Category Archives: Personal Finance

The ABCs of the Tax Deduction for Educator Expenses

Teachers who buy supplies for their classrooms may be eligible for a tax break.

Back to school compositionAt 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 when they are not reimbursed 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 two percent of the adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed two percent 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 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 and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

An added benefit
The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit:  Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.

The best advice we can offer is “don’t go it alone.” Contact Tax Department Accountant Eden LaLonde, CPA, MAcc, at 216-831-7171 or elalonde@cp-advisors.com for more details about the educator expense deduction or tax breaks available for other work-related expenses.

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Three Midyear Tax Planning Strategies for Individuals

Midyear Tax Planning

april 15In the quest to reduce your tax bill, year-end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department Senior Manager, offers three strategies that can be more effective if you begin executing them midyear:

Consider your bracket
The top income tax rate is 39.6 percent for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold, consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6 percent bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

Look at investment income
This year, the capital gains rate for taxpayers in the top bracket is 20 percent. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8 percent net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

Plan for medical expenses
The threshold for deducting medical expenses is 10 percent of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult Nick Leacoma, CPA, at 216-831-7171 or nleacoma@cp-advisors.com. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

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Tax Refund

Turn next year’s tax refund into cash in your pocket now

2018A tax refund, to be sure, feels like getting an influx of cash, and the bigger the check, the better. But it also means you are essentially giving the government an interest-free loan for close to a year. Keeping those dollars throughout the year is much better option for your financial well-being.

Now is the time to make a change in your withholding or estimated tax payments to begin collecting your 2017 refund now.

Reasons to modify amounts
It’s particularly important to check your withholding and/or estimated tax payments if:

  • You received an especially large 2016 refund,
  • You’ve gotten married or divorced or added a dependent,
  • You’ve purchased a home,
  • You’ve started or lost a job, or
  • Your investment income has changed significantly.

Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.

Making a change
You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.

While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.

The best advice we can offer is don’t go it alone. If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner at tconstantine@cp-advisors.com or 216-831-7171.

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Key Individual 2017 Tax Deadlines You Need to Know

Additional Tax Deadlines

tax-formWhile April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, it’s important to be aware of other deadlines throughout the rest of year. Here’s a look at when some key tax-related forms, payments and other actions are due.

June 15

  • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
  • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15

  • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2

  • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 16

  • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
  • Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
  • File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.

Keep in mind that this list isn’t all-inclusive. Your accountant is your best advisor to make sure you are in compliance. Need help? Contact Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department senior manager at nleacoma@cp-advisors.com or 216-831-7171.

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You filed your taxes – could an audit follow?

So you just filed your taxes — could an audit be next?

irs auditLike many people, you probably feel a great sense of relief wash over you after your tax return is completed and filed. Unfortunately, even professionally prepared and accurate returns may sometimes be subject to an IRS audit.

The good news? Chances are slim that it will actually happen. Only a small percentage of returns go through the full audit process. Still, you’re better off informed than taken completely by surprise should your number come up.

Red flags
A variety of red flags can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return. This is often the employer’s mistake or occurs following a merger or acquisition.

In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things may increase the likelihood of an audit, such as:

  • Running a traditionally cash-oriented business,
  • having a relatively high adjusted gross income,
  • using valid but complex tax shelters, or
  • claiming certain tax breaks, such as the home office deduction.

Bear in mind, though, that no single item will cause an audit. And, as mentioned, a relatively low percentage of returns are examined. This is particularly true as the IRS grapples with its budget issues.

Finally, some returns are randomly chosen as part of the IRS’s National Research Program. Through this program, the agency studies returns to improve and update its audit selection techniques.

Careful reading
If you receive an audit notice, the first rule is:  Don’t panic! Most are correspondence audits completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate.

Read the notice through carefully. The pages should indicate the items to be examined, as well as a deadline for responding. A timely response is important because it conveys that you’re organized and, thus, less likely to overlook important details. It also indicates that you didn’t need to spend extra time pulling together a story.

Your response (and ours)
Should an IRS notice appear in your mail, Ciuni & Panichi, Inc. can help.  Please contact Tony Constantine, CPA, at 216-831-7171 or tconstantine@cp-advisors.com. We can fully explain what the agency is looking for and help you prepare your response. If the IRS requests an in-person interview regarding the audit, we can accompany you — or even appear in your place if you provide authorization.

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Saving tax with home-related deductions and exclusions.

real estate trustCurrently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:
Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

Need more information or assistance?  Contact Jim Komos, Partner in the Ciuni & Panichi, Inc. Tax Department at 216.831.7171 or jkomos@cp-advisors.com.

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Elderly Parent as a Tax Deduction

When an elderly parent might qualify as your dependent

elderlyIt’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent tax exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.

Basic qualifications
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Tax exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the tax exemption.

Factors to consider
Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the financial burden
Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

For more information and to see if you qualify, contact Ciuni & Panichi, Inc. Partner Tony Constantine, CPA at 216.831.7171 or tconstantine@cp-advisors.com.

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Sales Tax and Your 2016 Tax Return

Ohio taxpayers can deduct sales tax on their 2016 tax return

David Reape HighRes-08Ohio is one of the states where taxpayers can take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to residents who purchased major items in 2016, such as a car or boat. But it’s one or the other, so it pays to figure out what’s the best benefit for you.

How do you determine whether you can save more by deducting sales tax on your 2016 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.

Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).

2017 and beyond
If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. When the PATH Act made the break “permanent” in late 2015, that just meant that there’s no scheduled expiration date for it. Congress could pass legislation to eliminate the break (or reduce its benefit) at any time.

Recent Republican proposals have included elimination of many itemized deductions, and the new President has proposed putting a cap on itemized deductions. Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.

Questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return? Or about the impact of possible tax law changes on your 2017 tax planning? Contact Ciuni & Panichi, Inc.‘s David Reape, CPA, at 216-831-7171 or dreape@cp-advisors.com. He can help you maximize your 2016 savings and effectively plan for 2017.

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Alternate Minimum Tax Awareness: Be ready for anything

The dreaded surprise tax: What you need to know about Alternative Minimum Tax

By Tony Constantine, CPA, Ciuni & Panichi, Inc. Partner, Tax

TJCAMT… those three little letters cause almost as much fear and trepidation as the other three letters… IRS!  Alternative Minimum Tax (AMT) just sounds scary, and for those facing it for the first time it can be.  You find the benefit that you count on from your itemized deductions wiped away and an increased (and often unexpected) tax liability.  It is important to understand what AMT is and if you are subject to it now, before you file your 2016 return. If you are, there are steps you can consider taking before year end to minimize potential liability.

Bigger bite
The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.

AMT rates begin at 26 percent and rise to 28 percent at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6 percent, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite. For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the two percent floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.

Steps to consider
Fortunately, you may be able to take steps to minimize your AMT liability, including:

Timing capital gains – The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.

Timing deductible expenses – Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.

Investing in the “right” bonds – Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.

Appropriate strategies
Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact Ciuni & Panichi’s Tony Constantine, CPA, Partner, Tax, at 216-831-7171 or tconstantine@cp-advisors.com for help assessing your risk now, and to plan and implement the appropriate strategies for your situation.

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Three Mutual Fund Tax Hazards to Watch Out For

Tax and Your Mutual Funds

AMTInvesting in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these three tax hazards:

 

  1. High turnover rates. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates.  Turnover percent’s amount of the portfolio that is new on a year by year basis.  Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
  2. Earnings reinvestments. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.  However, you may be on your own for investments made prior to 2012.)
  3. Capital gains distributions. Buying equity mutual fund shares late in the year can be costly tax-wise. Such funds often declare a large capital gains distribution at year end, which is a taxable event. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year — even if you reinvest the distribution.

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, watch out for these hazards.

The best advice we can offer is, “Don’t go it alone.” Contact David M. Reape, CPA, at Ciuni & Panichi, Inc. to help you avoid unnecessary tax liabilities. Contact us at 216-831-7171 or dreape@cp-advisors.com.

 

Tax-smart Gifting Strategies to Consider Now

More Tax Savings Ideas

tax giftingIf your 2015 tax liability was higher than you’d hoped and you’re ready to transfer some assets to your loved ones, it’s time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall. Consider the following:

  • Gift appreciated or dividend-producing assets to loved ones eligible for the 0 percent rate. The 0 percent rate applies to both long-term gain and qualified dividends that would be taxed at 10 or 15 percent based on the taxpayer’s ordinary-income rate.
  • Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0 percent rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8 percent net investment income tax on dividends from the assets or any gains if you sold the assets.
  • Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.

If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.

The best advice we can offer is, “Don’t go it alone.” Contact Tony Constantine, CPA at Ciuni & Panichi, Inc. today to explore tax strategies that will position you for a good tax season in 2017 and beyond at 216-831-7171 or tconstantine@cp-advisors.com.

Restricted Stock Units and Your Tax Bill

Awards of RSUs can provide tax deferral opportunity

RSUExecutives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

Tax deferral
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).

However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

Complex rules
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact Jim Komos, CPA, CFP, at 216.831.7171 or jkomos@cp-advisors.com. The rules are complex, and careful tax planning is critical.

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The 529 savings plan: A tax-smart way to fund college expenses

Tax Savings with a 529 Plan

collegeIf you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, earnings avoid income taxes if used for qualifying educational expenses. In addition, many states, including Ohio, offer tax incentives for contributions.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and most states, thus making the tax deferral a permanent savings.

529 plans offer other benefits as well:

  • They usually offer high contribution limits, and there are no income limits for contributing.
  • There’s generally no beneficiary age limit for contributions or distributions.
  • You can control the account, even after the child is of legal age.
  • You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downside may be that your investment options — and when you can change them — are limited.

It’s important to manage your withdrawals from your 529 to fully take advantage of the eligible tax credits. For example, you can benefit from both 529 withdrawals and educational credits in the same year, however the same expenses cannot qualify for both the 529 income exclusion and the educational credit.

The best advice we can offer is, “Don’t go it alone.” Contact James Komos, CPA, CFP, at Ciuni & Panichi, Inc. today to explore tax strategies that will position you for a good tax season in 2017 at 216-831-7171 or jkomos@cp-advisors.com.

Stock volatility can cut tax on a Roth IRA

Tax Savings

401k ficuciary dutyThis year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional IRAs
Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.

On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.

Roth IRAs
Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.

There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.

The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.

Saving tax
This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.

Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, discuss with Ciuni & Panichi whether a conversion is right for you.  Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com for assistance and more information.

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© 2016

Sustainable Tax Breaks Can Save You Green

Save on Taxes Save the Planet

earth2Many people want to do something, however small, to contribute to a healthier environment. There are many ways to do so and, for some of them, you can even save a few tax dollars for your efforts.

Indeed, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) late last year, a couple of specific ways to go green and claim a tax break have been made permanent or extended. Let’s take a closer look at each.

Not driving for dollars
Air pollution is a problem in many areas of the country. Among the biggest contributors are vehicle emissions. So it follows that cutting down on the number of vehicles on the road can, in turn, diminish air pollution.

To help accomplish this, many people choose to commute to work via van pools or using public transportation. And, helpfully, the PATH Act is doing its part as well. The law made permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for both parking benefits and van pooling / mass transit benefits.

Before the PATH Act’s parity provision, the monthly limit for 2015 was only $130 for van pooling / mass transit benefits. But, because of the new law, the 2015 monthly limit for these benefits was boosted to the $250 parking benefit limit and the 2016 limit is $255.

Sprucing up the homestead
Energy consumption can also have a negative impact on the environment and use up limited natural resources. Many homeowners want to reduce their energy consumption for environmental reasons or simply to cut their utility bills.

The PATH Act lends a helping hand here, too, by extending through 2016 the credit for purchases of residential energy property. This includes items such as:

  • New high-efficiency heating and air conditioning systems,
  • Qualifying forms of insulation,
  • Energy-efficient exterior windows and doors, and
  • High-efficiency water heaters and stoves that burn biomass fuel.

The provision allows a credit of 10% of eligible costs for energy-efficient insulation, windows and doors. A credit is also available for 100% of eligible costs for energy-efficient heating and cooling equipment and water heaters, up to a lifetime limit of $500 (with no more than $200 from windows and skylights).

Doing it all
Going green and saving some green on your tax bill? Yes, you can do both. Van pooling or taking public transportation and improving your home’s energy efficiency are two prime examples. Please contact Tony Constantine, CPA, Partner, at 216.831.7171 or tconstantine@cp-advisors.com for more information about how to claim these tax breaks or identify other ways to save this year.

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© 2016

May Tax Tips

Why it’s time to start tax planning for 2016

april 15Now that the April 18 income tax filing deadline has passed, it may be tempting to set aside any thought of taxes until year end is approaching. But don’t succumb. For maximum tax savings, now is the time to start tax planning for 2016.

More opportunities
A tremendous number of variables affect your overall tax liability for the year. Starting to look at these variables early in the year can give you more opportunities to reduce your 2016 tax bill.
For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

More certainty
In recent years, planning early has been a challenge because there were a lot of expired tax breaks where it was uncertain whether they’d be extended for the year. But the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks through 2016, or, in some cases, later. It also made many breaks permanent.

For example, the PATH Act made permanent the deduction for state and local sales taxes in lieu of state and local income taxes and tax-free IRA distributions to charities for account holders age 70½ or older. So you don’t have to wait and see whether these breaks will be available for the year like you did in 2014 and 2015.

Getting started
To get started on your 2016 tax planning, contact Jim Komos, CPA at 216-831-7171 or jkomos@cp-advisors.com.  We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.

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© 2016

April Tax Tips

Two tax consequences to consider if you’re refinancing a home

april tax TipsNow may be a great time to refinance, because mortgage rates are still low but expected to increase. Before deciding to refinance, however, here are a couple of tax consequences to consider:

1. Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness, and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt, and deductible interest is subject to a $100,000 debt limit.

2. Prepaying interest. “Points” paid when refinancing generally are amortized and deducted ratably over the life of the loan, rather than being immediately deductible. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. But if you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.

Is your head spinning? Don’t worry; we can help you understand exactly what the tax consequences of refinancing will be for you. Contact us today!

© 2015

Could you save more by deducting state and local sales taxes?

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.

So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.

Questions about this or other PATH Act breaks that might help you save taxes on your tax return? Ciuni & Panichi, Inc. can help.  Contact James Komos, CPA at 216-831-7171 or jkomos@cp-advisors.com.  We can help you identify which tax breaks will provide you the maximum benefit.

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© 2016

Filing for a tax return extension isn’t without perils

Tax Filing Deadline – April 18

april 18Yes, the federal income tax filing deadline is slightly later than usual this year — April 18 — but it’s now nearly upon us. So, if you haven’t filed your return yet, you may be thinking about an extension.

Extension deadlines
Filing for an extension allows you to delay filing your return until the applicable extension deadline:

  • Individuals — October 17, 2016
  • Trusts and estates — September 15, 2016

The perils
While filing for an extension can provide relief from April 18 deadline stress, it’s important to consider the perils:

  • If you expect to owe tax, keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by April 18.
  • If you expect a refund, remember that you’re simply extending the amount of time your money is in the government’s pockets rather than your own.

A tax-smart move?
Filing for an extension can still be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

Please contact Jim Komos if you need help or have questions about avoiding interest and penalties.  Reach Jim at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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© 2016

March Tax Tips

Make a 2015 contribution to an IRA before time runs out

iraTax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible. Have you maxed out your 2015 limits?

April 18 Deadline
While it’s too late to add to your 2015 401(k) contributions, there’s still time to make 2015 IRA contributions. The deadline is April 18, 2016. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2015).

A traditional IRA contribution also might provide some savings on your 2015 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2015 tax return.

Evaluate your options
If you don’t qualify for a deductible traditional IRA contribution, see if you qualify to make a Roth IRA contribution. If you exceed the applicable income-based limits, a nondeductible traditional IRA contribution may even make sense. Neither of these options will reduce your 2015 tax liability, but they still provide valuable opportunities for tax-deferred or tax-free growth.
We can help you determine which type of contributions you’re eligible for and what makes sense for you.

How to max out education-related tax breaks

college moneyIf there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 return. To max out your education-related breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.

Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:

  1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
  2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phase-outs apply to these credits
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however.

To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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February Tax Tips

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© 2016

February Tax Tips

Feb Tax TipsFile early to avoid tax identity theft

If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline (this year, April 18) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.

How filing early helps
In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Another key date
Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is February 1 — the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.

An added bonus
Let us know if you have questions about tax identity theft or would like help filing your 2015 return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.

Extension means businesses can take bonus depreciation on their 2015 returns – but should they?

Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017.

The break had expired December 31, 2014, for most assets. So the PATH Act may give you a tax-saving opportunity for 2015 you wouldn’t otherwise have had. Many businesses will benefit from claiming this break on their 2015 returns. But you might save more tax in the long run if you forgo it.

What assets are eligible
For 2015, new tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified leasehold-improvement property.

Acquiring the property in 2015 isn’t enough, however. You must also have placed the property in service in 2015.

Should you or shouldn’t you?
If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.

But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2015, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re in a higher bracket.

We can help
If you’re unsure whether you should take bonus depreciation on your 2015 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact   Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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© 2016