Monthly Archives: October 2015

2015 Year-End Tax Planning Tips

april 15Review your tax situation before year-end to avoid unpleasant surprises, take advantage of tax-reduction opportunities, and budget for a possible tax bill. Here are a few strategies to consider before December 31 from the tax experts at Ciuni & Panichi, Inc.

Pay Deductible Expenses Early
Consider accelerating some deductible expenses to produce higher 2015 write-offs on your itemized return if you expect to be in the same or lower tax bracket next year. You’ll reduce your income tax liability over the long run, however if you’re in the same bracket or higher next year, you’ll simply defer part of your liability until next year.

Perhaps the easiest deductible expense to prepay is your mortgage bill on your primary residence or vacation home due on January 1, 2016. Making that payment this year will give you 13 months’ worth of deductible interest in 2015 (if you didn’t implement this strategy last year). However, if you prepay this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll have only 11 months’ worth of interest in the year you stop.  Also easy to prepay are state and local income and property taxes due early next year.

Expenses subject to deduction floors based on a percentage of your adjusted gross income (AGI, which is the number at the bottom of page 1 of your Form 1040) merit attention as well. You can deduct such expenses only to the extent that they exceed the applicable floor. If year-to-date you’ve exceeded the floor — or you’re close to exceeding it — consider accelerating additional expenses into 2015. But if you’re far away from the floor, to the extent possible, defer expenses until next year to help you potentially exceed the floor then.

The two prime candidates are medical costs (10% floor for most taxpayers) and miscellaneous deductions (2% floor), such as investment expenses, job-hunting expenses, unreimbursed employee business expenses and fees for tax preparation and advice.

Important note: Prepayment may be a bad idea if you owe the alternative minimum tax (AMT) in 2015. That’s because write-offs for state and local income and property taxes, as well as miscellaneous itemized deductions subject to the 2% floor, are disallowed under the AMT rules. Even if an expense is also deductible for AMT purposes, such as mortgage interest and medical costs, the deduction may be less valuable under the AMT because your AMT rate may be lower than your regular tax rate. Before prepaying expenses, ask your tax adviser if you are in danger of owing AMT in 2015.

Pay College Tuition Bills Early
If you qualify for the American Opportunity credit or the Lifetime Learning credit but haven’t incurred enough expenses to max out the credit for 2015, consider prepaying tuition bills due in early 2016. Specifically, you can claim a 2015 credit based on prepaying tuition for academic periods that begin in January through March of next year.

The maximum American Opportunity credit is $2,500 per student, but it’s phased out if your 2015 modified adjusted gross income (MAGI) is too high. The 2015 MAGI phase out range for unmarried individuals is $80,000 to $90,000. The range for married joint filers is $160,000 to $180,000.

The maximum Lifetime Learning credit is $2,000 per tax return, but it’s also phased out if MAGI is too high. The 2015 MAGI phase out range for unmarried individuals is $55,000 to $65,000. The range for married joint filers is MAGI of $110,000 to $130,000.

For both credits, if your MAGI is within the phase out range, you can take a partial credit. If it exceeds the top of the range, your credit is completely phased out. Many other rules apply to these credits, so contact your tax adviser for details.

Defer Income
It may be worthwhile to defer some taxable income into next year if you expect to be in the same or lower tax bracket in 2016. For example, if you’re a self-employed, cash-basis taxpayer, you might postpone recognizing taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive these payments until early 2016. You can also defer taxable income by accelerating some deductible business expenses into this year. Both moves will postpone tax liability until next year, and could even save taxes permanently, depending on your tax bracket next year.

Deferring income can also be helpful if you’re affected by unfavorable phase out rules that reduce or eliminate various tax breaks, such as the child credit or higher-education tax credits. By deferring income every other year, you may be able to take more advantage of these breaks in alternating years.

Sell Underperforming Stocks Held in Taxable Accounts
Selling losing investments held in taxable brokerage firm accounts can lower your 2015 tax bill, because you can deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss.

You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment income, alimony and interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2016 and beyond.

Gift Appreciated Assets to Family Members in Lower Tax Brackets
For 2015, the federal income tax rate on long-term capital gains and qualified dividends is still 0% for taxpayers in the 10% or 15% rate brackets. While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the lower tax brackets. If so, consider giving them appreciated stock or mutual fund shares. They can sell the shares and pay 0% federal income tax on the resulting long-term gains.

Important note: Gains will be considered long-term if your ownership period plus the gift recipient’s ownership period equals at least a year and a day.

Giving qualified-dividend-paying stocks to family members eligible for the 0% rate is another tax-smart idea.

But before making a gift, consider the gift tax consequences. The annual gift tax exclusion is $14,000 in 2015 (the same as 2014). If you give assets worth more than $14,000 (or $28,000 for married couples) during 2015 to an individual, it will reduce your $5.43 million gift and estate tax exemption — or be subject to gift tax if you’ve already used up your lifetime exemption. Also keep in mind that, if your gift recipient is under age 24, the “kiddie tax” rules could potentially cause some of his or her capital gains and dividends to be taxed at the parents’ higher rates.

Donate to Charity
Charitable donations can be one of the most powerful tax-saving tools because you’re in complete control of when and how much you give. No floor applies, and annual deduction limits are high (20%, 30% or 50% of your AGI, depending on what you’re giving and whether a public charity or a private foundation is the recipient).

If you have appreciated stock or mutual fund shares that you’ve owned for more than a year, consider donating them instead of cash. You can generally claim a charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

If you own stocks that are worth less than you paid for them, don’t donate them to a charity. Instead, sell the stock and give the cash proceeds to a charity. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Consult with your Tax Pro
As always, year-end tax planning must take into account each taxpayer’s particular situation and goals. Contact Ciuni & Panichi, Inc. for tax advice before the end of the year at 216-831-7171 or sign up for our newsletter to get up to date information in your in-box at cp-advisors.com.

 You may also be interested in:

October Tax Tips

2015 Summer State Tax Update

© 2015

2015 Year-End Tax Planning Tips for Individuals

april 15Review your tax situation before year-end to avoid unpleasant surprises, take advantage of tax-reduction opportunities, and budget for a possible tax bill. Here are a few strategies to consider before December 31 from the tax experts at Ciuni & Panichi, Inc.

Pay Deductible Expenses Early
Consider accelerating some deductible expenses to produce higher 2015 write-offs on your itemized return if you expect to be in the same or lower tax bracket next year. You’ll reduce your income tax liability over the long run, however if you’re in the same bracket or higher next year, you’ll simply defer part of your liability until next year.

Perhaps the easiest deductible expense to prepay is your mortgage bill on your primary residence or vacation home due on January 1, 2016. Making that payment this year will give you 13 months’ worth of deductible interest in 2015 (if you didn’t implement this strategy last year). However, if you prepay this year, you’ll have to continue the policy for next year and beyond. Otherwise, you’ll have only 11 months’ worth of interest in the year you stop.  Also easy to prepay are state and local income and property taxes due early next year.

Expenses subject to deduction floors based on a percentage of your adjusted gross income (AGI, which is the number at the bottom of page 1 of your Form 1040) merit attention as well. You can deduct such expenses only to the extent that they exceed the applicable floor. If year-to-date you’ve exceeded the floor — or you’re close to exceeding it — consider accelerating additional expenses into 2015. But if you’re far away from the floor, to the extent possible, defer expenses until next year to help you potentially exceed the floor then.

The two prime candidates are medical costs (10% floor for most taxpayers) and miscellaneous deductions (2% floor), such as investment expenses, job-hunting expenses, unreimbursed employee business expenses and fees for tax preparation and advice.

Important note: Prepayment may be a bad idea if you owe the alternative minimum tax (AMT) in 2015. That’s because write-offs for state and local income and property taxes, as well as miscellaneous itemized deductions subject to the 2% floor, are disallowed under the AMT rules. Even if an expense is also deductible for AMT purposes, such as mortgage interest and medical costs, the deduction may be less valuable under the AMT because your AMT rate may be lower than your regular tax rate. Before prepaying expenses, ask your tax adviser if you are in danger of owing AMT in 2015.

Pay College Tuition Bills Early
If you qualify for the American Opportunity credit or the Lifetime Learning credit but haven’t incurred enough expenses to max out the credit for 2015, consider prepaying tuition bills due in early 2016. Specifically, you can claim a 2015 credit based on prepaying tuition for academic periods that begin in January through March of next year.

The maximum American Opportunity credit is $2,500 per student, but it’s phased out if your 2015 modified adjusted gross income (MAGI) is too high. The 2015 MAGI phase out range for unmarried individuals is $80,000 to $90,000. The range for married joint filers is $160,000 to $180,000.

The maximum Lifetime Learning credit is $2,000 per tax return, but it’s also phased out if MAGI is too high. The 2015 MAGI phase out range for unmarried individuals is $55,000 to $65,000. The range for married joint filers is MAGI of $110,000 to $130,000.

For both credits, if your MAGI is within the phase out range, you can take a partial credit. If it exceeds the top of the range, your credit is completely phased out. Many other rules apply to these credits, so contact your tax adviser for details.

Defer Income
It may be worthwhile to defer some taxable income into next year if you expect to be in the same or lower tax bracket in 2016. For example, if you’re a self-employed, cash-basis taxpayer, you might postpone recognizing taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive these payments until early 2016. You can also defer taxable income by accelerating some deductible business expenses into this year. Both moves will postpone tax liability until next year, and could even save taxes permanently, depending on your tax bracket next year.

Deferring income can also be helpful if you’re affected by unfavorable phase out rules that reduce or eliminate various tax breaks, such as the child credit or higher-education tax credits. By deferring income every other year, you may be able to take more advantage of these breaks in alternating years.

Sell Underperforming Stocks Held in Taxable Accounts
Selling losing investments held in taxable brokerage firm accounts can lower your 2015 tax bill, because you can deduct the resulting capital losses against this year’s capital gains. If your losses exceed your gains, you will have a net capital loss.

You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) against ordinary income, including your salary, self-employment income, alimony and interest income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2016 and beyond.

Gift Appreciated Assets to Family Members in Lower Tax Brackets
For 2015, the federal income tax rate on long-term capital gains and qualified dividends is still 0% for taxpayers in the 10% or 15% rate brackets. While your tax bracket may be too high to take advantage of the 0% rate, you probably have loved ones who are in the lower tax brackets. If so, consider giving them appreciated stock or mutual fund shares. They can sell the shares and pay 0% federal income tax on the resulting long-term gains.

Important note: Gains will be considered long-term if your ownership period plus the gift recipient’s ownership period equals at least a year and a day.

Giving qualified-dividend-paying stocks to family members eligible for the 0% rate is another tax-smart idea.

But before making a gift, consider the gift tax consequences. The annual gift tax exclusion is $14,000 in 2015 (the same as 2014). If you give assets worth more than $14,000 (or $28,000 for married couples) during 2015 to an individual, it will reduce your $5.43 million gift and estate tax exemption — or be subject to gift tax if you’ve already used up your lifetime exemption. Also keep in mind that, if your gift recipient is under age 24, the “kiddie tax” rules could potentially cause some of his or her capital gains and dividends to be taxed at the parents’ higher rates.

Donate to Charity
Charitable donations can be one of the most powerful tax-saving tools because you’re in complete control of when and how much you give. No floor applies, and annual deduction limits are high (20%, 30% or 50% of your AGI, depending on what you’re giving and whether a public charity or a private foundation is the recipient).

If you have appreciated stock or mutual fund shares that you’ve owned for more than a year, consider donating them instead of cash. You can generally claim a charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

If you own stocks that are worth less than you paid for them, don’t donate them to a charity. Instead, sell the stock and give the cash proceeds to a charity. That way, you can generally deduct the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Consult with your Tax Pro
As always, year-end tax planning must take into account each taxpayer’s particular situation and goals. Contact Ciuni & Panichi, Inc. for tax advice before the end of the year at 216-831-7171 or sign up for our newsletter to get up to date information in your in-box at cp-advisors.com.

 You may also be interested in:

October Tax Tips

2015 Summer State Tax Update

© 2015

Tax Reform Saves Time, Money, and Headaches

What House Bill 5 Means to Your Business

By Joshua Schering and Nick Leacoma

ohio stateOhio businesses will experience fewer headaches when tax reform House Bill 5 (HB 5) goes into effect on January 1, 2016. The relief comes from standardization of multiple municipality tax policies and a reduction in the number of returns you may need to file. This change eases some burdensome requirements that affect real estate and construction companies doing business in several municipalities.

Here’s how the reform works
HB 5 increases the number of days a large business (annual revenue over $500,000) employee can work in a municipality from 12 to 20 days before city tax withholding is required for that city.

The 20-day exemption only applies if:

  • The employee worked 20 or fewer days in a municipality outside of the employee’s principal work place
  • The employer does not withhold taxes where the employee worked for 20 or fewer days
  • A refund of taxes withheld is not requested by the employee from the municipality where the principal place of work is located
  • To allocate an employee’s time, the bill provides a determination test. One day spent in a municipality is defined as working in that municipality more than in any other. The following activities are considered performed at the principal place of work:
  • Commuting to and from work
  • Traveling time to pick up, load, move, and/or deliver the employer’s product (unless said products are attached to real estate not used, controlled, or owned by the employer)

Small business employers (under $500,000 in annual revenue) are only required to withhold municipality taxes where their principal business is located.

This alleviates additional payroll tax filings for a number of companies with short term projects in other municipalities.

Net Operating Losses (NOLs) rules are standardized
HB 5 requires municipalities to allow NOL deductions and carryforwards for five years in taxable years beginning after December 31, 2016. If the NOL occurs before 2017, it is only allowed if the municipality adopts an ordinance allowing it. Net operating losses do not include losses from basis, passive activity loss limitations, and at-risk losses.

The NOL deduction and carryforward is limited to 50 percent of the full amount allowed for the first five years (years 2018 – 2022). The 50 percent limit doesn’t apply to NOLs incurred prior to 2017 and under an ordinance that allows the deduction and carryforward of NOLs. The portion of the NOL that was not deducted may then be carried forward. Tax years that begin after taxable year 2023 allow the full NOL deduction.

Net profit calculation is standardized
Pass-through entities must compute their net profit as if they were a C corporation. They are not allowed to deduct the following in re-computing their net profit:

  • Guaranteed payments paid or accrued to an owner (or former owner)
  • Payments or accruals to a qualified self-employment retirement plan
  • Amounts paid or accrued for health insurance or life insurance plans for owners or owner-employees

To preclude NOLs from being deducted twice individuals are required to disregard NOLs carried forward by the entity to reduce the current year’s net profits.

Other noteworthy changes

  • The sales apportionment factor has changed to include income from rental property
  • If a taxpayer owes $10 or less to a municipality with their annual return they are not required to pay the tax but are still required to file a return

In conclusion
Ohio has long strived to be a pro-business state but maintained a burdensome municipal tax system. This latest round of municipal tax reform makes compliance easier and more cost effective. To learn about other changes that could affect your business, contact Ciuni & Panichi, Inc. at 216-831-7171 or cp-advisors.com.

Nicholas Leacoma, CPA, is a senior manager and Joshua Schering is a senior accountant in the Real Estate and Construction Services Group at Ciuni & Panichi, Inc. The Ciuni & Panichi, Inc. team provides audit and accounting services, tax compliance and consulting, management advisory services, wealth management, growth management, and retirement planning.

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A Tip-Line Protects Your Business from Fraud

© 2015

 

A tip-line protects your business from fraud

Fraud tip-line effectively helps prevent fraud

ReggieNovakTip-lines are one of the most effective tools organizations possess to detect and prevent fraud. In the most recent studies, companies with tip-lines experienced 59 percent smaller than the median loss for frauds then organizations without them. Despite their effectiveness, the same studies reported that approximately 15 percent of small businesses had tip-lines compared to 64 percent of larger organizations.

A good tip-line provides employees and others with an outlet to report unethical activity, defend against lawsuits, and emphasize fairness in an organization. Early reporting enables companies to take corrective action before a problem creates a serious threat.

The Association of Certified Fraud Examiners “2014 Report to the Nations on Occupational Fraud and Abuse” reported the most common detection source cited for frauds occurring at affected organizations is internal tips. Because tip-lines encourage and facilitate anonymous reporting, they are a proven fraud deterrent that can be successfully implemented without burdensome effort or expense.

An effective fraud tip-line should include the following features:

  • Provide an anonymous and confidential whistle-blower reporting service for potential fraud, ethical issues, and other concerns.  Anonymous and confidential reporting mechanisms help foster a culture whereby company employees are more likely to report or seek guidance regarding potential or actual wrongdoing.
  • Reports may be submitted 24-hours a day by employees, volunteers, board members, and others within a registered organization.
  • Allows users to have the ability to use a secure online form or a toll-free voicemail number to report wrong doing without the fear of retaliation.  The fear of retribution is generally strong among potential whistleblowers and such fear may adversely affect the effectiveness of the internal reporting process. Trust in a company’s whistleblower process, including making hotline reports without fear of retaliation, is essential to motivate employees to report suspected unethical or unlawful conduct internally.
  • Once a tip has been reported, all information is conveyed directly to those within the organization as designated by the organization’s management or the board of directors.
  • Could offer financial as well as non-financial reporting incentives, such as cash rewards or extra vacation days, for whistleblower reports that lead the company to identify suspected unethical or unlawful activity.

Companies need to evaluate existing tip-lines to ensure they are operating as intended and are effective in preventing and identifying unethical or potentially unlawful activity, including corporate fraud, securities violations and employment discrimination or harassment. This evaluation should be a key element of every company’s assessment of its compliance and ethics program.

It is more crucial than ever for organizations to have effective whistleblower tip-lines as part of their corporate compliance programs so employees (and other company stakeholders, such as vendors) are motivated to report suspected unethical or unlawful conduct internally and not incentivized to first turn to regulators.

Reggie Novak is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services, including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected, he can investigate and present his findings and recommendations.  Contact Reggie Novak at 216.831.7171 or rnovak@cp-advisors.com for more information.

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