Accountants: Tax Planning and Financial Solutions

for Businesses and Individuals


We are accountants and we do much more that just taxes! At Pappalardo & Merrill, our mission is to provide unparalleled CPA (Certified Public Accountant) service and expertise to both our business and individual clients. We achieve this by employing the most knowledgeable accounting,  tax planning and preparation, business valuation, strategic business consulting, Quick Books and service oriented professionals, providing you with tax planning preparation, consulting, accounting services, tax return preparation,compilation review, bookkeeping and other accounting services.

Accountant Services in NH and MA – We are Your Local Solution

It is important that you have the skilled and talented resources, and we offer them every opportunity to learn and grow in their positions. By supporting the career growth of our employees, we provide continually expanding service and value to our clients.

New Hampshire and Massachusetts Accounting Firm

As your local New Hampshire or Massachusetts tax accountant consultant, we pride ourselves in giving a wide range of services available to our NH or MA businesses and individuals. As a CPA firm and business consultant, we will provide you with advice to grow your business, reduce your taxes and deal with any IRS problems such as IRS audit resolutions. We offer Quickbooks training and payroll and bookkeeping services too.

For our individual clients, as tax consultants, our tax planning and yearly preparation guidance will assist you in reducing your taxes when you are required to file your federal or state tax forms. We send out yearly reminders, tax policy updates and forms to help you plan and prepare for our tax return service every year.

 Individual 2015 Tax Updates to Lower Your Tax Bill – Click Here

 Business 2015 Tax and Industry Updates – Click Here

Contact us today for a FREE Consultation… 603-382-8867

We are Your CPA Firm Business and Individual Tax Consultant!

[expand title=”trigger text”]

<a id=”href2″ target=”_blank” href=”http://www.2findlocal.com/b/11676375″><img class=”anchorImage” alt=”pappalardo &amp; merrill pc”src=”http://www.2findlocal.com/Set/Images/2.png”></a>&nbsp;&nbsp;<a id=”href3″ target=”_blank” href=”http://go.favecentral.com/11676375″><imgclass=”anchorImage” alt=”pappalardo &amp; merrill pc” src=”http://www.favecentral.com/Set/Images/fc.png”></a>[/expand]

Dollars and Sense

2017 Tax Law Changes
Planning out your 2017 tax strategy is essential to your financial health... Read More..>>


Affordable Care Act Planning
Are Your Tax Strategies Consistent with the Mandates of the Affordable Care Act? click here..>>


Estate Planning with Trusts
What you need to know to setup a Revocable Trust Read more ..>>

2016 Tax Organizer

2016 Tax Organizer - Pappalardo Merrill PC Hampstead NH
Click The Image To Download


Sign Up for Our Newsletter

Stay up to date with the latest tax policies.

E-mail:

Subscribe
Unsubscribe

                                Personal Income Tax Overview for 2015

Dear Clients

Just as the daylight hours are getting shorter, so is the time for fine tuning any last-minute strategies to lower your 2015 tax bill. Often, the correct steps to take will depend on whether you see your income going up or down next year.

For 2015, the top tax rate of 39.6% will apply to incomes over $413,201 (single), $464,851 (married filing jointly and surviving spouse), $232,426 (married filing separately), and $439,000 (heads of households). However, high-income taxpayers are also subject to the 3.8 percent net investment income tax and/or the .9 percent Medicare surtax. If you are subject to one or both of these additional taxes, there are certain actions we should discuss that can mitigate the damage of these additional taxes.

Finally, there is the alternative minimum tax which can creep up on taxpayers with a multitude of deductions; but there are also strategies available to deal with this if they make sense in the context of your situation.

Thus, it's important that we meet before the end of the year to nail down any actions that may be appropriate with respect to your 2015 tax return. The following are some ideas that you may want to consider before our meeting.

Many Tax Breaks Made Permanent in Budget Deal

Many taxpayer-favorable provisions were recently made permanent, retroactive for the 2015 tax year, by the budget deal signed into law by the President on December 18. Other popular provisions have been temporarily extended.

The law permanently extends the following tax breaks, which may impact your total tax for 2015:

(1) The Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit.

(2) The deduction for expenses of elementary and secondary school teachers.

(3) The exclusion from income for employer-provided mass transit and parking benefits.

(4) The deduction for state and local general sales taxes in lieu of the deduction for state income taxes.

(5) The charitable contribution deduction for contributions of real property (including partial interests in real property) for conservation purposes.

(6) Tax-free distributions from an individual retirement plan for charitable purposes.

The following provisions were extended through 2016:

(1) The exclusion from income of a discharge of qualified principal residence indebtedness (i.e., mortgage debt forgiveness).

(2) The deduction for qualified mortgage insurance premiums.

(3) The above-the-line deduction for up to $4,000 qualified tuition and related expenses for higher education (phased out for income above certain thresholds).

New rules also allow a taxpayer to roll over amounts from an employer-sponsored retirement plan (e.g., 401(k) plan) to a SIMPLE IRA, provided the plan has existed for at least two years. Such rollovers may be made from a traditional IRA, a qualified trust, a qualified annuity, certain tax-sheltered annuities, or a governmental Code Sec. 457 plan.

Retirement Plans Considerations

Fully funding your company 401(k) with pre-tax dollars will reduce current year taxes, as well as increase your retirement nest egg. For 2015, the maximum 401(k) contribution you can make with pre-tax earnings is $18,000. For taxpayers 50 or older, that amount increases to $24,000.

If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2015 is $12,500. That amount increases to $15,500 for taxpayers age 50 or older.

If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. For taxpayers under 50, the maximum contribution amount for 2015 is $5,500. For taxpayers 50 or older but less than age 70 1/2, the maximum contribution amount is $6,500. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA. Qualified withdrawals from a Roth IRA, including earnings, are free of tax, while earnings on a traditional IRA are taxable when withdrawn.

If you already have a traditional IRA, we should evaluate whether it is appropriate to convert it to a Roth IRA this year. You'll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax. And if you have a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, a new rule allows you to generally rollover these after-tax amounts to a Roth IRA with no tax consequences. A rollover of a SIMPLE 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that we should discuss before you take any actions.

Additionally, the Treasury Department has introduced a starter retirement account known as "myRA," into which you may deposit tax refunds. The program allows you to establish a Roth IRA with a Treasury Department designated custodian. You can continue to participate in the program until your account balance reaches $15,000 or until you have participated in the program for 30 years, whichever occurs first. At any time, you can transfer your balance to a commercial financial services provider to take advantage of a broader array of retirement products available in the marketplace.

Finally, self-directed IRAs allow an IRA owner to have more control over the type of investments that will be held in the IRA. However, the large amount of money held in self-directed IRAs makes them attractive targets for fraud promoters. Thus, self-directed IRA can be costly if not

properly managed. In addition, because of the types of investments taxpayers with self-directed IRAs are able to make, taxpayers have a greater risk of running afoul of the prohibited transaction rules. The prohibited transaction rules impose an excise tax on certain transactions - such as sales of property, the lending of money or extension of credit, or the furnishing of goods, services, or facilities - between an IRA and a disqualified person. If you have a self-directed IRA, we need to review the specifics of your arrangement.

Net Investment Income Tax Considerations

A 3.8 percent tax applies to certain net investment income of individuals with income above a threshold amount. The threshold amounts are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities. Thus, while the top tax rate for qualified dividend income is generally 20%, the top rate on such income increases to 23.8% for a taxpayer subject to the net investment income tax.

One way around the increased tax rate on dividend income is to invest instead in tax-exempt state and municipal bonds. The bonds generate tax-exempt income which isn't subject to the net investment income tax and is not included in determining if you meet the threshold amount for being subject to the net investment income tax. Note, however, that such income may be subject to state taxes and the alternative minimum tax. Additionally, if you are selling an appreciated asset and the gain on the sale will throw you over the threshold amount for being subject to the net investment income tax, you might consider selling the asset on an installment basis.

The net investment income tax also applies to income from trades or businesses that are passive activities. An activity is not generally considered passive if the taxpayer materially participates in the activity. If you are engaged in an activity which may be considered passive and thus has the potential to trigger the net investment income tax, we should evaluate the factors for determining material participation to see if they can help you escape this tax.

Finally, since net capital losses can be used against capital gains, you may want to consider getting rid of some of your losing stocks.

Additional Medicare Taxes

An additional Medicare tax of 0.9 percent is imposed on wages and self-employment income in excess of a threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. Employers are required to withhold the extra .9 percent once an individual's wages pass $200,000. No deduction is allowed for the additional tax. However, you may be due a credit if, for example, your status is married filing jointly, one of you had wages over $200,000, but joint wages are less than $250,000. On the flip side, you may owe the additional .9 percent if you and your spouse file jointly and each made under $200,000 of wages but together made over $250,000 in wages.

AMT Considerations

Because many deductions taken for regular tax purposes are not allowed for alternative minimum tax (AMT) purposes, you may be subject to the AMT if you have excessive deductions. Deductions which typically throw taxpayers into an AMT situation include high state and local taxes, interest on home equity loans, a high number of dependent deductions, and a large amount of miscellaneous itemized deductions. For 2015, the AMT rate is 26% on alternative minimum taxable income (AMTI) up to $185,400 ($92,700 for married filing separately) and 28% on AMTI over that amount. However, you are allowed an AMT exemption depending on your filing status; but the exemption is phased out for taxpayer's above a certain income level.

If it looks like you may be subject to the AMT this year, we should discuss what actions can be taken to reduce your exposure. Since the calculation of the AMT begins with adjusted gross income, lowering your adjusted gross income by maximizing contributions to a tax-deferred retirement plan (e.g., 401(k)) or tax-deferred health savings account may be appropriate. Additionally, if you use your home for business, related expenses (e.g., a portion of your property taxes, mortgage interest, etc.) allocable to Schedule C will also reduce your adjusted gross income.

American Opportunity Credit

If you, your spouse, or a dependent incurred qualified education expenses to attend an accredited post secondary institution (e.g., a college or university), you may be eligible for the American Opportunity Credit. The maximum annual credit is $2,500 per eligible student. Expenses which qualify for the credit include tuition and fees required for the enrollment or attendance at an eligible educational institution. For taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint filers), the amount of the credit is phased out. The credit is not available for married taxpayers filing separately.

Obamacare Considerations

Under Obamacare, there is a penalty, known as the "shared responsibility payment," for not having health insurance coverage. You may be liable for this penalty if you didn't have health insurance for two or more months in 2015. However, depending on your income, you may be eligible for an exemption from the penalty. The penalty is 2 percent of your 2015 income or $325 per adult, whichever is higher, and $162.50 per uninsured dependent under 18, up to $975 total per family.

Extension of the Health Coverage Tax Credit

Taxpayers who receive benefits under certain trade adjustment assistance (TAA) programs or benefits from the Pension Benefit Guaranty Corporation (PBGC) generally are allowed a credit for a percent of amounts paid for qualified health insurance coverage. This Health Coverage Tax Credit (HCTC) was set to expire at the end of 2013 but was extended and modified by the Trade Preferences Extension Act of 2015. The HCTC can now be claimed for coverage through 2019.

If you received the type of benefits mentioned in either 2014 or 2015 (or both), we should determine if you were eligible for the credit and make sure that you receive the tax benefit.

Child Tax Credit

The Trade Preferences Extension Act also added a provision which limits the refundable portion of the child tax credit if you elect to exclude foreign earned income from tax. If you have foreign earned income you wish to exclude, we should discuss the impact it may have on any child tax credits you planned to claim.

Other Steps to Consider Before the End of the Year

The following are some of the additional actions we should review before year end to see if they make sense in your situation. The focus should not be entirely on tax savings. These strategies should be adopted only if they make sense in the context of your total financial picture.

Accelerating Income into 2015

Depending on your projected income for 2016, it may make sense to accelerate income into 2015 if you expect 2016 income to be significantly higher. Options for accelerating income include:

(1) harvesting gains from your investment portfolio, but keeping in mind the 3.8 investment income tax;

(2) as previously mentioned, converting a retirement account into a Roth IRA and recognizing the conversion income this year;

(3) taking IRA distributions this year rather than next year;

(4) if you are self-employed with receivables on hand, trying to get clients or customers to pay before year end; and

(6) settling lawsuits or insurance claims that will generate income this year.

Deferring Income into 2016

There are also scenarios (for example, if you think that your income will decrease substantially next year) in which it might make sense to defer income into 2016 or later years. Some options for deferring income include:

(1) if you are due a year-end bonus, asking your employer to pay the bonus in January 2016;

(2) if you are considering selling assets that will generate a gain, postponing the sale until 2016;

(3) delaying the exercise of any stock options you may have;

(4) if you are selling property, considering an installment sale; and

(5) parking investments in deferred annuities.

Deferring Deductions into 2016

If you anticipate a substantial increase in taxable income, we may want to explore pushing deductions into 2016 by looking at the following:

(1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments, until next year; and

(2) postponing the sale of any loss-generating property.

Accelerating Deductions into 2015

If you expect your income to decrease next year, accelerating deductions into the current year can offset the higher income this year. Some options include:

(1) prepaying your property taxes in December;

(2) making your January mortgage payment in December;

(3) if you owe state income taxes, making up any shortfall in December rather than waiting until your return is due;

(4) since medical expenses are deductible only to the extent they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI), bunching large medical bills not covered by insurance into one year to help overcome this threshold;

(5) making any large charitable contributions in 2015, rather than 2016;

(6) selling some or all of your loss stocks; and

(7) if you qualify for a health savings account, consider setting one up and making the maximum contribution allowable.

Life Events

Certain life events can also affect your tax situation. If you've gotten married or divorced, had a birth or death in the family, lost or changed jobs, retired during the year, we need to discuss the tax implications of these events.

Miscellaneous Items

Finally, these are some additional miscellaneous items to consider:

(1) If you have a health flexible spending account with a balance, remember to spend it before year end (unless your employer allows you to go until March 15, 2016, in which case you'll have until then). You may want to check with your employer to see if they give the optional grace period to March 15.

(2) If you own a vacation home that you rented out, we need to look at the number of days it was used for business versus pleasure to see if there is anything we can do to maximize tax savings with respect to that property. For example, if you spent less than 14 days at the home, it may make sense to spend a few more days and have the house qualify as a second residence, with the interest being deductible. For a rental home, rental expenses, including interest, are limited to rental income.

(3) We should also consider if there is any income that can be shifted to a child so that the income is paid at the child's rate.

(4) If you have any foreign assets, there are reporting and filing requirements with respect to those assets. Noncompliance carries stiff penalties.

Please call me at your convenience so we can set up an appointment and estimate your tax liability for the year and determine whether any estimated tax payments may be due before year end.

Sincerely,

Pappalardo & Merrill, PC

Business Tax and Industry Updates for 2015

This year saw numerous tax developments that affect businesses, many of which deserve special scrutiny for year-end planning in an effort to minimize your 2015 tax bill.

As a year-end holiday gift, Congress gave taxpayers the Protecting Americans from Tax Hikes Act of 2015 (PATH), which was passed by Congress and signed by the President on December 18. As part of a broad budget deal, PATH permanently extends many tax provisions that previously had been up for renewal for one or two years at a time and temporarily extends dozens of others for periods ranging from two to five years.

With this legislation in place, we have a narrow window of time to take advantage of higher expensing limits under Code Section 179 and the 50% bonus depreciation for property placed in service before the end of the year.

The following outlines some of the more significant 2015 tax planning opportunities that you may want to consider even at this late date.

Section 179 Deduction Made Permanent

One of the more noteworthy provisions for businesses is the permanent extension of the small business Code Sec. 179 expensing limitation.

For tax years beginning in 2015, you can now expense up to $500,000 of qualified property placed into service by December 31. Had this tax break not been extended, the maximum amount you could expense for 2015 would have been $25,000. Note that the total amount of property that you can place into service before having to reduce your Section 179 deduction is $2,000,000. In addition, both the $500,000 and $2 million limits are indexed for inflation beginning in 2016.

The amounts that may be expensed can include up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. This cap will be eliminated beginning in 2016.

Bonus Depreciation Extended Through 2019

As you know, businesses can recover the cost of capital expenditures over time through depreciation. In 2014, you were entitled to a 50 percent bonus depreciation deduction for assets placed in service that year. PATH extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016, and 2017, and is phased down to 40 percent in 2018, and 30 percent in 2019.

PATH also allows you to elect to accelerate the use of AMT credits in lieu of taking the bonus depreciation.

Retroactive 2014 Bonus Depreciation

The IRS has recently issued guidance on how fiscal year taxpayers can retroactively elect to take the 50-percent bonus depreciation deduction for qualified property placed in service during the 2014 portion of fiscal years beginning in 2013. The guidance, which additionally addresses carrying over disallowed Code Sec. 179 deductions for qualified real property, applies to taxpayers who filed their 2013 returns (or 2014 short year returns) before enactment of last year's tax extenders bill on December 19, 2014. If you are eligible, we should meet to discuss the possibility of electing the retroactive bonus depreciation.

Research Tax Credit Made Permanent

PATH has permanently extended the popular research tax credit, retroactive for 2015. Additionally, beginning in 2016, small businesses may claim the credit against alternative minimum tax (AMT) liability, and this credit can be utilized by certain qualifying startup businesses against the employer's payroll tax liability.

And, it is worth noting that two taxpayer-favorable court cases rejected IRS attempts to rein in taxpayers' ability to take full advantage of this credit. If you've taken research tax credits in the past couple of years, it may be worthwhile to review the calculation of those credits in light of these cases to see if additional expenses can be claimed based on the court holdings.

Vehicle Deductions and Substantiation

Expenses relating to vehicles used in a business can add up to major deductions. The deductible vehicle expenses of a business are generally calculated using one of two methods: the standard mileage rate method or the actual expense method. If the standard mileage rate is used, parking fees and tolls incurred for business purposes can be added to the total amount calculated.

Since the IRS tends to focus on vehicle expenses in an audit and disallow them if they are not property substantiated, you should ensure that the following are part of your tax records with respect to each vehicle used in your business: (1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance); (2) the amount of mileage for each business or investment use and the total miles for the tax period; (3) the date of the expenditure; and (4) the business purpose for the expenditure. The following are considered adequate for substantiating such expenses: (1) records such as an account book, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Records such as an account book, diary, log, statement of expense, or trip sheet are considered adequate to substantiate the element of an expense only if the records are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Permanent Extension of Mass Transit Benefits

PATH has permanently extended, retroactive for 2015, the $175 monthly exclusion from income for employer-provided transit and vanpool benefits. Thus, the exclusion for such benefits is the same as the exclusion for employer-provided parking benefits. While such benefits are not includible in the employee's income on Form W-2, they are deductible by employers as fringe benefits.

S Shareholder Salaries

The IRS is scrutinizing the reporting of salaries of S corporation shareholder-employees. Some S shareholders prefer to take money out of an S corporation as a distribution rather than a salary on which employment taxes must be paid. The IRS has been going after such shareholders. Thus, if you are actively involved in an S corporation, you must be paid a "reasonable compensation" for your services. The key to establishing reasonable compensation is determining what type of work you did for the S corporation as an employee-shareholder. If you are in this situation, we need to document the factors that support the salary you are being paid.

Retirement Plans

While your business is not required to have a retirement plan, you may want to consider adding one. By starting a retirement savings plan, you not only help your employees save for the future but also attract and retain qualified employees. Such plans offer tax savings to your business because employer contributions are deductible from the business's income. Additionally, a tax credit is available to small employers for the costs of starting a retirement plan. Please let me know if this is an option you would like to discuss further.

Changes Made to Tax Return Due Dates

A new law changed the due date for partnership and C corporation tax returns. It also extended the automatic extension for corporate income tax returns from three to six months. The changes generally apply to tax years beginning after 2015.

The due date for partnership returns has been moved up to coincide with the due date of S corporation returns. Thus, partnership returns are now due by the 15th day of the third month after the close of the partnership tax year. The change is meant to help individual partner's avoid having to file an extension because partnership K-1s don't generally arrive until after the April 15 due date for individual tax returns.

The due date for filing a C corporation return has been changed from the 15th day of the third month (i.e., March 15 for a calendar year corporation) to the 15th day of the fourth month (i.e., April 15 for a calendar year corporation). However, there is an exception for C corporations with a June 30 fiscal year. The due date for filing a June 30 C corporation return remains the 15th day of the third month following the end of the year (i.e., September 15) for the next 10 years. All other changes are effective for tax years beginning after 2015.

Overstating Basis of Property Sold Can Extend Statute of Limitations

The same new law overrides a Supreme Court decision that was favorable to taxpayers. The new law extends the statute of limitations from three years to six years in cases where a taxpayer overstates the basis in property sold and thus understates the gain on the sale. The change applies to (1) returns filed after July 31, 2015, and (2) returns filed on or before July 31 if the statute of limitations (determined without regard to the change) for assessment of the taxes with respect to which such return relates has not expired as of such date.

Contracts Involving Regular Performance of Services

A new safe harbor is available for accrual method taxpayers who have contracts under which services are provided to them on a regular basis (for example, contracts for janitorial or I.T. services). Under the safe harbor, a taxpayer can potentially accelerate deductions related to the cost of such services in situations where the services are either recurring in nature or are expected to be performed within 3 1/2 months of the end of the tax year.

If you have contracts with service providers who perform regular and routine services that might qualify for the safe harbor, we should discuss the possibility of making an accounting method change in order to take advantage of the accelerated write-offs.

Additional Tax Breaks Extended by the Protecting Americans from Tax Hikes Act of 2015

In addition to major changes, such as making permanent the increased Section 179 expensing amounts (discussed earlier), the Protecting Americans from Tax Hikes Act of 2015 also extended numerous other tax breaks, including the following:

(1) The work opportunity tax credit is extended through 2019.

(2) The new markets tax credit is extended through 2019.

(3) Accelerated depreciation for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property is permanently extended.

(4) The classification, for depreciation purposes, of certain race horses as three-year property is extended through 2016.

(5) The classification, for depreciation purposes, of motorsports entertainment complexes as seven-year property is extended through 2016.

(6) The expensing allowance for certain film and television productions and the cost of live theatrical productions is available through 2016.

(7) The tax rule exempting dividends, interest, rents, and royalties received or accrued from certain controlled foreign corporations by a related entity from treatment as foreign holding company income is extended through 2019.

(8) The employer wage credit for employees called to active military duty is permanently extended and, beginning in 2016, will apply to employers of any size.

(9) The 100 percent exclusion from gross income of gain from the sale of small business stock is permanently extended.

(10) The deduction allowable with respect to income attributable to domestic production activities in Puerto Rico is extended through 2016.

(11) Empowerment zone tax incentives have been extended through 2016.

Please call me at your convenience so we can set up an appointment and discuss your business's tax situation before year end.

Sincerely,

Pappalardo & Merrill