MBE CPA’s LLP sincerely appreciates the opportunity to assist our clients with the preparation of their tax returns.
Here are a few important tax updates and helpful planning points:

Expand the categories below to see the tax related information.

  • Personal Tax Rates – Personal federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6%. The highest tax rate of 39.6% applies to those with taxable income above the following amounts (for 2016): $466,950 for married filing joint (MFJ) and qualifying widow; $441,000 for head of household; $415,050 for single; and $233,475 for married filing separate (MFS).
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  • Capital Gain and Divided Rates – The capital gains rate is 20% for those in the 39.6% bracket, 15% for those in the 25, 28, 33, or 35% bracket, and 0% for those in the 10 or 15% bracket.
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  • Net Investment Income Tax (NIIT) – The Affordable Care Act created a new Medicare tax of 3.8% that applies to taxpayers with modified adjusted gross income (AGI) that exceeds $250,000 for MFJ or qualifying widow; $125,000 for MFS; and $200,000 for others. (The thresholds are not scheduled to be adjusted for inflation in future years.)
    Net Investment income is defined as: interest (non tax-exempt), dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial investments or commodities, and businesses that are passive activities.
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  • Additional Medicare Tax – Taxpayers with W-2/earned income in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separate) will pay another 0.9% on earned income in excess of the above limits, making their Medicare tax rise from 1.45% to 2.35%.
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  • Alternative Minimum Tax (AMT) – Permanent tax relief increased the exemption amounts for 2016 to $53,900 for single and head of household, $83,800 for MFJ and qualifying widow, $41,900 for MFS. Also, nonrefundable personal credits are allowed to offset regular and AMT taxes.

  • The American Opportunity Credit – Refundable tax credit up to $2,500 based on expenses for the first four-years of a student’s post-secondary education. The credit phases out ratably for modified AGI’s between $80,000 and $90,000 ($160,000 and $180,000 for MFJ). Refunds for returns claiming this credit will NOT be processed by the IRS prior to February 15, 2017.
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  • Child Tax Credit – Child tax credit is unchanged from 2015. Refunds for returns claiming this credit will NOT be processed by the IRS prior to February 15, 2017.
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  • Earned Income Credit – Available to certain low-income individuals with income earned from employment, including self-employment. In 2016, the maximum amount of the credit for taxpayers with one qualifying child is $3,373; $5,572 with two qualifying children; $6,269 with three or more qualifying children; and $506 with no qualifying children. Refunds for returns claiming this credit will NOT be processed by the IRS prior to February 15, 2017.
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  • Energy-Related Credits Extended for 2016, including but not limited to the following:
    • Non-business energy property credit for energy-efficient homes
    • Energy-efficient new homes credit
    • Alternative fuel vehicle refueling property credit
    • Biodiesel and renewable diesel credit
    • Cellulosic bio-fuel producer credit

  • Dollar Limitation on Itemized Deductions – The limitation on itemized deductions for higher-income earners is as follows: $311,300 for MFJ and qualifying widow, $285,350 for head of household, $259,400 for Single, and $155,650 for MFS.
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  • Personal Exemption Phase-Out – Similarly, the phase out on personal exemptions for higher-income earners is as follows: $311,300 for MFJ and qualifying widow, $285,350 for head of household, $259,400 for Single, and $155,650 for MFS.
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  • Common Tax Deductions Extended for 2016, Expire on 12.31.2016
    • Tuition and fees deduction
    • Mortgage insurance premiums treated as residence interest
    • Exclusion for discharge of principal residence debt (exclusion is allowable into 2017 if made part of a binding agreement during 2016)

     

  • Common Tax Deductions Made Permanent
    • Deduction for school teacher expenses
    • State and local general sales tax deduction
    • Tax-free distributions from IRAs for charitable purposes
    • Special rule for contributions of capital gain real property made for conservation purposes
    • Parity for exclusion of employer-provided mass transit and parking benefits exclusions

     

  • Higher Threshold for Deducting Medical Expenses
    • Floor raised from 7.5% of AGI to 10% of AGI
    • AGI floor for individuals age 65 and older will remain unchanged at 7.5% through 2016

  • Depreciation provisions changes in 2016
    • Section 179 expensing limits: $500,000 limit with a $2,010,000 phase-out (made permanent and indexed for inflation)
      • Section 179 amended return election/revocation/modification option made permanent
    • Treatment of certain real property as section 179 property is available and made permanent
    • 50% bonus depreciation is available and is extended through 2019
      • 50% additional first-year depreciation is allowed for 2016 and 2017
      • 40% additional first-year depreciation is allowed for 2018
      • 30% additional first-year depreciation is allowed for 2019
    • Shorter depreciable MACRS recovery periods for Indian reservation property is reinstated for 2016
    • 15-year straight-line recovery period for leasehold improvements, restaurant buildings and improvements, and retail improvements is made permanent.
    • 7-year recovery period for motorsports entertainment complexes extended through 2016

     

  • Business Provisions Update for 2016
    • Credit for research and experimentation expenses made permanent and modified.
    • Work opportunity tax credit extended until 2019
    • Employer wage credit for payments to activated military reservists modified and made permanent
    • Indian employment credit extended to 2016
    • New markets tax credit extended to 2019
    • Enhanced charitable deduction for contributions of food inventory was modified and made permanent
    • Railroad track maintenance credit extended to 2016
    • Mine rescue team training credit extended to 2016
    • Qualified zone academy bonds extended to 2016
    • Exclusion of 100% of gain on the sale of small business stock made permanent
    • Basis adjustment to stock of S corporations making charitable contributions of property made permanent
    • Reduction in S corporation’s recognition period for built-in gains tax is 5 years and is made permanent
    • Domestic production activities deduction for activities in Puerto Rico extended to 2016
    • Exclusion from a tax-exempt organization’s unrelated business taxable income of interest, rent, royalties and annuities paid to it from a controlled entity was made permanent.
    • Empowerment zone incentives: designation of an empowerment zone and related provisions for exclusion for gain on qualified small business stock, tax-exempt bonds, employment credit, increased section 179 expensing, and nonrecognition of gain on rollover of investments extended to 2016.

  • Impact on Businesses
    • Applicable large employers (those with an average of 50 or more full-time employees (FTEs) and/or equivalents in the preceding calendar year) may be subject to a penalty if they do not offer their full-time employees (and their dependents) the opportunity to enroll in a qualified health plan that is affordable and provides minimum essential coverage.
      • Full-time employees – Those who work an average of at least 30 hours/week
      • Full-time equivalents – Those who work at least 120 hours during a month
    • Remember to consider if employers fall into a controlled group based on common ownership when determining if the employer is an applicable large employer.
    • The employer mandate is effective beginning 2015 which means applicable large employers will be subject to the employer shared responsibility penalty if:
      • The employer does not offer health coverage or
      • The employer offers coverage to fewer than 95% of its FTEs and at least one of the full-time employees receives a premium tax credit or
      • The employer offers coverage that is unaffordable
    • Reporting is required for businesses that provide minimum essential coverage to their employees beginning in 2015. Large penalties will be assessed if reporting requirements are not met.
    • Small employers (those with less than 50 full time employees)
      • Not required to provide health insurance to employees
      • May get a small business health care credit of up to 50% of premiums if:
        • Employer pays at least 50% of the premiums on behalf of employees for a qualified health plan purchased through the Small Business Health Options Program (SHOP) and
        • Must have fewer than 25 full time employees and
        • Pay employees an average annual wage of less than $50,000
      • This credit is available for only two consecutive years
      • Beware of reimbursement plans for health coverage. If group health plan reimbursement arrangements do not comply with the new market provisions of the ACA, employers could be subject to a penalty of $100/day per affected employee.

     

  • Impact on Individuals
    • Individual mandate effective beginning in 2014 – Requires all individuals to have “minimum essential insurance coverage” or pay penalties.
      • The penalties are the GREATER of the following:
        • Flat dollar amount per adult: $695 or
        • Percentage of income: 2.5%
      • Don’t have minimum essential insurance coverage? Exemptions from the individual mandate are available:
        • Short coverage gap – uninsured for less than 3 consecutive months
        • Unaffordable – Lowest-priced coverage available is > 8% of household income
        • Not required to file a tax return (income is below the filing requirement)
        • Member of a federal recognized Indian tribe
        • Member of a recognized health care sharing ministry
        • Member of a religious sect with religious objections to insurance
        • Incarcerated individuals
        • Not lawfully present in the US
        • Qualify for a hardship exemption
      • Need financial assistance when purchasing health insurance?
        • Premium Assistance Tax Credit – Refundable tax credit available to help reduce the cost of premiums. Eligible if:
          • Purchased a qualified health plan on the state exchange
          • Must have household income of less than 400% of the federal poverty level (FPL)
          • Not able to acquire affordable coverage from an employer plan
          • Not eligible for coverage through a government program, like Medicaid, Medicare, TRICARE, or CHIP.
          • Cannot be claimed as a dependent
          • Don’t file married filing separately
        • Cost-Sharing Reduction Subsidiary – Lowers out-of-pocket for deductibles, coinsurance, and copayments. Eligible if:
          • Same eligibility requirements as above except:
            • Must purchase a Silver plan on the state exchange
            • Must have household income of less than 250% of the FPL
        • NOTE: Notify the state exchange as soon as possible of any changes in income, family size, adoption, child birth, marriage/divorce, or gaining or losing government/employer sponsored health insurance
      • Information Returns for 2016:
        • Form 1095-A – Will receive, if insurance is purchased on the exchange
        • Form 1095-B/C – May receive, if acquired employer sponsored insurance

  • Roth 401(k); 403 (b); 457 – Participants in a 401(k) should check with their employers, to see if the Roth deferral option is available. Please consult with us before deciding if you should defer under the traditional pre-tax method or switch to the Roth deferral.
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  • Roth Conversions – Any amount converted is taxable income, but is thereafter eligible for the potential tax-free distribution rules of Roth IRAs. Starting in 2010, the $100,000 income threshold is removed – anyone can do a conversion. There are a multitude of strategies to consider regarding conversions such as timing, allocation of assets and need for funds. You will also want to consider factors, such as:
    1. Tax rate projections (year of conversion vs. the withdrawal years)
    2. Availability of outside funds to pay the income tax liability
    3. Time horizon for growth of their IRAs (consider that Roth IRA are not subject to RMD)

     
    One unique situation may also exist for individuals who have a Net Operating Loss carrying into 2016 from prior years. A conversion to a Roth IRA is one method to create taxable income which can be sheltered by the “tax benefit” from a Net Operating Loss deduction.
     

  • Recharacterization of Roths – Rules Governing Recharacterizations – The IRS permits IRA owners to recharacterize Roth IRA contributions from one type of IRA (i.e. Roth or traditional) to the other. This applies to both the ordinary annual contributions and the conversion contributions. The deadline for recharacterizing a contribution or conversion is October 15, of the subsequent year.
     
    There are also rules limiting the frequency of conversions, recharacterizations, and reconversions. You may not make a Roth conversion, “unconvert” it and reconvert the same IRA money in the same year. Even if you straddle different calendar years, you must still wait 30 days before reconverting a Roth IRA that you had previously converted and “unconverted.”

  • Standard Mileage Rates – 2016: 54 cents (19 cents for moving and 14 cents for charitable); For 2017, the IRS has not published the rates in time for this communication.
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  • Retirement (IRAs, Simple IRAs, Roth IRAs, 401(k) s, 403(b), 457/TSA)
    • Traditional (deductible/nondeductible) and Roth IRAs:
      • 2015 – $5,500 ($6,500 if over 50 years old)
    • Simple IRAs:
      • 2015 – $12,500 ($15,500 if over 50 years old)
    • 401(k); 457 and 403 (b):
      • 2015 – $18,000 ($24,000 if over 50 years old)
      • Consider a Roth 401(k); 457 or 453
      • For those in 457 plans consider if you qualify for a “catch-up” contributions based on not maxing out previous year’s deferrals.

 

  • Cost Segregation Studies – Identify property components and their related costs. Midsized businesses may be able to depreciate property faster and may dramatically increase current deductions for non-structural assets and costs related to installing non-structural assets. Cost segregation studies may be performed for buildings placed in service in the current year or prior years. If you think you may benefit from a cost segregation study, please call for an analysis.

 

  • Provisions Applicable to Transfer Taxes – EGTRRA phased out the estate and generation-skipping transfer (GST) taxes so that they were fully repealed in 2010, lowered the gift tax rate to 35%, and increased the gift tax exemption to $1 million for gifts made after 2001. The change permanently sets the exemption at $5.45 million per person (indexed for inflation to be $5.49 million in 2017) and increases the tax rate from 35% to 40%.