxes. You simply check a box on your return to indicate that everyone listed on the first page of the return had insurance coverage throughout the year.
    • If you purchased insurance through the government’s health insurance Marketplaces, you may be eligible for a tax credit/subsidy that can be applied directly to your insurance provider to lower premiums payable or applied on your tax return.
    • Approximately 85% of individuals who purchased insurance through the Marketplaces receive advance premium tax credits/subsidies. Subsidies generally apply for incomes between 100% and 400% of the Federal Poverty Level (which Level in 2016 varies from $11,770 for a single person to $40,890 for a family of 8). The applicable subsidy is based on income and family size.
    • If you received the advanced premium credit/subsidy in 2015, you will likely have received a Form 1095-A in January reporting this credit, that you should reflect on your tax return. You will file Form 8962 and may receive a larger credit or be required to pay back some or all of the credit, if your actual income is more or less than the amount you estimated when you purchased coverage in the Marketplace. If you are required to repay credit paid at the time you purchased insurance in the Marketplace, the amount owed will flow from Form 8962 to Form 1040, line 46.
  • If you did not have insurance coverage for 2 or more months in 2015, you may be subject to a penalty (known as an individual shared responsibility payment) when you file your return. The penalty is the higher of 2% of your 2015 income or $325 per adult, and $162.50 per uninsured dependent under the age of 18, up to $975 total per family. Individuals that need to make a shared responsibility payment/penalty can calculate the payment on the worksheet included in the instructions to Form 8965.
  • Taxpayers who did not maintain coverage, but meet certain criteria, may be eligible to receive an exemption from coverage. Some exemptions may be obtained only from the Marketplaces and others can be claimed on Form 8965 of your tax return. If a taxpayer does not have insurance or an exemption, a penalty will be payable.
  • The ACA also brings the new shared responsibility payment to applicable large employers that do not offer minimum essential coverage, coupled with complicated new reporting requirements, such as Form 1095-A discussed above for the individual recipients.

We are all hearing heated debates of the pros and cons of the ACA (aka, “Obamacare”) in the various presidential campaign events. Without regard to the relative merits of the various arguments, the time has come to focus on its impact on our tax returns. Preparation of our 2015 returns will be the first of many impacts of ACA on our financial lives. Many unfortunate taxpayers will discover that the government was serious when it mandated insurance coverage be in place for all, when they encounter the higher penalties in 2015 and still higher in 2016. Taxpayers who have not yet obtained coverage are encouraged to do so now, or apply for an exemption.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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More Year-End Tax Improvements

by  /  Tax Planning

Last submission we focused on the Tax Extenders enacted with the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) benefiting individual taxpayers. Today we focus on Tax Extenders affecting businesses. PATH passage was a great relief to many small businesses that heavily rely on these tax breaks.


  • Code §179 Expensing Deduction
    • Pre-PATH, the maximum §179 deduction for expensing fixed asset purchases beginning in 2015 was only $25,000, phasing out dollar-for-dollar to the extent that total qualifying fixed asset purchases for the year exceeded $200,000. No §179 deduction was allowable for real estate improvements and the 50% first-year bonus depreciation deduction for fixed assets ended after 2014.
    • PATH restored the $500,000 maximum §179 deduction with a $2 million phase-out threshold, as well as the §179 deduction for computer software and for qualifying real estate improvements, indexing for inflation starting in 2016. The 50% first-year bonus depreciation deduction is in place until 2017, decreasing to 40% in 2018 and 30% in 2019.
    • Companies are permanently allowed to use 15-year straight line cost recovery for qualified leasehold, restaurant buildings and retail improvements.
    • The §179 deduction cannot exceed the taxpayer’s business taxable income calculated before the deduction and special limitations apply to partnership and S corporation businesses and owners.
  • R & D Credit
    • The R & D tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and payments to universities and other qualified organizations for basic research.
    • The R & D credit equals the sum of
      • 20% of any excess of qualified research expenses for the tax year over a base amount,
      • The university basic research credit, which is generally 20% of the basic research payments, and
      • 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.
    • In addition, beginning in 2016, eligible small businesses with $50 million or less of gross receipts may claim the R & D credit against their alternative minimum tax (“AMT”) liability and small start-up businesses with less than $5 million of gross receipts may claim up to $250,000 per year of the credit against their employer FICA tax liability. This can be a huge help to a start-up business.
    • Many research investments require years to realize potential, so making this credit permanent, rather than annually renewable, is a great benefit to business and society.
  • Reduction in S Corporation Recognition Period for Built-in Gains Tax
    • An S corporation is not subject to a separate tax on its operations, like a C corporation, but instead passes through its income to its shareholders, who pay the tax pro-rata on their shares of the S corp.’s income.
    • When a C corp. elects to become an S corp. (or when an S corp. receives property from a C corp. in a nontaxable carryover basis transfer (spinoff)), the S corp. is taxed at the highest corporate tax rate on all built-in gains from C corp. operations pre-conversion, if assets are sold and gain is recognized during a “recognition period.”
    • PATH made permanent the five-year recognition period that has been in place temporarily since 2012, replacing the historic ten-year period, starting on the first day of the first tax year for which the corporation was an S corp. or acquired property from a C corp.
    • Any gain or loss on a disposition of property by an S corp. more than five years after the first day of the recognition period will not be taken into account in determining the net recognized built-in gain. Knowing that the waiting period to avoid the tax on built-in gains is permanently five years, rather than ten, is an obvious benefit.
  • 100-Percent Exclusion of Gain on Small Business Stock
    • Non-corporate sellers of Qualified Small Business Corporation stock held for more than five years can exclude any gain realized from such sale or exchange, without including any of this excluded gain in alternative minimum tax calculations.
    • This is a valuable method of funding certain startups. It requires a five year holding commitment, but trading such stock for a similar stock can allow gain recognition to be further deferred.
  • Other Permanent Breaks
    • Basis adjustments to S corps. making charitable contributions of property.
    • Employer wage credit for employees who are active duty military.
    • Enhanced charitable deduction for corporate contributions of food inventory.


  • First Year Bonus Depreciation (discussed above)
  • Expanded Work Opportunity Credit
    • Allows employers who hire members of certain targeted groups to get a credit against income tax of 40% of $6,000 in first year wages. This increases if the employee is a long-term family assistance recipient, up to an additional 50% of second year wages.
    • The maximum wages to which the credit can be applied for hiring a veteran increase from $6,000 to $12,000, $14,000 or $24,000, depending on factors such as service-related disability, and the period of unemployment before being hired, and when the unemployment occurred.
    • This credit has been extended until 2019.
  • Business Provisions Extended Through 2016
    • Various energy-efficiency tax credits, including wind, solar and energy-efficient commercial buildings.
    • Empowerment Zone tax breaks for certain economically depressed areas.
    • Employment credit for certain Indian tribe members.
    • Railroad track maintenance credit.
    • Election to expense mine safety equipment.

This discussion is a summary of PATH’s provisions that provide meaningful relief to taxpayers seeking to plan business operations in tax-efficient manners. Both individuals and businesses are relieved of waiting until December 2016 to see which of these various benefits will be continued.  It is a rare pleasure to discuss such positive tax legislation with you.


Remember, it’s not what you make that matters…it’s what you keep!


The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Year-End Tax Improvements

by  /  Tax Planning

As expected and discussed in previous submissions, Congress enacted the Tax Extender package prior to year-end 2015. President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), together with a FY 2016 Omnibus Budget, on December 18, 2015. This is much better news than expected, however, because PATH permanently renews many of the provisions, while renewing others for periods of a few years. For the first time in a number of years we will not find ourselves in tax limbo in late 2016, awaiting congressional action. As we commence our 2016 tax planning, we will focus on these legislative Christmas presents. This submission focuses on provisions affecting individual taxpayers, leaving corporate and partnership provisions for later submissions.


  • State and Local Sales Tax Deduction—
    • Since 2004, taxpayers living in states without income tax (i.e., Florida, Texas, Nevada, South Dakota, Alaska, Washington and Wyoming) have had the ability to claim an itemized deduction for either the payment of state income taxes or state sales taxes. Since residents of these states paid no state income tax, this basically added a deduction for state sales tax—a huge benefit. This provision was renewed annually since 2004, until it was made permanent by PATH.
    • The state sales tax deduction can be determined by adding up the actual state sales tax paid (validated by receipts), or the IRS provides a sales tax deduction calculator that estimates what can be claimed as sales taxes based on the taxpayer’s income and zip code.
    • Typically, because state sales taxes apply only to goods that are purchased and state income taxes apply to all income, the latter is typically used, unless the taxpayer lives in a state with no income tax. Making this deduction permanent will clearly benefit taxpayers with low taxable income (retirees), who have large expenses, such as acquisition of cars or other large ticket items.
  • Qualified Charitable Distributions (“QCDs”) from IRAs—
    • Individuals age 70 ½ and older are now permanently allowed to make annual tax-free distributions of up to $100,000 directly from their IRAs to qualified charitable organizations, as they have been able to since 2006.
    • The contribution to the charity is not claimed as a tax deduction, but it is not included in income either, and therefore does not increase Adjusted Gross Income (“AGI”) for calculations such as Medicare surcharges or other taxes that are subject to AGI thresholds.
    • A QCD counts toward the taxpayer’s Required Minimum Distribution (“RMD”) obligation for those age 70 ½ or over.
    • This provision is clearly beneficial to charities and taxpayers, but taxpayers may still find donation of appreciated securities to be a more attractive alternative, due to avoidance of capital gains tax as well as a charitable deduction for the current fair market value of the donated stock.
  • Qualified Conservation Contributions—
    • The special rule allowing contributions of capital gain real property for conservation purposes, against an increased 50% of the contribution base and an extended carryforward period, is made permanent. 
  • Transit Benefits Parity—
    • Makes permanent the increase in the monthly exclusion for combined employer-provided transit passes and vanpool benefits to the same level as the monthly exclusion for employer-provided parking.
  • Enhanced American Opportunity Tax Credit (“OPPORTUNITY”)—
    • Previously, college students were eligible for a $1,800 Hope Scholarship Credit (“HOPE”) for tuition and related expenses in the first two years of college, with the less desirable Lifetime Learning Credit available in the last two years. HOPE phased out for joint filers with AGIs of $96,000.
    • In 2009, HOPE changed into the American Opportunity Tax Credit (“OPPORTUNITY”), expanding the credit to $2,500 per year, allowing it for up to four years of college, and raising the AGI phase-out to $160,000 for couples filing jointly.
    • OPPORTUNITY was scheduled to lapse and revert to Hope at the end of 2017.
    • OPPORTUNITY is now permanent.
  • Enhanced Child Tax Credit—
    • The child tax credit is a $1,000 credit available for each “qualifying child” living in the household (under 17, claimed as a dependent and provides half or less of his/her own support).
    • This phases out for joint filers with AGIs over $110,000.
    • Lower-income taxpayers, who did not have a $1,000 tax liability to credit against, received a refundable credit, called the additional child tax credit, for 15% of the earned income over a threshold. This amount would have been $14,000 today, but was reduced to $3,000 in 2009 until it was to go back to $14,000 + in 2017.
    • This $3,000 threshold was made permanent by PATH.
    • This allows many more lower-income taxpayers to receive the entire $1,000 additional child tax credit.
  • Earned Income Credit—
    • Makes permanent changes that were to disappear after 2017-
      • The $5,000 increase in the phase-out amount for joint filers, and
      • The increased 45 percent credit rate for taxpayers with three or more qualifying children.
  • Teachers’ Classroom Expense Deduction—
    • Permanently extends the above-the-line deduction for elementary and high school teachers’ classroom expenditures, including professional development expenses.
    • If teachers need not buy erasers, they might take some Continuing Education classes.


  • Mortgage Debt Exclusion—
    • Traditionally when a taxpayer’s debt is discharged, other than due to total insolvency, the canceled debt is treated as taxable income.
    • The Mortgage Debt Relief Act of 2007 sought to provide relief for the declining real estate market by alleviating the traditional “cancellation–of-indebtedness income” rules for up to $2 million of cancelled debt associated with the mortgage on a primary residence.
    • Thus, a short sale of an “underwater” residence does not result in income for the difference between the value realized and the mortgage balance for a primary residence. This permitted the taxpayers who just took a loss on their house to avoid paying tax on the “income” represented by the loss below the mortgage amount.
    • This represented an important benefit to unfortunate homeowners, and is extended through 2016. Those facing a short sale of their principal residence below their mortgage amount may wish to consider such a sale (or at least entering into a binding written agreement to do so) in 2016, in case this provision is not extended again.
  • Mortgage Insurance Premium Deduction—
    • For taxpayers who pay Private Mortgage Insurance (PMI) for a mortgage that had a less-than-20% down payment, current law allows a deduction for the mortgage insurance payment, as interest on mortgage debt, as long as the mortgage was incurred after 2006 on a primary residence.
    • This phases out for joint AGIs above $110,000.
  • Above-the-Line Education Deduction for Tuition and Fees—
    • An alternative to the OPPORTUNITY or the Lifetime Learning Credit for college expenses discussed above, is to claim the “above-the-line deduction” of up to $4,000 of tuition and related fees for a dependent college student.
    • This dropped to $2,000 for joint AGIs of $130,000 and was eliminated for joint AGIs of $160,000.
    • This is generally a less desirable outcome to the OPPORTUITY credit of $2,500.

A review of these Extenders confirms that many of them were “gifts” to certain taxpayers that were deemed worthy. It is fortunate from a planning viewpoint, therefore, that many of these benefits of social engineering through the tax code were made permanent, so as to no longer be subject to an annual judgment of their worth. After all, who can deny that Teachers buying chalk and erasers out of their own pockets should be entitled to a $250 deduction?


Remember, it’s not what you make that matters…it’s what you keep!


The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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