Berdon Blogs

TAX TALK: Are You Eligible to Claim the American Opportunity Credit?

Posted by Hal Zemel, CPA, J.D., LL.M. on Mar 27, 2017 12:50:00 PM

College costs are high and increasing every year. The federal government offers a credit to help defray the costs of a college education. If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. However, the credit’s income limitations may preclude your ability to qualify for the credit. If you earn too much to take the credit, your child may be eligible to claim the credit.

Credit Limitations

The American Opportunity credit equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses. The credit is capped at $2,500 per student, per year for the first four years of postsecondary education.

The American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) exceeds $160,000 for joint filers ($80,000 for others) and is completely eliminated when MAGI exceeds $180,000 for joint filers ($90,000 for others)

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Topics: TAX TALK

TAX TALK: There is Still Time to Make 2016 IRA Contributions

Posted by Hal Zemel, CPA, J.D., LL.M. on Mar 20, 2017 11:00:00 AM

You have until the original due date for filing your federal 1040 to make a contribution to your individual retirement account (IRA). This year, due to Patriot’s Day, the IRS has moved the due date for filing to April 18, 2017 (normally it is April 15).  Depending on the type of IRA, you may receive a federal tax deduction for the contribution.

Other Benefits

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, potentially tax-free. However, the annual contributions to the IRAs are limited, and any unused limit can’t be carried forward to make larger contributions in future years. The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you make smaller contributions before the deadline, you will not be able to make additional contributions after the deadline to reach the annual limit.

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Topics: TAX TALK

TAX TALK: Dependent Exemption for Elderly Parents

Posted by Hal Zemel, CPA, J.D., LL.M. on Mar 13, 2017 12:50:00 PM

If you are providing financial support for your aging parents, you may qualify to claim an exemption for them as a dependent on your tax return. The exemption allows eligible taxpayers to deduct up to $4,050 for each dependent claimed on their 2016 tax return.

Basic Qualifications

For your parents to qualify as your dependent, in most cases they must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled).  Generally, their Social Security benefit is excluded from this income limitation, but income from dividends, interest, and retirement plans are included.

Also, you must have contributed more than 50% of your parent’s total financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, you can claim the exemption even though no one individually provided more than 50%. However, only one of you can claim the exemption.

Other Considerations

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Topics: TAX TALK

TAX TALK: Repair & Improvement Safe Harbors Help Accelerate Tax Deductions

Posted by Hal Zemel, CPA, J.D., LL.M. on Mar 6, 2017 12:50:00 PM

If last year your business made repairs to tangible property, such as buildings, machinery, equipment, or vehicles, you may be eligible to deduct the expenses on your 2016 income tax return. However, you must determine if the expenses qualify as “repairs,” and are not actually “improvements.”

The distinction between repairs and improvements is important. In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized and depreciated over a period of years.  But, you can take an immediate expense for the costs incurred for incidental repairs and maintenance.

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Topics: TAX TALK

TAX TALK: Simplified Method for Determining Potential Estate Tax Exposure

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 28, 2017 10:50:56 AM

While not exact, here is a simplified way to project your potential estate tax exposure.

  • Determine the value of your assets, net of any debts.
  • Subtract any assets that will pass to charity on your death.
  • If you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies.
  • The net number represents your taxable estate.
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Topics: TAX TALK

TAX TALK: Are You Required to File a 2016 Gift Tax Return by April 18?

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 21, 2017 11:00:00 AM

If last year you made significant gifts to your children, grandchildren, or other heirs as part of your estate planning strategy, or you just wanted to provide loved ones with some helpful financial support, it’s important to know when you are required to file a gift tax return.

Some transfers require a gift tax return even if you do not owe any tax. Also, sometimes it is desirable to file a return even if it is not required.

Mandatory Filing Requirement

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Topics: TAX TALK

TAX TALK: Basics of Incentive Stock Options

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 13, 2017 12:50:00 AM

Incentive stock options (“ISOs”) allow you to buy your employer’s stock in the future at a fixed exercise price. The exercise price must at least equal the stock’s fair market value on the date granted. If the stock appreciates above the exercise price, the ISOs will allow you to buy the stock at a price below the fair market value (“FMV”) on the exercise date. However, complex tax rules apply to this type of compensation.

Tax Treatment of ISOs

ISOs must comply with many rules (not discussed here), but receive tax-favored treatment:

GRANT DATE: On the date your employer grants your ISOs - You owe no tax.

EXERCISE DATE (purchase stock at exercise price) On the date you exercise the ISOs:

  • Regular Tax
    1. You owe no regular income tax. There may be other tax consequences if you leave your employment and exercise the ISO.
    2. Your basis in the stock will equal the exercise price that you pay.

  • Alternative Minimum Tax (“AMT”)
    1. You will have an AMT adjustment equal to the FMV of the stock on the date of exercise in excess of the exercise price of the ISOs.
    2. Depending on your tax situation, the AMT adjustment may cause you to pay AMT.
    3. You will add the AMT adjustment to your basis in the stock in order to calculate your AMT gain or loss when you sell the stock.
    4. Generally, you will receive an AMT credit carry-forward to offset future regular tax liability to alleviate potential double taxation.
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Topics: TAX TALK

TAX TALK: The Domestic Production Activities Deduction Applies to More than Just Manufacturing

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 6, 2017 12:50:00 PM

The Section 199 deduction, also called the “domestic production activities deduction,” is intended to boost US jobs by encouraging domestic manufacturing.  In fact, it’s often referred to as the “manufacturers’ deduction.” But, this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 Deduction 101

A company calculates its Sec. 199 deduction by first determining its qualified production activities income (“QPAI”).  QPAI is the net income from qualified production activities. A company computes its QPAI by taking its domestic production gross receipts (“DPGR”) and subtracting the cost of goods sold and other expenses allocable to DPGR.

Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t. If less than 5% of receipts do not qualify as DPGR, the company may treat all of the receipts as DPGR.  Also, the company will need to allocate its expenses to those that directly and indirectly relate to the DPGR and those that do not relate to DPGR.

The Sec. 199 deduction is determined by multiplying the lesser of the qualified production activities income or taxable income by 9%. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production.

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Topics: TAX TALK

TAX TALK: Investment Interest Expense Deduction and Its Limitations

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 30, 2017 12:50:00 PM

If you borrow money and use the proceeds to buy assets held for investment, such as margin debt used to buy securities, generally the interest on the debt is deductible for both regular tax and alternative minimum tax purposes. However, there are limitations that apply that may reduce the benefits of this itemized deduction.

Deduction Limitations

First, interest is only deductible to the extent you invest in securities that produce taxable income. You cannot deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you cannot deduct the interest.

Second, your investment interest deduction is limited to your net investment income. Your net investment income, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, net investment income includes only investment income taxed at ordinary income tax rates and not investment income taxed at preferential capital gain tax rates such as long-term capital gains and qualified dividends.

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Topics: TAX TALK

TAX TALK: Can you Benefit from the State & Local Sales Tax Deduction?

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 23, 2017 7:00:00 AM

Currently, you are allowed an income tax deduction for the greater of your state and local income taxes and your state and local sales taxes.  A little over a year ago, the PATH Act made “permanent” the break allowing taxpayers to deduct state and local sales taxes as an itemized deduction in lieu of state and local income taxes. For many taxpayers their income taxes will substantially exceed their sales taxes, and therefore, not provide any benefit. However, if you reside in a state with no or low income taxes or you purchase major items, such as a car or boat, this break can be valuable.

2016 Tax Return

You do not have to document all of the sales tax you actually paid during the year. You can use the IRS sales tax calculator to determine your deduction based on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation). Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax and deduct the greater.

If you are in the Alternative Minimum Tax (“AMT”), it does not matter, since neither is deductible for AMT purposes.

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Topics: TAX TALK

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