Believe It or Not, Social Security Income Can Be a Tax Burden

Social Security income used to be tax-free to all, but that’s no longer the case. Depending on your other income, you could wind up paying tax on up to 85% of your Social Security benefits, at a time when you need steady income the most. However, your qualified tax professional may be able to help you map out a strategy that will reduce your exposure to federal income tax on your Social Security benefits.

According to the Social Security Administration (SSA), about one-third of people who receive Social Security benefits have to pay income taxes on their benefits.

If you file a federal tax return as “single,” and your combined income is between $25,000 and $34,000, you may have to pay taxes on 50 percent of your Social Security benefits. If your combined income is more than $34,000, up to 85 percent of your Social Security benefits are subject to income tax.

If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income that is between $32,000 and $44,000. If your “combined income” is more than $44,000, up to 85 percent of your Social Security benefits are subject to income tax.

Each year, the SSA sends individuals a Statement of Social Security Benefits. You can use this Statement along with your earnings report to determine if your combined income may be subject to taxation. You can also check online at

If there is a chance that your Social Security income will be subject to federal income tax, you may be able to reduce your exposure by using the following techniques to reduce your income level:

  • Consider switching some funds into investments (such as annuities) that pay monthly amounts that include a tax-free return of capital component. That part of each annuity payment representing your investment is not currently taxed and is not factored into the calculation of how much Social Security income is subject to tax.

  • If you currently are not expending all of your investment income on living expenses, defer as much income as possible. For example, the interest buildup in U.S. Government Series EE bonds isn’t taxed until the bonds are redeemed. In addition, defer taking cash out of your IRAs and qualified plan accounts as long as possible.

  • If you have the choice, consider withdrawing interest from your municipal bond funds before withdrawing cash from IRAs for living expenses. This helps because municipal bond interest you earn is taken into account when computing the tax on Social Security benefits, but interest and dividends accumulating in an IRA account are not taken into account.

Of course, always bear in mind that taxes should never be the motivating factor behind an investment decision. It’s important to consider your financial, investment, and tax situation in detail before you use one of these techniques.

5 Third Quarter Tax Moves to Make Right Now

With almost three-quarters of the year squarely behind us, now is a great time to assess your tax situation. Even though tax law changes are up in the air again this year, here are five moves, with the help of your tax professional, that you should consider right now.

One – Deductions and Credits

Look at last year’s tax return and determine if you are at a point to get a good estimate of your deductions and credits. If your deductions are less than half of what they were for the full year, you will end up paying more tax. Now would be a good time to clean out the kids closet or the garage and make an in-kind charitable donation.

Two – Investment Portfolio

Many people wait until the end of the year to do tax loss harvesting on their investment accounts. However, you can take those losses at any point during the year. You can sell your securities that are at a loss to offset capital gains and up to $3,000 of ordinary income each year. Proper planning with security purchases and sales can make for big savings during tax time.

Three – Retirement Plans

Retirement plan contributions through work are often forgotten or underutilized. Many employers offer some type of match for a retirement plan and that is free money to you! If you are not contributing enough to take full advantage of the employer match, now is a great time to up your contribution. Also, if you are over 50, you can increase the deferral to the max contribution of $24,000. If you were a late starter on making those retirement contributions, you may even want to consider contributing to an IRA in addition to the 401k.

Four – Higher Education

Paying for college seems to be getting more and more difficult. By claiming some of the higher education credits that are available, you can lessen the financial burden. For some higher earners, the credits do have phaseouts. Get a head start on reviewing which credit could apply so you can make sure you don’t miss out.

Five – Estate Plan

Everyone has an estate plan; either the one you create or the one a judge determines for you. Now is the time to make sure you have your financial affairs in order and to maximize gifting strategies among spouses, family members and charitable organizations. Current estate and gift tax exemptions for 2017 are $5.49 million per taxpayer or $10.98 million per couple.

These are just five simple moves to make at this point to help reduce taxes and make sure you take advantage of a range of financial incentives. Don’t wait though, soon it will be too late, so schedule a 3Q tax review now.

5 Things to know about the 2017 Tax Season

2017 tax season is upon us. Monday, January 23, 2017 The IRS will begin accepting electronic tax returns that day, with more than 153 million individual tax returns expected to be filed in 2017. The IRS again expects more than four out of five tax returns will be prepared

electronically using tax return preparation software. So that you’re ready for the season, here are five things that you should be aware of:

Start early
While there’s time until your taxes are due, it’s best to get a jump on things. With new rules, credits on refund delays and the sheer volume of returns, IRS Commissioner, John Kosikman, is advising; “For this tax season, it’s more important than ever for taxpayers to plan ahead,…IRS employees and the entire tax community will be working hard to make this a smooth filing season for taxpayers.”

Gathering all of your tax information and having it in-hand for preparation by your qualified tax professional will ensure smooth and timely processing. Using a tax organizer, like this one, will help to ensure that you’ve gathered everything you need.

This year’s deadline
The filing deadline to submit 2016 tax returns is Tuesday, April 18, 2017, rather than the traditional April 15 date. In 2017, April 15 falls on a Saturday, and this would usually move the filing deadline to the following Monday — April 17. However, Emancipation Day — a legal holiday in the District of Columbia — will be observed on that Monday, which pushes the nation’s filing deadline to Tuesday, April 18, 2017. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.

Some refunds will be delayed
Beginning in 2017, a new law requires the IRS to hold refunds on tax returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit until mid-February. Under the change required by Congress in the Protecting Americans from Tax Hikes (PATH) Act, the IRS must hold the entire refund — even the portion not associated with the EITC and ACTC — until at least Feb. 15. This change helps ensure that taxpayers get the refund they are owed by giving the IRS more time to help detect and prevent fraud.

Track your refund
The IRS anticipates issuing more than 9 out of 10 taxpayer refunds in less than 21 days. Where’s My Refund? ‎on and the IRS2Go phone app will be updated with projected deposit dates for early EITC and ACTC refund filers a few days after Feb. 15. Taxpayers will not see a refund date on Where’s My Refund? ‎or through their software packages until then. The IRS, tax preparers and tax software will not have additional information on refund dates, so Where’s My Refund? remains the best way to check the status of a refund.

E-file for speedy refunds
Eight out of 10 taxpayers will receive their tax refunds by using direct deposit rather than requesting a paper check. According to the IRS, e-filing your return together with direct deposit is the fastest way to receive your refund.

Only use qualified tax professionals
A trusted tax professional can provide helpful information and advice about the ever-changing tax code. The IRS urges taxpayers to avoid fly-by-night preparers who may not be available after this year’s April 18 due date or base fees on a percentage of the refund. By law, all paid tax preparers must have a Preparer Tax Identification Number or PTIN. Paid preparers must sign the return and include their PTIN. The IRS offers tips to help taxpayers choose a tax return preparer wisely.

Remember though, no matter who prepares it, by signing your return, you become legally responsible for the accuracy of all information included. So, be sure to double-check everything.

Be Careful When Deducting Expenses Your Employer Doesn’t Cover

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.Before you rush to deduct those new golf clubs that you use when entertaining clients, be sure that you’re not setting yourself up as audit bait.

Know the rules
In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. Keep in mind though that the IRS is fairly explicit on record keeping for the purpose of substantiating expenses. On form 2106-EZ, which is used to claim expenses that are not reimbursed by your employer, the agency states: “You can’t deduct expenses for travel (including meals, unless you used the standard meal allowance), entertainment, gifts, or use of a car or other listed property, unless you keep records to prove the time, place, business purpose, business relationship (for entertainment and gifts), and amounts of these expenses. Generally, you must also have receipts for all lodging expenses (regardless of the amount) and any other expense of $75 or more.” Examples of qualifying expenses include:

  • Travel, transportation, meal, or entertainment expenses

  • Safety equipment, small tools, or supplies

  • Uniforms required by your employer that are not suitable for everyday wear

  • Required protective clothing

  • Dues to professional organizations

  • Subscriptions to professional journals

  • Certain job hunting expenses

  • Certain expenses for the business use of your home

  • Computer costs

  • Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. As always, if you’re uncertain about a deduction, be sure to and keep you deducting safely.

Understanding Incentives For Investment In Small Business

The Internal Revenue Code contains several provisions that encourage investment in small businesses. One option is to purchase “small business stock”. While certain rules must be followed, investors in qualified small business stock (QSBS), may be eligible for generous exclusions from federal tax on capital gains within certain parameters.

This tax benefit began when Congress passed the Creating Small Business Jobs Act of 2010 to encourage individual taxpayers to investment in startup corporations. Although initially intended as a tax incentive for stock issued during a limited period, Congress expanded those time frames more than once. Then on December 15, 2015, President Obama signed into law the Protecting Americans From Tax Hikes Act of 2015, making the incentive for investment in QSBS a permanent tax benefit.

Before getting into the details, let’s first review the basics. A “qualified small business” is a domestic C corporation, the gross assets of which at all times on or after August 10, 1993 through the issuance of the stock in question do not exceed $50 million (without regard to liabilities) and must be an active business – meaning that at least 80% of the business’ revenue is derived in the pursuit of one or more qualified trades or businesses.

A capital gain or loss may occur when stock is sold or exchanged. If the selling price is greater than the purchase price, the transaction results in a gain. If the selling price is lower than the purchase price, a loss occurs. Most investors that have bought and sold stock, likely understand this.

The sale of stock at a loss usually generates a capital loss, which can only be deducted in any particular year to the extent of capital gains, plus $3,000 ($1,500). Fortunately, Congress recognizes that investors in small corporations often run more of a risk of loss. As a result, the Internal Revenue Code permits an individual to deduct, as an ordinary loss, a loss from sale or exchange, or from worthlessness, of “small business stock” Unlike a capital loss, an ordinary loss may fully offset wage income, dividends, or similar “ordinary” income.

Special provisions within the Tax Code not only protect investors from the downside of QSBS investment; the Tax Code also provides favorable treatment on the upside for gains from investing in small business stock. In fact, a portion of your gain—or in some cases all of your gain—can be excluded from federal tax. There are limits to the gains that can be recognized at the 0% rate and there is certain requirements that need to be met like holding the stock for a minimum of 5 years, but your qualified tax professional can help you with that.

So, what’s the catch? The QSBS exclusion does not necessarily apply to state-level taxes. In New York, for example, the exclusion on a state level mirrors that of the U.S. government. However, here in California QSBS in not recognized in accounting of state level taxes.

Beyond state level restrictions, investment in qualified small business stock can be risky with significantly more than 50% of businesses failing. Additionally, returns are usually only recognized if the company is sold or goes public and the time horizon for those occurrences is often five, seven or even 10 years.

There are all sorts of good reasons to invest in small businesses. Be sure, however, to understand if those benefits are right for your tax situation and will ultimately benefit you.

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