You May Be Able to Sell Profitable Stocks Without Paying Any Tax

Taxpayers whose top marginal tax bracket is lower than 25% enjoy a long-term capital gain tax rate of zero. Yes, you read correctly: the tax on any long-term capital gains for taxpayers within the 10% or 15% tax bracket is zero! This can provide you with the opportunity to sell some of your winner stocks and pay no tax on the resulting gain. Long-term capital gains apply to stocks and other capital assets you have owned for a year and a day or longer.

Even if you want to hold on to the stock because it is performing well, you can sell it and immediately buy it back, allowing you to include the current accumulated gain in this year’s return with no tax while also reducing the amount of taxable gain in the future. If you are concerned about the so-called wash sale rules that require a taxpayer to wait 60 days before buying back stock, don’t be—the wash sale rules only apply to stocks sold at a loss.

To see if you can take advantage of this tax-saving strategy, you must determine if your taxable income without the potential sale is below the 25% tax bracket. The following table shows the point at which income becomes taxable at 25% for different filing statuses in 2017.

25% Tax Bracket Threshold for 2017
Filing Status
Single
Head of Household
Marrried Filing Jointly
Married Filing Separately
Taxable Income $37,950
$50,800
$75,900
$37,950
Example: Suppose you are filing married joint and your taxable income for the year is projected to be $50,000. From the table above, we find that the 25% tax bracket threshold for you is $75,900. This means you could add $25,900 ($75,900 − $50,000) in long-term capital gains to your income and pay zero tax on the capital gains.

Of course, this strategy must be worked out based upon your projected taxable income for the year, and your actual income could be more or less than the estimated amount, meaning that some of the gain may end up getting taxed if your income is greater than projected. Or if you overestimated your income, you will not have taken advantage of as much tax-free long-term capital gains as you might have been able to.

In addition, if you have any loser stocks, you can sell them for a loss, allowing you to bring in that much more zero-taxed long-term capital gains.

There are also somewhat rare situations where the increase in your adjusted gross income as a result of the added long-term capital gains could have unanticipated adverse effects on your taxes that could reduce the overall benefit of this strategy.

If you would like to take advantage of this strategy and need assistance in projecting your 2017 taxable income, checking for adverse effects of the strategy, and determining the approximate amount of long-term capital gains you can assimilate with zero tax, please give this office a call.

Ignoring Those IRS Notices Only Makes It Worse

Remember those 1099s, W-2s, K-1s and other informational forms you receive each year reporting your interest, dividends, sales, wages, retirement income, IRA withdrawals, health insurance forms and other items having to do with your tax return? Well, the IRS also gets this information and feeds it into its computers. Thanks to modern computer technology, the IRS is able to match that information to what you reported on your tax return, and if something significant is omitted or there’s a discrepancy with the numbers, the IRS is going to send you a letter asking for an explanation or a tax payment. You will also receive correspondence if you don’t file a return and the data the IRS has indicates that you should have filed. It has form letters for just about every possible situation.

Most frequently, these notices will include a proposed tax due, plus interest and/or penalties, along with an explanation of the examination process and how you can respond. However, the letters must, by law, advise you of your rights and other information. Thus, these letters can become overly lengthy and are sometimes difficult to understand. That is why it is important to have a trained eye review them before you take any action.

Do not procrastinate or throw the letter in a drawer hoping the issue will go away. After a certain period of time, another letter will automatically be produced. And, as you might expect, each succeeding letter will become more aggressive and more difficult to deal with, and it may reach the point where you might have to go to tax court to argue your case or pay whatever amount of money the IRS is demanding.

Most importantly, don’t automatically pay an amount the IRS is requesting unless you are positive it is correct. Quite often, you really do not owe the amount being billed, and it will be difficult and time consuming to get your payment back.

It is always good practice to have a tax professional review the correspondence and respond to the IRS in a timely manner. Also, note that these “love letters” from the IRS will come by regular mail, not email. If you receive an email from someone claiming to be from the IRS and demanding a tax payment, this communication will be a fraud, since the IRS does not use email for this purpose. Please call this office immediately in regards to any notice you receive about your tax returns.

Education Tax Credit Nuances — Don’t Leave Money on the Table

There are actually two higher-education tax credits. The American Opportunity Tax Credit (AOTC) provides up to $2,500 worth of credit for each student, 40% of which is refundable. The credit is equal to 100% of the first $2,000 of college tuition and qualified expenses and 25% of the next $2,000. The AOTC only applies to the first 4 years of post-secondary education.

The other credit is the Lifetime Learning Credit (LLC), which only provides a maximum $2,000 of credit (20% of up to $10,000 of eligible expenses) per family. None of it is refundable, meaning it can only be used to offset the taxpayer’s tax liability, and any additional credit amount is lost.

When it comes to these credits, it is easy to leave money on the table. Here are the reasons why:

  1. Many students attend local colleges for the first two years and then transfer to a university for the remainder of their education. Knowing the university tuition will be higher, some parents take the LLC and wait on the AOTC, thinking they can use it in years with higher tuition and get a larger credit. What they don’t realize is that the AOTC credit is only good for the first four years of post-secondary education. Thus, it is always better to claim the AOTC in the first four years.
  2. Parents don’t realize what constitutes a year of post-secondary education. Most students start college in the autumn after their May or June graduation from high school. Thus, for them, the first four years of post-secondary education actually span parts of five calendar years, and as a result, the student will qualify for the AOTC in five calendar years. With careful planning, students can qualify for the full $2,500 of the refundable credit in all five calendar years.
  3. A special rule allows the tuition for an academic period that begins in the first three months of the next year to be paid in advance and thus increase the amount of tuition qualifying for the credit in the year the tuition is paid. This allows for planning when to make tuition payments to maximize credits, especially in the first partial calendar year.
    Example: Cameron just graduated from high school and will be beginning college in September. Her tuition and credit-qualifying expenses for the semester covering the last four months of the year and January of the next year are $1,500. Her mother, Tricia, is aware of the 3-month rule, and in December she prepays Cameron’s $1,500 tuition for the semester beginning February 1 of the next year, bringing the qualifying expenses to a total of $3,000. The AOTC is equal to 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Thus the AOTC for Cameron is $2,250 ($2,000 + 25% of $1,000). Tricia could increase the credit for the year to the full $2,500 maximum by purchasing $1,000 worth of course materials needed for “meaningful attendance or enrollment” in Cameron’s course of study.
  4. Qualifying expenses other than tuition are often overlooked, especially in light of a recent tax regulation change that specifies for the AOTC that qualifying expenses include course materials needed for “meaningful attendance or enrollment” whether purchased from the school or an outside vendor. Previously, only course material purchased from the school qualified (and this is still the rule for the Lifetime Learning Credit). This is a significant change and opens up the possibilities of including expenses not previously allowed.
  5. Taxpayers also often overlook another very important fact: Whoever claims the tax exemption for the student gets to claim the education credit even if someone else paid for the tuition and qualified expenses.
    Example: Suppose Cameron’s Uncle Lee pays her tuition but Tricia, her mother, claims Cameron on her tax return. Tricia is the one who qualifies for and receives the credit.
  6. What many also overlook is the fact that the AOTC is phased out for higher-income taxpayers based on their adjusted gross income (AGI). It phases out for AGIs between $160,000 and $180,000 for married taxpayers filing jointly, and between $80,000 and $90,000 for others. The LLC phases out a little quicker than the AOTC: between $112,000 and $132,000 for joint filers and between $56,000 and $66,000 for others. As an exception, married taxpayers filing separately aren’t eligible to claim either credit. (Note: the LLC phaseout ranges are adjusted for inflation annually, and the one quoted is for 2017.)
    Thus, in cases when the parent claiming the student has an AGI above the phaseout range, regardless of who paid the tuition and qualified expanses, no one will be able to claim the credit. So it is important to consider the income of the individual who is claiming the student when there is an option of who claims the child, such as in cases of divorced parents.
  7. Because of gift tax issues, a person other than the one qualifying for the credit, such as a grandparent, may hesitate to volunteer to pay a tuition expense. Where payments are made directly to the educational institution, they are excluded from gift tax rules. However, depending on the amounts involved, there may be a gift tax reporting requirement if a monetary gift is given to the student or the individual who is claiming the credit and then the gift money is used to pay tuition.
  8. A question often arises as to whether tuition payments to a trade school or foreign university will count toward the education credit. To qualify for the credit, the tuition must be paid to any accredited public, nonprofit or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education. This would rule out foreign educational institutions because they don’t qualify for the student aid program administered by the Department of Education, but it would generally include most accredited public nonprofit or privately owned, profit-making post-secondary educational institutions in the U.S.

As you can see, there are several nuances associated with the education credits that must be considered. Please call this office if you need assistance with education planning or the application of the education tax credits to your particular circumstances.

Following Congress on its Path to Tax Reform

As Congress begins debating tax reform, you might be interested in an overview of the GOP’s proposed changes so you’ll have an understanding of what the proposals actually entail as you follow the debate and won’t have to rely on politically motivated analysis by the various media sources. It is important to understand that the GOP’s tax reform proposal is actually only an overall framework of the tax legislation that will be formulated later by congressional committees. So it only provides the “big picture,” with details to be added later. However, the devil is always in the details, and you frequently have to read between the lines and listen to and read comments by Washington insiders to glean additional detail. Based upon that, the following are the provisions of the proposed tax reform that will apply to individual taxpayers and small businesses.

Filing Status
Current Law: The current law includes five filing statuses: single (unmarried), married taxpayers filing jointly (MFJ), head of household, married filing separately (MFS) and surviving spouse. The head of household (HH) status is for single individuals and some married but separated individuals who are maintaining a home for a dependent. MFS is a filing status that applies to a married individual who is not filing a joint return with their spouse (it keeps married individuals from filing as single and abusing the intent of the tax laws). Surviving spouse is a status that allows a widow or widower with a dependent child to continue to use the joint tax rates for 2 years after the year of death of their spouse.

Proposed Law: It appears that the proposal would retain only the single and married taxpayers filing jointly statuses in an effort to simplify the tax law. If this is the actual intent, it would greatly streamline the tax code, which is littered with special treatment for HH and MFS taxpayers. Potential losers under this proposal are HH filers, who currently enjoy a standard deduction that is higher than that of a single filer as well as lower tax rates.

Personal Exemptions
Current Law: A deduction from adjusted gross income (AGI), called an exemption allowance, is permitted for the filer of the return, his or her spouse if filing jointly, and each dependent claimed on the return. For 2017, each exemption allowance is $4,050. So, for example, a married couple filing jointly with two dependent children would be entitled to an exemption allowance of $16,200. However, the exemption deduction phases out for higher-income taxpayers.

Proposed Law: Personal exemptions would be eliminated, but child and other dependent credits might take their place, as described later in this article.

Standard Deduction
Current Law: The standard deduction is for taxpayers without enough deductions to file a Schedule A and itemize their deductions. Currently a standard deduction is set for each filing status and is adjusted for inflation each year. For 2017, the standard deduction is $6,350 for single and married separate, $9,350 for head of household, and $12,700 for married joint and surviving spouse. There are also add-on amounts for each filer and spouse who is age 65 or over, plus an additional amount for blindness.

Proposed Law: The GOP’s framework would replace both the current standard deduction and the personal exemptions with new higher standard deductions. In addition, the proposal would do away with the additional standard deductions for the seniors and people with visual impairments.

When the proposed higher standard deductions were first announced some months ago, those using the standard deduction were excited to think their standard deductions would be roughly doubled. But now that we have a few more details, we find that personal exemptions would no longer be allowed, which changes the outcome significantly. The table below compares the current standard deduction and exemptions for different filing statuses and number of exemptions to the proposed standard deduction replacement.

As you can see, the proposed change favors the smaller family size, but this is supposed to be compensated for with a larger and partially refundable child tax credit that is discussed below.

Itemized Deductions
Current Law: Medical deductions are allowed to the extent that they exceed 10% of the taxpayer’s AGI, tax deductions for state and local (city) income taxes or sales tax, plus real and personal property taxes. Also included is interest paid on qualified first and second home mortgage acquisition and equity debt, provided the acquisition debt doesn’t exceed $1 million and the equity debt isn’t over $100,000. The debt amounts of the first and second homes are combined for this limitation. Other categories of itemized deduction are charitable contributions and miscellaneous itemized deductions.

Proposed Changes: The tax reform would eliminate all deductions except for charitable contributions and those that encourage home ownership, such as home mortgage interest.

There is already pushback from members of Congress whose constituents reside in states that impose an income tax on their residents. Taking away the ability to deduct state and local income tax, referred to as the SALT deduction, would most significantly impact taxpayers living in states that have income taxes, and thus they would be double-taxed on the same income. All but seven states have income tax, with California, New York and New Jersey imposing the highest rates.

Eliminating medical deductions will significantly impact senior citizens who require expensive elder care and taxpayers who incur extraordinary medical expenses.

Casualty, theft and disaster losses are currently included in itemized deductions, and the proposal is silent as to what will become of these all-important deductions. Also unaccounted for is the deduction for gambling losses, the elimination of which will force recreational gamblers to pay tax on all winnings even if they have a net loss.

Individual Tax Rates:
Current Law: There are seven tax rates (10%, 15%, 25%, 28%, 33%, 35% and 39.6%), with the tax progressively increasing as the taxpayer’s taxable income increases. Each tax rate is applied to ever-increasing ranges of taxable income, referred to as tax brackets, with the 2017 top brackets kicking in at $418,400 for single taxpayers and $470,700 for married taxpayers filing jointly.

Proposed Changes: The tax reform would reduce the number of tax rates to three: 12%, 25% and 35%, with possibly a fourth rate for the “highest-income” taxpayers. The proposal is silent as to the ranges of taxable income these rates will apply to, making it impossible to make comparisons between the current law and the proposed changes. However, should the three rates be made into law, the wealthiest taxpayers would enjoy a significant tax cut.

Child Tax Credit (CTC)
Current Law:  Allows a tax credit of $1,000 for each qualifying child dependent under the age of 17. The credit is generally nonrefundable (meaning it can only offset your tax liability and any excess is lost). However, when a taxpayer’s income is low or there are three or more qualifying children, a portion of the credit is refundable. The credit is also phased out for higher-income taxpayers.

Proposed Changes: The reform would increase the amount of the credit by an unspecified amount and make the first $1,000 of the CTC refundable. It would also add a nonrefundable credit of $500 for other dependents of the taxpayer that do not meet the child criteria. This presumably eliminates the current complicated calculation for the refundable portion of the child tax credit. The proposal intends that the income phaseout ranges be adjusted so more taxpayers will be eligible for the credit, but the higher phaseout levels are not specified. These adjustments to the CTC are touted to make up for the loss of personal exemptions, but without knowing the amount of the credit increase and the high-income phaseout ranges, it is impossible to make comparisons between the current and proposed regimes.

Alternative Minimum Tax (AMT)
Current Law: The AMT was originally initiated to keep higher-income taxpayers from benefiting from certain tax provisions. Over the years, inflation has caused the AMT to significantly impact more taxpayers than originally intended. Determining whether the AMT applies and computing the tax adds a layer of complexity to preparing the return.

Proposed Changes: The reform would eliminate the AMT.

Estate Tax
Current Law: The current code imposes a 40% tax on the estate of a decedent whose estate’s value exceeds $5.49 million. The $5.49 million is adjusted down for certain gifts made during the decedent’s lifetime. Beneficiaries of estates receive inheritances at the fair market value of the property inherited as of the decedent’s date of death. Thus beneficiaries who inherit property and then sell it are subject to tax only on the appreciation from the time they inherited the property.

Proposed Changes: The reform would eliminate the estate tax. Unanswered in the proposal is whether a beneficiary will continue to receive inherited property at fair market value or whether the heir will inherit the decedent’s basis in the property. If the latter, then when the beneficiary sells the property the beneficiary will be stuck with paying income tax on the entire appreciation in value from the time the property was acquired by the decedent. Also unanswered is whether the gift tax will continue to apply.

Top Tax Rate for Small Businesses
Current Law: At present, business income from a Schedule C, LLC, Partnership and S-Corporation is passed through to the owner of the business and included on his or her 1040 individual return and taxed at rates ranging rom 10% to 39.6%.

Proposed Changes: As mentioned previously, the proposed changes would reduce the current seven tax rates to three. For pass-through businesses, the proposed changes limit the tax on pass-through small business income to 25%, the middle rate of the three new proposed rates. Unfortunately, the term “small business” is not defined in the proposal. This proposed change would favor successful businesses that would otherwise be subject to the highest proposed tax rates.

Expensing Business Purchases
Current Law: Generally, capital purchases by a business, such as machinery, vehicles, or computer systems, must be depreciated (written off) over their useful lives—usually 3, 5 or 7 years for most purchases by small businesses. A special allowance, usually referred to as bonus depreciation, is available in the first year for certain types of property. There is also a provision that allows expensing up to $510,000 worth of purchases in lieu of depreciating the cost of the property.

Proposed Changes: The reform would allow 100% first-year expensing of capital purchases (other than structures) after September 27, 2017. The full expensing provision would not be permanent, but would be in the tax code for a minimum of five years. A future Congress could decide to extend the provision or make it permanent.

Other issues: Other issues generally not impacting small businesses or individuals include reducing the corporate tax rate to 20% – which is below the 22.5% average of the industrialized world – with the intent to make U.S. businesses more competitive with their foreign rivals. The corporate alternative minimum tax would also be eliminated. The proposed changes would also repeal the domestic production activities deduction and most business tax credits, except the low-income housing and the research and development credits.

The current consensus is that the changes, other than the business expensing, would not be effective until 2018. We hope this provides you with insight into the GOP’s proposed tax reform. But keep in mind that these proposals could, and probably will, change as the proposal works its way through Congress.

QuickBooks Tip: Creating Customer Statements in QuickBooks

Let’s say you have a regular customer who used to pay on time, but he’s been hit-and-miss lately. How do you get him caught up?

Or, one of your customers thinks she’s paid you more than she owes. How do you straighten out this account?

Both of these situations have a similar solution. QuickBooks’ statements provide an overview of every transaction that has occurred between you and individual customers during a specified period of time. They’re easy to create, easy to understand, and can be effective at resolving payment disputes.

A Simple Process
Here’s how they work. Click Statements on the home page, or open the Customers menu and select Create Statements. A window like this will open:

QuickBooks provides multiple options on this screen so you create the statement(s) you need.

First, make sure the Statement Date is correct, so your statement captures the precise set of transactions you want. Next, you have to tell QuickBooks what that set is. Should the statement(s) include transactions only within a specific date range? If so, click the button in front of Statement Period From, and enter that period’s beginning and ending dates by clicking on the calendar graphic. If you’d rather, you can include all open transactions by clicking on the button in front of that option. As you can see in the screenshot above, you can choose to Include only transactions over a specified number of days past due date.

Choosing Customers
Now you have to tell QuickBooks which customers you want to include in this statement run. Your options here are:

  • All Customers. 
  • Multiple Customers. When you click on this choice, QuickBooks displays a Choose button. Click on it, and your customer list opens in a new window. Click on your selections there to create a check mark. Click OK to return to the previous window.
  • One Customer. QuickBooks displays a drop-down menu. Click the arrow on the right side of the box, and choose the correct one from the list that opens.
  • Customers of Type. Again, a drop-down list appears, but this one contains a list of the Customer Types you created to filter your customer list, like Commercial and Residential. You would have assigned one of these to customers when you were entering data in their QuickBooks records (click the Additional Info tab in a record to view).
  • Preferred Send Method. E-mail or Mail?

Miscellaneous Options
At the top of the right column, you can select a different Template if you’d like, or Customize an existing one. Not familiar with the options you have to change the layout and content of forms in QuickBooks? We can introduce you to the possibilities.

Below that, you can opt to Create One Statement either Per Customer or Per Job. The rest of the choices here are pretty self-explanatory – except for Assess Finance Charges. If you’ve never done this, we strongly recommend that you let us work with you on this complex process.

When you’re satisfied with the options you’ve selected in this window, click the Preview button in the lower left corner of the window (not pictured here). QuickBooks will prepare all the statements in the background, then display the first one. You can click Next to view them one by one. At the bottom of each, you’ll see a summary of how much is due in each aging period, like this:

It’s easy to see how much each customer is past due within each aging period. This summary appears at the bottom of statements.
After you’ve checked all the statements, click the Print or E-mail button at the bottom of the window.

Other Avenues
Your company’s cash flow depends on the timely payment of invoices. Sending statements is only one way to encourage your customers to catch up on their past due accounts. There are many others, like opening a merchant account so customers can pay you online with a bank card or electronic check. If poor cash flow is threatening the health of your business, give us a call. We can work together to identify the trouble spots and get you on the road to recovery.

Natural Disaster Charity Volunteer Tax Breaks

If you volunteered your time for a charity in the aftermath of a natural disaster, you probably qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a qualified charity or federal, state or local governmental agency, some deductions are permitted for out-of-pocket costs incurred while performing the services. The following are some examples:

  • Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel costs, taxi fares, and other costs of transportation between the airport or station and hotel, plus 100% of lodging and meals. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel or if your services for a charity do not involve lobbying activities.
  • The cost of entertaining others on behalf of a charity, such as wining and dining a potentially large contributor (but the costs of your own entertainment and meals are not deductible).
  • If you use your car or other vehicle while performing services for a charitable organization, you may deduct your actual unreimbursed expenses that are directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
  • You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

There are some misconceptions as to what constitutes a charitable deduction, and the following are frequently encountered issues:

  • No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles and computers.

Example: Kathy volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Kathy is required to provide a horse. Kathy is not allowed to deduct the cost of purchasing her horse or to depreciate her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.

However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent that its use is related to providing services for a charity. Thus, for example, a taxpayer is allowed to deduct the fuel, maintenance, and repair costs (but not depreciation or the fair rental value) of piloting his or her plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer—such as Kathy in our example, who participated in a mounted posse that is a civilian reserve unit of the county sheriff’s office—could deduct the cost of maintaining a horse (shoeing and stabling).

  • A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he or she retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.

No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization (including a government agency). To verify your contribution:

  • Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
  • You should submit a statement of expenses to the charity if you are paying out of pocket for substantial amounts, preferably with a copy of the receipts. Then, arrange for the charity to acknowledge the amount of the contribution in writing.
  • Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

For additional details related to expenses incurred as a charity volunteer, please contact us.

Qualifying for the Work Opportunity Tax Credit

If you are an employer who is willing to help disadvantaged individuals, you could benefit from a substantial federal tax credit. Hiring certain new employees can qualify you for the work opportunity tax credit (WOTC).

The WOTC is typically worth up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.” The credit is available for eligible employees who begin working for you before January 1, 2020.

Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).

  1. Qualified IV-A recipients — generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program;
  2. Qualified veterans;
  3. Qualified ex-felons – generally, those hired within one year of release;
  4. Designated community residents — those who are aged 18 through 39 and who are living in an empowerment zone or a rural renewal area*;
  5. Vocational rehabilitation referrals — handicapped individuals who are referred by rehabilitation agencies;
  6. Qualified summer youth employees — those who are 16 or 17 years old, have never previously worked for the employer and reside in an empowerment zone*;
  7. Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP);
  8. Qualified Supplemental Security Income recipients;
  9. Qualified long-term family assistance recipients — those receiving TANF assistance payments; and
  10. Qualified long-term-unemployed individuals.
    * Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions.

For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit.

For an employee from most of the targeted groups, the credit is based upon the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000).

Two categories allow for higher first-year wages to be taken into account when calculating the credit:

  • Long-term family assistance recipients — For this category, the first-year wage that can be taken into account for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000.
  • Veterans — The three possible qualifications of veterans have applicable first-year wages for the credit of up to $12,000, up to $14,000 and up to $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification.

Certification Process — To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency no later than 28 days after an eligible employee begins work. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).

Other Issues:

  • No Dual Benefits — No deduction is allowed for the portion of wages equal to the WOTC for that tax year.
  • Unused Current-Year Credit — The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years).

In some circumstances, electing not to claim the credit is more beneficial for the employer. Please call us for additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances.

Hurricane Disaster Loss Tax Ramifications

With the historic flooding and damage caused by recent hurricanes, President Trump has declared the affected areas disaster areas. If you were an unlucky victim and suffered a loss as a result of these disasters, you may be able to recoup a portion of that loss through a tax deduction. When you suffer a casualty loss within a federally declared disaster, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.

Income Tax Casualty Loss – By taking the deduction for a 2017 disaster area loss on the prior year (2016) return, you may be able to get a refund from the IRS before you even file your tax return for 2017, the loss year. You have until six months after the original due date of the 2017 return to make the election to claim it on your 2016 return, in most cases by filing an amended 2016 return to claim the disaster loss. Before making the decision to claim the loss in 2016, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.

If you elect to claim the loss on either your 2016 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2016 or 2017 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more than 20 years), or you can elect to only carry the unused loss forward.

Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.

Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster.

As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.

Extension of Filing and Payment Due Dates – The IRS has announced that Hurricane Harvey and Irma victims have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments.

This tax relief postpones various tax filing and payment deadlines that occurred starting on:

  • Aug. 23, 2017 for Harvey victims,
  • September 4, 2017 for Irma victims in Florida, and
  • September 5, 2017 for Irma victims in Puerto Rico and the Virgin Islands.

As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes:

  • The Sept. 15, 2017 and Jan. 16, 2018 deadlines for individuals making quarterly estimated tax payments.
  • The 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief and may be subject to late payment penalties.
  • A variety of business tax deadlines are also affected, including the Oct. 31 deadline for quarterly payroll and excise tax returns. Businesses with extensions, including among others, calendar-year partnerships whose 2016 extensions run out on Sept. 15, 2017 and calendar-year tax-exempt organizations whose 2016 extensions run out on Nov. 15, 2017, also have the additional time. The disaster relief page on www.irs.gov has details on other returns, payments and tax-related actions qualifying for the additional time.
  • In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Check out the disaster relief page for the time periods that apply to each jurisdiction.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in a disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside of a disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to:

If you need further information on filing extensions, casualty and disaster losses, your particular options for claiming a loss, or if you wish to amend your 2016 return to claim your 2017 loss, please give us a call.