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Certified Public Accountants

Certified Public Accountants

 

To: Clients and Friends

From: Neil S. Kahn

         Ashley BK Grubbs

Date: December 14, 2016

Subject: Highlights of tax code changes that affect the planning and filing of your 2016 and 2017 Income Tax Returns.

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Once again, in 2016 we saw minimal tax legislation. In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed that created or enhanced certain tax provisions and either extended or made permanent many tax provisions that are normally questionable at this time of year. Congress is currently meeting for a “lame duck” session, the results of which are yet to be seen, although no major tax provisions are expected to come at this time.

 

2016 TAX RATES

Single Taxpayers:

10 percent                 $ .00 to $ 9,275.00

15 percent             9,275.00 to 37,650.00

25 percent           37,650.00 to 91,150.00

28 percent         91,150.00 to 190,150.00

33 percent       190,150.00 to 413,350.00

35 percent       413,350.00 to 415,050.00

39.6 percent            415,050.00 and over

 

Joint Filers:

10 percent               $ .00 to $ 18,550.00

15 percent           18,550.00 to 75,300.00

25 percent         75,300.00 to 151,900.00

28 percent       151,900.00 to 231,450.00

33 percent       231,450.00 to 413,350.00

35 percent       413,350.00 to 466,950.00

39.6 percent             466,950.00 and over

 

KIDDIE TAX

Applies to children under age 18 and children over 18 but under age 24 who are full-time students that have unearned income. There are exceptions to this rule.

CAPITAL GAINS

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The top capital gains rate has remained at 20% for single filers with taxable income over $415,050.00 and for joint filers with taxable income over $466,950.00. For single taxpayers whose taxable income is between $37,650.00 and $415,050.00 and joint taxpayers whose taxable income is between $75,300.00 and $466,950.00, the capital gains rate will remain at 15%. For single taxpayers whose taxable income does not exceed $37,650.00 and joint taxpayers whose taxable income does not exceed $75,300.00, the rate remains at 0%.

Capital assets held less than one year will continue to be taxed at the individual’s tax rate.

Capital losses can be used to offset capital gains. If the losses are greater than the gains, you can deduct $3,000.00 against other income. If you cannot utilize all your capital losses in the current year, you can carryover the unused loss to future years.

DIVIDEND INCOME

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Certain dividends received by a shareholder will be taxed at the same capital gains rates. For most taxpayers the maximum rate has remained at 15%. For single filers with taxable income over $415,050.00 and for joint filers with taxable income over $466,950.00, the maximum rate has remained at 20%. For single taxpayers whose taxable income does not exceed $37,650.00 and joint taxpayers whose taxable income does not exceed $75,300.00, the rate remains at 0%.

INDIVIDUAL RETIREMENT ACCOUNTS

Annual limit remained at $5,500.00.

For taxpayers aged 50 or older, a "catch-up" contribution is available. The amount is $1,000.00. If you qualify for an Individual Retirement contribution, you qualify for this "catch-up" contribution.

STUDENT LOAN INTEREST DEDUCTION

The maximum deduction remains at $2,500.00. This deduction is "above the line", (you do not have to itemize your deductions to get this deduction). Phased out if your adjusted gross income, with certain modifications, exceeds $160,000.00 for joint filers and $80,000.00 for single taxpayers.

ITEMIZED DEDUCTIONS

The phase out of itemized deductions begins when adjusted gross income exceeds $259,400.00 for single filers and $311,300.00 for joint filers. Itemized deductions are reduced by 3% of the amount of income over these thresholds, not to exceed 80% of total itemized deductions.

MEDICAL EXPENSE DEDUCTION

The threshold for deducting medical expenses paid during 2016 has remained at 10% of adjusted gross income. Taxpayers who were age 65 or older before December 31, 2016 continue to qualify for the 7.5% threshold through 2016.

CHARITABLE CONTRIBUTIONS

For all charitable contributions of money, regardless of the amount, you must maintain a bank record of the contribution (a cancelled check, charge card receipts, or a paystub) in addition to a written record from the charity.

For all charitable gifts over $250.00, you must have a letter detailing the amount of the donation and affirming that either no goods or services were provided in connection with the gift, or if goods or services were received, a description and a value of the item(s) received. This letter must be in your possession when your tax return is filed.

NON-CASH CHARITABLE CONTRIBUTIONS

Clothing and household items must be in good used condition or better. This rule does not apply to a contribution of any single item for which a deduction of $5,000.00 or more is claimed.

For any single item donated with a value of $5,000.00 or greater, a qualified appraisal must be made as part of your tax return.
For contributions of clothing and household items being valued at less than $5,000.00 per item, photos of the items being donated will be best to prove the items were in good used condition or better.

STANDARD DEDUCTION

This has remained at $12,600.00 for married individuals filing a joint return and $6,300.00 for single individuals. An additional standard deduction of $1,250.00 is allowed for married filers and $1,550.00 is allowed for single taxpayers who are blind and/or over the age of 65.

DEPENDENTS STANDARD DEDUCTION

A dependent's standard deduction generally may not exceed the greater of $1,050.00 or earned income plus $350.00.

PERSONAL EXEMPTIONS

This has increased to $4,050.00 from $4,000.00.

The phase out of personal exemptions begins at $259,400.00 for single filers and $311,300.00 for joint filers. Personal exemptions are entirely phased out when income exceeds $216,900.00 for single filers and $433,800 for joint filers.

BUSINESS USE OF PERSONAL VEHICLE

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The standard mileage rate for business use of your personal vehicle has decreased to 54.0 cents from 57.5 cents per mile.

EMPLOYER-SPONSORED RETIREMENT PLANS

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Taxpayers who are participants in 401(K) plans, 403(b) annuities, and salary reduction SEP plans can now contribute up to $18,000.00. For taxpayers aged 50 or older, the "catch-up" contribution remained at $6,000.00.

The American Taxpayer Relief Act of 2012 lifted most restrictions on rollovers of 401(k) monies to designated Roth accounts in the same plan. Participants in 401(k) plans with in-plan Roth conversion features can now make transfers to a Roth account at anytime.

For self-employed taxpayers who have no employees, 401(K) plans have become very attractive and affordable. This can be used alone or with other retirement plans.

For employers who are looking into setting up a retirement plan, they may be available to receive $500.00 in tax credits for start-up costs, for up to three (3) years.

The compensation cap to determine contributions to retirement plans has increased to $265,000.00 from $260,000.00.

The maximum amount a plan participant can put into a defined contribution plan has remained at $53,000.00.

For profit sharing plans, the amount of your contribution, per participant, has remained at 25% of compensation.

MEDICARE TAXES

A 0.9% Medicare tax applies to wages and self-employment income of individuals with earnings exceeding $250,000.00 for joint filers and $200,000.00 for single filers.

In addition, there is a 3.8% “net investment income tax” on unearned income of individuals with earnings exceeding $250,000.00 for joint filers and $200,000.00 for single filers. This additional tax does not apply to qualified plan distributions or “active” LLC’s, partnerships and S corporations.

DEPRECIATION

For equipment, furniture and fixtures and off-the-shelf computer software that qualify for a Code Section 179 expending deduction, the deduction has remained at $500,000.00. This deduction is eliminated if your total qualified property purchases exceed $2,010,000.00 during the year.

For acquisitions of sports utility vehicles with a gross vehicle weight of more than 6,000 pounds, Code Section 179 will be limited to $25,000.00.

Luxury autos weighing over 6,000 pounds do not have to follow the rules for luxury autos listed below.

For acquisitions of luxury autos, the first year depreciation remained at $3,160.00. The second and third years have remained at $5,100.00 and $3,050.00 respectively. Succeeding years have remained at $1,875.00.

For acquisitions of trucks or vans weighing less than 6,000 pounds that are modified in such a way that it is not likely to be used more than a de minimis amount for personal use, the first year depreciation has remained at $3,560.00. The second year remained at $5,700.00. The third year remained at $3,350.00. Each succeeding tax year remained at $2,075.00.

SOCIAL SECURITY TAX

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The wage base remained at $118,500.00. The rate remained at 6.20 percent for wage earners and 12.40 percent for self-employed individuals.

ALTERNATIVE MINIMUM TAX

For 2016, the AMT exemption increased to $83,800 from $83,400.00 if married filing a joint tax return and to $53,900.00 from $53,600.00 for single individuals.

The alternative minimum tax (AMT) is a separate method of determining income tax devised to ensure that at least a minimum amount of tax is paid by taxpayers who reap large tax savings by making use of certain tax deductions, exemptions, losses and credits. Without the AMT, some of these taxpayers might be able to escape income taxation entirely. In essence, the AMT functions as a recapture mechanism, reclaiming some of the tax breaks to taxpayers.

CHILD TAX CREDIT

$1,000.00 for each qualifying child. Phased out if your adjusted gross income, with certain modifications, exceeds $110,000.00 for joint filers and $75,000.00 for single taxpayers.

HOPE/AMERICAN OPPORTUNITY TAX CREDIT

The credit has remained at $2,500.00 per eligible student per year and is available for the first 4 years of postsecondary education. 40% of the credit is refundable.

Costs include course materials (e.g. books)

Phased out if your adjusted gross income exceeds $160,000.00 for joint filers and $80,000.00 for single taxpayers.

RESIDENTIAL ENERGY CREDIT

Available to individuals for the installation of residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters on their principle residence. These improvements must be new, can be expected to remain in use at least 5 years and meet certain requirements for energy efficiency.

The credit is 10% of the costs paid or incurred. In addition, there is a lifetime credit limit (since 2005) of $500.00, which only $200.00 may be used for windows.

AFFORDABLE CARE ACT

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Taxpayers must now report if they carried minimum essential health coverage or if they carried an exemption. If essential coverage was not maintained or an exemption was not obtained, a shared responsibility payment is required with filing of Form 1040. The shared responsibility payment in 2016 increased to $695.00 per adult and $347.50 per child from $325.00 and $162.50, respectively, or 2.5% of household income. The amount owed is 1/12 of the annual payment for each month that a person or person’s dependents are not covered.

Minimum essential coverage is employer-sponsored coverage, coverage through a state or federal Marketplace, Medicare, Medicaid, and other plans.

An individual is treated as having coverage for a month if they have coverage for any one day of the month. In addition, a short gap of three months or less generally will not subject an individual to the shared responsibility payment.

FOREIGN BANK (BROKERAGE) ACCOUNTS

All U.S. Taxpayers with offshore accounts totaling more than $10,000.00 at any time during a year must file form TD F 90-22.1. The requirement applies to taxpayers with a signature authority or a “financial interest” – often ownership or control – in foreign bank or brokerage accounts. The penalty for failure to file this form is $10,000.00.

In addition, if you had a signature authority or a “financial interest” in a foreign bank or brokerage account, no matter the amount in the account, it must be disclosed on Schedule B of your Form 1040.

GIFT TAX EXEMPTION

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All taxpayers are allowed to gift monies to anybody they choose. This amount has remained at $14,000.00.

NEW TAX FILING DEADLINES FOR CERTAIN BUSINESS TAX RETURNS

Beginning with tax years that begin on January 1, 2016 and later, the due date of Form 1065 and certain Form 1120s has changed. Form 1065 will be due on the fifteenth day of the third month following the close of the tax year, or March 15th for calendar-year taxpayers. Form 1120 for certain C Corporations will be due on the fifteenth day of the fourth month following the close of the tax year, or April 15th for calendar-year taxpayers. The extended due date for calendar-year taxpayers filing Form 1065 and Form 1120 will be September 15th.

MICHIGAN USE TAX

When you purchase items for personal use outside the state and do not pay Michigan sales tax, and this purchase would have been subject to sales tax if purchased in the state, then you are required to pay use tax. The rate of tax is 6 percent of the total price (including shipping and handling charges). Simply put: If you purchased an item that you should have paid sales tax but you did not, then you owe use tax. This is now part of your income tax return. If you plan on filing a true, accurate and complete tax return you must include this information.

MICHIGAN INDIVIDUAL INCOME TAX

The tax rate remains unchanged at 4.25%

The Personal Exemption Amount has remained at $4,000.00.

CITY OF DETROIT NON-RESIDENT TAXPAYERS

In efforts to help the City of Detroit run more efficiently, the State Treasury Department began processing City of Detroit Individual Income Tax returns. Taxpayers are now able to e-file their City of Detroit return with their State of Michigan return.

The City of Detroit requires non-resident taxpayers who are employees that allocate less than 100% of their income to the City of Detroit to provide the following documentation:

Letter from their employer to verify actual number of days paid, days not worked and days worked in Detroit. The letter should also include the name, title, and phone number of the person signing the letter and should be on the official letterhead of the employer.

Documentation/work-log showing days/time worked in/out of the City of Detroit.

Note: Non-resident taxpayers based in Detroit who work in their homes cannot use those days as days worked outside Detroit.

2017 TAX RATES

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Single Taxpayers:
10 percent                   $ .00 to $ 9,325.00
15 percent               9,325.00 to 37,950.00

25 percent             37,950.00 to 91,900.00
28 percent           91,900.00 to 191,650.00

33 percent         191,650.00 to 416,700.00
35 percent         416,700.00 to 418,400.00

39.6 percent              418,400.00 and over

Joint Filers:
10 percent                  $ .00 to $18,650.00
15 percent             18,650.00 to 75,900.00
25 percent           75,900.00 to 153,100.00
28 percent         153,100.00 to 233,350.00

33 percent         233,350.00 to 416,700.00
35 percent         416,700.00 to 470,700.00

39.6 percent              470,700.00 and over

PERSONAL EXEMPTIONS

Will remain unchanged at $4,050.00.

The phase out begins at $261,500.00 for single filers and $313,800.00 for joint filers.

STANDARD DEDUCTION

This has increased to $12,700.00 from $12,600.00 for married individuals filing a joint return and to $6,350.00 from $6,300.00 for single individuals. An additional standard deduction of $1,250.00 is allowed for married filers and $1,550.00 is allowed for single taxpayers who are blind and/or over the age of 65.

INDIVIDUAL RETIREMENT ACCOUNTS

Annual limit has remained at $5,500.00.

For taxpayers aged 50 or older, a "catch-up" contribution is available. The amount is $1,000.00. If you qualify for an Individual Retirement contribution, you qualify for this "catch-up" contribution.

ITEMIZED DEDUCTIONS

The phase out of itemized deductions begins when adjusted gross income exceeds $261,500.00 for single filers and $313,800.00 for joint filers. Itemized deductions are reduced by 3% of the amount of income over these thresholds, not to exceed 80% of total itemized deductions.

DEPRECIATION

For equipment and furniture and fixtures that qualify for a Code Section 179 expending deduction, the deduction will increase to $510,000.00 from $500,000.00. This deduction is eliminated if your total qualified property purchases exceed $2,030,000.00 during the year.

BUSINESS USE OF PERSONAL VEHICLE

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The standard mileage rate for business use of your personal vehicle has decreased to 53.5 from 54.0 cents per mile.

EMPLOYER-SPONSORED RETIREMENT PLANS

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Taxpayers who are participants in 401(K) plans, 403(b) annuities, and salary reduction SEP plans can contribute up to $18,000.00.

For taxpayers aged 50 or older, a "catch-up" contribution has remained at $6,000.00.

SOCIAL SECURITY TAX

The wage base has increased to $127,200.00 from $118,500.00.

GIFT TAX EXEMPTION

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All taxpayers are allowed to gift monies to anybody they choose. This amount will remain at $14,000.00.

SALES, USE AND WITHHOLDING ONLINE SERVICES

The State of Michigan is encouraging taxpayers to register to file and pay their sales, use and withholding taxes online at Michigan Treasury Online (MTO). Paper filing is still permitted, however, the state will not be mailing out coupons. If you need coupons, or if you would like to use this new system to file and pay your taxes to the State of Michigan and would like our assistance, please contact us.

A MESSAGE REGARDING IRS SCAMS

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Unfortunately, we live in an environment where we must be very cautious and skeptical of certain communications we receive. It is important to know that the Internal Revenue Service will never ever contact you via telephone or email without your initial request. Should you receive any communications that you find to be questionable, please contact us.

CONCLUSION

We have highlighted the changes that affect the majority of our clients. As the change in our Presidential Administration begins to unfold, we will be closely watching the actions of the President, Congress and the Treasury as tax reform is a hot topic with the incoming administration. Should any significant changes occur, we will post information for you on our website.

By working together and with proper planning, we may be able to take advantage of some of these changes and lower your tax obligations today and into the future. If you have children, grandchildren, or are saving for your retirement, there are provisions that become very important to you. If you are contemplating a financial transaction and are not sure of the tax implications or want to know more about a particular tax law change, please feel free to contact us.

Material discussed in this memo is meant to provide general information and should not be acted on without obtaining professional advice appropriately tailored to your individual needs.

In order to comply with requirements imposed by Treasury Department regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or any tax-related matters addressed herein.

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