Individual Tax Advice

A refresher on the ACA’s tax penalty on individuals without health insurance

Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”

Penalty exemptions

Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:

Their household income is below the federal income tax return filing threshold.
They lack access to affordable minimum essential coverage.
They suffered a hardship in obtaining coverage.
They have only a short-term coverage gap.
They qualify for an exception on religious grounds or have coverage through a health care sharing ministry.
They’re not a U.S. citizen or national.
They’re incarcerated.
They’re a member of a Native American tribe.

Calculating the tax

So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentativeamount equals the greater of the following two prongs:

The applicable percentage of your household income above the applicable federal income tax return filing threshold, or
The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.

In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).

The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.

If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.

Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.

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3 midyear tax planning strategies for individuals

In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear:

1. Consider your bracket

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

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

2. Look at investment income

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

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

3. Plan for medical expenses

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

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

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

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Own a vacation home? Adjusting rental vs. personal use might save taxes

Now that we’ve hit midsummer, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences:

If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.

Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way.

For assistance, please contact us. We’d be pleased to help.

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Summer is a good time to start your 2017 tax planning and organize your tax records

Certified Public Accountant Expert Tax Advice Summer Planning

You may be tempted to forget all about taxes during summertime, when “the livin’ is easy,” as the Gershwin song goes. But if you start your tax planning now, you may avoid an unpleasant tax surprise when you file next year. Summer is also a good time to set up a storage system for your tax records. Here are some tips:

Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you owe. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 with your employer. If you make estimated payments, those may need to be changed as well.

Keep records accessible but safe. Put your 2016 tax return and supporting records together in a place where you can easily find them if you need them, such as if you’re ever audited by the IRS. You also may need a copy of your tax return if you apply for a home loan or financial aid. Although accessibility is important, so is safety.

A good storage medium for hard copies of important personal documents like tax returns is a fire-, water- and impact-resistant security cabinet or safe. You may want to maintain a duplicate set of records in another location, such as a bank safety deposit box. You can also store copies of records electronically. Simply scan your documents and save them to an external storage device (which you can keep in your home safe or bank safety deposit box). If opting for a cloud-based backup system, choose your provider carefully to ensure its security measures are as stringent as possible.

Stay organized. Make tax time easier by putting records you’ll need when you file in the same place during the year. That way you won’t have to search for misplaced records next February or March. Some examples include substantiation of charitable donations, receipts from work-related travel not reimbursed by your employer, and documentation of medical expenses not reimbursable by insurance or paid through a tax-advantaged account.

For more information on summertime tax planning or organizing your tax-related information, contact us.

Claiming a federal tax deduction for moving costs

Baton Rouge cpa individual tax moving

Claiming a federal tax deduction for moving costs

Summer is a popular time to move, whether it’s so the kids don’t have to change schools mid-school-year, to avoid having to move in bad weather or simply because it can be an easier time to sell a home. Unfortunately, moving can be expensive. The good news is that you might be eligible for a federal tax deduction for your moving costs.

Pass the tests

The first requirement is that the move be work-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction.

The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would increase your commute significantly.

Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.)

What’s deductible

So which expenses can be written off? Generally, you can deduct transportation and lodging expenses for yourself and household members while moving.

In addition, you can likely deduct the cost of packing and transporting your household goods and other personal property. And you may be able to deduct the expense of storing and insuring these items while in transit. Costs related to connecting or disconnecting utilities are usually deductible, too.

But don’t expect to write off everything. Meal costs during move-related travel aren’t deductible. Nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return.

Questions about whether your moving expenses are deductible? Or what you can deduct? Contact us.

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