Saturday, December 13, 2014
Friday, December 12, 2014
Year-end planning: Tax factors in buying a car for personal use
Car sales are up as a result of plummeting gasoline prices and
year-end incentives offered by dealers and manufacturers. The substantial
uptick in hiring also no doubt has helped to increase sales. Even so, some
prospective purchasers, especially those in states without an income tax, may
have held off on buying because of uncertainty over the availability of the
optional itemized deduction for sales tax. It now appears that the deduction is
going to be restored retroactively to the beginning of 2014. The House has
already passed an extenders bill that would do just that, the Senate is
expected to follow suit, and the president is expected to sign the final
legislation. Thus, those holding off on a car purchase can now be reasonably
assured of the availability of an optional sales tax deduction this year. This Alert looks at federal income tax considerations
an individual should consider in deciding whether to purchase a car for
personal use before year-end or in early next year.
Standard deduction or itemized deduction. For 2014, the basic standard deduction
amounts under Code Sec. 63(c) generally are $12,400 for joint filers and
surviving spouses, $6,200 for married persons filing separately, $6,200 for
single persons and $9,100 for unmarried heads of household. For 2015, these
amounts are $12,600, $6,300, $6,300, and $9,250, respectively. The standard
deduction is available where itemized deductions are less than the standard
deduction amounts.
Optional sales tax deduction. For tax years beginning before 2015
(assuming the House-passed 1-year extender bill passes the Senate and is signed
into law by the President), taxpayers may elect to take state and local general
sales and use taxes as an itemized deduction, instead of deducting state and
local income taxes. (Code Sec. 164(b)(5))
Taxpayers who make this election may either (a) deduct their actual sales and
use taxes, or (b) use IRS-published tables and then add to the amount from
those tables the actual amount of their sales tax for certain “big-ticket”
items—motor vehicles, boats, aircraft, homes (including mobile and
prefabricated homes), and home building materials. (Code Sec. 164(b)(5))
IRS has published tables based on the average consumption by taxpayers, on a
state-by-state basis, of items other than motor vehicles, boats, etc., taking
into account total available income, number of exemptions claimed, and the rate
of state general sales taxation.
Planning considerations in purchasing a car this year or early
next year. Assuming
sales incentives are the same for a purchase this year or early next year,
should a taxpayer who is planning to buy a new automobile in the near future
buy it before year-end or wait until next year? For those who itemize
deductions and deduct state income taxes, it doesn't matter whether they
purchase this year or next year. A purchase this year may be preferred for
non-tax reasons, such as greater number of cars to choose from. Also, while we
assumed that sales incentives are the same for either year, a prospective buyer
could conceivably extract a better deal for a purchase this year from a dealer
who wants to push up his profit for the current year.
What about an individual who is
deducting income taxes this year but would deduct sales tax next year because, for
example, he is retiring to a state that does not impose an income tax? While
there is uncertainty about the availability of the optional sales tax deduction
in 2015 (remember the legislation under consideration now would only revive the
deduction for 2014), it seems probable that the deduction will end up being
extended or made permanent by the next Congress. There may be less certainty
over whether the president would sign such a measure given that the current
Congress was considering a 2-year extender package with some extenders being
made permanent, including the optional sales tax deduction, before the
president scuttled it with his veto threat. However, it seems reasonable to
assume that the optional sales tax deduction will be extended through 2015.
Under that assumption, one who is shifting from deducting income taxes this
year to deducting sales taxes next year should hold off on the purchase until
next year unless he can gain a price break that would be worth more than the
anticipated savings from the deduction next year.
What about an individual who
lives in a non-income tax state this year and will remain there next year and
who generally does not itemize but conceivably could with the sales tax
deduction?
The situation would be
different if in either year the car purchase wouldn't cause her potential
itemized deduction to exceed her standard deduction. This could happen where a
taxpayer goes from renting a home to buying one and thus paying real estate
taxes that could be deducted or vice versa. In such case, the purchase should
be made in the year in which the sales tax would put the taxpayer in a position
to itemize.
Most itemizing taxpayers who
live in states that have both income and sales taxes will deduct income taxes.
But that is not always the case. For example, a retiree may owe no state income
tax because his pension and social security benefits are exempt from state tax
and he has little other income. At the same time, he may itemize federal
deductions because he pays real estate taxes, has deductible medical expenses,
pays mortgage interest, and makes charitable contributions. Such a taxpayer
will choose to deduct sales tax and could benefit from making a contemplated
car purchase this year rather than next year. The benefit would be, as in the
case of Clara, from the example above, realizing the tax savings even sooner.
Please
give us a call if you have any questions. We would be pleased to assist you in
applying the tax rules for treating computer software costs in the way that is
most advantageous for you.
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763)
269-5396
Wednesday, December 10, 2014
Time to Act to Avoid Surprises at Tax-Time
Virtual CFO Services-Even
though only a few days remain in 2014, you still have time to act so you
aren’t surprised at tax-time next year. You should take steps now to avoid
owing more taxes or getting a larger refund than you expect. Here are some actions you can take to bring
the taxes you pay in advance closer to what you’ll owe when you file your tax
return:
Adjust your withholding. If you’re an employee and you think that your
tax withholding will fall short of your total 2014 tax liability, you may be
able to avoid an unexpected tax bill by increasing your withholding. If you are
having too much tax withheld, you may get a larger refund than you expect. In
either case, you can complete a new Form W-4, Employee's Withholding Allowance
Certificate and give it to your employer. Enter the added amount you want
withheld from each paycheck until the end of the year on Line 6 of the W-4
form. You usually can have less tax withheld by increasing your withholding
allowances on line 5. Use the IRS Withholding Calculator tool on IRS.gov to
help you fill out the form.
Report changes in circumstances. If you purchase health insurance coverage
through the Health Insurance Marketplace, you may receive advance payments of
the premium tax credit in 2014. It is important that you report changes in
circumstances to your Marketplace so you get the proper type and amount of
premium assistance. Some of the changes that you should report include changes
in your income, employment, or family size. Advance credit payments help you
pay for the insurance you buy through the Marketplace. Reporting changes will
help you avoid getting too much or too little premium assistance in advance.
Change taxes with life events. You may need to change the taxes you pay when
certain life events take place. A change in your marital status or the birth of
a child can change the amount of taxes you owe. When they happen you can submit
a new Form W–4 at work or change your estimated tax payment.
Be accurate on your W-4. When you start a new job you fill out a Form
W-4. It’s important for you to accurately complete the form. For example,
special rules apply if you work two jobs or you claim tax credits on your tax
return. Your employer will use the form to figure the amount of federal income
tax to withhold from your pay.
Pay estimated tax if required. If you get income that’s not subject to
withholding you may need to pay estimated tax. This may include income such as
self-employment, interest, or rent. If you expect to owe a thousand dollars or
more in tax, and meet other conditions, you may need to pay this tax. You
normally pay the tax four times a year. Use Form 1040-ES, Estimated Tax for
Individuals, to figure and pay the tax.
If
you found this Tax Tip helpful, please share it through your social media
platforms. We're here to help! For no obligation free consultation contact us
today!
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
New Standard Mileage Rates Now Available; Business Rate to Rise in 2015
New 2015 Standard Mileage Rates; Business Rate to Rise in 2015
Tax Services - The
Internal Revenue Service today issued the 2015 optional standard mileage rates
used to calculate the deductible costs of operating an automobile for business,
charitable, medical or moving purposes.
Beginning on Jan. 1, 2015, the standard mileage rates for the
use of a car, van, pickup or panel truck will be:
- 57.5 cents per mile for business miles driven, up from 56 cents in 2014
- 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
- 14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study
of the fixed and variable costs of operating an automobile, including
depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for
medical and moving purposes is based on the variable costs, such as gas and
oil. The charitable rate is set by law.
Taxpayers always have the option of claiming deductions based on
the actual costs of using a vehicle rather than the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a
vehicle after claiming accelerated depreciation, including the Section 179
expense deduction, on that vehicle. Likewise, the standard rate is not
available to fleet owners (more than four vehicles used simultaneously).
Details on these and other special rules are in Revenue Procedure 2010-51, the
instructions to Form 1040 and various online IRS publications including
Publication 17, Your Federal Income Tax.
Besides the standard mileage rates, Notice 2014-79, posted today
on IRS.gov, also includes the basis reduction amounts for those choosing the
business standard mileage rate, as well as the maximum standard automobile
cost that may be used in computing an
allowance under a fixed and variable
rate plan.
We're
here to help! For no obligation free consultation contact us today!
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763)
269-5396
Tax Audits
IRS Audit
Representation - IRS will audit
hundreds of thousands of individual tax returns this year. Although that
represents but a small percentage of all returns filed, this is little
consolation if your return is among those selected for audit. But with proper
preparation and planning, you should fare well.
The purpose of the audit is to verify items
reported on a tax return. The easiest way to survive a tax audit is to prepare
for one in advance. On an ongoing basis you should systematically maintain
documentation—invoices, bills, cancelled checks, receipts or other proof—for
all items to be reported on your tax return. Keep all your records in one place
and hold on to your calculations.
The government normally has three years within
which to conduct an audit, and often the audit won't begin until a year or more
after you file your return. So don't trust your memory. Leave a good trail. If
you have to go back to your records later, you should be able to backtrack all
of the entries on your return.
The scope of an audit depends on the
complexity of the return being examined. A return reflecting business or real
estate income and expenses is likely to take longer to audit than a return
reflecting only salary income. You can facilitate matters by having the
necessary records arranged in an orderly and systematic fashion for
presentation to the IRS agent. The typical IRS agent is experienced and knows
his job. Trying to outsmart the agent or sidestepping questions is likely to
create friction and raise suspicions in the agent's mind.
AB Tax Accounting Representation. Even if you
prepared your own return, it is often advisable to have a tax professional
represent you at an audit. Your representative knows what issues the IRS agent
is likely to focus on and can prepare accordingly. More importantly, a tax
professional knows that in many instances IRS agents will take a position (for
example, to disallow deduction of a certain type of expense) even though courts
and other authority have expressed a contrary opinion on the issue. Because the
representative knows and can point to the proper authority, the IRS agent may
be forced to throw in the towel.
If you are facing a tax audit or simply want
to improve your recordkeeping, AB Tax Accounting office stands ready to assist
you. Please call to set up an appointment to discuss this or any other aspect
of your taxes.
We're
here to help! For no obligation free consultation contact us today!
(651)
621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
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