Back to basics: Our 2016 digest for individuals & businesses
As 2016 concludes, it’s a perfect opportunity to get back to the basics of year-end planning — the blocking-and-tackling, if you will. In the digest below, we’ve highlighted a few planning opportunities for you to consider and discuss with your Plante Moran tax advisor.
- Do a year-end projection
Projections done prior, but close, to year end are still the best way to determine your true tax position. For example, only with an accurate picture of your income can you determine whether alternative minimum tax will be an issue or if you’ll meet or exceed thresholds for the net investment income tax. This is a great year to calculate your taxable income and tax liability in order to identify tax-planning opportunities.
- Understand the impact of stock-based compensation
Stock-based compensation plans are often the most lucrative component of an executive pay and benefits package, but their complexity can make tax planning tricky. Make sure you understand whether your plan is an incentive stock option plan, a non-qualified stock option plan, a phantom plan, or one of a myriad of other types of equity-based compensation.
Planning for your equity compensation plan fits perfectly with your year-end projection discussed above. A common pitfall with stock-based compensation is that the withholding percentage on the compensation may be significantly lower than your actual tax rate. This lower withholding can surprise you when your tax returns are filed and can sometimes lead to an underpayment penalty or surprise on April 15.
- Review your real estate portfolio
If you own a second or third home that you rent out, carefully track the income and all related expenses. If you have significant rental real estate, remember to treat it like a business; separate the business and personal use of your properties by tracking days used personally and days rented out. Separate bank accounts and/or credit cards can prove useful in tracking amounts earned from and spent on the properties.
- The Alternative Minimum Tax (AMT) is still a pain in the bottom line
AMT may limit the benefit you get from certain itemized deductions and could increase your tax bill. Knowing what triggers AMT can help you identify strategies that can lower or eliminate AMT.
AMT may limit the benefit you get from certain itemized deductions and could increase your tax bill.
- Different types of investments have different tax consequences
Your investment strategy should account for taxes. For instance, a high-income individual looking for bond income should consider how different types of interest could have different tax effects. If you’re not in an AMT situation, private activity bonds might be the best choice. If AMT is an issue, municipal bonds might be a much more tax-efficient choice. And consider holding taxable bonds in your retirement account where the ordinary income they generate will be deferred until you withdraw it from your IRA or qualified plan account.
When analyzing investment choices, always use after-tax rates of return based on the full range of applicable federal and state taxes, as after-tax numbers give you a clearer picture of how much money the investment will actually generate.
- Don’t overlook year-end retirement planning
Contributions to IRAs can generally be done anytime prior to the April 15 deadline for the filing of your tax return. Extending your tax return filing deadline beyond April 15 doesn’t extend the deadline for funding your IRA. If you’re self-employed, consider creating or contributing to a Keogh or other self-employed plan. Small businesses should review some of the plan options targeted to their needs, and salaried and wage-earning employees should consider fully funding IRAs and 401(k)s.
- Charitable donations: Give, but verify
Year-end donations can reduce your taxes, but be sure you have a receipt and tax acknowledgment letter from the charity, and that you’ve valued your non-cash donations properly. The receipt should provide you with the “actual value” of non-cash items.The IRS has been very strict in this area recently. If your donation isn’t properly documented, the IRS can deny your deduction.
- Invest in your children (or your children’s children)
Gifts to education programs, like 529 plans or Coverdell education savings accounts, are a great way to fund your children’s future needs, and they provide a great gift tax planning option.
- Review your estate and gift tax plans
To understand your estate, you must first understand your personal balance sheet. While many of us have household budgets and understand our income and expenses, few of us take the time to prepare this important tool which, when updated appropriately, gives an overview of your whole financial picture — particularly where assets and liabilities are growing or shrinking. An understanding of your balance sheet will help you identify issues that should be addressed in your estate or gift plans.
- Concerns with identity theft continue
The IRS and state agencies are almost continuously under assault by hackers trying to steal tax identity information and fraudsters attempting to use stolen information. If you believe you’ve had your identity stolen, contact the IRS and follow their protocols for reporting identity theft. One suggestion the IRS provides to taxpayers is to file as early as possible. In the event your tax identification number is compromised, you’re better off if your return is filed before the fraudulent one.
- Do a year end projection
Good tax planning for businesses starts in the same place as it does for individuals — by preparing a projection of what you expect your income to be for the year. The only way for business owners to know what type of tax position they’re facing is to estimate their income for the year and crunch the numbers. This knowledge helps to plan the optimal timing for income or expenses that might occur late in the year.
- W-2s, W-3s, and some 1099s are due to the IRS on January 31
One notable law change that will take effect this year is an earlier deadline for filing information reports on wages and non-employee compensation with the IRS. Wage and compensation information forms that were previously due to the IRS by February 28 (March 31 if filed electronically) will now be due by January 31. If your business is required to file Form 1099-MISC in 2016 to report payments made to non-employees (payments reported in Box 7 of the form), the forms must be filed with the IRS by January 31, 2017.
- There are new due dates for partnerships and C-corp returns
The due date for partnership tax returns and related Schedules K-1 will move from April 15 to March 15 (or 2½ months after the close of the tax year). C-corporation returns will now be due April 15 (or 3½ months after the close of the tax year), with the exception of corporations with tax years ending June 30. Their filing deadline will remain September 15 until tax years beginning after 2025, when the new deadline will be October 15.
- The IRS can assess tax (and penalties) to partnerships
New rules change the way that the IRS can assess taxes (and penalties) against partnerships. Assessments at the entity level require the business to pay the additional tax, interest, and penalties and distribute the charges, rather than previous rules that required the IRS to figure out the allocation and assess each partner individually. For more information, click here.
- The research credit is no longer about to expire
The research credit is now a permanent part of the tax code. In addition, the IRS has provided new rules on claiming credits for internally developed software. Even if you aren’t in the business of research and development, some costs you incur to develop new products or improve processes may qualify. It can be helpful to review your business activities with an eye toward determining if any of them qualify for the credit. For more information, click here.
- Review your fixed assets
With the tangible property regulations final for over a year now, it’s time to review your processes to make sure that they’re properly documented, that capital expenditures are properly identified, and that assets are assigned the correct lives. Expenditures that might have been treated as capital improvements under old rules may now be currently deductible.
- All meals are not created equal
While most meals are 50 percent deductible, expenses for a holiday party may be 100 percent deductible when all staff in a business or division are invited. (This is a great rule to keep in mind as you plan year-end festivities for your staff.) Consider using expense-tracking software that can sort the different levels of meal deductibility as the costs are incurred.
- Don't let state taxes surprise you
Doing business across state lines? States are becoming increasingly aggressive in pursuing taxpayers that are domiciled elsewhere and doing business within their boundaries. Many states are looking to collect revenue based on increasingly broad definitions of nexus or, in some cases like Nevada’s new commerce tax, by taxing businesses on revenue earned in a state.
- International operations may qualify the U.S. benefits buy may also incur tax in foreign countries
U.S. businesses that export goods should consider tax-saving opportunities like IC-DISCs and review their operations to make sure that they’re filing in every country in which they’re required to file. Foreign countries, as well as U.S. states, are watching the valuation of intercompany transfers, known as transfer pricing, as a source of potential additional revenue.
- Don't forget healthcare reform
As of January 1, 2016, the employer mandate to provide affordable health benefits to most full-time employees or pay a penalty for failing to do so was fully phased in for Applicable Large Employers with 50 or more full-time or full-time-equivalent employees. It’s an important year to review compliance with the law and stay clear of penalties. Healthcare reporting on forms 1094 and 1095 began in 2015 but with a delayed due date; 2016 healthcare reporting forms must be distributed to employees by January 31, 2017.
As you can see, there’s often just as much tax planning to do in a “relatively calm” tax year as there is in a year in which significant changes occur. By gathering information early and talking with your Plante Moran advisor before the end of 2016, you can make decisions prior to year end that can have a positive effect on both this year’s and next year’s income tax exposure.