Do You Need to File a 2016 Gift Tax Return by April 18?

Do You Need to File a 2016 Gift Tax Return by April 18?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return. Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required. When filing is required Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts: • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse), • That exceeded the $148,000 annual exclusion for gifts to a non-citizen spouse, • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016, • Of future interests — such as remainder interests in a trust — regardless of the amount, or • Of jointly held or community property. When filing isn’t required No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions. If you transferred hard-to-value property, such as artwork or interests in a family-owned...
Can You Pay Bonuses in 2017 But Deduct Them This Year?

Can You Pay Bonuses in 2017 But Deduct Them This Year?

You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available. For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year. The all-events test For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when: 1. All events have occurred that establish the taxpayer’s liability, 2. The amount of the liability can be determined with reasonable accuracy, and 3. Economic performance has occurred. Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed. For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the...
There’s Still Time to Benefit on Your 2016 Tax Bill by Buying Business Assets

There’s Still Time to Benefit on Your 2016 Tax Bill by Buying Business Assets

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016. Section 179 deduction The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list. The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $200,010,000. Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs. Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation. First-year bonus depreciation For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture. Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the...
Accelerating Your Property Tax Deduction to Reduce Your 2016 Tax Bill

Accelerating Your Property Tax Deduction to Reduce Your 2016 Tax Bill

Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial. One deductible expense you may be able to control is your property tax payment. You can prepay (by December 31) property taxes that relate to 2016 but that are due in 2017, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2017 and deduct the payment on this year’s return. Should you or shouldn’t you? As noted earlier, accelerating deductible expenses like property tax payments generally is beneficial. Prepaying your property tax may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher. However, under the President-elect’s proposed tax plan, some taxpayers (such as certain single and head of household filers) might be subject to higher tax rates. These taxpayers may save more tax from the property tax deduction by holding off on paying their property tax until it’s due next year. Likewise, taxpayers who expect to see a big jump in their income next year that would push them into a higher tax bracket also may benefit by not prepaying their property tax bill. More considerations Property tax isn’t deductible for AMT purposes. If you’re subject to the AMT this year,...
Year-End Tax Strategies for Accrual-Basis Taxpayers

Year-End Tax Strategies for Accrual-Basis Taxpayers

The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill. Record and recognize The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include: •Commissions, salaries and wages, • Payroll taxes, • Advertising, • Interest, • Utilities, • Insurance, and • Property taxes. You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher. Look at prepaid expenses Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials. Miscellaneous tax tips Here are a few more year-end tax tips to consider: • Review your outstanding receivables and write off any receivables you can establish as uncollectible. •...
A Quick Look at the President-Elect’s Tax Plan for Businesses

A Quick Look at the President-Elect’s Tax Plan for Businesses

The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include: Reducing the top corporate income tax rate from 35% to 15%, Abolishing the corporate alternative minimum tax, Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work, Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit,  Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid, and Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate. President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate. So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law. It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income...