TAX UPDATE SPRING 2016
As always we appreciate your business during the tax season and beyond. For many accountants tax season does not end until the final due date deadline of October 15th. However, now is the time to start thinking about your 2016 tax situation and if any changes are needed to adequately prepare you for any possible tax liability.
If you receive your health insurance through either the federal or state exchange, it is imperative that you review your information regularly. One of the biggest challenges we faced this tax season was unexpected tax bills due to the Affordable Care Act. If the information provided to Healthcare.gov is not accurate it could result in the total disallowance of the premium tax credit. If this affects you, see the information provided later in this letter.
Of major concern to the IRS is the challenge to combat identity theft and refund fraud. Practitioners are facing many challenges in providing adequate protection for their clients. If you are asked to provide additional information or documentation it is for your protection. The tax software companies and the IRS are installing additional security protocols to assure the accuracy of the tax returns being filed.
Following are selected provisions and a brief description of the tax consequences. Be sure to contact our office if you have any questions regarding these tax provisions and how they may affect your tax return.
IRS Announces 2016 Tax Rates, Standard Deductions, Exemption Amounts and More
The IRS has provided us with the tax rates necessary to prepare accurate tax projections for the 2016 tax year. These numbers are for the year beginning January 1, 2016 which will be used to project any potential tax liabilities and to prepare your 2016 tax returns in 2017.
If you are anticipating any major changes such as marriage, divorce, the birth of a child or the purchase of a home you may want to contact us to determine if your withholding or estimated payment amounts should be adjusted. Also, some of these life changes must be reported to the health insurance exchange if you are receiving the advanced premium tax credit.
The Benefits of a Roth IRA
In the last letter we had shared some information about a new Roth program, myRA, that was introduced by the Obama administration for those who had limited funds and were looking for some assurance of security for their investment. We also included an analysis of the various programs available that included both post-tax and pre-tax beneﬁts.
In this issue we will focus on the traditional Roth IRA. The traditional Roth IRA still remains a very viable choice
for those who want to maximize their investment options, tax savings, and retirement planning. Following are some facts about the Roth IRA that may help you with your choice of retirement vehicle:
1. There's an annual contribution limit: You cannot throw your entire life savings into a Roth IRA. In 2016, the maximum contribution limit for Americans is $5,500 with earned income. This is a dynamic number set by the Internal Revenue Service that tends to change with the rate of inflation every couple of years.
2. But you can contribute more if you're older: However, if you're age 50 or older; you are entitled to what is known as a "catch-up" contribution. The catch-up amount has been consistent at $1,000, meaning those with earned income after the age of 50 can contribute up to $6,500 in 2016.
3. No age limits: Unlike the traditional IRA, which disallows regular contributions starting the year you turn 70½, Roth IRAs have no age limit when it comes to regular contributions. With Americans regularly living into their 80s, 90s, and 100s, a Roth IRA is a tool that allows for ongoing contributions.
4. Income limits could prevent your contribution to a Roth IRA: You should also understand that not everyone will be able to open, or contribute to, a Roth IRA as it is based on their modiﬁed adjusted gross income. In 2016, single filers' Roth contributions could be limited if their adjusted income falls between$117,000 and $131,999. Adjusted income of $132,000 or above makes single filers ineligible for a Roth IRA contribution. For joint filers the phaseout begins at $184,000, with couples becoming ineligible at $194,000 of adjusted income. Contact us before setting up a monthly contribution to a Roth IRA to determine if your income falls within the allowable limits.
5. ...but there is a way around income limits: The good news is Roth IRA income limits don't have to stop you—but they may slow you down a bit. Anyone, regardless of income, can open and contribute to a traditional IRA. Subsequently, a traditional IRA can be rolled over into a Roth IRA, since there are no income limits on converting your traditional IRA to a Roth IRA. What you need to keep in mind is that you can only roll over money from one IRA to another once within a 12-month period, thanks to new regulations implemented in 2015. If the funds contributed to the traditional IRA were pre-tax, then there will be a tax imposed when the funds are converted to a Roth, however no penalties will apply.
6. Your eligible withdrawal age: Regardless of whether you invest in a Roth IRA or traditional IRA, the age at which you become eligible to begin taking regular withdrawals is 59½. But as you'll see below, with a Roth IRA certain types of early, penalty-free withdrawals may be possible. (There are also specific situations that a traditional IRA withdrawal may also be penalty-free.)
7. Tax-free in, tax-free out: With a traditional IRA, an early withdrawal before age 59½ will likely be met with a 10% penalty on top of ordinary income tax. This makes sense given that traditional IRA contributions are in pre-tax dollars. With a Roth IRA, account holders can pull out what they've contributed to a Roth IRA at any time without tax or penalty (not including investment gains) since the money contributed is after-tax income. These contributions would probably be best left alone over time, but in a pinch they could be used for a mortgage or college tuition payment.
8. The ﬁve-year rule: However, when it comes to earnings and interest generated within a Roth IRA, account holders are required to wait five years before making a withdrawal. Failing to follow the ﬁve-year rule could make your distribution unqualified and expose your withdrawal to federal taxes. This ﬁve-year rule applies to contributions, as well as conversions. The ﬁve-year rule for regular contributions to a Roth starts January 1st of the first year of contributions. The ﬁve-year rule for conversions is based on when the conversion occurred. Separate records must be kept to accurately determine when the ﬁve-year period has run.
9. Minimum withdrawals are not required: One of the more beneficial aspects of a Roth IRA is that minimum distributions are not required. If you choose, you can let your Roth IRA grow without making a single withdrawal. Combined with no age limit for contributions, it's easy to see why Roth IRAs can be such a powerful retirement tool. By comparison, a traditional IRA does require a minimum distribution beginning the year in which you turn 70½.
10. You could save a lot on your taxes in your golden years: Of course the best thing about a Roth IRA is that if you follow the rules, none of your distributions beginning at age 59½ or after are taxable. If you begin contributing to a Roth IRA early in your working career, you could wind up saving hundreds of thousands of dollars thanks to time and compounding.
11. Contributions can be made retroactively for tax purposes: Lastly, contributions to a Roth IRA (as well as a traditional IRA) can be made up until the due date of the tax return (usually April 15th).
A Roth IRA can also be an effective planning tool if you own your own business and employ your children. While there are no age requirements for distributions from your Roth IRA, there is also no age requirement for setting up a Roth IRA. Since they will have earned income, the full amount can be contributed to a Roth IRA. Just remember to follow all the rules on employing your children and that they are a bona ﬁde employee of your business.
Protecting Taxpayers from Identity Theft and Refund Fraud
The IRS has formed a coalition of tax software companies, payroll companies, tax practitioners and other stakeholders to combat the proliferation of identity theft and refund fraud. The Security Summit Initiative was formed to identify new safeguards that will better protect taxpayers.
Identity theft occurs when someone steals your social security number in order to file a tax return claiming a fraudulent refund. Unfortunately, you may be unaware that this has happened until you have filed your tax return and receive a notification that a tax return has already been filed using your social security number. The IRS may also send you a notice that they suspect fraudulent activity using your social security number.
Remember, the IRS will NEVER call to threaten you, demand immediate payment, or that they will send the police to arrest you. The first point of contact will always be a notice from the IRS of any outstanding tax liability or unreported income on your tax return. Be sure to forward any notices you may receive to our office to determine if the notice is authentic and to research the discrepancy or the information requested.
The IRS has provided a course of action if you should find yourself the victim of identity theft:
Know the Warning Signs
Be alert to possible tax-related identity theft if you are contacted by the IRS that:
Steps to take if you become a victim
If you are a victim of identity theft, the Federal Trade Commission recommends these steps:
If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, the IRS recommends these additional steps:
About Data Breaches and Your Taxes
Not all data breaches or computer hacks result in tax-related identity theft. It’s important to know what type of personal information was stolen.
If you’ve been a victim of a data breach, keep in touch with the company to learn what it is doing to protect you and follow the “Steps for victims of identity theft.” Data breach victims should submit a Form 14039, Identity Theft Affidavit, only if your Social Security number has been compromised and your eﬁled return was rejected as a duplicate or IRS has informed you that you may be a victim of tax-related identity theft.
How to Reduce Your Risk
Join efforts by the IRS, states and tax industry to protect your data. We all have a role to play. Here's how you can help:
Moving and Job Hunting Expenses
If you are seeking a new job you may incur a variety of expenses, including costs directly associated with moving to a new job location or those specifically related to the job search. Many of these expenses are deductible, but the rules are strict, and expenses must be carefully documented and substantiated. You may be able to take advantage of these deductions, if you plan carefully.
Any moving expenses you may incur, including expenses of traveling to the new location and transporting household goods and personal effects, are deductible so long as you meet certain requirements relating to when you begin work at the new position and how far the new job is from the old job and your old residence. These expenses are deductible even if you are seeking employment for the first time or in a completely new field. Also, qualified moving expenses reimbursed or paid by your employer are considered nontaxable fringe benefits.
You also may be able to deduct the expenses you incur in searching for a new job, including the costs of a headhunter or employment service, and the expense of preparing your resume. These expenses are deductible so long as the job being sought is in the same line of work as the old job, even if you are unemployed at the time of the job search. Further, the job search does not have to be successful in order to qualify for the deduction. However, job hunting expenses for a ﬁrst job, or related to changing to a new career, are not deductible.
Considerations of whether the moving expense is tax deductible or not includible:
Eligible expenses include:
- Not deductible: Cost of meals while traveling, temporary living expenses, or house hunting expenses before or after the move are not deductible.
Advanced Premium Tax Credit (PTC)
Reporting income and household changes
Any changes in your life circumstances should be reported as quickly as possible to the health insurance Marketplace. Certain changes may qualify you for a Special Enrollment Period, which allows you to make changes within 60 days of the event to change or update your coverage. Otherwise any changes to your policy or changing insurance providers must wait until the open enrollment period—generally certain dates during November and December. The open enrollment dates have not yet been announced for 2016 to make changes in your 2017 health insurance coverage. Some events that may qualify you for the Special Enrollment Period include:
Changes that should be reported on an ongoing basis, particularly if you qualify for the premium tax credit, or the change would qualify you include some of the following:
Contact us to help you determine if these changes may result in an additional federal tax liability. Adjustments can be made now to your payroll withholding or estimated tax payments to plan for this additional tax.
For more information, please contact me.
Contact the office if you have any questions regarding these issues or any changes in your household that may have an impact on your tax filing requirements.
As your tax professional, I assure you that I will be keeping a watchful eye on Congress and on IRS actions which may affect your business and your tax filings in the New Year. I will be happy to address any concerns and answer questions you have about any of the issues covered in this newsletter. Thank you for the opportunity and privilege of allowing me to serve as your tax professional this past year.
Stephen W. McKown
Did you ever notice that when you put
the words “The” and “IRS” together, it spells
-- Author Unknown