Do you know your tax bracket? Understanding what rate was assessed on the last dollar of taxable income on your 2015 federal income tax return can help with 2016 tax planning as well as financial decisions you make throughout the year. For example, say you’re wondering how much tax you’ll save by increasing the pre-tax contribution to your retirement plan during 2016. The additional amount invested times your tax rate provides a quick estimate.
For 2016 planning, your estimated taxable income determines which of the seven federal tax brackets will apply. For instance, 2016 taxable income ranging from $75,301 to $151,900 puts you in the 25% bracket if you’re married and filing a joint federal return. Keep in mind that your tax bill will not be 25% of your total taxable income. One reason: The rate only applies to the income in that bracket.
Since each bracket consists of a range of income, a planning opportunity is to “fill a bracket.” That means you keep your income below the level that will push you into the next bracket. You could accomplish this by prepaying itemized deductions, making a partial conversion of a traditional IRA to a Roth, or taking a comprehensive family-level approach to planning.
Contact Carl Heinemann, your Chattanooga CPA, for more information about tax brackets and 2016 planning strategies.
If you’re shopping for a new auto for yourself or your business, you may be wondering if the federal government still offers incentives for “green” cars. The answer is yes, in the form of credits you can use to directly reduce the amount of income tax you owe — but only when you buy certain vehicles. Here’s an overview.
- Plug-in electric drive motor vehicle. This credit was extended for vehicles purchased through 2016, and includes cars, light trucks, and motorcycles. In general, the vehicle must be under 14,000 pounds and powered by a rechargeable electric motor. Depending on the size of the battery, the credit can be as much as $7,500 for vehicles with four wheels. For two-wheeled highway-use vehicles, the credit is 10% of the cost, up to a maximum of $2,500.
- Fuel cell motor vehicle. The alternative motor vehicle credit is available for fuel cell vehicles for 2015 and 2016. Fuel cell motor vehicles are powered by cells that convert chemical energy into electricity. The base credit is $4,000 for vehicles weighing less than 8,500 pounds.
To take advantage of these credits, you need to be the original owner of a new qualified vehicle you’ve purchased and placed in service during the tax year. How do you know if the vehicle is qualified? The manufacturer certifies eligibility with the IRS, and you should be able to obtain and rely on a copy of the IRS letter acknowledging the certification.
You may also be able to claim an alternative fuel vehicle refueling property credit if you buy and place in service equipment such as a recharging station for your vehicle. Contact Carl Heinemann, your Chattanooga CPA, for details about these and other available energy credits.
As you finalize, file, and pay your 2015 federal income tax, you’ll want to be thinking about how much you’ll owe for 2016. Why? Because the mid-April filing due date for 2015 federal individual income tax returns is also the due date for the first estimated tax payment of 2016. If you’re required to make estimated payments this year, missing the deadline could lead to penalties. Here’s what to consider.
- Do you need to make estimates? If you operate your own business, or receive alimony, investment, or other income that’s not subject to withholding, you may have to pay the tax due in installments. Each estimated tax installment is a partial prepayment of the total amount you expect to owe for 2016. You make the payment yourself, typically four times a year.
- How much do you need to pay? To avoid penalties, your estimated payments must equal 90% of your 2016 tax or 100% of the tax on your 2015 return (110% if your adjusted gross income was over $150,000).There are exceptions to the general rule. For instance, say you anticipate the balance due on your 2016 federal individual income tax return will be less than $1,000 after subtracting withholding and credits. In this case, you can skip the estimated payments and remit the final balance with your return next April. Other exceptions may also apply, and state laws can differ from federal requirements. In addition, farmers and fishermen are subject to special rules.
Contact Carl Heinemann, your Chattanooga CPA, for more information. We’ll be happy to review the rules with you.
If you received income in 2015 that wasn’t subject to federal income tax withholding, you may have paid the tax you owed in installments. Those estimated tax installments were due in four payments: April, June, and September of 2015, and January of 2016. In most cases, you’ll include the total of all four on your return. But some situations require more planning.
For instance, say you filed joint estimates with your spouse for 2015. If you’re filing a joint federal income tax return, you’ll report the entire amount in the “payments” section. That’s true even if your spouse died during the year. But what if you and your spouse decide to file separately for 2015? In that case, you have to decide how to split the joint payments. The two of you can agree to any method you choose.
Can’t reach an agreement? You’ll have to use a formula. The first step is for you and your spouse to prepare separate returns for 2015, each claiming your own income and deductions. Then you split the estimated tax you paid in proportion to the tax shown on those returns.
Illustration. If the tax on your separate Form 1040 is $4,000, and the tax on your spouse’s return is $1,000, you can claim 80% of the 2015 estimates because your tax is 80% of the total owed ($5,000).
Use the same method if you and your spouse got divorced in 2015. In this case, remember to include your spouse’s social security number on your return, either in the space on page one or beside the line in the “payments” section of Form 1040. That helps the IRS track the total payments you made.
Did you marry during 2015 and change your name? Attach a statement to your return to claim estimated payments you made under your former name.
For more information about these and other estimated tax rules, contact Carl Heinemann, your Chattanooga CPA.
For several years now, financial institutions have been touting prepaid debit cards (also known as stored-value cards) for the millions of Americans who lack traditional checking accounts. Governments have used the cards to disperse unemployment benefits, disaster relief aid, and tax refunds. Employers sometimes tie the cards to health savings accounts or use them as a depository for payroll checks. In an increasingly plastic-dependent world, these cards can be substituted for cash, and you can use them to pay for airline tickets, hotel stays, electronics, and groceries. Money is transferred, or “loaded,” to the card and is yours to spend until the card runs out of funds or is reloaded.
Prepaid cards have several advantages over traditional credit and debit cards. For example, if you’re traveling and the card is stolen, losses are limited to the amount on the card. In addition, because your personal banking information isn’t on the card, thieves and con artists can’t extract that data to steal your identity. Another use: Teaching kids how to budget. Some issuers offer instant alerts that monitor card activity, which is a great way for parents to see what their teens are purchasing in real time. If you’re the one who’s prone to overspending, prepaid cards offer a built-in safety net: you can’t spend more than the amount that’s loaded onto the card.
But be aware of the lack of regulatory constraints on the cards. Issuers have great latitude over fees and prepaid cards can get expensive. Depending on the card issuer, you might be charged a fee to activate the card, use it at an ATM machine, check your balance, add more money, or talk to customer support. You might be charged a monthly maintenance fee as well. Before you buy, read the fine print.
Two more cautions: the money loaded onto these cards doesn’t earn interest, and a prepaid card won’t bolster a bad credit rating. Remember, the card is equivalent to carrying cash.
If you need help planning a budget or making major financial decisions, contact Carl Heinemann, your Chattanooga CPA.
Deciding how to price your products and services is one of the toughest choices you’ll face as a business owner or manager. Prices affect long-term viability, short-term profits, market share, customer loyalty, and myriad other tangible and intangible aspects of your business. Unfortunately, the guidebook or financial guru who can provide infallible answers doesn’t exist. However, certain tried-and-true principles can help you arrive at reasonable and appropriate pricing for your market and industry. Here are three.
- Cover your costs. As a business owner, you can’t afford to operate at a deficit for long. The price you charge for a particular product must at least equal the cost of producing that product. Depending on your industry, production costs might include raw materials, storage, salaries, advertising, delivery, rent, equipment, taxes, and insurance. Some of these will be categorized on the income statement as “cost of goods sold.” Others will be overhead. Some, such as rent and utilities, are relatively fixed. Others are variable, such as shipping and stocking fees. Simply adding the amount of profit you want to earn as a percentage (called the cost-plus pricing method) is one way to arrive at an appropriate price. Of course, profit margins or “mark-ups” vary by industry, so a restaurant might set the profit percentage lower than a car dealership.
- Know your market. There’s no substitute for strong market research. After all, your customers are scanning the market for a good deal. Provide value at a perceived bargain price and they’ll tell their friends. Some businesses hire research firms to develop detailed reports on competitors, markets, and forecasts for a particular region or industry. But you may be able to get a handle on your market by using surveys and other methods of ferreting out customer perceptions about your product and service quality, the effectiveness of your advertising, and the reasonableness of your prices as compared to your competition.
- Monitor regularly. Product pricing is not a one-time event. Instead, you’ll want to monitor the impact of price fluctuations on sales revenue over time. Overpricing — charging more than a reasonable buyer can be expected to pay — may limit sales. Underpricing may create the perception of poor quality or lead to unsustainably low profit margins.
Pricing decisions affect every aspect of your business. Contact Carl Heinemann, your Chattanooga CPA, for more tips and techniques that can help you manage your company profitably.