Michael Boucher CPA, LLC

BEWARE of mailings that look like official notices from the State of Connecticut about business registration, annual reports, labor law notices, tax filings, etc.

These notices are sent by companies unaffiliated with any state or government office. They often look very legitimate and will have your business ID number because your business ID number is publicly available. Carefully review all such mailings and check with the state office to confirm the legitimacy of these notices. Call or email the CT Secretary of State at 860-509-6003 or crd@ct.gov to confirm the legitimacy of a mailing.

Despite the Corona virus, we are still working. The governor has declared us an essential business, but we have modified our practices to keep our clients and ourselves safe.

As we navigate through these unprecedented times, we want to assure you that we are taking every precaution necessary to keep our clients, and ourselves safe. If you plan to drop off or pick up your returns, please call the office at (860) 395-6677.  When you are arrive, knock on the inside office door (not the outside door). If we do not have another client inside we will ask you to come in. If there happens to be another client picking up at that time, we will let you know and ask that you wait outside until they leave to comply with the recommended social distancing of 6 feet.
Together we can get through this difficult time!

The Secretary of the State and the Attorney General Warn Connecticut Businesses about “Official” Reporting Scam

Released on Thursday, January 3, 1919

HARTFORD – Secretary of the State Denise Merrill and Attorney General George Jepsen are warning businesses across Connecticut about a mailing being sen​t by “Workplace Compliance Services” purporting to be an official “Annual Report Instruction Form,” alleging that payment is required by Connecticut law. A copy of the form is attached.

“Businesses registered with the state of Connecticut are only required by law to file Annual Reports with our office,” said Secretary Merrill, Connecticut’s chief business registrar. “There is no legal requirement for any business to file the form they received from Workplace Compliance Services, or to pay the inflated fee indicated.”

“This scam targets small businesses and, unfortunately, resurfaces every few years in an attempt to cheat hardworking business owners,” said Attorney General George Jepsen. “Scams like this one try to appear legitimate, but business owners shouldn’t fall for it. Tell your employees to be on the lookout, and whenever in doubt about a suspicious mailing, call the Secretary of State or my office to verify legitimacy before sending any payment.”

This deceptive solicitation has an “official” appearance and references a Connecticut state law. This scam directs the recipient business to send an inflated fee for filing an Annual Report that can be filed directly with the state at ct.gov/annualreport.

Secretary Merrill said, “If you are ever unsure about the legitimacy of a business filing notice you receive, please contact my office at 860-509-6003 or email us at crd@ct.gov. We are ready and eager to help any Connecticut business owner.”

If your business has received the bogus “Annual Report Instruction Form” form, please make a complaint with the Office of the Attorney General at attorney.general@ct.gov, including a copy of the mailing, as an investigation into the mailing in coordination with the U.S. Postal Inspector is underway.

Gabe Rosenberg

Communications Director

Connecticut Secretary of the State Denise Merrill

W: 860-509-6255

C: 203-981-5825

gabe.rosenberg@ct.gov

Jaclyn Severance

Director of Communications

Office of the Attorney General

W: 860-808-5324 

C: 860-655-3903 

jaclyn.severance@ct.gov 

2016 Year–End Strategies:

Straddling Two Years of Significant Change

Implementing tax strategies at year-end always presents unique challenges and opportunities.  The impact of recent tax legislation and significant IRS rule changes during 2016 raises the stakes.  The Protecting Americans from Tax Hikes Act (PATH Act), passed in late 2015, change – both dramatically and through some nuanced revisions – the dynamics of planning for the expiration of various tax breaks… and the permanence of others.  The IRS for its part has been busy creating safe-harbor benefits under the “repair regulations”, clarifying the definition of marriage for tax purposes, fine-tuning Affordable Care Act requirements, and more, all of which immediately impact the 2016 tax year.

YEAR-END INDIVIDUAL PLANNING

Tax Rate Exposure

Balancing the impact of the existing tax rates on a variety of transactions during the year and at year-end can be challenging: the ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all may play a role.

Ordinary income tax rates. One of the most significant changes over three years ago that still reverberates with many taxpayers is the creation of the 39.6 percent bracket, up from a top 35 percent rate.

Net Investment Income (NII) tax. The NII tax is 3.8% on the lesser of net investment income or excess of modified adjusted income over the threshold amount.  The threshold amount is equal to $250,000 modified adjusted gross income (MAGI) in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return, and $200,000 for other files.

STRATEGY. If possible, keep general income below the threshold amounts by spreading income out over a number of years or offsetting the income with above-the-line deductions.  Grouping similar categories of net invested income activity may be another way to reduce NII.

Additional Medicare Tax. The Additional Medicare Tax is .09 percent of covered wages and other compensation above threshold dollar amounts that mirror the threshold amounts of the NII tax regime.

Capital Gains and Dividends.  The tax rates on qualified capital gains (net long-term gains) and dividends range from zero to 20 percent, depending upon the individual’s income tax bracket:

STRATEGY. Spikes in income, whether capital gains or other income, may push gains into either the 39.6 percent bracket for short-term gain or the 20 percent capital gains bracket.  Spreading the recognition of certain income between 2016 and 2017 may help minimize the total tax paid for the 2016 and 2017 tax years.

Capital losses. Cashing out stocks with a built-in loss may be a simple means of providing a loss to be taken against current ordinary income.  Individuals can deduct up to $3,000 of additional losses, whether net long-term or short-term; losses above $3,000 can be carried over and deducted in succeeding years.  If the investment remains economically attractive, taxpayers can buy the same stock more than 30 days before or after they sell shares in the same company.  This avoids the wash sale rules, which would disallow the loss.  The wash-sale rule, however, applies only to losses; gains are recognized in full – a benefit if acceleration of some income into 2016 is a goal, whether to absorb excess losses or otherwise.

Adjusted gross income caps.  Monitoring adjusted gross income (AGI) at year-end can also pay dividends in qualifying for a number of tax benefits.  Often tax savings can be realized by lowering income in one year at the expense of realizing it in the other; in this case, either 2016 or 2017.  Some of those tax benefits that get phased out depending upon the taxpayer’s AGI level include:

• Itemized deductions
• Personal exemptions
• Education savings bond interest exclusion
• Maximum child’s income on parent’s return; (Form 8814)
• Education credits
• Student loan interest deduction adoption credits
• Maximum Roth IRA contributions and maximum IRA contributions for individuals

PATH Act “Extenders”

The PATH Act permanently extended many tax incentives that were previously temporary, removing for the first time in many years the year-end concern over the temporary applicability.

CAUTION. Not all “extenders” however were extended beyond 2016 and some were modified in the process.  Others were extended but with the intention to eventually replace them within more sweeping tax reform.

American Opportunity Tax Credit.  The PATH Act made the American Opportunity Tax Credit (AOTC) permanent.  The AOTC is equal to 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of qualified tuition and related expenses.

STRATEGY. An education tax credit is generally allowed only for payments of qualified tuition and related expenses for an academic period beginning in the same tax year as the year the payment is actually made.  However, if qualified expenses are paid during one tax year for an academic period that begins during the first three months of the following tax year, the academic period is treated as beginning during the tax year in which the expenses were paid.

CAUTION.  The Tax Code now requires that the taxpayer possess a valid Form 1098-T to claim the AOTC.  To prevent improper and fraudulent claims due to the refundable nature of a portion of the AOTC, additional criteria must be satisfied and a due diligence requirement has been added.

Teachers’ classroom expense deduction.  The PATH Act permanently extended the above-the-line deduction of up to $250 for elementary and secondary-school administrators’ and teachers’ classroom expenses.  Eligible educators (such as teachers, administrators and others) may claim this above-the-line deduction in lieu of a miscellaneous itemized deduction.

STRATEGY. Additionally, starting in 2016, the Act places within the scope of the deduction “professional development expenses”, which include the cost of courses related to the curriculum in which the educator provides instruction.

State and local sales tax deduction.  The PATH Act made permanent the itemized deduction for the state and local general sales taxes.  That deduction may be taken in lieu of state and local income taxes when itemizing deductions.

STRATEGY. Generally IRS tables based upon federal income levels and a taxpayer’s number of dependents are used for this optional deduction.  Taxpayers who wish to claim more than the table amounts must provide adequate substantiation.

Exclusion for the direct charitable donation of IRA funds.  The PATH Act made permanent the exclusion from gross income of qualified charitable distributions for individuals aged 70 ½ or older.  The exclusion covers distributions of up to $100,000 received from traditional or Roth IRAs ($100,000 for each spouse on a joint return).

STRATEGY. The transfer to the charity from the IRA must be completed by December 31, 2016, to treat it taking place in 2016; mere instructions to the IRA trustee insufficient.

More permanent extenders include:

• 100 percent gain exclusion on qualified small business stock
• Conservation contributions benefits
• Five-year solar energy property

Extenders Expiring at End of 2016

The PATH Act renewed several extenders related to individuals retroactively for only two years through 2016, so they are up for renewal again at the end of 2016.

Tuition and fees deduction.  The PATH Act extended the above-the-line deduction for qualified tuition and related expenses for two years, for expenses paid before January 1, 2017.  The maximum amount of the tuition and fees deduction is $4,000 for an individual whose AGI for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose AGI does not exceed $80,000 ($160,000 in the case of a joint return).

STRATEGY. Payments by year-end 2016 may be particularly critical to taking this deduction.  There is some – but not unlimited – flexibility regarding the deductibility of tuition paid before a semester begins.  As with the AOTC, the deduction is allowed for expenses paid during a tax year, in connection with an academic term beginning during the year or the first three months of the next year.

Exclusion for discharge of indebtedness on principle residence.  The PATH Act extended the exclusion from gross income of discharged qualified principle residence indebtedness, applicable to discharges of qualified principle residence indebtedness occurring before January 1, 2017, or discharges that are subject to an arrangement that is entered into and evidenced in writing before January 1, 2017.

STRATEGY. To exclude discharged debt under this exclusion, the lender needs to issue the appropriate Form 1099-C, for the particular tax year desired (in this case, 2016).  The IRS says that it “encourages” the homeowner to work out the disagreement with the lender and have the lender issue a corrected Form 1099-C.

Mortgage insurance premium deduction.  The PATH Act extended the treatment of qualified mortgage insurance premiums as qualified residence interest retroactively for two years, to apply to amounts paid or accrued through 2016, and not properly allocable to a period after December 31, 2016.

Nonbusiness energy property tax credit.  The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals, making it available for qualified energy improvements and property placed in service before January 1, 2017.

STRATEGY. Several overall limitations apply.  A credit amount for qualified energy efficiency improvements equals 10 percent of the amount paid or incurred during the tax year and 100 percent of the amount paid or incurred for the qualified energy property during the tax year.  The maximum credit amount for qualified energy property varies depending upon the type of property; further all nonbusiness energy property carries a $500 maximum lifetime credit cap.

More incentives extended through 2016 include:

• Fuel cell motor vehicle
• Electric motorcycles credit

Other 2016 Deadlines/Changes

IRS guidance, regulations, and case law released so far in 2016 also impact on year-end tax planning.  Two of the more notable 2016 developments for use by individuals include:

Relief for late rollovers.  The IRS unveiled a new self-certification procedure for taxpayers who inadvertently miss the 60-day time limit for certain retirement plan distribution rollovers (Rev. Proc. 2016-47).  Distributions to plan participants must be rolled over (i.e. deposited) into another qualified retirement account (usually an IRA) within 60 days.

Per taxpayer mortgage deduction. The IRS announced its acquiescence in Voss, 2015-2 USTC 50,427, where the Ninth Circuit Court of Appeals, found that when multiple unmarried taxpayers co-own a qualifying residence, the debt limit provisions under Code Sec. 163(h)(3) apply per taxpayer and not per residence.

STRATEGY.  Rather than sharing the $1.1 million mortgage debt limit to which each taxpayer is subject, whether single or married (half for married, filing separately), two unmarried taxpayers sharing the same residence and same mortgage debt are effectively allowed – as the law now stands – a combined $2.2 million limit.

LIFE EVENTS

Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning.

Marriage. Marital status (single, married, or divorced) for the entire tax year is determined on December 31^st. Because the income tax brackets vary depending upon filing status, a marriage penalty or a marriage benefit may result for any particular couple.

STRATEGY. As a general rule, if each partner has income approximately in the same amount of the other, they will pay more filing a married, joint return rather than as two single individuals.  Accelerating or postponing marriage or divorce at year-end night be a considered based up this difference in tax brackets.

Same-sex marriage.  The Supreme Court held in June 2015 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex (Obergfell, 2015-1 ustc 50,357).  Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.  The IRS followed up in 2016 with final regulations (TD 9785).

Dependents.  A child born at any time during the tax year is considered a child for that entire tax year.  Subject to AGI limits, a child born at year-end 2016 entitles the parent to a full $4,050 personal exemption, a full $1,000 child credit, and up to a $3,000 child care credit if eligible.

STRATEGY. The benefits also have cut-off ages that are keyed to the age a dependent turns before the close of the tax year: under 19 (or incapacitated, or under 24 if a student) for the dependency exemption and the “kiddie” tax rules, under age 17 (or incapacitated) for the child credit, under age 13 (or incapacitated) for the child care credit.

Retirement.  Taxpayers may want to take a look at a number of different provisions at year-end in anticipation of retirement, at the point of retirement, or after retirement.  Many of these provisions have opportunities and deadlines keyed to the tax year.  Three strategies especially stand out for year-end consideration:

• Minimum distribution requirements. Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70 ½.  While distributions generally must be made at the end of the calendar year, distributions for the first year can be delated until April 1 of the succeeding year.
• Roth conversions/reconversions. A traditional IRA may be converted to a Roth IRA.  As with rollovers to traditional IRAs, the 10-percent additional tax on early distributions does not apply; however, unlike rollovers to traditional IRAs the amount converted is taxable in the year of the conversion.
• Roth reconversions. Once a Roth IRA has been recharacterized back to a (new) traditional IRA, the (new) traditional IRA can be (re)converted to a Roth IRA, provided the taxpayers meets the eligibility requirements in the reconversion year. This reconversion option is most often used to allow a “do-over” when assets that are transferred lose value before year end.

STRATEGY. Any amount converted to a Roth IRA is included in gross income as a distribution from the tax year in which the amount is distributed or transferred from the traditional IRA.  When a rollover spans two tax years, the taxable amounts from the traditional IRA are included in gross income in the year in which the amounts are withdrawn from the traditional IRA.

AFFORDABLE CARE ACT – INDIVIDUALS

Year-end planning for individuals with regards to the ACA may generally be more prospective than retrospective but there are some year-end moves that may be valuable, particularly with health-related expenditures.

Individual Shared Responsibility Payments.  For 2016, the individual shared responsibility payment is greater of 2.5 percent of household income that is above the tax return filing threshold for the individual’s filing status or the individual’s flat dollar amount, which is $695 per adult and $347.50 per child, limited to a family maximum of $2,085, but capped at the cost of the national average premium for the bronze level health plan available though the Marketplace in 2016.

STRATEGY. Open enrollment for coverage through the Health Insurance Marketplace for 2016 has closed.  However, some qualifying life events may make an individual eligible for non-filing season special enrollment.  The Marketplace is now open for 2017 through January 31, 2017.  If you want coverage to begin on January 1, 2017 you must complete your renewal or new application by December 15, 2016.

Medical expense deduction. Taxpayers who itemized deductions (for regular tax purposes) may claim a deduction for qualified unreimbursed medical expenses to the extent those expenses exceed 10 percent of adjusted gross income (AGI), unless the taxpayer falls within an age-based exception.  Taxpayers (or their spouses) who are age 65 or older before the close of the tax year, may apply the old 7.5 percent threshold for tax years but on through 2016.

STRATEGY. Taxpayers who are age 65 or older may consider accelerating medical costs into 2016 if they want to itemize deductions since the AGI floor for deductible expenses rises from 7.5 percent to 10 percent in 2017.  For deductions by cash-basis taxpayers in general, including for purposes of the medical expense deductions, a deduction is permitted only in the year in which payment for services rendered is actually made.

FSAs. Contributions to health flexible spending arrangements (health FSAs) are capped under the ACA at $2,500 (indexed for inflation to $2,550 in 2016 and $2,600 in 2017).

STRATEGY. Use-it-or-lose-it rules for health FSAs allow cafeteria plans to provide for a 2½ month grace period after the current year to incur expenses and request reimbursement.  However, plans are not required to offer this grace period so participants should check before year-end whether a grace period applies to them.  Additionally, IRS regulations allow but do not require employers to amend their plans to permit employees to carry over up to $500 in unused health FSA balances to the following plan year.

GENERAL TIMING STRATEGIES

Year-end tax planning, especially if done “at the eleventh hour”, requires some understanding of the timing rules: when income becomes taxable and when it may be deferred; and, likewise, when a deduction or credit is realized and when it may be deferred into next year or beyond.

Income Acceleration/Deferral

Taxpayers using the cash method basis of accounting (generally most individuals) can defer or accelerate income using a variety of strategies.  These may include:

Sell appreciated assets. If a taxpayer has current losses that may cover these gains that are “locked into” certain assets until they are sold, realizing gains may make sense.  For example, identical appreciated securities may be sold and repurchased.  Their cost basis would be reset with, at worst, a downside of some accelerated tax liability.  The “wash sale” rule only applies to losses.

Bonuses. If an accrual-basis employer delays paying a properly-accrued bonus in the year of service (for example, 2016) until up to 2½ months into 2017, the employer can get its deduction in 2016 while the employee (if “unrelated” for tax purposes) will be taxed in 2017.

Installment contracts. Income on a sale reported under the installment method is realized pro-rata over the years in which the installment payments are made.  To accelerate income realization, the taxpayer simply sells the remainder of the installment contract to a third party for a lump sum.

U.S. Savings Bonds. For cash-basis taxpayers, interest on series E, EE and I bonds is generally taxed at the earliest of disposition, redemption or final maturity of the bond (however, the taxpayer can elect to report the interest as it accrues).

Debt forgiveness income. Determination of the time of debt forgiveness requires a practical assessment of the facts and circumstances relating to the likelihood of payment.  Convincing the lender to issue a Form 1099-C, Cancellation of Debt, for the 2016 tax year, should also form a part of the process.

Like-kind exchanges.  Taxpayers may also avoid tax deferred, like-kind exchanges by taking steps to disqualify the transaction from Code Sec 1031 treatment.  Such steps might include delaying identification of replacement property, transferring cash to an intermediary, or switching to sale-and-reinvestment arrangement.

Deduction Acceleration/Deferral

A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense generally will not accelerate a deduction.  There are exceptions.

Year-end payments.  It is not necessary to pay cash to make a payment with the goal of attaining a deduction or other tax benefit for 2016.  Taxpayers can write a check or can charge an item by credit card and treat these actions as payments.

STRATEGY.  It does not matter, for example, when the recipient receives a check mailed by the payer, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered “in due course”.  The same treatment applies for a gift – sending a check is treated as a payment and will qualify for the current year gift tax exclusion.

Package payments.  An agreement for services or other deliverables that require full upfront payment may gain a full, immediate deduction, depending upon the circumstances (for example, payment up front for an orthodontia program as a medical expense deduction).

Tuition.  Payments made in 2016 for tuition for an academic period beginning in 2016 or during the first three months of 2017 qualify for an education credit taken in 2016.

Estimates state taxes.  Although the deadline under state law is generally not until January 15, 2017, payment of fourth quarter state and local estimated taxes before year-end 2016 is deductible for 2016 for federal tax purposes.

YEAR-END PLANNING FOR BUSINESS

The PATH Act makes permanent many business-related provisions.

Code Sec. 179 expensing.  The PATH Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million over-all investment limit before phase out (both amounts indexed for inflation, for 2016 at $500,000 and $2.01 million, and for 2017 at $510,000 and $2.03 million, respectively).  The PATH Act also permanently allows for the expensing of off-the-shelf computer software.

STRATEGY. New for 2016, the PATH Act also removed the $250,000 cap related to the expensing of qualified real property.

STRATEGY.  Year-end purchases of qualifying section 179 property entitle the taxpayer to a full deduction up to the $500,000 cap.  There is no prorated reduction based upon the portion of the year that a qualifying asset is placed in service.

STRATEGY.  When comparing the possible benefits of the Code Sec. 179 deduction versus bonus depreciation, keep in mind that Code Sec. 179 is available for both new and second-hand/used property that is purchased and placed in service by a taxpayer.  However, bonus depreciation is available only for new (first-time use) property.

Research credit. The PATH Act made the research credit permanent.  The PATH Act also made the research credit more useful to small business.

More business incentives made permanent by the PATH Act include:

• Shorter recovery period for leasehold improvement, restaurant and retail improvement property made permanent.
• Recognition period of S corporation’s built-in gains tax made permanent.
• Shareholder’s basis reduction for S corporation’s charitable donations made permanent.

Five-Year Extensions for Businesses

The PATH Act extended several business-related provisions for five years.

Bonus Depreciation.  The PATH Act extended bonus depreciation (additional first-year depreciation) under a phase-down schedule.  In addition to extending bonus depreciation, a number of modifications have been made that enhance incentive.

STRATEGY. Because bonus depreciation can be elected on the 2016 return filed in 2017, in is not necessary for businesses to make an immediate decision on its use, although qualifying property must nevertheless be purchased and placed in service in 2016.  Bonus depreciation is optional and businesses can elect not to use it.  Electing out may be appropriate if the business wants to spread its depreciation deductions over future years more evenly.

WOTC.  The PATH Act extended work opportunity credit (WOTC).  In addition, the credit has been expanded and is available to employers who hire qualified long-term unemployment recipients.

Business Extenders Scheduled To Expire At the End of 2016

A few business extenders are scheduled to expire if not renewed by Congress:

• Film and TV production expense provisions
• Energy efficient commercial buildings deduction
• Mine safety equipment expense election
• Additional depreciation for biofuel plant property

Revised Repair Reg Rules

The IRS issued sweeping tangible property regulations (“repair regs”) in 2013 to govern accounting for costs to acquire, repair and improve tangible property (TD 9636).  The “repair regs” impact virtually all asset-based businesses and continues to generate changes in 2016, with additional “clean-up” expected in 2017.

De minimis safe harbor. The tangible property regulations dealing with repairs include a de minimis expensing safe harbor that allows taxpayers to annually elect to deduct the cost of materials and supplies and units of property produced or acquired subject to per-item dollar limit.  Effective starting in 2016, Notice 2015-82 increased the de minimis safe harbor limit under the repair regs – from $500 to 2,500 – for taxpayers without an applicable financial statement (AFS).

STRATEGY. Despite waiving the AFS requirement, certain IRS officials have indicated that an unwritten policy employing $2,500 per-item deduction limit must still be in effect as of the beginning of the 2016 tax year in order for the $2,500 limit to apply for the 2016 tax year.

STRATEGY: Thus, use of safe harbor for 2017 requires a policy be in place by January 1, 2017.  Further, the per-item deduction limit may exceed $2,500 but only items costing $2,500 or less receive safe harbor protection.

Remodel-refresh.  The IRS supplemented the tangible property regs with a safe harbor that allows a taxpayer operating a retail establishment or a restaurant to change to a method of accounting that allows the taxpayer to treat 25 percent of qualified remodel-refresh costs as capital expenditures under Code Sec. 263 and 75 percent of such costs as currently deductible repair and maintenance expenses.  The IRS also described how taxpayers may obtain automatic consent to change to the safe harbor method of accounting.

CAUTION. Certain retailers may not use the remodel-refresh safe harbor.  These excluded retailers include: automobile and other motor vehicle dealers; gas stations; manufactured home dealers; and non-store retailers.

Partnership Audit Rules

The Bipartisan Budget Act of 2015 (Budget Act) repealed the TEFRA unified partnership audit rules and replaced them with streamlined procedures.  The Budget Act delated the effective date of the new audit rules for returns filed for partnership tax years beginning after 2017.  However, subject to certain exceptions, partnerships may choose to apply the new regime to any partnership tax year beginning November 2, 2015.  In mid-2016, the IRS issued temporary rules that provide the time, form, and manner of the election for a partnership to opt in to the new partnership audit regime (TD 9780; NPRM REG-105005-16).

STRATEGY. This change impacts the manner in which the IRS will audit a partnership return and its partners.  It does not impact year-end tax strategies, except perhaps to the extent an aggressive year-end technique may be audited differently and will bear upon who will be ultimately asked by the IRS to pay the tax.

Business Use of Vehicles

Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees involve an awareness of certain rules and dollar caps that change annually.

Standard Mileage Rate.  The standard business mileage allowance rate for 2016 is 54 cents-per-mile (down from 57.5 cents-per-mile for 2015).

Depreciation. The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2016 calendar tax year are:

• $3,160 for the first tax year ($11,160 if bonus depreciation is claimed);
• $5,100 for the second tax year;
• $3,050 for the third tax year; and
• $1,875 for each succeeding year.

The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2016 calendar year are:

• $3,560 for the first tax year ($11,560 if bonus depreciation is claimed);
• $5,700 for the second tax year;
• $3,350 for the third tax year; and
• $2,075 for each succeeding year.

STRATEGY. Sport utility vehicles (SUVs) and pickup trucks with a gross vehicle weight rating in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on loophole in the operative definition.  Congress in 2004 placed a $25,000 limit on Code Sec. 179 expensing of heavy SUVs but has not extended it to Code Sec. 280F.  Consistent depreciation conventions for purchases throughout the year, however, do apply in this case.

AFFORDABLE CARE ACT – BUSINESSES

Despite several delays and legislative tweaks, the basic structure of the ACA for businesses, both large and small, generally remains intact.  If an employers is an applicable large employer (ALE), this triggers the employers share responsibility provisions and the employer information reporting provisions.  Small businesses, however, are not unaffected by the ACA and should take the ACA into account in year-end planning.  Some incentives in the ACA could help maximize tax savings for small businesses.

IMMEDIATE RELEASE 
Thursday, January 3, 2019

HARTFORD – Secretary of the State Denise Merrill and Attorney General George Jepsen are warning businesses across Connecticut about a mailing being sen​t by “Workplace Compliance Services” purporting to be an official “Annual Report Instruction Form,” alleging that payment is required by Connecticut law. A copy of the form is attached.
 
“Businesses registered with the state of Connecticut are only required by law to file Annual Reports with our office,” said Secretary Merrill, Connecticut’s chief business registrar. “There is no legal requirement for any business to file the form they received from Workplace Compliance Services, or to pay the inflated fee indicated.”
 
“This scam targets small businesses and, unfortunately, resurfaces every few years in an attempt to cheat hardworking business owners,” said Attorney General George Jepsen. “Scams like this one try to appear legitimate, but business owners shouldn’t fall for it. Tell your employees to be on the lookout, and whenever in doubt about a suspicious mailing, call the Secretary of State or my office to verify legitimacy before sending any payment.”
 
This deceptive solicitation has an “official” appearance and references a Connecticut state law. This scam directs the recipient business to send an inflated fee for filing an Annual Report that can be filed directly with the state at ct.gov/annualreport.
 
Secretary Merrill said, “If you are ever unsure about the legitimacy of a business filing notice you receive, please contact my office at 860-509-6003 or email us at crd@ct.gov. We are ready and eager to help any Connecticut business owner.”
 
If your business has received the bogus “Annual Report Instruction Form” form, please make a complaint with the Office of the Attorney General at attorney.general@ct.gov, including a copy of the mailing, as an investigation into the mailing in coordination with the U.S. Postal Inspector is underway.
 

 
Gabe Rosenberg
Communications Director
Connecticut Secretary of the State Denise Merrill
W: 860-509-6255
C: 203-981-5825
gabe.rosenberg@ct.gov
 
Jaclyn Severance
Director of Communications
Office of the Attorney General
W: 860-808-5324 
C: 860-655-3903 
jaclyn.severance@ct.gov

Year-End Strategies: Leveraging Traditional Techniques And new Developments

Year-end tax planning for individuals and businesses provides an opportunity to review the activities of the past year and it leverage tax planning techniques as they relate to new developments.

Planning note. As in past years, tax legislation – or the lack of tax legislation – is an essential consideration in year-end planning. At the time this briefing was prepared, a host of individual and business tax extenders had not yet been renewed by Congress for 2015. Comprehensive tax reform continues to be discussed in Washington, but as year-end approaches it is almost certain that no major changes will be made to the Tax Code. Some stand-alone bills, discussed below, and the expected passage of the extenders, may provide year-end planning opportunities.

YEAR-END INDIVIDUAL PLANNING

As in past years, traditional year-end income shifting techniques may be valuable. Taking inventory of income and expenses to calculate whether strategies to accelerate or defer one or the other, before the current tax year closes, should be employed as applicable at year-end 2015 as it has been in the past. Assessing current gains and losses, to map out year-end buy, sell or hold strategy later makes particular sense as markets continue to make adjustments.

Income and Capital Gains/Dividends

For individuals, the income tax rates for 2015 are unchanged from 2014: 10%, 15%, 25%, 28%, 33%, 35% and 39.6% (although the start of each bracket continues to be inflation-adjusted upward each year). The tax rates for qualified (net long-term) capital gains and dividends, which are keyed to the general income tax brackets, are also unchanged for 2015, ranging from 20% for those in the 39.6% income tax bracket, down to 15% for those within the 25% to 35% brackets, and to 0% for those otherwise in the 10% or 15% income tax brackets.

STRATEGY. Spikes in income, whether capital gains or other income, may push capital gains into either the top 39.6% bracket (for short-term gains) or the 20% capital gains bracket. Spreading the recognition of certain income between 2015 and 2016 may help minimize the total tax paid for the 2015 and 2016 tax years. Likewise, those individuals finding themselves in the 15% or 10% tax brackets should consider recognizing any long-term capital gain available to the extent that, with other anticipated income, will not exceed the top of the 15% bracket ($74, 900 for joint filers and $37,450 for singles in 2015).

Another strategy for some taxpayers might be to look for a short-term investment (bonds, etc.) payable into the next year, intended to defer the receipt of taxable income from 2015 to 2016. The taxpayer would not recognize income on such investments until the maturity date of the investment in 2016.

PLANNING NOTE. Marital status (single, married or divorced) for the entire tax year is determined on December 31. Because of varying income tax brackets depending upon filing status, a marriage penalty or a marriage benefit may result for any particular couple. As a general rule, if each partner has income approximately in the same amount of the other, they will pay more in combined tax filing a married, joint return, rather than as two single individuals. Accelerating or postponing marriage or divorce at year end might be considered based upon this difference in tax.

Alternative Minimum Tax

For 2015, the AMT exemption amounts are $53,600 for single individuals and heads of household; $83,400 for married couples filing a joint return and surviving spouses; and $41,700 for married couples filing separate returns.

STRATEGY. No single factor automatically triggers AMT liability, but some common facts are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures; itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Investments, especially in oil and gas partnerships may also generate “tax preferences” that may add up to AMT liability.

Same-Sex Marriage

In Obergefell, 2015-1 USTC 50,357, the U.S. Supreme Court held that the Fourteen Amendment requires a state to license a marriage between two people of the same sex. Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licenses and performed out-of-state. Obergefell was not a tax case, but the Supreme Court’s decision will impact married same-sex couples not only with return filings but in other areas, such as employee benefits and health care.

Tax Extenders For Individuals

Under current law, a number of popular but temporary tax incentives are not available for 2015 unless extended by Congress. For individuals, these include the state and local sales tax deduction, the higher education tuition and fees deduction, a mortgage debt forgiveness exclusion, the teachers’ classroom expense deduction and the Code Sec. 25C residential energy property credit.

Child Tax Credit

The Trade Preferences Act of 2015 places new limits to the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. These taxpayers will not be able to claim the refundable portion of the child tax credit for the tax year.

Estate and Gift Taxes

The maximum federal unified estate and gift tax rate is 40% with an inflation-adjusted $5 million exclusion for gifts made and estates of decedents dying after December 31, 2012. The annual gift tax exclusion allows taxpayers to give up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts), gift-tax free and without counting the amount of the gift toward the lifetime $5 million exclusion, adjusted for inflation.

PLANNING NOTE. The $14,000 ($28,000) annual exclusion is a use-it or lose-it benefit; it resets each January 1st but cannot be then retroactively taken for the prior year. The applicable exclusion amount, as adjusted for inflation, is $5,430,000 for gifts made and estates of decedents dying in 2015. This exclusion jumps to $10.86 million when spouses combine exclusions.

Year-End Retirement Planning – Employer Plans

One of the first steps for retirement savings is to contribute to an employer-sponsored elective salary deferral plan (particularly to the extent of an employer match). These salary deferral plans include 401(k) plans, 403(b) plans, and 457 plans (depending on the type of employment).

STRATEGY. For 2015, the inflation-adjusted elective salary deferral limit for 401(k), 403(b) and 457 plans is the lesser of $18,000 or 100 percent of compensation. If an employer makes contributions, the total contribution for the 2015 year from both the employee and the employer is capped at $53,000 (not including an additional $6,000 for catch-up contributions). Plans rules vary on the extent to which ability to increase contributions at year-end.

myRAs

myRAs might be viewed as “starter IRSAs” in that they cap out at $15,000 (or 30 years, whatever comes first). The account follows all the other tax rules associated with regular Roth IRAs. However, myRAs have no fees and can be opened for as little as $25 through payroll direct deposit. The account balance will never go down in value and the security in the account, like U.S. savings bonds and other Treasury securities, is guaranteed. It is open to anyone who has an annual income currently of less than $129,000 a year for individuals and $191,000 for couples; but only through an employer, whose participation is not mandatory.

AFFORDABLE CARE ACT – INDIVIDUALS

Unless exempt, the ACA requires that all individuals carry minimum essential coverage or make a shared responsibility payment. Individuals with health insurance coverage should ascertain that their coverage satisfies the ACA’s minimum essential coverage requirements. Individuals without minimum essential coverage may be liable for a share responsibility payment unless exempt. Individuals who obtain health insurance coverage through the ACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit.

STRATEGY. The coverage requirement applies to each month. Individuals are treated as having minimum essential coverage for a month as long as the individual has coverage for at least one day during the month.

A number of exemptions are available to qualified individuals:

• Religious conscience exemption
• Hardship exemption
• Exemption for members of federally-recognized Native American nations
• Exemption for members of a health care sharing ministry
• Exemption for incarcerated individuals
• Short coverage gap exemption
• Exemption for individuals not lawfully present in the U.S.

STRATEGY. Generally, a gap in coverage that lasts less than three months qualifies as a short coverage gap. If an individual has more than one short coverage gap during a year, the short coverage gap exemption only applies to the first gap.

Individual Shared Responsibility Payment

For 2015, the individual share responsibility payment is greater of two percent of household income that is above the tax return filing threshold for the individual’s filing status, or the individual’s flat dollar amount, which is $325 per adult and $162.50 per child, limited to a family maximum of $975, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2015. For 2015, the monthly national average premium for qualified health plans that have a bronze level of coverage that are offered through the Marketplace is $207 per individual and $1,035 for a shared responsibility family with five or more members.

STRATEGY. Open enrollment for coverage through the Health Insurance Marketplace for 2015 has closed. However, some qualifying life events may make an individual eligible for non-filing season special enrollment. An individual who experiences a complex situation may also qualify for special enrollment.

Health Flexible Spending Arrangements

Contributions to health flexible spending arrangements (health FSAs) are capped under the ACA at $2,500 (indexed for inflation). Any salary reductions in excess of the cap subject an employee to tax on distributions from the FSA. For 2015 and again for 2016, the cap is $2,550.

STRATEGY. Health FSA balances are use-it or lose-it each year, except to the extent a plan provides a $500 carryover.

YEAR-END BUSINESS PLANNING

As in past years, business tax planning is uncertain because of the expiration of many popular but temporary tax breaks that have been part of an “extenders” package of legislation. Also added to the mix is the far-reaching Affordable Care Act (ACA). Other changes to tax laws in 2015 made by new regulations and other IRS guidance should also be considered in assessing year-end strategies.

Code Sec. 179 Expensing

Code Sec. 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and that is purchased to use in an active trade of business. Under enhanced expensing, for 2014 and prior years, businesses could write off (“expense”) up to $500,000 in qualifying expenditures, and would not reduce this amount unless expenditures exceed $2 million. Until the enhanced provisions are extended, the limits, respectively, are $25,000 and $200,000 for 2015 and later years.

PLANNING NOTE. Qualifying property has included off-the-shelf computer software and certain real property.

Bonus Depreciation

Congress provided for 50-percent bonus depreciation through 2014 (through 2015 for certain transportation and other property). Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent.

STRATEGY. Because bonus depreciation, if and when extended, can be elected on the 2015 return filed in 2016, it is not necessary for a business to make an immediate decision on its use, although qualifying property must nevertheless be purchased and placed in service in 2015. Bonus depreciation is optional and businesses can elect not to use it. Electing out may be appropriate if the business wants to spread its depreciation deductions over future years more evenly.

S Corp Built-In Gains

If a C corporation converts to and S corporation, and the S corporation sells, during the recognition period, assets that had built-in gain at the conversion, a corporate level tax at the highest marginal rate for corporations applies to the built-in gain. This prevents a C corporation from avoiding a corporate-level tax on appreciated property by converting to an S corporation, which sells the assets and passes the gain through to shareholders. The recognition period was 10 years after the conversion, reduced to seven years, and then reduced to five years through 2014. With a shorter period, the S corporation can sell the asset more quickly without having to recognize the additional tax.

COMMENT. Currently, the 10-year recognition period applies for 2015.

Other Business Extenders

Other beneficial tax provisions for businesses would be included in the extenders legislation for 2015 and beyond. These include:

• New Markets Tax Credit
• Work Opportunity Tax Credit
• Employer wage credit for activated military reservists
• Subpart F provisions
• Enhanced deduction for contributions of food inventory
• Empowerment zones
• Indian employment credit
• Low-income credits for subsidized new buildings and military housing
• Treatment of regulated investment companies (RICs)
• Basis reduction of S corporation stock after donations of property

“Repair” Regulations

A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor. The safe harbor enables taxpayers to routinely deduct items whose cost is below the specified threshold.

STRATEGY. The de minimis safe harbor is an annual election, not an accounting method, so it can be made and changed from year to year. The current threshold is set at:
• $5,000 for taxpayers with an applicable financial statement (taxpayers with an AFS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor).
• $500 for taxpayers without an AFS.

PLANNING NOTE. Efforts being made in Congress to raise the $500 threshold for small businesses have met with resistance so far this year.

Routine Service Contracts

The IRS has provided a safe harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts (Rev. Proc. 2015-39). The IRS also indicated that additional safe harbors may be developed.

PLANNING NOTE. This new safe harbor should prove useful immediately in year-end strategies taken by accrual-basis taxpayers that are currently negotiating contracts for regular services that extend into 2016. Done correctly to fit under the definition of ratable service contracts, a full deduction in the current 2015 tax year may be taken for certain 2015 payments, even for services not performed until 2016.

Business Use of Vehicles

Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees involve an awareness of certain rates and dollar caps that change annually. Changes affecting 2015, as well as some 2016 information include:

• Standard Mileage Rate. The standard business mileage allowance rate for 2015 is 57.5 cents-per-mile (up from 56 cents-per-mile for 2014).
• Depreciation Limits. The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether anticipated 2015 extenders legislation will make the same retroactive adjustment for 2015.

PLANNING NOTE. Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year.

AFFORDABLE CARE ACT – BUSINESSES

PACE Act. In October 2015, Congress passed the Protecting Affordable Coverage for Employees (PACE) Act, which maintains the current language in the ACA that defines “small employer” as an employer with fewer than 50 full-time employees on average during the prior calendar year for purposes of the small group health market. The PACE Act, however, given states the option to apply the original definition of small employer to employers with 51 to 100 employees for purposes of the small group health market. Employers should check state law.

PLANNING NOTE. Only small employers can be qualified employers who may offer a cafeteria plan under Code Sec. 125 that permits their employees to enroll in a qualified health plan through the health insurance marketplace. The PACE Act may therefore have consequences for any large employers with between 51 and 100 employees that were planning to take advantage of this provision after they became “small employers” after January 1, 2016.

Health Reimbursement Arrangements

Many small businesses have traditionally provided a health benefit to their employees through a health reimbursement arrangement (HRA). Following the passage of the ACA, the IRS released Notice 2013-54, which described these arrangements as employer payment plans. Therefore, they are considered to be group health plans subject to the ACA’s market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventative care without cost sharing. Failure to comply with the ACA’s market forms triggers excise taxes under Code Sec. 4980D.

PLANNING NOTE. The IRS provided transition relief (Notice 2015-17) from the excise taxes to qualified small employers but the relief expired after June 30, 2015. Bipartisan legislation has been introduced in the House and Senate (Small Business Health Care Relief Act, HR 2911; Sen. 1697) to provide permanent relief for small employers.

Small Business Health Care Tax Credit

Small employers with no more than 25 full-time equivalent employees may quality for a special tax credit to help offset the cost of health insurance for their employees. The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement.

STRATEGY. The small employer tax credit may be carried back or forward. Small businesses that do not owe tax may take advantage of the credit in a prior year or a future year, if eligible.

FILING DEADLINE CHANGES

Due to changes in the tax laws and other events, some deadlines will be changing starting in 2016. As a result, planning at year-end 2015 might start factoring in some of these deadlines when setting out schedules and strategies at the start of 2016. Notably, under the Surface Transportation Act of 2015 partnerships will be subject to an earlier March 15th deadline and C corporations generally will move to an April 15th deadline starting for 2016 tax year returns. Extensions-to-file are also adjusted.

Filing Deadline

A Washington, D.C. holiday, Emancipation Day, will shift the filing and payment deadline for 2015 individual returns from April 15, 2016 to April 18, 2016. Taxpayers in two states (Maine and Massachusetts) will have one additional day to file because of Patriots Day, which will be observed on April 18, 2016 in those states.

Delay of Estate Tax Uniform Basis Reporting

The IRS delayed new uniform basis reporting requirements for estate tax property until February 29, 2016. The delay was provided to give the IRS time to issue guidance to executors, beneficiaries, and others on how to comply with the new reporting requirements.

FBARs

The due date going forward for filers of FBAR (FinCEN Report 114) will shift from June 30 to April 15, applicable for FBARs for tax years beginning after December 31, 2015. The Surface Transportation Act also provides that any penalty for failure to timely request or file an extension may be waived for taxpayers required to file Report 114 for the first time. The IRS is also given authority to modify regulations to provide for a maximum extension of six months ending on October 15.

PLANNING NOTE. Treasury’s Financial Crimes Enforcement Network (FinCEN) again postponed the Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114) filing deadline for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts to June 30, 2016.

PLANNING NOTE. 2015 has been a successful year for Treasury Department efforts to gain international cooperation against unreported offshore accounts. The Foreign Account Tax Compliance Act of 2010 (FATCA), enables the IRS, under the threat of 30 percent withholding, to obtain information from foreign financial institutions on foreign accounts that have U.S. owners. On September 30, 2015, the IRS announced a milestone under FATCA, signaling an initial exchange of financial account information under authority of intergovernmental agreements (IGAs) negotiated by Treasury with foreign jurisdictions. U.S. taxpayers holding foreign assets, whether individuals or businesses, need to reexamine their compliance as year-end approaches, particularly in light of stepped-up IRS enforcement.

TRADITIONAL YEAR-END PLANNING TECHNIQUES

Traditional year-end planning techniques include:

Income Acceleration
(for postponement to 2016, delay the following actions):

• Sell outstanding installment contracts
• Receive bonuses before January
• Sell appreciated assets
• Redeem U.S. Savings Bonds
• Declare special dividend
• Complete Roth conversions
• Accelerate debt forgiveness income
• Maximize retirement distributions
• Accelerate billing and collections
• Avoid mandatory like-kind exchange treatment
• Take corporate liquidation distributions in 2015

Deductions/Credit Acceleration
(for deferral, take contrary actions):

• Bunch itemized deductions into 2015/Standard deduction into 2016
• Don’t delay bill payments until 2016
• Pay last state estimated tax installment in 2015
• Don’t delay economic performance
• Watch AGI limitations on deductions/credit
• Watch net investment interest restrictions
• Match passive activity income and losses

With a breach in security in several data basis including the IRS; identity theft is on the rise. A common scam is for a thief to file tax returns using your name and social security to get at a refund. If you find you are the victim of identity theft, here is what you should do immediately.

1. Contact the IRS:
For individual – wage earners 800-829-0922
For individual – Self Employed/Business owners 800-829-8374
For additional information you may read the following. The important contacts are listed below.
http://www.irs.gov/Individuals/Identity-Protection
Publication 4535 Identity Theft Prevention and Victim Assistance
http://www.irs.gov/pub/irs-pdf/p4535.pdf

2. Contact the Connecticut Department of Revenue:
SIS unit – special investigation 855-842-1441

3. File Form 14039 Identity Theft Affidavit with the IRS.
This form can be found by typing the form number in the search box when on any IRS web page.
http://www.irs.gov/

4. Contact the Credit Reporting Agencies. By contacting any one of the following you may place a 90 day fraud alert. You only need to contact one of the agencies and they will shared the alert with the other two agencies. You may call or file a fraud alert on-line.
*Equifax 1800 525-6285 www.equifax.com/
*Experian 1888 397-3742 www.experian.com/
*Transunion 1800 680-8289 www.transunion.com/

5. Contact your Bank

6. Contact Federal Trade Commissions to file a report.
877-438-4338 www.ftc.gov/idtheft

7. Contact your state Attorney General to file a report.
www.NAAG.ORG

8. Contact your local police to file a report.

9. Contact Social Security Administration.
800-772-1213 www.fsa.gov/pub/10064.html

10. Monitor charges on your credit cards.
Most credit card companies allow you to set up notifications for transactions over a specified amount or when your available credit drops to a specified amount.

For victims of identity theft who have previously been in contact with the IRS and have not achieved a resolution, please contact IRS Protection Specialization Unit at 800-908-4490.

If you receive an e-mail claiming to be from the IRS, remember the IRS does NOT initiate contact with taxpayers by email to request personal or financial information. This includes text messages and social media channels.

Security is a growing concern for all of us. We would like to pass along this security warning from our local bank to help all our clients.

Health Reform

Individuals without health insurance will owe a tax.

Although the Obama administration delayed to 2015 the requirement that employers with 50 or more full-time workers provide employees with affordable health coverage or pay a stiff fine, the 2014 starting date for the individual mandate wasn’t deferred. Taxpayers must have qualifying coverage for themselves and their dependents to avoid this tax. This includes, for example, health coverage purchased through an exchange and federal coverage such as Medicare, Medicaid, Tricare and veteran’s coverage.

Individuals for whom coverage is too expensive are exempt from the tax. Employees whose share of premiums exceeds 8% of the household’s AGI won’t be hit. The same is true for people ineligible for employer coverage if the cost of a basic bronze-level plan in an exchange, less any tax credit for buying insurance, exceeds 8% of household AGI. Also exempt: Filers without coverage for periods of less than three months.And people who can show that a hardship forced them to go without coverage, including individuals whose insurance was canceled and who can’t buy an affordable policy.

The tax for being uninsured is normally the higher of two amounts:
The basic penalty or an income-based levy. The basic penalty is $95 a person ($47.50 for each family member who is under the age of 18), with a ceiling of $285. The income-based penalty is 1% of the excess of the taxpayer’s household AGI over the minimum level of AGI needed to trigger filing a return… $10,150 for singles and $20,300 for couples, plus $3,950 per dependent. The tax is lowered proportionally for any months the taxpayer had coverage. The levies will be higher in 2015 and 2016.
But in no case can the tax exceed the cost of a bronze-level exchange plan for the taxpayer and family members, also adjusted for months with health coverage.

IRS has limited remedies to collect this tax. It cannot use liens or levies, so it can only offset tax refunds. Nor can it charge interest on the unpaid balance.

Lower-income earners get a refundable tax credit to help them afford coverage. They can elect to have the credit sent directly to an exchange to help pay premiums or take the credit on their returns. The credit is allowed on a sliding scale for filers with household income over $11,490 for singles and $23,550 for a family of four. It ends as household income hits $45,960 for singles and $94,200 for a family of four.

Social Security

The Social Security wage base increases this year to $117,000, up $3,300 from the cap for 2013. The tax rate imposed on employers and employees remains 6.2%, and the employer’s share of Medicare tax stays at 1.45%, but the 0.9% Medicare surtax kicks in for singles with wages exceeding $200,000 and couples earning over $250,000. The surtax doesn’t affect the employer’s share. Self-employed individuals are also subject to the surtax.

Social Security benefits rise just 1.5% in 2014, due to low inflation. The earnings limits are heading up, too. People who turn 66 this year do not lose any benefits if they make $41,400 or less before they reach that age. Individuals between ages 62 and 66 by the end of 2014 can make up to $15,480 before they lose any benefits. There’s no earnings cap once a beneficiary turns 66.
The amount needed to qualify for coverage climbs to $1,200 a quarter. So earning $4,800 anytime during 2014 will net the full four quarters of coverage.
The threshold for the nanny tax rises to $1,900 this year, a $100 boost.

Medicare

The basic Medicare Part B premium remains $104.90 per month in 2014.
Upper-income seniors still have to pay higher Part B and D premiums if their modified adjust gross income for 2012 exceeded $170,000 for couples or $85,000 for single people. Modified AGI is AGI plus any tax-exempt interest, EE bond interest that’s used for education and excluded foreign earned income. The Part B surcharge for 2014 won’t change, and the Part D ad-on will rise slightly. The total surcharge on upper-incomers can be as large as $300.10 a month.

 Medicals

The annual caps on deductible contributions to HSAs have increase this year. The ceilings rise slightly to $6,550 for account owners with family coverage and to $3,300 for self-only coverage. Individuals born before 1960 can put in $1,000 more. The limits on out-of-pocket costs, such as deductibles and co-payments, will increase to $12,700 for people with family coverage and to $6,350 for individual coverage. Minimum policy deductibles will stay at $2,500 for families and $1,250 for singles.

The limits on deducting long-term-care premiums are a slightly higher. Taxpayers who are age 71 or older can write off as much as $4,660 per person. Filers age 61 to 70…$3,720. Those who are 51 to 60 can deduct up to $1,400. Individuals age 41 to 50 can take $700. And people age 40 and younger…$370. Also, the limit for tax free payouts under such policies increases to $330 a day.

 Savings Plans

The deduction phase-outs for contributions to regular IRAs start at higher levels, from AGIs of $96,000 to $116,000 for couples and $60,000 to $70,000 for singles. If only one spouse is covered by a plan, the phase-out for deducting a contribution for the uncovered spouse begins at $181,000 of AGI and finishes at $191,000.

The income ceilings on Roth IRA contributions go up. Contributions phase out at AGIs of $181,000 to $191,000 for couples and $114,000 to $129,000 for singles.

The contribution limitation for defined contribution plans increases to $52,000. That’s a $1000 hike for profit sharing plans and similar arrangements.

Retirement plan contributions can be based on up to $260,000 of salary. And the benefit limit for pension plans is rising to $210,000 in 2014.
The 401(k) contribution cap remains $17,500, plus $5,500 for people 50 and up.

IRA and Roth contribution limits stay at $5,500…$1,000 extra for tax payers born before 1965.

Fringe Benefits

U.S. taxpayers working abroad have a slightly larger exclusion…$99,200.

Caps on transit passes and commuter vans fall sharply this year to $130 a month.

The monthly limitation on tax free parking goes up to $250.

Education

The income caps are higher for tax free EE bonds used for education. The exclusion starts phasing out about $113,950 of AGI for married couples and $76,000 for singles. It ends when AGI hits $143,950 and $91,100, respectively.

The student loan interest deduction begins to phase out at higher levels, beginning when AGI exceeds $130,000 for couples and $65,000 for single filers.

The lifetime learning credit also starts phasing out at higher income levels… from $54,000 to $64,000 of AGI for singles and $108,000 to $128,000 for couples.

Adoption

The adoption credit can be taken on up to $13,190 of costs, a $220 boost. If the credit is more than the filer’s tax liability, the excess is not refundable. The full $13,190 credit is available for a special needs adoption, even if it cost less. The credit starts to dry up for filers with AGIs over $197,880 and ends at $237,880.

The exclusion for company-paid adoption aid also increases to $13,190.

Tax Rate Table

2014 income tax brackets are slightly wider but the tax rates did not change

Personal Taxes

Standard deductions for 2014 rise a slightly. Married people get $12,400. If one spouse is age 65 or older…$13,600. If both are…$14,800. Singles can claim $6,200…$7,750 if they’re 65. Household heads get $9,100 plus $1,550 more once they reach age 65. Blind people receive $1,200 more ($1,550 is unmarried and not a surviving spouse).

High-incomer earners lose their itemized deductions above a higher level for 2014. Their write-offs are slashed by 3% of the excess of AGI over $254,200 for singles, $279,650 for household heads and $305,050 for marrieds. But the total reduction can’t exceed 80% of itemizations. Medicals, investment interest, casualty losses and gambling losses (to the extent of winnings) are exempted from this cutback.

Personal exemptions increase to $3,950 for filers and their dependents. However, this write-off is phased out for upper-incomers. It is trimmed by 2% for each $2,500 of AGI over the same thresholds for the itemized deduction phase-out.

The 20% top rate on dividends and long-term gains starts at a higher level for 2014…singles with taxable income above $406,750, household heads over $432,200 and joint filers above $457,600. The 3.8% Medicare surtax boosts the rate to 23.8%. The regular 15% maximum rate applies for filers with incomes below these amounts, except that filers in the 10% or 15% income tax bracket still get the special 0% rate.

Minimum Tax

AMT exemptions are increasing for 2014. They jump to $82,100 for couples and $52,800 for both singles and heads of household. The phase-out zones for the exemptions start at higher income levels as well…above $156,500 for couples and $117,300 for single filers and household heads. Also, the 28% AMT tax bracket kicks in a little later in 2014…above $182,500 of alternate minimum taxable income.

Estate & Gift Tax

The estate and gift tax exemption for 2014 increases upward to $5,340,000. The rate remains 40%. The gift tax exclusion stays at $14,000 per donee. Up to $1,090,000 of farm or business realty can receive discount estate tax valuation.

Business Taxes

The standard mileage rate is 56 cents per mile for business driving, down half a cent from 2013. The rate for medical travel and moving is 23.5 cents a mile. The allowance for the charitable driving is unchanged…14 cents a mile.
The tax credit for small firms that offer health coverage has increased for 2014. The top credit rises to 50% (35% for tax-exempt groups) of the lesser of what they pay for employee coverage bought via an exchange or the average group exchange premium for small businesses in their state. However, the full credit is available only to firms with 10 or fewer full-time-equivalent employees and average wages of $25,400 or less. It falls rapidly for firms with more employees and higher pay, completely phasing out for businesses with more than 25 workers or average pay in excess of $50,800. Employers must contribute at least 50% toward the cost of coverage to get the credit.

Only $25,000 of business assets can be expensed.
50% bonus depreciation has ended.
The work opportunity tax credit for hiring disadvantaged workers has ended.
The 15-year depreciation for restaurant renovations and leasehold improvement has ended.