Monthly Archives: January 2017

Be upfront to avoid backup withholding

If you took on a freelance gig, or opened a financial account that will pay interest, you most likely filled out IRS Form W-9. The form asks for your taxpayer identification number, and includes a certification that you sign stating you’re not subject to backup withholding. But do you know what backup withholding is? Here’s an overview.

  • What is backup withholding? Backup withholding is a way for the IRS to collect federal income tax on certain types of income. While your employer typically withholds federal income tax from your wages, certain other income, such as interest and dividends, patronage dividends, rent, royalties, commissions and fees paid to independent contractors, payments by brokers on stock and bond transactions, and payments from fishing boat operations, generally do not have tax withheld. Backup withholding rules require the payer of those items to withhold federal income tax at the rate of 28% in some circumstances.
  • When does backup withholding apply? You might be subject to backup withholding if you fail to provide your social security number or taxpayer identification number to a company or individual who is paying you income that is subject to the tax. Backup withholding may also apply if you provide an incorrect identification number, or if you fail to sign the certification portion of Form W-9.
  • Can you get a refund of backup withholding? If backup withholding was withheld by mistake from income you received and you act quickly to correct your records with the payer, you may be able to get a refund directly from the payer. Otherwise, you can claim the amount withheld on your individual income tax return along with other federal income tax withholding.

The best way to avoid backup withholding is to provide the correct information up front. Contact Carl Heinemann, your Chattanooga CPA,  if you have questions about the backup withholding rules and how they apply to you.

Can you claim a dependency exemption for your college grad?

Do you have a recent college graduate in the family, or will your child be graduating this year? If so, this might the last chance you have to claim a dependency exemption on your federal income tax return. Since the exemption is $4,050 for 2016 and 2017, that’s a tax break you don’t want to miss. Here’s what you need to know.

Generally, you can claim a dependency exemption for your child based on a support test for the year and whether your child has taxable income of less than the personal exemption. For 2017, the personal exemption amount is $4,050, the same as in 2016.

The taxable income requirement doesn’t apply when your child is under age 19 or is a full-time student under age 24. To meet the full-time student rule, your child must attend school at least five months during the year. That means you may be entitled to the exemption if your twenty-something child graduates in May after the spring semester, though you’ll still have to pass the support test.

What counts as support? Examples include food, clothing, and medical care. Typically, money your child receives but doesn’t use as support — for example, wages that are banked and not spent — does not count as support for this purpose.

Be aware that dependency exemptions, along with other personal exemptions, are phased out, or reduced, when your modified adjusted gross income exceeds certain levels. On your 2016 federal income tax return, the phase-out begins at $259,400 when you’re single and $311,300 if you’re married filing jointly. For 2017, the phase-out increases slightly to $261,500 for singles, and $313,800 when you file jointly.

Please contact Carl Heinemann, your Chattanooga CPA, for more information on dependency exemptions and how you can maximize your tax savings.

Protect yourself from the 100% penalty on payroll taxes

As an employer, you’re responsible for collecting payroll taxes from employee wages and depositing the taxes with the IRS. The IRS takes these rules very seriously – so seriously that if your business willfully fails to deposit payroll taxes on time, the responsible person could be held personally liable for a penalty of 100% of the past due amount. In other words, if your company comes up short on payroll deposits, you might have to pay the entire balance out of your own pocket.

  • Who is a “responsible person” for purposes of the penalty? You can be considered a responsible person when you’re the active owner of the business. The definition can also be extended to others with authority over disbursing funds, such as the treasurer or other officer of the company, a bookkeeper, and even an independent third party.

    For example, in one court case, a corporate vice president had an agreement with the president of the company that stated the vice president wouldn’t exercise control over funds, although he had check writing authority if the president was out of the office. Nevertheless, the vice president was found to be a responsible person.

  • What is a “willful failure?” Typically, the penalty will apply if you knew or should have known about the unpaid payroll tax liability.
  • What can you do to protect yourself? Make complying with payroll rules a top priority. Stay aware of due dates by setting up a “tickler” or reminder file, or notifications on an electronic calendar. Follow up to ensure that deposits have been made on time. Assign the task of payroll collection and deposits to a reliable employee and train backup staff to fill in during vacations or other absences.

You can’t be too careful with your payroll tax obligations. Contact Carl Heinemann, your Chattanooga CPA, for assistance and guidance whenever you have questions about your responsibilities as an employer.

Traveling for business? Lock in your deductions

The ability to deduct expenses on your tax return often boils down to whether you’ve kept the proper records or not. This is especially true when it comes to write-offs for travel and entertainment expenses. Tax law has a special set of rules for these expenses. Here’s what you need to know.

  • Understand the basics. Generally, you’re required to substantiate expenses for traveling away from home on business, including meals and lodging, local transportation, and entertainment and business gifts. The specific information you’ll need for each expense consists of five items.

    1. The amount
    2. The time and place
    3. The business purpose
    4. The business relationship of the person being entertained
    5. The date and description of business gifts.

  • Do it now. Records for travel and entertainment expenses must be “contemporaneous.” Although this doesn’t mean you have to log your expenses as soon as you shut off your car engine, you can’t wait until tax filing day, either. Compiling the records on a weekly basis is generally sufficient.
  • Be adequate. Another requirement for travel and entertainment expense deductions is that records must be “adequate.” According to the IRS, adequate evidence shows the amount, date, place and main character of the expense. For example, keep receipts from hotels when you stay overnight on business, and restaurant and bar tabs for entertaining business clients. Credit card statements can also corroborate the receipts. As a last resort, the IRS says you may offer a written or oral statement containing specific information to help prove an element of the expense with other supporting evidence.

The IRS has a long history of targeting travel and entertainment expenses during audits. Make sure you establish a record keeping system that will stand up to scrutiny.

The home sale exclusion: do you qualify for full, partial, or nothing?

You’re probably familiar with the current version of the tax break known as the home sale exclusion. If you’re single, you can exclude up to $250,000 of gain on the sale of your home. The exclusion can be as much as $500,000 when you’re married filing jointly. In either case, the general requirement is that you have owned and used the home as your principal residence for at least two of the previous five years. Typically, the exclusion is unavailable if you claimed it on your tax return within the last two years.

What happens if you sell the home without meeting the two-of-five-year requirement, or if you elected the exclusion within the last two years? In some cases, you still may be eligible for a partial exclusion. To qualify for this modified tax break, the home sale must have resulted from a change in employment, the need for medical care, or other “unforeseen circumstances.”

What are unforeseen circumstances? Examples include death, divorce, loss of a job or a substantial pay cut, multiple births from the same pregnancy, the taking of property, and damage from a disaster.

What if none of the examples apply? You may not be able to claim any exclusion – or the IRS may examine the facts and circumstances of your case, and grant a partial exclusion. That could happen when factors beyond your control forced you to sell the home before you could have reasonably anticipated that you would in the normal course of events.

A partial exclusion is based on the time of use and ownership as a principal residence. For example, if you lived in the home for one year, the maximum is $125,000 when you’re single, and $250,000 when you’re married filing jointly.

No matter the reason you’re selling your home, contact Carl Heinemann, your Chattanooga CPA, to learn how the rules can affect your tax return.

Is private mortgage insurance a good deal?

Private mortgage insurance, known as PMI, is a type of insurance that makes sure your lender gets paid back if you default on your loan. Generally, lenders require you to pay for PMI if your down payment will be less than 20% of the value of your new home. Is that a good idea? If you can’t finance your home any other way, private mortgage insurance may be worth considering. But before you sign on the dotted line, research the costs.

Here’s what to consider. PMI fees may be added to your regular mortgage payment or paid upfront during closing. Depending on the size of your down payment and the mortgage balance, insurers typically charge between 0.5% and 1% of the original loan amount on an annual basis. Here’s an illustration. Say you take out a mortgage for $200,000. PMI may add as much as $166 per month to your house payment ($200,000 x .01 divided by 12 months).

If you don’t want to pay for PMI, you have other options. For example, you could scale down your expectations and consider a less expensive home, or you can ramp up your savings and wait to buy until you can make a down payment of at least 20% of the sales price. You can also apply for a loan from the Federal Housing Administration or Veteran’s Administration. If you qualify, these lenders may require a smaller down payment or offer lower interest rates. Alternatively, you can find a lender that doesn’t require PMI. Just be aware this option may mean you’ll have to accept a higher interest rate, which may end up costing you more money.

What if you’re already paying PMI? A new appraisal may eliminate the need for the insurance. PMI premiums are typically paid until the loan-to-value ratio reaches 80% or less, which generally happens when your home increases in value or you pay down your mortgage. If your house has increased in value, the loan-to-value ratio may have dropped.

You could also prepay your loan. Paying off your mortgage faster lets you reach the 80% loan-to-value threshold sooner. Another viable alternative may be remodeling. Add a room or refurbish your kitchen, then ask the lender to recalculate the loan-to-value ratio.

For help evaluating private mortgage insurance and other financial decisions, give Carl Heinemann, your Chattanooga CPA, a call.

Motivation matters: Encourage your employees with the right policies

Keeping your staff motivated and productive can be difficult even in the best of times. One recent study found that only 30% of U.S. workers feel “engaged and inspired” by their careers. But motivating your employees, and making them feel appreciated, engaged, and fulfilled, is critical to employee retention. Are you up to the task?

Take a walk around your company and observe your employees. Do they interact? Do they appear engaged by their work? If not, your personnel policies may be at fault. Here are suggestions for improving them.

  • Eliminate unnecessary rules. Do company rules hinder productivity and communicate mistrust? If your policies are riddled with over-zealous attendance rules, unreasonable internet usage guidelines, and petty parking lot decrees, consider rewriting them in a way that shows you trust your employees to perform in a professional manner.
  • Hire the right people. A team with broad experience, training, and a common vision can perform wonders. Give employees the benefit of working alongside like-minded professionals who have the training and skills that allow everyone to succeed.
  • Inspire top performance. Set the bar high. Establish goals for each of your employees and schedule regular performance reviews to keep them on the right track toward reaching those goals.
  • Value differences. Do you know what motivates individual employees? For some, a public pat on the back is a real incentive. Others might prefer to stay in the shadows and receive kudos without fanfare. Be a perceptive manager, and take time to understand these differences.
  • Focus on leadership. Be the kind of boss you’d want to work for. Avoid excessive control, harsh behavior, and arrogance. Remain accessible and open to feedback. Understand the day-to-day work your staff performs, give employees a sense of autonomy, and treat everyone as an integral part of the team.
  • Provide long-term career opportunities. If the workplace seems stagnant and career paths are nonexistent, a loss of motivation is not far behind. To counteract flagging morale, create paths to promotion in as many roles as possible. Challenge employees with new tasks that will prepare them for the next level of career advancement.
  • Open communication. Communicate with your employees. Provide clear and timely updates and feedback, even when presenting bad news. Keeping everyone in the loop will stop rumors from spreading, and help your employees develop as a team.

For more tips on how to build a productive and motivated workforce, give Carl Heinemann, your Chattanooga CPA, a call.