Monthly Archives: September 2016

Can you benefit from a recent court decision?

Interpreting the tax code can be difficult, even for the IRS, and sometimes that means you can benefit. An example is the recent IRS acceptance of a court decision on the proper way to calculate a deduction for home mortgage interest. Here’s what you need to know.

When you itemize, interest you pay on the mortgage on your main residence can reduce your taxable income. In some cases, mortgage interest on a second home is also deductible. But these deductions have “ceilings,” that is, limits on the amount of debt on which you can claim deductible interest.

One ceiling applies to loans you take out to buy, build, or improve your main home (and in some cases, a second home). Under this ceiling, the first $1 million of a mortgage secured by your home is considered “acquisition indebtedness,” and the interest you pay on this amount is generally deductible. The ceiling is $500,000 if you’re married filing separately.

Another ceiling applies to additional loans secured by your home. Interest you pay on the first $100,000 of this “home equity indebtedness” is generally deductible, subject to certain limitations, no matter what you use the money for. The ceiling is $50,000 if you’re married filing separately.

The two interest ceilings can interact if you have one mortgage exceeding $1 million. In that case, the first $1 million of your mortgage is considered acquisition indebtedness, and the first $100,000 of the balance is home equity indebtedness. The result: You can deduct interest paid on up to $1.1 million of your mortgage.

Or can you deduct even more? This was the question raised by unmarried co-owners of two residences. The taxpayers each deducted interest paid on $1.1 million on each residence, in effect raising the ceilings to $2.2 million.

The IRS disagreed with the deduction, but the court said the IRS was wrong — and the IRS has accepted the court decision.

The result? If you’re single and co-own a qualifying residence with another person, the amount of your interest deduction for current and prior years may be increased. Contact Carl Heinemann, your Chattanooga CPA, to discuss your options, including the opportunity to amend federal and state income tax returns.

You still have time to establish these retirement plans

The problem with time is that you always think you have enough. And yet fall is already here, and the time for establishing a retirement plan for your business is ticking down to the deadline. Here are two plans with upcoming due dates.

  • Savings Incentive Match Plan for Employees (SIMPLE). The deadline for setting up a SIMPLE for your business is October 1. SIMPLEs are easy to establish and maintain. You can use an IRS “model” document to set up your plan, and you’re not required to file an annual retirement plan return with the IRS. Your business can deduct contributions made on behalf of employees. In addition, you may be eligible for a credit of up to $500 to offset the cost of establishing a plan and getting your employees enrolled.The maximum contribution for SIMPLE plans in 2016 is $12,500, plus an extra $3,000 when you’re over age 50.
  • Simplified Employee Pension plan (SEP). If you’re a sole proprietor and you requested an extension of time to file your tax return, the last day to establish and fund a SEP is October 17. You set up a SEP by signing a plan document such as IRS Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. Contributions are deductible, and you don’t have to file an annual return with the IRS.For 2016, the maximum contribution is $53,000.

Not sure which plan will suit your business? Contact Carl Heinemann, your Chattanooga CPA, for a detailed comparison.

Remember other taxes when setting up your estate plan

As you begin your estate planning, strategies for reducing estate tax may be first on your to-do list. Or perhaps you think the current $5.45 million exclusion, combined with portability of the exclusion for married couples, means you have nothing to worry about. But overlooking other types of taxes that may apply to your estate can be costly. Here are two.

  • Generation-skipping transfer tax. The generation-skipping transfer tax is imposed when you transfer assets to your grandchildren, or others who are two generations or more below you. The tax has a maximum rate of 40%, and applies to transfers made directly or in trust. Similar to estate and gift taxes, you can apply a lifetime exclusion of $5.45 million to your generation-skipping transfers. Both the tax and the exclusion are separate from estate and gift taxes.

    Tip: You may need to report generation-skipping gifts on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

  • Gift tax. For 2016, you can transfer up to $14,000, estate- and gift-tax free, to anyone you choose. You and your spouse can combine gifts and make a tax-free transfer of up to $28,000. For amounts greater than the annual exclusion, gift taxes are “unified” with estate taxes under current rules, meaning the two share a current lifetime exclusion of $5.45 million. The result? Whatever portion of the $5.45 million exclusion you use to offset gift taxes is unavailable to offset estate tax.

We’re here to help with your estate planning needs. Contact Carl Heinemann, your Chattanooga CPA.

Are you familiar with these tax code sections?

While the tax code sometimes seems like a foreign language, understanding the lingo can help you make informed decisions. The good news: You probably know more tax code sections than you think. Here are three you may be able to benefit from as you review your 2016 tax planning.

  • Section 179. Section 179 is shorthand for an Internal Revenue Code section titled “Election to expense certain depreciable business assets.” Essentially a very accelerated form of depreciation, Section 179 lets you write off the cost of business equipment in the year you place it in service instead of having to depreciate the asset over a specified useful life. For 2016, you can elect to deduct up to $500,000 of the cost of assets purchased, as long as the total cost of the assets you purchase and place in service during the year is less than $2,010,000. Your deduction is also limited by your taxable income for the year.

    Bonus question. Do you know what year Section 179 was added to the Internal Revenue Code?

  • Section 529. Section 529 plans provide a tax-advantaged way to save for higher education expenses, and take two forms: prepaid plans and savings plans. With a prepaid plan, you pay for tomorrow’s tuition costs at today’s rates. With a savings plan, you put money in an investment account and the account grows tax-free until you make withdrawals to pay for higher education. The withdrawals are also tax-free as long as the expenses you pay meet the tax code definition of “qualified higher education expenses,” such as tuition, books, and certain computer expenses.

    Bonus question. Withdrawals from Section 529 savings plans must be used for tuition at U.S.-based schools only. True or false?

  • Section 1031. You’re probably familiar with Section 1031 in the form of the expression “like-kind exchange.” An exchange of similar business or investment properties that meets the requirements of Section 1031 allows you to postpone the federal income tax on gain from the transaction. Keep in mind the tax is postponed, or deferred, not eliminated. You’ll still need to track your basis in property you acquire in an exchange.

    Bonus question. Section 1031 rules apply only to corporations. True or false?

Got questions about tax rules or need help with tax planning? Contact Carl Heinemann, your Chattanooga CPA, for answers. We’ll be happy to tell you Section 179 was added to the Internal Revenue Code in 1958, Section 529 savings plan withdrawals can be used tax-free at certain foreign colleges, and Section 1031 rules apply to individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, and trusts.

Trim the fat from your grocery bill

Looking to save money on household expenses? Start with your grocery bill. Here are eight ideas for reducing how much you spend on food.

  • Make a list. By deciding ahead of time what’s needed for upcoming meals, you’ll be less likely to buy on impulse.
  • Buy generic. Thanks to advertising and packaging, brand differences are often more perceived than real. Blind taste-comparison tests have shown that study participants often can’t tell the difference between well-known and generic brands. That’s especially true with staples such as salt, sugar, and other baking supplies. Be willing to experiment. If you try a product and aren’t satisfied with quality or taste, you can always purchase a more expensive brand on a subsequent trip to the store.
  • Go simple. Think salads, one-dish casseroles, and in-season fruits. You’ll avoid the trap of eating pre-packaged, less nutritious, and more expensive meals.
  • Pay with cash. Research studies show that paying with a credit or debit card lessens your perception of how much you’re spending. Pull actual currency from your wallet and you may find that impulse purchases aren’t as tantalizing. Stay within budget by bringing only as much cash as you need.
  • Shop at the edges. In many stores, the produce, dairy, and meat departments are located on the perimeter. Snacks, canned goods, and pre-packaged meals are stocked in the center aisles and toward the front of the store. Buy items mostly from the outside edges and your meals will be healthier and cheaper.
  • Scrutinize unit prices. Don’t buy items based on total cost alone. Instead, compare unit prices, which tell you the cost per a standard weight or volume. Larger doesn’t always mean cheaper.
  • Eat first, shop later. That candy bar or bag of potato chips won’t be quite as appealing after a full meal.
  • Try a different establishment. If you frequent a particular store out of habit, don’t be afraid to shop around.

For more budgeting and money-saving tips, contact Carl Heinemann, your Chattanooga CPA..

Do you have a plan for the future of your business?

Is your company a statistic? If you operate a family-owned business, the answer may be yes. According to the U.S. Small Business Administration, over 50% of all small business owners are aged 50 or older. If you’re included in that group, you might be wrestling with the question of selecting and training a successor. Think you’re too young to retire? Getting an early start helps you avoid “crisis mode” decisions that may damage your company’s future prospects. Early planning also provides opportunities for helping your successor learn the business and get prepared to assume full responsibility.

Here are two initial steps to consider.

  • Choosing a successor. Do you expect a family member — perhaps one of your kids — to take over the company when you’re ready to retire? Be sure to align your company’s best interests with your child’s dreams, skills, knowledge, and passion for success. The decision can be an emotional one, so it makes sense to involve an objective third party such as a financial advisor, attorney, board member, or trusted friend. Be open to considering a long-term employee or an outsider with more extensive experience in your industry.
  • Establish a training plan. Identify the critical functions of the company and provide the opportunity for your chosen successor to gain experience in operations, sales, and accounting. Establish a timetable for training, allow for mistakes, and resist the temptation to override routine decisions. Let your successor develop a management style that fits both the company’s mission and your successor’s temperament.

Succession planning takes time and effort. For assistance, put Carl Heinemann, your Chattanooga CPA, on your team.