Tax Law Changes Started or Continuing in 2017

Tax Law Changes Started or Continuing in 2017

 IR-2016-139, Oct. 25, 2016

WASHINGTON — The Internal Revenue Service today 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:

Estate Tax

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.

Social Security Wage Base

The Social Security wage base remains $127,200.

Individual Responsibility Penalties

Penalties are assessed for each month that any individual does not have the minimum essential health insurance coverage. In 2017 the penalty remains at $695 per adult, or 2.5% of income with a family maximum of $2,085.

Premium Tax Credits for Health Coverage

Some taxpayers who obtain health insurance coverage through a qualified marketplace may qualify for health premium tax credits to subsidize the cost of coverage.

Deduction for State and Local Income Taxes

State and local income taxes remains an itemized deduction.

Exclusion From Income of Canceled Debt on Qualified Principal Residence

Debt cancelled from the short sale, foreclosure, or mortgage modification for Qualified Principal Residences is no longer excludable from income under the Mortgage Forgiveness Debt Relief Act. This was extended to the end of 2016. This could also apply to debt that was discharged in 2017 provided that there was a written agreement entered into in 2016.

Standard & Itemized Deductions – Schedule A

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 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).

Personal Exemption Amount Increases

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.)

Tuition and Fees Deduction

The deduction for tuition and fees is no longer available. The  American Opportunity Credit and Lifetime Learning Credit are both still available to qualified taxpayers.

Deduction for Medical Expenses

Starting in 2017, all taxpayers, including those over 65, are now subject to the 10% of Adjusted Gross Income (AGI) threshold for deducting medical expenses.

Earned Income Credit

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.

Medical Savings Accounts

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.

The Alternative Minimum Tax

The 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).

Foreign Earned Income

For tax year 2017, the foreign earned income exclusion is $102,100, up from $101,300 for tax year 2016.

Reminder of Arizona Minimum Wage and Paid Time Laws Currently in Effect

Arizona Minimum Wage and Paid Time Laws Currently in Effect

In the 2016 November election, Arizona voters approved the Fair Wages and Healthy Families Act (the Act), also known as Proposition 206. The Act raised Arizona’s minimum wage incrementally over the next several years, and also requires employers to provide employees with paid sick time off. The Governor’s office signed the Act into law and it was slated to become effective as of January 1, 2017 so employers need to ensure that they are currently in compliance!

 Minimum Wage Increase

Beginning on January 1, 2018, the minimum wage in the state of Arizona will increase from $10.00 to $10.50 an hour. As such, employers currently paying employees $10 per hour will need to take action on January 1, 2018 to ensure that its payroll will be in compliance.

Arizona minimum wage will continue to increase on January 1 of every year up to $12.00 an hour in 2020, as follows:

  • January 1, 2017 was increased from $8.05 to $10.00 an hour
  • January 1, 2018 it will increase to $10.50 an hour
  • January 1, 2019 it will increase to $11.00 an hour
  • January 1, 2020 it will increase to $12.00 an hour

Starting on January 1, 2021, the minimum wage in Arizona will increase each year in correlation to the cost of living.

 Any employers whose employees regularly receive tips or gratuities may continue to pay them up to $3.00 per hour less than the respective minimum wage so long as, with the tips included, they do not fall below minimum wage.

Just as under the current law, the minimum wage provisions do not apply to the State of Arizona, the United States, or small businesses with less than $500,000 in gross annual revenue and that are exempt from having to pay minimum wage under the Fair Labor Standards Act.

Mandatory Paid Sick Time (‘PST’)

          1. What Are the Act’s Requirements for Employers

Any employer that did not have a Paid Sick Time (“PST”) policy or practice that met or exceeded the requirements of the FWHFA by the PST effective date of July 1, 2017 needs to do so immediately. Employers with existing policies that met the statutory minima were not required to provide additional PST.  Please note that employers have to have policy revisions that provide employees with information about their statutory rights and duties regarding the use of PST, such as: requesting PST, PST borrowing, treatment of PST upon separation of employment and should be laid out in writing.  The practical implication of the statute is that all employers should already have updated plans of their policies, as well as their leave practices .

The Act also requires that employers include on employee pay statements (or in a notice provided with employee paychecks) the amount of an employee’s accrued PST, the amount of PST used by the employee, and the amount of pay an employee has received as earned PST.  Regardless of whether an employer currently maintains a compliant policy or will be implementing a new policy, an employer must have posted notice of employees’ PST rights on or before July 1, 2017, as described more fully below.

          2. Key Provisions.

a.  Paid Sick Time Defined

Under the FWHFA, all employees of Arizona entities covered by the Act (as described above) will now be lawfully entitled to accrue and use PST as provided by the statute.  The Act defines PST as “time that is compensated at the same hourly rate and with the same benefits, including health care benefits, as the employee normally earns during hours worked.”  In other words, employers must pay employees for their use of PST no differently than they would pay an employee for time actually worked.

               b.  Statutorily Mandated Minimum Accrual of Paid Sick Time

PST accrues at a rate of no less than one hour for every 30 hours actually worked.  For employees who are exempt from overtime and minimum wage requirements of the Fair Labor Standards Act (29 U.S.C. 213(A)(1)), the statute assumes for purposes of PST accrual that the employee works 40 hours per week.  If an exempt employee’s normal workweek is less than 40 hours, his or her PST accrues based on the actual number of hours worked in that normal workweek.

The statute gives latitude to an employer to designate a calendar year, fiscal year, or any another consecutive 12-month period as a “year” for purposes of its PST policy.  The statute is silent on how a “year” is defined by default if the employer fails to specify how it will define a “year” under its policy.

               c.  Accrual Caps

If an employer has 15 or more employees, its employees can accrue a maximum of 40 hours of PST per year, unless the employer selects a higher limit.  If an employer has fewer than 15 employees, the maximum an employee can accrue is 24 hours of PST per year, unless the employer selects a higher limit.

Employers should proceed with caution as to leave accrued under former leave policies and how such leave is treated in relation to any modifications to that policy.  Under the most conservative approach, employees should generally be permitted to retain any accrued PST in their banks as of July 1, 2017.  The statute is silent on whether an employee’s already-accrued PST as of July 1, 2017 may be counted toward his or her statutory cap of 40 (or 24, depending on the size of the employer) hours per year, though, given the Act’s purpose, it may be that such time could be counted toward the cap.  Employers should continue to monitor developments as forthcoming regulations may address the transition year issue.

               d.  Use of PST

An employee may use earned PST as it is accrued.  An employer is required to permit employees to use their accrued PST in either hourly increments or “the smallest increment that the employer’s payroll system uses to account for absences or use of other time[,]” whichever is smaller.  The statute provides for the use of PST in the event of an employee’s own illness or injury, a family member’s illness or injury, and in other situations.  Generally, these categories can be summarized as follows:

  • An employee’s own mental or physical illness, injury or health condition, or the employee’s need to seek medical diagnosis, treatment, or preventative care;
  • A family member’s mental or physical illness, injury or health condition, or the family member’s need to seek medical diagnosis, treatment, or preventative care;
  • Closure of the employee’s workplace due to a public health emergency, or an employee’s need to care for a child whose school or place of care has been closed due to a public health emergency;
  • When an employee or employee’s family member’s “presence in the community may jeopardize the health of others” due to exposure or suspected exposure to a communicable disease; and
  • Absences due to domestic violence, sexual violence, abuse, or stalking of an employee or employee’s family member, as these terms are defined in the statute, if the leave is to address the psychological, physical, or legal effects on the employee or the employee’s family member.

The Act defines “family member” broadly as a spouse or legally registered domestic partner, a grandparent, grandchild, sibling, or person who stood in loco parentis of an employee or his or her spouse or domestic partner, a biological child, adopted child, foster child, stepchild, of the employee or the employee’s spouse or domestic partner, regardless of age, a child to whom the employee or employee’s spouse or domestic partner stands or stood in loco parentis, regardless of age, and any other individual related by blood or affinity whose close relationship is the equivalent of a family relationship.

Employers should note that, in some ways, the Act provides for broader use of PST than would be permitted under the FMLA (such as in domestic violence situations), but in others, the Act provides narrower coverage than the FMLA.  For example, a conspicuous absence from the Act’s approved list of PST uses is for the birth of a child or care of a newly adopted child.  However, because the Act expressly states that it shall not be construed to preempt or conflict with federal statutes, there is no reason yet to believe that the Act would interfere with an employer’s right under the FMLA to require that an employee’s paid time off benefits, of which PST would be a part, run concurrently with his or her use of FMLA leave.

While all employees must begin to accrue PST under the Act on July 1, 2017 or their date of hire, whichever is later, an employer may require that employees hired after July 1, 2017 wait 90 days from their date of hire before they are permitted to use accrued PST.

               e  Requesting PST

An employee’s request for PST “may be made orally, in writing, by electronic means or by any other means acceptable to the employer.”  If possible, an employee’s leave request must include the expected duration of the leave.  If an employee’s need to use leave is “foreseeable,” employees must make a “good faith effort” to give their employers advance notice and schedule their absences in a way that lessens the impact on the employers’ businesses, much like an employee’s obligation when using FMLA leave.  For “unforeseeable leave,” employers may require that employees give notice of the leave if the notice requirements are clearly set forth in writing and that written description is disseminated to the employee.  The statute does not appear to place restrictions on the procedures an employer may require for notice of unforeseeable leave, but an employer should be hesitant to place an unreasonably onerous burden on employees to give notice of unforeseeable leave.

Note that the statute does not define the terms “foreseeable,” “unforeseeable,” and “good faith effort,” so employers should continue to monitor further developments.  Generally, a common-sense approach in interpreting these terms should be applied.  Employers should refrain from ascribing meaning to these terms that could be viewed as unduly punitive to employees.

               f.  Requesting Verification of The Reason for PST Use

The statute permits an employer to request “reasonable documentation” that earned PST is used for a proper purpose only where an employer seeks to use three or more consecutive work days of PST. “Reasonable documentation” is defined as “documentation signed by a health care professional indicating that the earned paid sick time is necessary.”  Where three or more consecutive PST days are used in cases of domestic violence, sexual violence, abuse, or stalking, the statute provides alternative forms of reasonable documentation that may be requested, such as a police report, a protective order, or a signed statement from the employee or other individual (a list of which appears in the statute) affirming that the employee was a victim of such acts.

The inference to be drawn from this language is that an employer may not ask for verification of the reason for an employee’s use of PST if the employee uses only one or two consecutive days.  Employers who currently follow a policy of requesting a doctor’s note for any single-day absences should pay close attention to this change and modify its practices accordingly.

               g.  Carry-Over Limits

An employee must be permitted to carry over unused, accrued PST to the next year, but cannot use this carried-over amount to increase his or her maximum use caps for that year.  By way of example, an employee may carry over ten hours of unused accrued PST to a following year, accrue an additional 40 hours, but would still not be permitted to use over a total of 40 (or 24, depending on the size of the employer) hours of PST per year.  Employers should continue to monitor whether limitations on carryover are discussed in any forthcoming regulations.

               h.  End-Of-Year Payout Option

While the Act does give an employer the option to pay out unused, accrued PST to employees at the end of the year, this option is not without its drawbacks.  The Act requires that, if an employer exercises its pay-out option, it must then “provide the employee with an amount of earned paid sick time that meets or exceeds the requirements of [the Act] that is available for the employee’s immediate use at the beginning of the subsequent year.”  This perplexing requirement appears to diminish an employer’s incentive to exercise this option by accelerating the employee’s PST accrual for the subsequent year and requiring that the employer provide the employee with a “full” bank of accrued hours for the employee’s immediate use at the beginning of that year, as opposed to requiring that the employee gradually accrue these hours as usual.

               i. PST Borrowing

The statute permits an employer, in its discretion, to allow an employee to borrow PST time from a subsequent year before it is earned; however, there is no provision in the statute speaking to an employer’s ability to recover borrowed PST if the employee in question separates from employment before he or she actually accrues the borrowed PST.  While we are hopeful that this grey area will be addressed in forthcoming regulations, employers would be prudent to ensure they are complying with A.R.S. § 23-352(2) in the event they decide to recoup such borrowed PST from employees’ wages, and understand that, in the absence of legislative guidance on this issue, doing so is not without risk.

               j.  Treatment of PST Upon Conclusion of Employment

Employers are not required to pay unused, accrued PST to employees whose employment terminates for any reason, including involuntary termination, voluntary resignation, layoff, or death.  However, if an employer rehires a separated employee within nine (9) months, all PST that the employee had accrued at the time of his or her separation must be reinstated.

               k.  Notice Requirements

The Act provides that in addition to the information that must now be included with an employee’s pay statement (see Section 3(a) above), employers must give employees written notice informing them, at a minimum, of the following:

  • Employees’ entitlement to earn PST and the rate at which employees will accrue PST;
  • The terms of use of PST as provided by the Act;
  • That retaliation against employees requesting or using PST is prohibited;
  • Employees’ right to file a complaint if PST use is unlawfully denied or retaliated against; and
  • The contact information for the Commission where questions about rights and responsibilities under the Act can be answered.

Under the Act, such notices must have been provided by the statute’s effective date of July 1, 2017, or the date of hire, whichever is later, and must be in English, Spanish, and “any language that is deemed appropriate by the commission.”  Civil penalties apply for failure to post such a notice.  Sample notices in each language will be provided by forthcoming regulation prior to the Act’s effective date.  It also appears that employers must also post notices, as will be specified, notifying employees of their rights under the Act.

               l.  Anti-Discrimination and Retaliation

The Act provides that it is “unlawful for an employer or any other person to interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right protected” by the Act.  In sum, much like the ADA and FMLA, the FWHFA carries with it provisions against discrimination and retaliation for requesting or using PST, or any other exercise of rights provided by the Act.  Also like the FMLA, the Act prohibits employers from counting the use of PST “as an absence that may lead to or result in discipline, discharge, demotion, suspension, or any other adverse action.”  There is a presumption that any adverse employment action taken within 90 days of an employee’s exercise of rights under the Act is retaliatory, unless there is “clear and convincing” evidence that the action was taken for other lawful reasons.  This is a stark contrast to many “no fault” attendance policies that track all absences (whether paid or unpaid) and convert them into adverse points unless the absences are ADA or FMLA related.  Under this new law, any PST day counts as a protected absence and cannot be used or counted toward disciplinary action.

The Act applies the AMWA’s preexisting enforcement mechanisms to the new PST provisions.  Among other things, those enforcement mechanisms permit employees, as well as State agencies, to file lawsuits to assert their PST rights.  In addition to the prospect of defending civil lawsuits, employers may face investigations by the State of Arizona or its political subdivisions, including inspections and monitoring, and civil penalties, for violations of the Act.

Recordkeeping Requirements.  The Act requires employers to add to their existing Arizona Minimum Wage Act recordkeeping obligations details of an employee’s PST use and accrual for four (4) years.  There is a rebuttable presumption that an employer who fails to maintain such records did not pay statutorily earned PST.

 

 

 

Seven Mid-Year Tax Moves

Seven Mid-Year Tax Moves

After April 15, most of us are happy to ban all thoughts of income tax until next April’s deadline looms. But taking a little time to do a mid-year check-in and tune up can really be worth it – saving you last-minute panic and big bucks. Summer is a good time to make sure you’re on track because, for a lot of people, the pace is a little slower.  If you wait until year-end to check on your tax status, you’ll be right in the middle of holiday season. And summer is your tax advisor’s slow time, too. Here are some points experts recommend you cover in a mid-year checkup.

1. If you have an extension to file your 2016 tax return, do it now.

Why wait until Oct. 15, when the return is due? If you’re expecting a refund, the money should be earning interest for you, not the government. And if by some chance you’ve miscalculated (and underpaid) the tax you owe, the sooner you pay up the better. Penalties and interest start to accrue the day after the April tax deadline, even if you have filed for an extension.  And if the reason you’ve been procrastinating about filing is because you can’t pay what you owe, “don’t let that stop you ….. File the return – you can always ask for an installment plan to pay.”

2. Are you on track with tax payments so far?

If you’ve had, or expect to have, any life-changing events during the year – marriage, divorce, having a child, buying a house, a spouse taking or leaving a job – you may need to adjust the amount of tax that’s being withheld from your paycheck. You don’t want to give Uncle Sam a big interest-free loan, but you don’t want any underpayment penalties, either (although they’re only 3% right now). The IRS has a withholding calculator, so you can get it right. If you need to make any adjustments, file a new W-4 form with your employer.

If you’re self-employed and make estimated tax payments it’s helpful to closely monitor your income and expenses throughout the year, so that you know what you owe and set aside enough money to make the quarterly installments. There’s a “safe harbor” with no underpayment penalties if you pay at least 100% of the tax you owed last year (110% if your adjusted gross income last year was more than $150,000) or 90% of the current year’s tax.

But there may be surprises in store for high-income taxpayers, especially if you’re landing in that category for the first time.  It’s not so hard for a married couple to find themselves hitting the $250,000 threshold. When that happens, new tax issues come up, such as additional Medicare taxes and the phase-out of personal exemptions and itemized deductions, which you’ll need to account for in your estimated taxes and withholding.

3. Eyeball your retirement accounts.

Could you afford to bump up your contributions or even max them out? “Some companies are limiting and cutting back on their 401(k) contributions, but that doesn’t mean YOU should. Check on your investments and asset allocation.

4. Are you close to the itemize/don’t-itemize point for deductions?

If so, you may want to use a strategy called bunching, in which you push discretionary write-offs into a year when you’re going to itemize, rather than one when you take the standard deduction. Think of scenarios / examples such as the following: At mid-year, it looks like you’re almost at the point where you could itemize. You usually give $1,000 to a particular charity each year. You’re close to retirement, so next year you won’t need the deductions to offset as much income. So this year you double up on your contribution to take advantage of itemization when you need it.

5. Get organized – there’s an app for that.

Who hasn’t vowed on April 16, “Next year I’m going to stay on top of my tax receipts”.  If you still haven’t acted on that vow, avoid another marathon session of receipt logging next April by enlisting the help of an app. For instance, Shoeboxed Receipt and Mileage Tracker lets you scan receipts (valid for IRS documentation) with your iPhone, iPad or Android mobile device, making it easy to track your expenses and deductions as you go along. The DIY program is free, or you can choose a paid plan (starting at $9.95/month after a free trial) that lets you mail in your receipts. Keeping up-to-date with expenses and maximizing your tax deductions is particularly important if you have business travel and entertainment expenses, or need to track business use of your personal car.

6. Are you within tax limits for renting out your vacation home?

If you rent out your vacation home when you’re not using it, you can generally deduct expenses such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation against your rental income. But you won’t be able to take a loss if you make personal use of the home for more than 14 days a year, or 10% of the days it is rented to others at a fair rental price (whichever is greater). If you spend the day at your home making repairs, it’s not considered personal use, even if your family is there for other reasons. But if you rent the home to a close family member, even at market rate, it is.

7. Could you be taking advantage of the 25D energy credit?

The 25C energy credit expired at the end of 2013, but the 25D credit has been extended to last through Dec. 31, 2021. It covers 30% of the cost of solar water heaters, solar panels that generate electricity directly for your home, small wind turbines, “qualified fuel cell property” and geothermal heat pumps. It can be used for a primary residence or a vacation home that you own.

The Bottom Line

Take advantage of summer to lock in tax breaks and catch up with any payments you owe. It’s the slow period in the world of tax advising, and, therefore, a good time to plan ahead before the year speeds up in December.

 

Due Date Approaches for 2016 Federal Income Tax Returns

Due Date Approaches for 2016 Federal Income Tax Returns

Tax filing season is here again. If you haven’t done so already, you’ll want to start pulling things together — that includes getting your hands on a copy of last year’s tax return and gathering W-2s, 1099s, and deduction records. You’ll need these records whether you’re preparing your own return or paying someone else to do your taxes for you.

Don’t procrastinate

The filing deadline for most individuals is Tuesday, April 18, 2017. That’s because April 15 falls on a Saturday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 17. Unlike last year, there’s no extra time for residents of Massachusetts or Maine to file because Patriots’ Day (a holiday in those two states) falls on April 17 — the same day that Emancipation Day is being celebrated.

Filing for an extension

If you don’t think you’re going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 16, 2017) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions.

Filing for an automatic extension does not provide any additional time to pay your tax! When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Note: Special rules apply if you’re living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension without filing Form 4868, though interest will be owed on any taxes due that are paid after April 18. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?

One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there’s no way that you can pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you’ll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).

Expecting a refund?

The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, beginning this year, a new law requires the IRS to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the Child Tax Credit until at least February 15.

Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return.

New Due Date, Filing Extensions, & Penalties for Form W-2 & 1099 Misc

New Due Date, Filing Extensions, & Penalties for Form W-2

According to the 2016 General Instructions for Forms W-2 and W-3 published by the IRS:

  • New Due Date for Forms   W-2 — January 31, 2017 is now the due date for filing 2016 Forms W-2 and W-3 with the SSA, whether filing using paper forms or electronically. (Forms W-2AS, W-2CM, W-2GU, W-2VI, and W-3SS are also included.)
  • Extensions Not Automatic — Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or after January 1, 2017, one 30-day extension may be requested. However, the IRS will only grant the extension in extraordinary circumstances or catastrophe.
  • Higher Penalty Amounts — Higher penalty amounts apply to returns required to be filed after December 31, 2015 and are indexed for inflation.
New Due Date for Form 1099-MISC Box 7 Use

According to the 2016 General Instructions for Certain Information Returns:

  • New Due Date for Forms 1099-MISC Using Box 7 — January 31, 2017 is now the due date for filing Forms 1099-MISC when reporting nonemployee compensation payments in box 7. Otherwise, file on paper by February 28, 2017, or file electronically by March 31, 2017. (The due dates for furnishing payee statements remain the same.)
  • Electronic Filers must use the FIRE System. The IRS has included a “First Time Filers Quick Reference Guide” in Publication 1220 (page 2).
  • Extensions — A 30-day extension must be requested by the due date of the return. Under certain hardship conditions, an additional 30-day extension can be requested. For more information, go to https://www.irs.gov/pub/irs-pdf/i1099gi.pdf (page 6).

More detailed information is available at https://www.irs.gov/pub/irs-pdf/p1220.pdf

New Overtime Rules -The Small Business Owner’s Guide to Obama’s Overtime Rules

If you’ve opened the internet or a newspaper in the past week, you’ve definitely heard about the Obama Administration’s newly enacted changes to overtime rules.

Politics aside, you probably have some concerns about these changes since there’s a good chance the Department of Labor’s ruling will directly impact you and your business.

Before we get into the changes you’ll need to make in order to comply with the new rules, let’s first review precisely what those changes are (remember, they take effect Dec. 1, 2016).

Proposed changes to overtime rules

The current rules, which expire Nov. 30, dictate that salaried workers making more than $455 a week, or $23,660 a year, do not qualify for required overtime pay. The new changes more than double that threshold to $913 a week, or $47,476 a year.

So how about that awesome employee you’ve been paying $40,000 who definitely pulls more than 40 hours a week? They will soon be entitled to overtime compensation at time-and-a-half for every hour after 40 hours a week. (The overtime compensation rules do provide exceptions for employees who perform duties that are mainly executive, administrative, or professional. Those employees would not be entitled to overtime and could remain exempt (i.e. salaried as opposed to hourly).

To be certain you know just how to classify any role that could be affected by the new rules, you’ll have to review their job description and subject it to the “duties test,” http://www.flsa.com/coverage.html which describes the specific duties that qualify employees for exemption from overtime pay.

In case you were wondering about a business making less than $500,000 of annual revenue, it turns out that there is no exception for small businesses, even though the Department of Labor FAQ fact sheet does say that “the proposed rule applies to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and certain other businesses.”

So if your business makes less than $500,000 of annual revenue, is it exempt? Probably not! Under the Fair Labor Standards Act (FLSA), individual employees may still be “covered in any workweek when they are individually engaged in interstate commerce, the production of goods for interstate commerce, or an activity that is closely related and directly essential to the production of such goods.”

Well, that cleared it up, right?? Leave it to federal lawmakers to really make sure you’re crystal clear on the new regulations that affect your business. LOL!! Now all cynicism aside, this is a serious topic that you might want to sort out with your professional expert.

What really determines if an employee falls within one of the white collar exemptions?

 To qualify for exemption, a white collar employee generally must:

  1. be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
  2. be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule (the “salary level test”); and
  3. primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).

Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (“HCE”) who earn above a higher total annual compensation level ($134,004 under this Final Rule) and satisfy a minimal duties test. 

In the end, these proposed changes are a big deal with many implications, and the confusion you may feel around them isn’t your imagination. As The L.A. Times reports:

According to the Obama administration, the new employers could cost employers between $240 million and $255 million per year in direct costs.

Business groups estimate the costs would be much higher. A recent study commissioned by the National Retail Federation estimated employers could shell out as much as $874 million to update payroll systems, convert salaried employees to hourly, and track their hours if similar regulations were imposed.

There is a little time left until December 1, 2016, so you should start planning now!

 

IRS Issue Number: HCTT-2016-68 Maintaining Eligibility for Advance Payments of the Premium Tax Credit

To Maintain Eligibility for Advance Payments of the Premium Tax Credit, File ASAP

The IRS is sending letters to taxpayers who received advance payments of the premium tax credit in 2016, but who have not yet filed their tax return. You must file a tax return to reconcile any advance credit payments you received in 2016 and to maintain your eligibility for future premium assistance. If you do not file, you will not be eligible for advance payments of the premium tax credit in 2017.

If you receive Letter 5858 or 5862, you are being reminded to file your 2016 federal tax return along with Form 8962, Premium Tax Credit.  The letter encourages you to file within 30 days of the date of the letter to substantially increase your chances of avoiding a gap in receiving assistance with paying Marketplace health insurance coverage in 2017.

Here’s what you need to do if you received a 5858

  • Read your letter carefully.
  • Review the situation to see if you agree with the information in the letter.
  • Use the Form 1095-A that you received from your Marketplace to complete your return. If you need a copy of your Form 1095-A, log in to your HealthCare.gov or state Marketplace account or call your Marketplace call center.
  • File your 2016 tax return with Form 8962 as soon as possible, even if you don’t normally have to file.
  • If you have already filed your 2016 tax return with Form 8962, you can disregard the letter.

Here’s what you need to do if you received a 5862 letter:

  • Read your letter carefully.
  • Review the situation to see if you agree with the information in the letter.
  • Use the Form 1095-A that you received from your Marketplace to complete Form 8962. If you need a copy of your Form 1095-A, log in to your HealthCare.gov or state Marketplace account or call your Marketplace call center.
  • File your 2016 tax return with Form 8962 as soon as possible, even though you have an extension until October 15, 2017, to file.

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The Internal Revenue Service today encouraged taxpayers to consider a mid-year tax withholding checkup.

IRS Urges Taxpayers to Check Their Withholding; New Factors Increase Importance of Mid-Year Check Up

WASHINGTON — The Internal Revenue Service today encouraged taxpayers to consider a mid-year tax withholding checkup following several new factors that could affect their refunds in 2017.  Taking a closer look at the taxes being withheld can help ensure the right amount is withheld, either for tax refund purposes or to avoid an unexpected tax bill next year.

The withholding review takes on even more importance this year given a new tax law change that requires the IRS to hold refunds a few weeks for early filers in 2017 claiming the Earned Income Tax Credit and the Additional Child Tax Credit. In addition, the IRS and state tax administrators continue to strengthen identity theft and refund fraud protections, which means some tax returns could again face additional review time next year to protect against fraud.

“With these changes, it makes good sense on many different levels to check on your withholding and plan ahead for next tax season,” said IRS Commissioner John Koskinen. “It’s a personal choice if you want to have extra money withheld to get a bigger tax refund, but you have options available if you prefer to have a smaller refund next year and more take-home money now.”

So far in 2016, the IRS has issued more than 102 million tax refunds out of 140 million total individual returns processed, with the average refund well over $2,700. Historically, the refund figure has increased over time in size.

By adjusting the Form W-4, Employee’s Withholding Allowance Certificate, taxpayers can ensure that the right amount is taken out of their pay throughout the year so that they don’t pay too much tax and have to wait until they file their tax return to get any refund. Employers use the form to figure the amount of federal income tax to be withheld from pay.

Some Refunds Delayed in 2017

When considering refund issues, the IRS wants taxpayers to be aware several factors could affect the timing of their tax refunds next year.

A major change will affect some early tax filers claiming two key credits who won’t see their refunds until after Feb. 15.

Beginning in 2017, a new law requires the IRS to hold refunds on tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. Under the change required by Congress in the Protecting Americans from Tax Hikes (PATH) Act, the IRS must hold the entire refund — even the portion not associated with the EITC and ACTC — until at least Feb. 15. This change helps ensure that taxpayers get the refund they are owed by giving the agency more time to help detect and prevent fraud.

As in past years, the IRS will begin accepting and processing tax returns once the filing season begins. All taxpayers should file as usual, and tax return preparers should also submit returns as they normally do. Even though the IRS cannot issue refunds for some early filers until at least Feb. 15, the IRS reminds taxpayers that most refunds will still be issued within the normal timeframe: 21 days or less, after being accepted for processing by the IRS.

”This is an important change to be aware of for some taxpayers used to getting an early refund,” Koskinen said. “We’ll be focusing on awareness of this change throughout the fall, but it’s important for taxpayers who might be affected by this to be aware of the change for their planning purposes. Although we still expect to issue most refunds within 21 days, we don’t want people caught by surprise if they get their refund a few weeks later than previous years.”

Stronger Security Filters and Tax Refund Processing

As the IRS steps up its efforts to combat identity theft and tax refund fraud through its many processing filters, legitimate refund returns sometimes get delayed. While the IRS is working diligently to stop fraudulent refunds from being issued, it is also focused on releasing legitimate refunds as quickly as possible.

The IRS, state tax agencies and the private sector tax industry continue to work together to fight fraud through their unprecedented Security Summit partnership. Additional safeguards will be set in place for the upcoming 2017 filing season.

“These increased security screenings are invisible to most taxpayers,” Koskinen said. “But we want people to be aware we are taking additional steps to protect taxpayers from identity theft, and that sometimes means the real taxpayers face a slight delay in their refunds. As we continue improving our processes and working with the states and the tax industry, we will stop more fraud while also fine-tuning our tools to reduce the number of innocent taxpayers who might see a refund delay. ”

The agency encourages taxpayers to check their tax withholding now. Whether they prefer more earned money during the year or a large refund, checking withholding can ensure people don’t receive an unexpected tax bill next year. Making these checks in the late summer or early fall can give taxpayers enough time to adjust their withholdings before the tax year ends in December.

Changes in Circumstances and Advance Premium Tax Credits

There are also some important reminders for taxpayers who receive advance payments of the Premium Tax Credit under the Affordable Care Act.

People who have advance payments of the premium tax credit made to their insurance company on their behalf should report life changes to their Marketplace. Changes in circumstances that should be reported include moving to a new address and changes to income or family size. Reporting these changes will help individuals avoid large differences between the advance credit payments and the amount of the premium tax credit allowed on their tax return, which may affect their refund or balance due.

Making a Withholding Adjustment

In many cases, a new Form W-4, Employee’s Withholding Allowance Certificate, is all that is needed to make an adjustment. Taxpayers submit it to their employer, and the employer uses the form to figure the amount of federal income tax to be withheld from pay

The IRS offers several online resources to help taxpayers bring taxes paid closer to what is owed. They are available anytime on IRS.gov. They include:

Self-employed taxpayers, including those involved in the sharing economy, can use the Form 1040-ES worksheet to correctly figure their estimated tax payments. If they also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.

If you have any question regarding your withholding and/or need some assistance with the W-4, it might be a good idea to consider discussing your individual situation with your tax professional.

New Tax Due Dates & Extension Periods

New Tax Due Dates & Extension Periods for Most Entities for Tax Year 2016

Many bills that Congress passes contain provisions that affect items that aren’t related to the main bill. The “Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015” is one such bill. Primarily a stopgap extension of the Highway Trust Fund, this bill also includes tax provisions that impact the due dates of a number of returns and other required filings.

The due date changes with the most impact will likely be those changes for partnership tax returns (Form 1065) and C Corporation tax returns. Essentially the due dates have swapped. The significant reorganization of due dates is intended to assist individuals involved in pass-through entities in receiving information required to prepare their individual returns in a more timely fashion.

For tax returns reporting 2016 information that are due in 2017, the following due date changes will apply.  These changes are effective for tax years beginning after December 31, 2015 for calendar year filers (tax year 2016 and beyond):

Form 2016 Filing Due Date(Tax   Year 2015) 2017 Filing Due Date(Tax Year 2016)
Form 1065 – Partnerships April 15th March 15th
Form 1065 Extension September 15th September 15th
C Corporations March 15th April 15th
S Corporations March 15th March 15th
C Corporations & S Corporation Extensions September 15th September 15th
Form 1040 Individual April 15th April 15th
Form 1120 C Corporation w/June 30 Fiscal Year September 15th September 15th
C Corporation Extension w/June 30 Fiscal Year March 15th April 15th
C CorporationFiscal   Year End (other than Dec. 31 or June 30) 15th day of 3rd month after year-end 15th day of 4th month after year-end
C Corporation Extension Fiscal Year End (other than Dec. 31 or June 30) 15th day of 9th monthafter year-end 15th day of 10th month after year-end
Form 1040 Extension October 15th October 15th
Form 1041 Trust & Estate April 15th April 15th
Form 1041 Extension September 15th September 30th
Form 5500 series –   Employee Benefit Plan July15th July 15th
Form 5500 series – Employee Benefit Plan Extension October 15th October 15th
Information Returns (i.e., W-2 and 1099s) To   IRS/SSA — Feb. 28 andMarch 31 if filed electronically Forms   W-2 and certain 1099-MISC due to IRS/SSA Jan. 31. All other Forms 1099 due   Feb. 28; March 31 if filed electronically

For fiscal year filers:

  • Partnership and S Corporation tax returns will be due the 15th day of the third month after the end of their tax year. The filing date for S Corporations is unchanged.
  • C Corporation tax returns will be due the 15th day of the fourth month after the end of the tax year.  A special rule to defer the due date change for C Corporations with fiscal years that end on June 30 defers the change until December 31, 2025 – a full ten years.

Other changes include:

  • Filers of U.S. Return of Partnership Income (Form 1065) will have a longer extension period, a maximum of six months, rather than the current five month extension, leaving the current (2015 and prior years) extended due date in place (September 15th for calendar year taxpayers.)
  • U.S. Income Tax Return for Estates and Trusts (Form 1041) will have a maximum extension of five and a half months, two weeks longer than the current (2015 and prior years) five month extension.
  • Annual Return/Report of Employee Benefit Plans will have a maximum automatic extension of three and a half months.
  • The Foreign Bank and Financial Accounts Report (FinCEN Report 114, FBAR) will be due on April 15th and permitted to extend for six months, thus aligning the FBAR reporting with the individual tax return reporting. Additionally, the IRS may waive the penalty for failure to file a timely extension request for any taxpayer required to file for the first time.

If you have any questions about these new due dates and/or the impact on your tax filings, please contact Alice, our qualified tax professional at (928)680-1300

 

Understanding the Net Investment Income Tax

Understanding the Net Investment Income Tax

It’s been around since 2013, but many are still struggling to come to grips with the net investment income tax. The 3.8% tax, which is sometimes referred to as the Medicare surtax on net investment income, affected approximately 3.1 million federal income tax returns for 2013 (the only year for which data is available) to the tune of almost $11.7 billion.1 Here’s what you need to know.

What is it?

The net investment income tax is a 3.8% “extra” tax that applies to certain investment income in addition to any other income tax due. Whether you’re subject to the tax depends on two general factors: the amount of your modified adjusted gross income for the year, and how much net investment income you have.

Note:  Nonresident aliens are not subject to the net investment income tax.

What income thresholds apply?

Modified adjusted gross income (MAGI) is basically adjusted gross income–the amount that shows up on line 37 of your IRS Form 1040–with certain amounts excluded from income added back in.

The net investment income tax applies only   if your modified adjusted gross income exceeds the following thresholds:

Filing Status MAGI
Married filing jointly or qualifying   widow(er) $250,000
Married filing   separately $125,000
Single or head of   household $200,000

What is net investment income?

Investment income generally includes interest, dividends, capital gains, rental and royalty income, income from nonqualified annuities, and income from passive business activities and businesses engaged in the trade of financial instruments or commodities. Investment income does not include wages, unemployment compensation, Social Security benefits, tax-exempt interest, self-employment income, or distributions from most qualified retirement plans and IRAs.

Note:  Even though items like wages and retirement plan distributions aren’t included in net investment income, they are obviously a factor in calculating MAGI. So higher levels of non-investment income can still make a difference in whether the net investment income tax applies.

Gain from the sale of a personal residence would generally be included in determining investment income. However, investment income does not include any amount of gain that is excluded from gross income for regular income tax purposes. Qualifying individuals are generally able to exclude the first $250,000–or $500,000 for married couples filing jointly–of gain on the sale of a principal residence; any of the gain that’s excluded for regular income tax purposes would not be included in determining investment income.

To calculate net investment income, you reduce your gross investment income by any deductible expenses that can be allocated to the income.  So, for example, associated investment interest expense, investment and brokerage fees, expenses associated with rental and royalty income, and state and local income taxes can all be factored in.

How is the tax calculated?

You know your modified adjusted gross income. You know your net investment income. To calculate the net investment income tax, first subtract the threshold figure (shown above) for your filing status from your MAGI. Then compare the result with your net investment income. Multiply the lower of the two figures by 3.8%.

For example, assume you and your spouse file a joint federal income tax return and have $270,000 in MAGI and $50,000 in net investment income. Your MAGI is $20,000 over the $250,000 threshold for married couples filing jointly. You would owe $760 (3.8% multiplied by $20,000), because the tax is based on the lesser of net investment income or MAGI exceeding the threshold.

How is it reported?

If you’re subject to the net investment income tax, you must complete IRS Form 8960, Net Investment Income Tax–Individuals, Estates, and Trusts, and attach it to your federal income tax return (you must file IRS Form 1040). The instructions for IRS Form 8960 provide an overview of the rules that apply and can be a good source of additional information. If you think you may be affected by the net investment income tax, though, it’s a good idea to consider  discussing your individual situation with a tax professional.

1IRS Statistics of Income Bulletin, Spring 2015