Posted on Jul 5, 2016

Individual Tax Breaks from PATH ActNumerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, individuals can plan ahead with these 5 mid-year tax strategies inspired by the recent legislation.

5 Tax Breaks for Individuals

1. Consider tax breaks for college students. If you have a child in college this year, you may be eligible for tax benefits. The PATH Act makes the American Opportunity credit permanent and extends the tuition and fees deduction through 2016. Both of these breaks are subject to phaseouts based on income level. For each student, you may claim either the American Opportunity credit or the tuition and fees deduction, but not both. Thus, while it is possible to claim the credit and the deduction in the same year, you may not claim both for the same student. If your income is too high to take one of these breaks, your child might be eligible.

The PATH Act also permanently treats computers, computer equipment, software and Internet service as qualified expenses for Section 529 savings plans, so distributions for this purpose are tax-free. Summer planning can help maximize your tax benefits for costs incurred for the fall semester.

2. Shop for a new car. If you itemize deductions on your federal income tax return, you can generally deduct state and local income taxes paid for the year. As an alternative, however, you may claim a deduction for state and local sales taxes. This option — which has been permanently extended by the PATH Act — is generally beneficial to taxpayers in locales with low or no state or local income taxes. But it can also benefit taxpayers who make large purchases during the year, regardless of where they live.

The sales tax deduction is determined based on actual receipts or an IRS table that lists amounts for each state. If you opt to use the IRS table, you can add on the actual sales tax paid for certain “big-ticket items,” such as cars or boats. If you’re in the market for a new vehicle, remember this alternate tax deduction.

3. Transfer IRA funds directly to charity. After you turn age 70½, you must take required minimum distributions (RMDs) from your traditional IRAs, whether you want to or not. These RMDs are taxable in the tax year they’re received.

Under a provision made permanent by the PATH Act, if you’re age 70½ or older, you may transfer up to $100,000 directly from your IRA to a charity without any tax consequences. In other words, you can’t claim a charitable deduction for these transfers, but the payouts aren’t taxable either — even if they’re used to satisfy your RMD. Act sooner rather than later to avoid year-end scrambling. Keep in mind that this is a per person benefit. Although both spouses may individually transfer up to $100,000 from an IRA to a charity, one spouse cannot “borrow” the other spouse’s $100,000 to make a $200,000 transfer.

4. Gift property to a charity. Real estate owners can deduct the value of “conservation easements” made to a charity that preserve the property in its original condition. Charitable deductions for long-term capital gains property (appreciated property that’s been held more than one year) are generally limited to 30% of the taxpayer’s adjusted gross income (AGI). Any excess may be carried forward for up to 15 years.

Under enhancements made permanent by the PATH Act, the deduction threshold is raised to 50% of AGI (100% for farmers and ranchers) for conservation easements. Any excess may still be carried forward for up to 15 years. One catch, however, is that all such conservation donations must be made in perpetuity.

5. Install energy-saving equipment. Are you dreading the summer heat? It may be time to install a central air conditioning system. There are various requirements to qualify for the credit. First, the home must be your main home. Also, while the credit is generally equal to 10% of the cost of qualified energy-saving improvements, there is a lifetime credit limit of $500. Thus, if you’ve claimed the credit in a prior year, your current-year credit will be reduced accordingly. Other special dollar limits may apply. It’s available for a wide range of items from central air to insulation.

The PATH Act extended the residential energy credit only through 2016. So, it’s important to act before this tax-saving opportunity expires. (It may be extended again, but there are no guarantees.)

Midyear Individual Tax Planning Meeting

We’re almost half way through the tax year. Summer is a great time for individuals to get a jump start on tax planning. Contact your Cornwell Jackson tax adviser to estimate your expected tax liability based on year-to-date taxable income and devise ways to reduce your tax bill in 2016 and beyond.

Posted on Jun 21, 2016

Heavy Vehicle Business Tax Breaks

Favorable depreciation rules for business use of “heavy” SUVs, pickups and vans were locked in by the Protecting Americans from Tax Hikes (PATH) Act of 2015. By taking advantage of these rules, you may be able to write off the entire business-use portion of a heavy vehicle’s cost in the first year. Here’s how it works.

Depreciation Deductions for Lighter Vehicles

The PATH Act extended 50% bonus depreciation for 2016 and 2017, thereby increasing the maximum first-year deduction for new (not used) vehicles with GVWRs of 6,000 pounds or less. Even so, the deductions for lighter vehicles are much less than those for heavy vehicles. Here are the maximum annual depreciation deductions for lighter vehicles used 100% for business. (Deductions for less-than-100% business use are proportionately reduced.)

New Cars Placed in Service in 2016

Year 1 $11,160 (including $8,000 bonus depreciation)
Year 2 $5,100
Year 3 $3,050
Year 4 and beyond $1,875 (until full cost is recovered)

Used Cars Placed in Service in 2016

Year 1 $3,160 (no bonus depreciation allowed)
Year 2 $5,100
Year 3 $3,050
Year 4 and beyond $1,875 (until full cost is recovered)

New Light Trucks and Vans Placed in Service in 2016

Year 1 $11,560 (including $8,000 bonus depreciation)
Year 2 $5,700
Year 3 $3,350
Year 4 and beyond $2,075 (until full cost is recovered)

Used Light Trucks and Vans Placed in Service in 2016

Year 1 $3,560 (no bonus depreciation allowed)
Year 2 $5,700
Year 3 $3,350
Year 4 and beyond $2,075 (until full cost is recovered)

Heavy Vehicle Depreciation Business Tax Breaks in a Nutshell

The business portion of the cost of your heavy vehicle is first reduced by the Section 179 deduction. If the vehicle is classified as an SUV under the tax rules, the Sec. 179 deduction is limited to $25,000.

Heavy non-SUVs — such as long-bed pickups and vans — are unaffected by the $25,000 limit. For those vehicles, you can often write off the entire business-use portion of the cost in the first year under the Sec. 179 deduction privilege. Importantly, pickups with cargo beds that are at least six feet in interior length aren’t classified as SUVs. (Pickups with shorter beds are treated as SUVs, however.)

Second, you can claim the first-year 50% bonus depreciation deduction, which is allowed only for new (not used) vehicles. Finally, the business-use portion of the remaining cost (if any) is depreciated under the “regular” depreciation rules. In the first year, the regular depreciation rate is usually at 20% for vehicles.

Important note: The generous first-year depreciation deduction rules explained in this article are available only for vehicles used more than 50% for business.

Case in Point

Here are a couple of examples to show how these favorable tax breaks can add up.

First, suppose you buy a new $50,000 heavy SUV before year end. It’s used 100% in your sole proprietorship business. Because the vehicle is an SUV, the Sec. 179 deduction is limited to $25,000. So, the first-year depreciation would be a whopping $40,000, including the following elements:

1. $25,000 Sec. 179 deduction,

2. $12,500 bonus depreciation (half of the remaining purchase price after the Sec. 179 deduction), and

3. $2,500 regular depreciation (20% of the remaining purchase price after the above two deductions).

The first-year deduction of $40,000 will reduce both your federal income tax bill and your self-employment tax bill. In some (but not all) states, you also may be eligible for a generous state income tax deduction.

Alternatively, suppose you buy a new $50,000 sedan and use it 100% for business. With this smaller vehicle, your first-year depreciation write-off would be only $11,160. For a new $50,000 light truck or light van, your first-year write-off would be only $11,560.

What if you purchase a used vehicle instead of a new one? You can still claim the $25,000 Sec. 179 deduction, but you’re not eligible for bonus depreciation. Regular depreciation would be $5,000 (20% of the remaining $25,000 of the purchase price after the Sec. 179 deduction). In this case, your total first-year depreciation deduction would be $30,000.

Now, let’s suppose you buy a heavy pickup with a long bed for $50,000. This vehicle isn’t subject to the $25,000 Sec. 179 deduction limitation. For federal income tax purposes, you can generally deduct the entire cost of this vehicle on this year’s tax return under Sec. 179. Moreover, the pickup can be either new or used.

In contrast, if you buy a used $50,000 sedan, your first-year depreciation write-off would be only $3,160. For a used $50,000 light truck or light van, your first-year depreciation write-off would be only $3,560.

Examples of Heavy Vehicles

The Sec. 179 deduction and bonus depreciation deals are available only for an SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that’s purchased (not leased). Fortunately, quite a few vehicles qualify for the “heavy” SUV label, including:

  • Buick Enclave
  • Cadillac Escalade
  • Chevy Tahoe
  • Dodge Durango
  • Jeep Grand Cherokee

Most full-size pickups — including Nissan Titans, Toyota Tundras and Dodge Rams — also qualify. A vehicle’s GVWR can usually be found on a label on the inside edge of the driver’s side door. The IRS has confirmed that heavy SUVs qualify for the aforementioned depreciation tax breaks whether they are built on a truck chassis or an auto chassis. So, heavy cross-over vehicles also qualify for this favorable tax treatment.

Potential Caveats for these Business Tax Breaks

The favorable depreciation rules for heavy vehicles come with limits. Here are some common caveats you should be aware of:

1. The Sec. 179 deduction can’t exceed the taxpayer’s aggregate net business taxable income before the Sec. 179 write-off. If you operate your business as a sole proprietorship, or as a single-member LLC treated as a sole proprietorship for tax purposes, you can count any wages that you may earn as an employee as additional business income. If you’re married and file a joint return, you can also count your spouse’s earnings from employment as well as any self-employment income that he or she may earn.

2. Special rules apply if you operate your business as a partnership, multimember LLC or corporation. Consult your tax adviser about how to take full advantage of the depreciation breaks for heavy business vehicles in your situation.

3. In the five tax years following the year that you put your heavy vehicle into service, the business-use percentage must continue to exceed 50%. Otherwise, you run afoul of “recapture” rules that will force you to add back some previous depreciation write-offs into your taxable income. To fully cash in on the available depreciation breaks, you must commit to using the vehicle over 50% for business for the first six years.

4. For 2016, the maximum Sec. 179 deduction is $500,000, subject to a $2,010,000 phaseout threshold. These amounts are now permanent and subject to inflation indexing under the PATH Act.

Quick Action May Be Advisable

As things stand right now, the favorable business vehicle depreciation rules outlined in this article are “permanent” features of the Internal Revenue Code. But nothing is permanent when it comes to taxes. Depending on how the upcoming elections turn out, less favorable rules could apply in the future.

Additionally, under the PATH Act, bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on December 31, 2019. So, it’s a limited time offer that will gradually decrease and expire, unless Congress takes further action.

For these reasons, it might make sense to buy your vehicle this year and place it in service before year end. That way, you can lock in the valuable first-year depreciation breaks. However, consult your tax adviser before signing the paperwork to make sure you’re not affected by the fine print in the tax code that can limit depreciation write-offs.


Posted on Apr 27, 2016

Alternative Minimum Tax

Congress originally devised the alternative minimum tax (AMT) rules to ensure that high-income individuals who take advantage of multiple tax breaks will owe something to Uncle Sam each year. In recent years, however, that concept has eroded. Now, even upper-middle-income taxpayers are likely to owe the AMT. Here’s an overview of how the AMT works and possible ways to minimize it.

Don’t Overlook the AMT Credit

If you owed the AMT last year, you may have earned an AMT credit that will reduce your regular federal income tax bill in the current tax year. Many taxpayers who pay the AMT fail (or forget) to claim their rightful AMT credits the following year.

There are two reasons you earn an AMT credit for a tax year:

1. If you owed the AMT from exercising in-the-money incentive stock options, or

2. If your AMT bill was caused by claiming accelerated depreciation write-offs.

The first situation is common, especially with employees of start-ups and high-tech firms. The second typically happens only if you own an interest in a business with significant investments in depreciable assets.

Ask your tax adviser if you earned an AMT credit. But, be advised that you can claim it only if your regular federal income tax liability exceeds your AMT liability for the tax year. That’s because you’re allowed to use the credit to reduce only regular federal income taxes (not the AMT). Put another way, you can’t claim the AMT credit on your current return if you owe the AMT again this year.

So, you still must calculate your AMT liability for the current year. The difference between your AMT liability and your regular federal income tax liability is the maximum amount of AMT credit you can claim on your current-year return. In other words, you can use the AMT credit to equalize your regular federal income tax and the AMT for the current year, but that’s it. After taking this limitation into account, any leftover AMT credit is carried forward to next year.

AMT Basics

Think of the AMT as an alternate set of tax rules that are similar to the regular federal income tax system. But there are key differences. For example, under the AMT rules, certain types of income that are tax-free under the regular federal income tax system are taxable. The AMT rules also disallow certain deductions and credits that are allowed under the regular federal income tax system. And the maximum AMT rate is only 28% compared to the 39.6% maximum rate that applies under the regular federal income tax system.

In addition, taxpayers are allowed a relatively large inflation-adjusted AMT exemption, which is deducted when you calculate AMT income. Unfortunately, the exemption is phased out when your AMT income surpasses certain levels.

If your AMT liability exceeds your regular federal income tax liability for the tax year, you must pay the higher AMT amount.

Why Upper-Middle-Income Taxpayers Get Hit

After repetitive tax law changes, the AMT often doesn’t apply to the wealthiest taxpayers in the highest tax bracket. That’s because many of their tax breaks are already cut back or eliminated under the regular federal income tax rules before getting to the AMT calculation.

For instance, the passive activity loss rules greatly restrict the tax benefits that can be reaped from “shelter” investments, including rental real estate and limited partnerships. And, if your income exceeds certain levels, phaseout rules are likely to reduce or eliminate various tax breaks, such as personal and dependent exemption deductions, itemized deductions, higher-education tax credits and deductions for college loan interest.

Moreover, individuals in the 35% or 39.6% tax brackets are less likely to be hit with the AMT, which has a maximum tax rate of 28%. Finally, the AMT exemption — which is deducted when you calculate AMT income — is phased out as income goes up. This phaseout has little or no impact on individuals with the highest incomes, but it increases the likelihood that upper-middle-income taxpayers will owe the AMT.

AMT Risk Indicators

Various inter-related factors make it hard to pinpoint who will be hit by the AMT. But taxpayers are generally more at risk if they have:

    • Substantial (but not necessarily huge) salary income (more than $250,000 per year).
    • Significant long-term capital gains and/or dividends.
    • Large deductions for state and local income and property taxes.
    • A spouse and several children (e.g., at least four) who provide personal and dependent exemption deductions for regular federal income tax purposes. (These deductions are disallowed under the AMT rules.)
    • Significant miscellaneous itemized deductions, such as investment expenses, fees for tax advice and unreimbursed employee business expenses.
    • Interest from private activity bonds. This income is tax-free for regular federal income tax purposes, but it’s taxable under the AMT rules.
  • Significant depreciation write-offs for personal property assets, such as machinery, equipment, computers, furniture, and fixtures from your own business or from investments in S corporations, LLCs or partnerships. These assets must be depreciated over longer periods under the AMT rules.

Another noteworthy factor that’s likely to trigger the AMT is exercising in-the-money incentive stock options (ISOs) during the tax year. The so-called “bargain element” — the difference between the market value of the shares on the exercise date and the exercise price — doesn’t count as income under regular federal income tax rules, but it counts as income under the AMT rules.

A significant spread between a stock’s current market value and an ISO’s exercise price can result in an unexpected AMT liability. Consult your tax professional before exercising your options. Depending on current and anticipated market conditions, it may be advantageous to exercise them over several years to minimize the adverse AMT effects.

Possible Ways to Minimize the AMT

Any strategy that reduces your adjusted gross income (AGI) might help to reduce or avoid the AMT. AGI includes all taxable income items and certain non-itemized deductions, such as moving expenses and alimony paid.

By lowering AGI, you may be able to claim a higher AMT exemption. Here are some considerations that may help reduce your AGI:

    • Contribute as much as you can to your tax-favored retirement plan, such as a 401(k) plan, profit-sharing plan or SEP.
    • Contribute to your cafeteria benefit plan at work. Contributions lower your taxable salary and AGI. Most cafeteria plans include healthcare and dependent care flexible spending account arrangements.
    • Harvest losses from investments held in taxable brokerage firm accounts. Then use the capital losses to offset any capital gains. Any leftover capital losses up to $3,000 are deductible against income from salary, interest, dividends, self-employment and other sources.
    • Defer the sale of appreciated investments held in taxable brokerage firm accounts until next year. Doing so will defer the resulting taxable gains.
  • Prepay deductible business expenses near year end if you run a business as a sole proprietorship, limited liability company, partnership or S corporation. The resulting business deductions will be “passed through” to you, thereby lowering AGI. Similarly, postpone the receipt of business income until next year to reduce your AGI in the current tax year.

Important note: Lowering AGI will also slash your state and local income taxes, which are disallowed for AMT purposes and, therefore, increase your AMT exposure. Likewise, if you’re likely to be hit with the AMT, the traditional tax year-end strategy of prepaying state and local income and property taxes that are due early next year won’t help you. Those taxes aren’t deductible under the AMT rules. So prepay them in a year when you have a chance of not being in the AMT mode.

Address the AMT Head-On

Taxpayers can’t automatically assume they’re exempt from the AMT. Most individuals in the higher tax brackets probably have some risk factors. The IRS has trained auditors to find unsuspecting folks who owe the AMT. If you’re not careful, you could owe back taxes, interest and potential penalties under the AMT rules.

Consult with your tax adviser about your specific situation. Cornwell Jackson’s tax team can identify whether you’re at risk and help find ways to reduce your exposure to the AMT that also factor in current market conditions and other personal investment goals.

Posted on Jun 4, 2015

How much money do you need to raise a child? According to an estimate from the U.S. Department of Agriculture, it will cost a middle-income couple roughly $245,000 to raise a child born in 2013 to the age of 18. This is up 1.8 percent from the prior year. Plus, the estimated average cost is much higher in certain parts of the country. For example, high-income families living in the urban Northeast United States are projected to spend almost $455,000 to raise a child for 18 years.

These figures cover costs for housing, food, transportation, clothing, health care, education, childcare, and miscellaneous expenses such as cell phones and sports team fees. But they do not include college. That can easily add tens or hundreds of thousands of extra dollars to the tab.

Here is a list of 10 Federal Tax Breaks for Parents.

  1. Dependency Exemptions

You can generally claim a dependency exemption for a child under age 19 or a full-time student under age 24, if you provide more than half of the child’s annual support. Each dependency exemption is $4,000 for 2015. However, you may lose at least part of the benefit of your exemptions if your adjusted gross income (AGI) is above a certain amount.

  1. Child Tax Credit

Parents may be entitled to the child tax credit for each qualifying child under age 17 at the end of the year. The maximum credit for 2015 is $1,000 per child.

You may lose at least part of the benefit of your exemptions if your modified adjusted gross income (MAGI) is above a certain amount. To qualify, you must meet certain criteria regarding the child.

  1. Child and Dependent Care Credit

Another tax credit may be claimed if you pay someone to care for a child under the age of 13, allowing you (and your spouse, if married) to be gainfully employed. The child and dependent care credit is based on a sliding scale. For parents with an AGI of more than $43,000, it’s equal to 20 percent of qualified expenses paid to a qualified caregiver to ensure the child’s well-being and protection. The total expenses that you may use to calculate the credit should not be more than $3,000 for one qualifying child or $6,000 for two or more qualifying children.

  1. Earned Income Tax Credit (EITC)

This credit is only available to certain lower-income families. On a 2015 return, the maximum EITC amount available is $3,359 for taxpayers filing jointly with one child; $5,548 for two children; and $6,242 for three or more children. You may be eligible for the EITC without a qualifying child, but the credit is higher for families with children. If you can claim the EITC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return, where available.

  1. Adoption Credit

If you adopt a child, you may be eligible for a special tax credit for qualifying expenses. On a 2015 return, the maximum adoption credit is equal to $13,400 of the qualified expenses incurred to adopt an eligible child. However, credit amounts are phased out for upper-income taxpayers based on MAGI. The adoption credit begins to phase out for taxpayers with MAGI of $201,010 and is eliminated for those with MAGI of $241,010 or more.

  1. Higher Education Credits

If you pay higher education costs for yourself or an immediate family member, including a child, you may qualify for one of two education tax credits (but you can’t claim both). The maximum American Opportunity Tax Credit is $2,500 per student while the maximum Lifetime Learning Credit is $2,000 per taxpayer. Both higher education credits are phased out for upper-income taxpayers based on MAGI.

  1. Tuition Deduction

The deduction for qualified tuition and fee expenses, which had expired after 2013, was retroactively extended for 2014 by new legislation. It’s on the list of tax breaks Congress will address extending in 2015. Depending on your MAGI, the deduction on a 2014 return is either $4,000 or $2,000 before it’s completely phased out. Note that you can’t deduct tuition expenses if you claim one of the higher education credits.

  1. Student Loan Interest

You may be able to deduct interest you paid on a qualified student loan up to a maximum of $2,500 for 2015. This “above the line” deduction can be claimed whether or not you itemize deductions on your tax return. You can only claim the deduction if your MAGI is less than a specified amount, which is set annually. The amount of student loan interest is phased out if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you are married and file jointly).

  1. Self-Employed Health Insurance Deduction

If you’re self-employed and pay for health insurance, you may be able to deduct premiums paid to cover your child, as well as yourself and your spouse, if married. This tax break, which was authorized by the Affordable Care Act, applies to children who are under age 27 at the end of the year, even if the child isn’t your dependent.

  1. Potential Lower Tax Rates

Last but not least, parents may be able to benefit from shifting income-generating assets to children. As a result, income that is normally taxed to the parents in their high tax bracket is taxed to the children in their lower tax brackets. Of course, this means you must give up control over the assets.

However, remember that this strategy may be mitigated by the Kiddie Tax. Under the “Kiddie Tax,” the unearned income received by a dependent child under age 19, or a full-time student under age 24, is taxed at the top rate of the child’s parents to the extent that it exceeds $2,100 in 2015.

For more information about any of the above 10 child tax breaks — including limitations, detailed rules, and exceptions — contact our tax advisor.