Retirement Plan Contribution Limits Remain Unchanged for 2016
Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, the limits remain unchanged for 2016.
News & Tech Tips
Tax consequences to consider before putting your home on the market
When you sell your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain if you meet certain tests. Gain that qualifies for exclusion also is excluded from the new 3.8% Medicare contribution tax.
Losses on the sale of your home aren’t deductible. But if part of it is rented or used exclusively for your business, the loss attributable to that portion is deductible, subject to various limitations.
Because a second home is ineligible for the gain exclusion, consider converting it to rental use before selling. It can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion.
If you’re thinking about putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.
Planning to make a large cash gift for high school graduation? Consider paying some college tuition instead
With commencement ceremonies for high school seniors coming up, many parents and grandparents are contemplating making cash gifts the student can use for college expenses. But if gift and estate taxes are a concern, consider a potentially more tax-efficient gift: paying some of the child’s college tuition.
Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.25 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.25 million GST tax exemption.
But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers. If you’d like to learn more about tax-smart ways to fund education expenses or make gifts to reduce your taxable estate, please contact us.
Alternative-asset IRAs: Handle with care
Most IRA owners invest their funds in traditional assets, such as stocks, bonds and mutual funds. But some intrepid investors have enjoyed impressive, tax-deferred returns — or even tax-free returns in the case of a Roth IRA — by using their IRAs to hold rental real estate, business interests or other alternative assets.
Despite the appeal of earning higher returns in a tax-advantaged account, alternative-asset IRAs contain a minefield of tax traps that can quickly wipe out the potential benefits. For example:
- Mortgaged real estate held in an IRA can trigger unrelated business income tax. Real estate may also create problems when traditional IRA minimum distributions are required (beginning after age 70½).
- Your dealings with a business in which your IRA has an interest may violate the prohibited transaction rules, resulting in substantial taxes and penalties.
- Transferring S corporation stock to an IRA may terminate the company’s S status and trigger corporate tax liability.
So if you’re contemplating an alternative-asset IRA, please contact us for professional advice.
Review ATRA for Possible Tax-Saving Opportunities
It’s been about six months since Congress passed the American Taxpayer Relief Act (ATRA) of 2012. The legislation prevented many of the tax hikes that were scheduled to go into effect in 2013 and retained a number of tax breaks that were scheduled to expire. On the negative side, individual income tax rates rose with the top rate increasing from 35 percent to 39.6 percent.
While much focus was given to ATRA at the start of the year, it’s probably a good time to review some of the bill’s provisions and determine if there are still opportunities for you and your business:
- Section 179 Expense Deduction – Section 179 Expense was increased to $500,000 for both 2012 and 2013 (2012 was previously scheduled to be $139,000, and 2013 was only $25,000)
- Bonus Depreciation – Bonus Depreciation was extended through December 31, 2013. This will allow the business to depreciate 50 percent of the asset cost in 2013 for equipment, fixtures, furniture, signage and land improvements.
- Luxury Auto Depreciation – $11,160 is now allowed for first-year depreciation for luxury autos placed in service in 2013.
- Restaurant Improvements Depreciation – The 15-year write-off for “qualified restaurant” improvements was reinstated and extended through December 31, 2013.
- WOTC – The Work Opportunity Tax Credit was extended through December 31, 2013. The maximum credit is generally $6,000, but can be as high as $12,000, $14,000, or $24,000 for qualified veterans depending on service connected disability, amount of time unemployed and when the period of unemployment occurred.
- Enhanced Deduction for Food-Inventory Donation – This deduction was reinstated and extended through December 31, 2013. The donation must be wholesome and be for the ill or needy. An owner/operator can get 150 percent of their basis in the donation as a charitable contribution.
- Empowerment Zone – If your restaurant is located in a Federal Empowerment Zone, you can potentially qualify for a tax credit. The tax credit was extended through December 31, 2013.
If you have questions about any of these provisions or would like additional information, contact Patrick McClary, Director/Tax Department, or Bruce Berry, Director/Accounting Department.