Why You May Want to Accelerate Your Property Tax Payment Into 2017

Why You May Want to Accelerate Your Property Tax Payment Into 2017

Accelerating deductible expenses, such as property tax on your home, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying property tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the property tax deduction beginning in 2018. Proposed changes The initial version of the House tax bill would cap the property tax deduction for individuals at $10,000. The initial version of the Senate tax bill would eliminate the property tax deduction for individuals altogether. In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions. 2017 year-end planning You can prepay (by December 31) property taxes that relate to 2017 but that are due in 2018 and deduct the payment on your 2017 return. But you generally can’t prepay property tax that relates to 2018 and deduct the payment on your 2017 return. Prepaying property tax will in most cases be beneficial if the property tax deduction is eliminated beginning in 2018. But even if the property tax deduction is retained, prepaying could still be beneficial. Here’s why: If your property tax bill is very large, prepaying is likely a good idea in case the property tax deduction is capped beginning in 2018. If you could be subject to a lower tax rate in 2018 or won’t have enough itemized deductions overall in 2018 to exceed a higher standard deduction, prepaying is also likely tax-smart...
2017 Might Be Your Last Chance to Hire Veterans and Claim a Tax Credit

2017 Might Be Your Last Chance to Hire Veterans and Claim a Tax Credit

With Veterans Day on November 11, it’s an especially good time to think about the sacrifices veterans have made for us and how we can support them. One way businesses can support veterans is to hire them. The Work Opportunity tax credit (WOTC) can help businesses do just that, but it may not be available for hires made after this year. As released by the Ways and Means Committee of the U.S. House of Representatives on November 2, the Tax Cuts and Jobs Act would eliminate the WOTC for hires after December 31, 2017. So you may want to consider hiring qualifying veterans before year end. The WOTC up close You can claim the WOTC for a portion of wages paid to a new hire from a qualifying target group. Among the target groups are eligible veterans who receive benefits under the Supplemental Nutrition Assistance Program (commonly known as “food stamps”), who have a service-related disability or who have been unemployed for at least four weeks. The maximum credit depends in part on which of these factors apply: • Food stamp recipient or short-term unemployed (at least 4 weeks but less than 6 months): $2,400 • Disabled: $4,800 • Long-term unemployed (at least 6 months): $5,600 • Disabled and long-term unemployed: $9,600 The amount of the credit also depends on the wages paid to the veteran and the number of hours the veteran worked during the first year of employment. You aren’t subject to a limit on the number of eligible veterans you can hire. For example, if you hire 10 disabled long-term-unemployed veterans, the credit can be as...
Two ACA Taxes That May Apply to Your Exec Comp

Two ACA Taxes That May Apply to Your Exec Comp

If you’re an executive or other key employee, you might be rewarded for your contributions to your company’s success with compensation such as restricted stock, stock options or nonqualified deferred compensation (NQDC). Tax planning for these forms of “exec comp,” however, is generally more complicated than for salaries, bonuses and traditional employee benefits. And planning gets even more complicated if you could potentially be subject to two taxes under the Affordable Care Act (ACA): 1) the additional 0.9% Medicare tax, and 2) the net investment income tax (NIIT). These taxes apply when certain income exceeds the applicable threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers. Additional Medicare tax The following types of exec comp could be subject to the additional 0.9% Medicare tax if your earned income exceeds the applicable threshold: • Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold, • FMV of restricted stock when it’s awarded if you make a Section 83(b) election, • Bargain element of nonqualified stock options when exercised, and • Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture. NIIT The following types of gains from stock acquired through exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold: • Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election, and • Gain on the sale of stock from an incentive...
Why You Should Boost Your 401(k) Contribution Rate Between Now and Year End

Why You Should Boost Your 401(k) Contribution Rate Between Now and Year End

One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step. If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement. Traditional 401(k) A traditional 401(k) offers many benefits: • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax. • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions. • Your employer may match some or all of your contributions pretax. For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld. If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions...
Watch Out For Potential Tax Pitfalls of Donating Real Estate to Charity

Watch Out For Potential Tax Pitfalls of Donating Real Estate to Charity

Charitable giving allows you to help an organization you care about and, in most cases, enjoy a valuable income tax deduction. If you’re considering a large gift, a non-cash donation such as appreciated real estate can provide additional benefits. For example, if you’ve held the property for more than one year, you generally will be able to deduct its full fair market value and avoid any capital gains tax you’d owe if you sold the property. There are, however, potential tax pitfalls you must watch out for: Donation to a private foundation. While real estate donations to a public charity generally can be deducted at the property’s fair market value, your deduction for such a donation to a private foundation is limited to the lower of fair market value or your cost basis in the property. Property subject to a mortgage. In this case, you may recognize taxable income for all or a portion of the loan’s value. And charities might not accept mortgaged property because it may trigger unrelated business income tax. For these reasons, it’s a good idea to pay off the mortgage before you donate the property or ask the lender to accept another property as collateral for the loan. Failure to properly substantiate your donation. This can result in loss of the deduction and overvaluation penalties. Generally, real estate donations require a qualified appraisal. You’ll also need to complete Form 8283, “Non-cash Charitable Contributions,” have your appraiser sign it and file it with your federal tax return. If the property is valued at more than $500,000, you’ll generally need to include the appraisal report as...
The ABCs of the Tax Deduction For Educator Expenses

The ABCs of the Tax Deduction For Educator Expenses

At back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses. The miscellaneous itemized deduction Generally, your employee expenses are deductible if they’re unreimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business. These expenses must be claimed as a miscellaneous itemized deduction and are subject to a 2% of adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed 2% of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet. The educator expense deduction Congress created the educator expense deduction to allow more teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses. The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses. Qualifying elementary and secondary school teachers and other eligible educators (such as counselors...