Friday, February 21, 2014

Health insurance tax credits are good medicine for small businesses

Small businesses may be missing out on an important new tax perk related to health insurance. And the stakes are even higher in 2014.

The Affordable Care Act provides a tax incentive for small business owners who pay at least a portion of their employees' health insurance. This year as much as 50% (up from 35% in 2013) of the employer's cost for worker health care premiums can be deducted as a tax credit. That's a dollar-for-dollar reduction in your 2014 tax bill. But as with most tax deals, you must meet certain requirements to qualify.

First, you must employ fewer than 25 full-time equivalent (FTE) employees. A half-time employee would count as a .5 FTE, so you must consider all workers in your calculation. The fewer FTE employees you have, the higher the tax credit percentage.

Second, the average annual wages of your employees must be less than $50,000. To make the calculation, you would take your total wages and divide by the FTE number you figured above. In most cases the owner's salary is not included in the formula.

Finally, the business owner must contribute at least 50% of the total cost for single coverage. Family coverage is not factored in. The policy must also be purchased through the Small Business Health Options Program, or SHOP to be eligible for the credit.


A few more wrinkles: if a business doesn't owe tax for the current year, they can apply the credit to past or future years. In addition, the excess of the employer's actual cost of health insurance over and above the credit received can still be deducted as a business expense. And the new rules also mean that small nonprofit organizations can receive a tax credit of up to 35% of their health insurance costs if they meet the above requirements.

Friday, January 24, 2014

Parents can cut taxes with child-related credits

Are you a parent? Give yourself some credit – a child-related tax credit, that is. Here are two that can reduce your 2013 federal income tax liability.

Child tax credit. The child tax credit applies if your dependent children were age 16 or younger at the end of 2013. The basic credit is $1,000 per child, though the amount you can claim may be less when you file a joint return and your income is more than $110,000 ($75,000 for other parents).

You may also qualify for the "additional child tax credit," which can generate a refund even if you owe no tax, and comes into play when your tax bill is less than the basic credit.

Child and dependent care credit. Did you pay a daycare or babysitter to take care of your child so you could work? You can claim a credit of as much as 35% of your expenses, up to a maximum of $1,050 for one child ($2,100 for two or more children). To qualify, your child must generally be under age 13. In addition, both you and your spouse must have earned income, unless one of you was attending school full-time.

You can claim both of these credits on your 2013 federal income tax return in addition to the $3,900 dependency exemption for each child. Contact us if you need more details.

Friday, January 10, 2014

Who must file a 2013 income tax return?

The rules for filing 2013 tax returns are straightforward for most people. Marital status, age, and income level are generally the determining factors. Here's a quick overview of the income levels at which a 2013 return is required.

*Single individual…..$10,000

*Single individual, 65 or older…..$11,500

*Married individual, separate return, regardless of age…..$3,900

*Married couple, joint return…..$20,000

*Married couple, joint return, one spouse 65 or older…..$21,200

*Married couple, joint return, both spouses 65 or older…..$22,400

*Head of household…..$12,850

*Head of household, 65 or older…..$14,350

*Qualifying widow or widower (surviving spouse)…..$16,100

*Qualifying widow or widower (surviving spouse), 65 or older…..$17,300


Different IRS rules govern filing for dependents, those who owe special taxes (e.g., self-employment tax), children under age 19 and noncitizens. Also taxpayers due a refund should file regardless of income level.

Friday, December 6, 2013

Tax strategies for charitable giving

Now that the holiday season has arrived, you might decide to step up your charitable donations to boost your deductions for 2013. Here are six timely strategies.

1. Audit-proof your claims. The IRS imposes strict substantiation rules for charitable donations. In fact, you're required to keep records for all monetary contributions, no matter how small. The best approach is to obtain written documentation for every donation.

2. Charge it. The deductible amount for 2013 includes charitable gifts charged by credit card before the end of the year. This covers online contributions using a credit card account. So you can claim a current deduction for donations made as late as December 31.

3. Give away appreciated stock. Generally, you can deduct the fair market value (FMV) of capital gain property owned longer than one year. For instance, if you acquired stock ten years ago for $1,000 and it's now worth $5,000, you can deduct the full $5,000. The appreciation in value isn't taxed.

4. Sell depreciated stock. Conversely, it usually doesn't make sense to donate stock that has declined in value, because you won't receive any tax benefit for the loss. Instead, you might sell the stock and donate the proceeds. This entitles you to a capital loss on your 2013 return plus the charitable deduction.

5. Clean out the storage space. The tax law permits you to deduct charitable gifts of used clothing and household goods that are still in "good used condition or better." Don't be so quick to discard items that can be donated to charity.


6. Donate a car. The deduction for a donated vehicle valued above $500 is generally limited to its resale amount. However, if the charity uses the vehicle for its tax-exempt purposes, you may be able to deduct its fair market value.

Friday, November 8, 2013

Plan for the return of some tax break phase-outs

Are you familiar with PEP and Pease? Though they sound like a pop duo, the terms refer to tax rules known as phase-outs that can impact how much federal income tax you owe.

Phase-outs are reductions in the amount of deductions, credits, and other breaks you can claim on your tax return. Though generally based on adjusted gross income, phase-outs vary in rate, amount, and how they're calculated.

Here's an overview of PEP and Pease, two tax breaks that are once again subject to phase-out this year.

* Personal exemption phase-out (PEP). If you're married filing jointly for 2013 and your income exceeds $300,000, the PEP will reduce the amount you claim for yourself, your spouse, and your dependents.

The personal exemption for 2013 is $3,900. But when PEP applies and your income increases, your deduction is reduced accordingly.

* Itemized deduction phase-out. You probably already know that some itemized deductions are limited. For instance, to claim a deduction for medical expenses, your out-of-pocket costs for this year have to exceed 10% of adjusted gross income (AGI). This threshold remains at 7.5% of AGI if you are 65 or older. Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are limited to amounts over 2% of AGI.

* There's also an additional phase-out called the Pease provision that limits the amount of total itemized deductions - after the above reductions. For 2013, Pease kicks in when your income exceeds $300,000 ($150,000 if you're married filing separately).


Other phase-outs limit the amount and deductibility of IRA contributions; the education, adoption, and childcare credits; and the alternative minimum tax exemption. Please call for a review of how phase-outs affect you and what you might be able to do to avoid them.

Friday, October 25, 2013

Delaying retirement affects benefits and taxes

In today’s economic environment, you may decide you have to work beyond the "normal" retirement age. Here's how extending your work life can affect your taxes and retirement benefits.

"Normal" retirement age is not a fixed number. For social security purposes, the "full" retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you're 70. Once you reach age 70, there's no incentive to postpone your benefits further since you'll already have reached your maximum.

* Earnings limit

If you're working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $15,120). However, you will receive a compensating increase when you do reach full retirement age, and your payments will not be reduced thereafter no matter how much you earn.

* Taxable benefits

Whether or not you draw benefits, you'll continue to pay social security and Medicare taxes on any income you earn from wages or self-employment. Up to 85% of your benefits may become subject to income tax, depending on the amount of your other income.

* Medicare

Medicare eligibility begins the year you reach age 65. The program encompasses four types of coverage: Medicare A (hospital insurance), Medicare B (general medical insurance), Medicare C (Medicare Advantage), and Medicare D (prescription drug coverage).

It's wise to sign up for Medicare A as soon as you're eligible. There's generally no cost, and the program provides supplemental coverage even if you're already insured at work. Medicare B and D are neither free nor mandatory, but the monthly premiums are reasonable, and either may be used as a stand-alone program or in conjunction with a private plan. If you have "creditable coverage" at work (i.e., coverage that's at least as good as Medicare), you can postpone signing up for Medicare B and/or D until you're no longer employed.

Your employer's plan also may offer Medicare C, which provides for private programs administered under contract with the government. These plans typically merge Medicare A and B benefits with other coverage.

Working beyond retirement age can require several complex decisions. Call us for help with planning the outcome that's best for you.

Friday, October 18, 2013

Business or Hobby? What's the tax difference?

For federal tax purposes, the determination of "business" or "hobby" is a matter of deduction. If your new venture is considered a business, you can deduct losses against other income.

However, when the activity is classified as a hobby, the "hobby loss" rules limit the amount you can write off. Expenses you incur might be deductible only if you itemize - or they might even be nondeductible.

The distinction affects the amount of tax you owe. So how can you prove you're trying to run a money-making business despite several years of losses?

One test you're probably familiar with is the general rule of earning a profit in three of the past five years. If your business has more income than deductions in three of five consecutive taxable years, the IRS generally accepts that you have a profit motive. (The time frame is two years in seven for certain horse-related activities.)

Unable to meet that test? Additional factors play a role as well. For instance, the Tax Court agreed that a volleyball consulting service with multiple loss years qualified as a business, in part because of a businesslike manner of operation. Among other items, the Court mentioned the maintenance of a separate bank account and accurate records as support for a profit motive.

Positive indicators of your profit-making intentions also include your expertise in the activity, the time and effort you put into your new business, and your success in other ventures.

If you'd like a complete list of the IRS "business vs. hobby" criteria, please contact us. We'll be happy to review the guidelines with you.