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Increased Tax Benefits Due to Inflation Adjustments

 

The Internal Revenue Service has announced the tax year 2017  annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2016-55 provides details about these annual adjustments. The tax year 2017 adjustments generally are used on tax returns filed in 2018.   The tax items for tax year 2017 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married filing jointly rises to $12,700 for tax year 2017, up $100 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,350 in 2017, up from $6,300 in 2016, and for heads of households, the standard deduction will be $9,350 for tax year 2017, up from $9,300 for tax year 2016.
  • The personal exemption for tax year 2017 remains as it was for 2016: $4,050.  However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly). It phases out completely at $384,000 ($436,300 for married couples filing jointly.)
  • For tax year 2017, the 39.6 percent tax rate affects single taxpayers whose income exceeds $418,400 ($470,700 for married taxpayers filing jointly), up from $415,050 and $466,950, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2017 are described in the revenue procedure.
  • The limitation for itemized deductions to be claimed on tax year 2017 returns of individuals begins with incomes of $287,650 or more ($313,800 for married couples filing jointly).
  • The Alternative Minimum Tax exemption amount for tax year 2017 is $54,300 and begins to phase out at $120,700 ($84,500, for married couples filing jointly for whom the exemption begins to phase out at $160,900). The 2016 exemption amount was $53,900 ($83,800 for married couples filing jointly).  For tax year 2017, the 28 percent tax rate applies to taxpayers with taxable incomes above $187,800 ($93,900 for married individuals filing separately).
  • The tax year 2017 maximum Earned Income Credit amount is $6,318 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,269 for tax year 2016. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
  • For tax year 2017, the monthly limitation for the qualified transportation fringe benefit is $255, as is the monthly limitation for qualified parking,
  • For calendar year 2017, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is $695.
  • For tax year 2017 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250 but not more than $3,350; these amounts remain unchanged from 2016. For self-only coverage the maximum out of pocket expense amount  is $4,500, up $50 from 2016. For tax year 2017 participants with family coverage, the floor for the annual deductible is $4,500, up from $4,450 in 2016, however the deductible cannot be more than $6,750, up $50 from the limit for tax year 2016. For family coverage, the out of pocket expense limit is $8,250 for tax year 2017, an increase of $100 from  tax year 2016.
  • For tax year 2017, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $112,000, up from $111,000 for tax year 2016.
  • For tax year 2017, the foreign earned income exclusion is $102,100, up from $101,300 for tax year 2016.
  • Estates of decedents who die during 2017 have a basic exclusion amount of $5,490,000, up from a total of $5,450,000 for estates of decedents who died in 2016.

IRS Unveils Procedures to Renew ITINs

The IRS has announced procedures to renew Individual Tax Identification Numbers (ITINs) to reflect the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The IRS also updated its online frequently asked questions (FAQs) about ITINs.

Take away. Only ITINs scheduled to expire at the end of the year and that need to be included on a U.S. tax return in 2017 should be renewed now, the IRS instructed. To assist taxpayers, the IRS has developed a rolling renewal schedule.

Background

Individuals filing a U.S. tax return are required to provide their taxpayer identification numbers on the return. Generally, a taxpayer identification number is the individual’s Social Security number (SSN). In the case of individuals who are not eligible to be issued an SSN, but who still have a tax filing obligation, the IRS issues ITINs.

Under the PATH Act, any ITIN not used on a federal tax return for three consecutive tax years, either as the ITIN of an individual who files the return or as the ITIN of a dependent included on a return, will expire on December 31 of the third consecutive tax year of nonuse. This rule applies to all ITINs regardless of when the ITIN was issued. For ITINs issued before 2013, the PATH Act provides that ITINs will no longer be in effect according to a certain schedule, unless the ITIN has already expired due to nonuse for three consecutive years.

Unused ITINs

ITINs not used on a federal income tax return in the last three years (covering 2013, 2014, or 2015) will no longer be valid to use on a tax return as of January 1, 2017. ITIN holders in this group who need to file a tax return next year will need to renew their ITINs. The renewal period begins October 1, 2016.

Expiring ITINs

The first ITINs that will expire under the schedule are those with middle digits of 78 and 79. The renewal period for these ITINs begins October 1, 2016.

What Goes Into a Health and Wellness Program

A 2016 report from the Society for Human Resource Management found that 78% of surveyed businesses offered wellness benefits to their employees. It’s true that wellness programs are most common in large corporations, but small companies also can offer these benefits and reap the advantages.

Generally, wellness programs may improve worker morale and perhaps lead to greater retention of key employees. Direct results might include fewer health-related absences, greater energy, and more on-the-job productivity. Cost reduction also may result, if the company winds up paying less for health insurance and workers’ compensation.

Education and motivation

If you decide to offer a wellness program to employees, where do you begin? One popular starting point is to offer education and information leading to better health choices. Wellness tips might be delivered by health-oriented newsletters, email, or tweets. Companies commonly schedule “health fairs,” events where vendors and exhibitors come to the workplace with educational materials on health and fitness. Often, employees can get readings on blood pressure, cholesterol levels, and other physical conditions at health fairs.

Taking fitness information a step further, some wellness programs bring in health or lifestyle coaches for the employees. Although these coaches will differ in their approach, they generally attempt to help plan participants discover and articulate wellness goals. Those objectives might include weight loss, better eating, smoking cessation, and stress reduction. Once the goals have been expressed, wellness coaches may help employees make reasonable choices towards achieving the desired results.

Stepping into wellness

Beyond information, wellness programs can include simple group activities such as stretching and walking. “Stretch breaks” might be led by trainers, who’ll demonstrate simple exercises that can be done at work to prevent soft tissue injuries. Walking programs, which often are popular among employees, might involve establishing walkway routes around the office to encourage employees to become more active. The American Heart Association offers a Workplace Walking Program Kit to help companies get their employees to take “the first step on the path to wellness,” as the association puts it.

Wellness programs also can deliver medical benefits to employees. For example, many health care companies offer on-site flu vaccine clinics. Convenient and cost-free for employees, such benefits may attract workers who don’t otherwise participate in wellness programs, perhaps enticing them to become more active. Of course, widespread flu vaccination likely will cut down on employee sick days lost to influenza.

Added benefits 

Another popular benefit available from health care companies is a toll-free 24-hour nurse telephone line. Participants, covered spouses, and eligible dependents can receive immediate answers from registered nurses to questions about possible illnesses, minor injuries, prescription instructions, and other areas of concern.

Wellness programs can be tailored to suit the needs of your employees. Benefits might include smoking cessation or weight loss programs, CPR and first aid training, visiting guest speakers from local hospitals and universities, and more.

To encourage participation in wellness programs, you might offer discounts on health insurance premiums for getting an annual health risk assessment, for example, or for not smoking. Conversely, employees who smoke might have to pay higher premiums. One way to start a wellness program is to ask your health insurance company which benefits have proven to be most effective.

Investing in Gold Can be Taxing

Investment asset classes include precious metals, especially gold. Enthusiasts cite several reasons for including gold in a diversified portfolio. If governments print money to cover increasing obligations, gold may act as an inflation hedge. Moreover, gold can offer a safe haven in times of geopolitical upheaval: in mid-2016, for example, when Great Britain voted to leave the European Union (Brexit) and financial markets were unsettled, the price of gold reached a two-year high.

If you decide to allocate some investment dollars to gold, there are many options to choose. The tax treatment can vary, depending on how you invest, and you might be unpleasantly surprised.

Classed as a collectible

Gold investors may prefer to invest in “physical” gold: mainly, coins and bars. If the price of gold increases over time, so will the value of these holdings. Investments in gold mining companies, on the other hand, don’t have this direct relationship.

However, physical gold is considered a “collectible,” under the tax code, similar to paintings or rare stamps. Any profits on the sale of collectibles is taxed as ordinary income, with a top rate of 28% if the item has been held for more than one year.

Example 1: Dave Adams bought gold coins several years ago. He sells them in 2016. This year, Dave’s taxable income is $250,000, which puts him in the 33% federal tax bracket. His profits on the sale of the gold coins is taxed at 28%, the top rate on collectibles.

Suppose that Dave had invested in a gold mining stock or in a fund holding shares of mining companies. In that situation, Dave’s profitable sale would have been taxed no higher than 15%, the typical tax rate on long-term capital gains. The highest tax rate on long-term capital gains, owed by investors with extremely high incomes, is 20%—which is still lower than the maximum 28% tax rate on long-term collectibles gains.

Funds can be collectibles

Increasingly, investors are choosing bullion-backed exchange-traded funds (ETFs) for gold investing. Essentially, these funds buy huge amounts of physical gold, store that gold, and issue shares to investors. The value of the shares is directly related to the price of gold.

Example 2: When gold trades at $1,250 an ounce, Jenny Brown invests $25,000 in a gold-backed ETF. If gold prices go up 20%, to $1,500 an ounce, Jenny’s shares will be worth approximately $30,000, for a 20% gain. If gold falls 20%, to $1,000 an ounce, Jenny’s shares will be worth around $20,000, for a 20% loss.

Gold-backed ETFs can be bought and sold like any stock or fund, so they can fit easily into the rest of your portfolio. As indicated, they offer a direct play on the price of gold. On the downside, gold-backed ETFs are taxed as collectibles, even though they seem to be similar to traditional traded securities. If you sell one of these ETFs at a profit after a holding period of more than a year, you won’t get the benefit of low long-term capital gain tax rates. Instead, long-term gains will be taxed as ordinary income, with tax rates as high as 28%.

Mining stocks and funds

Another way to put gold into your portfolio is to buy shares of a gold mining company, or shares of a fund holding mining-company stocks. Generally, rising gold prices are good for these securities. In fact, if you’re truly bullish on gold, such investments might be ideal because operating leverage can boost your gains.

Example 3: Wayne Douglas buys shares of ABC Gold Mining Corp. when gold is priced at $1,250 an ounce. ABC can mine and deliver gold to the market at $1,000 per ounce, with costs that are mainly fixed, for a profit of $250 an ounce, in this example.

Suppose that gold goes up to $1,500 an ounce, for a 20% gain. Here, ABC’s profit goes from $250 an ounce to around $500 an ounce, for a 100% gain. With a leap in profitability of that magnitude, it’s possible that ABC shares will rise far more than the 20% rise in the price of gold. This is a simplified example, but a successful investment in mining shares might be more lucrative than an investment in physical gold or in bullion-backed ETFs, if gold rises in price.

In addition, gains on the sale of mining shares held more than one year will get long-term capital gain tax treatment, as mentioned. Depending on the investor’s income, such gains would be taxed at 20%, 15%, or even 0%.

Nevertheless, operating leverage can work against investors, too. A drop in the gold price could reduce or eliminate profits and send ABC’s share price tumbling. Moreover, any investment in an operating business takes on business risk: exposure to poor management, labor problems, lagging production, and so on. Thus, buying mining shares is not a direct play on gold’s valuation.

There are still other ways to invest in gold, from closed-end funds to exchange-traded notes. Each may have pros and cons and well as varying tax treatment. If you are considering an investment in gold via an unfamiliar vehicle, HLB Gross Collins, P.C. can explain the tax consequences.

Financial Steps to Take When a New Bundle of Joy Arrives

The arrival of a newborn is a joyous occasion. Even while emotions are at their peak, though, you shouldn’t neglect the practical aspects. Several steps should be taken to protect the family’s finances, and the sooner the better.

Start with Social Security 

Assuming the birth takes place in a hospital, ask for a birth registration form; most hospitals distribute them to maternity patients. Check the box on the form to request a Social Security number for your baby. You’ll have to supply the parents’ Social Security numbers.

If the birth doesn’t take place in a hospital, or if there’s some other reason this form isn’t available, contact your local Social Security office to get the process started. The same is true if you’re adopting a child.

Once you have the Social Security number, you’ll be on solid ground for claiming tax benefits. Those include an additional dependency exemption and perhaps the child tax credit. You’ll also be able to open savings and investment accounts in the child’s name.

Notify your employer

Another key step is locking in health insurance for the newborn. If you’re covered by an employer plan, let your employer know about the baby. When both parents have employer plans, determine which one will be better, going forward. If neither parent has a health plan at work, notify your health insurance company directly. There may be a 30-day window, after the birth, in which to enroll the child and avoid possible problems.

Regardless of your health insurance situation, you should speak with someone at your company about adjusting your IRS Form W-4, which determines the amount that’s withheld from your paychecks for income tax. On your W-4, the more “allowances” you claim, the less tax you’ll have withheld.

Therefore, you might add one allowance to your W-4 after the birth of a child. You’ll have more cash flow with every paycheck, money that you’ll need to meet the increasing expenses of new parenthood or expanding a family.

That said, adding one allowance might not be sufficient.

Example 1: Marge and Paul Carter have been living in an apartment with their young daughter. The Carters recently had a son, so they bought a house to have more room for their family. The house was purchased with a mortgage, and the deductible interest payments will sharply reduce the tax the Carters will owe each year. However, those deductions, which are only realized in their tax refund, won’t help them with the year-long cash crunch they’ll be experiencing with a newborn baby and a new mortgage payment. Adding only one allowance to Paul’s W-4 may still result in over-withholding and make for a financially-strained year.

Paul could add two, three, or more allowances to his W-4, boosting the net amount from each paycheck. The danger, though, is that Paul will be under-withheld and will wind up owing taxes and possibly interest or penalties at tax time. Our office can help you determine the amount of W-4 allowances to claim, in order to maximize cash flow without incurring a future tax problem. Similarly, we can help you determine how much to adjust estimated tax payments after the birth of a child.

Enhance your estate plan

Whether you just had your first child or have added a sibling to the family, the addition of a family member should mean reviewing your estate plan. Do both parents have wills? If not, getting them drawn up should be a top priority. Parents who already have wills should see if any changes are required.

Child Tax Credit

  • The Child Tax Credit can save up to $1,000 per year for each qualifying child.
  • To merit the credit for 2016, a child must be 16 or younger at the end of this year.
  • You must claim the child as a dependent on your federal tax return.
  • To get the full $1,000 tax savings, your modified adjusted gross income (MAGI) must be less than $110,000 on a joint return, or $55,000 for married taxpayers filing a separate return.
  • For all other taxpayers, this MAGI number is $75,000. The credit phases out for taxpayers with MAGIs higher than the amount for their filing status. Partial credits are allowed with somewhat higher MAGI.
  •  Typically, MAGI for this credit will be the same as AGI.
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