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Why Investing in Small-Business Stock May Make More Tax Sense Than Ever

By purchasing stock in certain small businesses, you can not only diversify your portfolio but also enjoy preferential tax treatment. And under a provision of the tax extenders act signed into law this past December (the PATH Act), such stock is now even more attractive from a tax perspective.100% exclusion from gainThe PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010. (Smaller exclusions are available for QSB stock acquired earlier.)The act also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.What stock qualifies?A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business.Many factors to considerOf course tax consequences are only one of the many factors that should be considered before making an investment. Also, keep in mind that the tax benefits discussed here are subject to additional requirements and limits. Consult us for more details.

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Could You Save More by Deducting State and Local Sales Tax?

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.Questions about this or other PATH Act breaks that might help you save taxes on your 2015 tax return? Contact us — we can help you identify which tax breaks will provide you the maximum benefit.

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2 Tax Credits Can Save Businesses Taxes on Their 2015 Returns

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks, in some cases making them permanent. Extended breaks include many tax credits — which are particularly valuable because they reduce taxes dollar-for-dollar (compared to deductions, for example, which reduce only the amount of income that’s taxed).Here are two extended credits that can save businesses taxes on their 2015 returns:1. The research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has been made permanent. It rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial.2. The Work Opportunity credit. This credit has been extended through 2019. It’s available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.Want to know if you might qualify for either of these credits? Or what other breaks extended by the PATH Act could save taxes on your 2015 return? Contact us!

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No Changes to Retirement Plan Contributions for 2016

Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, the limits remain unchanged for 2016:

  • Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans stay at $18,000
  • Contributions to defined contribution plans stay at $53,000
  • Contributions to SIMPLEs stay at $12,500
  • Contributions to IRAs stay at $5,500
  • Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans stay at $6,000
  • Catch-up contributions to SIMPLEs stay at $3,000
  • Catch-up contributions to IRAs stay at $1,000

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2016. And if you turn age 50 in 2016, you can begin to take advantage of catch-up contributions.However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2016, check with us.

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Congress Passes “Extenders” Legislation Reviving Expired Tax Breaks for 2015

Many valuable tax breaks expired December 31, 2014. For them to be available for 2015, Congress had to pass legislation extending them — which it now has done, with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by the President on December 18. The PATH Act not only revives expired breaks for 2015 but also makes many breaks permanent, generally extends the rest through either 2016 or 2019, and enhances some breaks.Here is a sampling of extended breaks that may benefit you or your business:• The deduction for state and local sales taxes in lieu of state and local income taxes (extended permanently),• Tax-free IRA distributions to charities (extended permanently),• Bonus depreciation (extended through 2019, but with reduced benefits for 2018 and 2019),• Enhanced Section 179 expensing (extended permanently and further enhanced beginning in 2016),• Accelerated depreciation for qualified leasehold-improvement, restaurant and retail improvement property (extended permanently),• The research tax credit (extended permanently and enhanced beginning in 2016),• The Work Opportunity credit (extended through 2019 and enhanced beginning in 2016), and• Various energy-related tax incentives (extended through 2016).Please contact us for more information on these and other breaks under the PATH Act. Keep in mind that, for you to take maximum advantage of certain extended breaks on your 2015 tax return, quick action may be required.

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7 Last-Minute Tax-Savings Tips

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2015 taxliability — you just must act by December 31:1. Pay your 2015 property tax bill before the end of the year.2. Make your January 1 mortgage payment.3. Incur deductible medical expenses (if your deductible medical expenses for the year alreadyexceed the applicable floor).4. Pay tuition for academic periods that will begin in January, February or March of 2016 (if it willmake you eligible for a tax credit).5. Donate to your favorite charities.6. Sell investments at a loss to offset capital gains you’ve recognized this year.7. Ask your employer if your bonus can be deferred until January.Keep in mind, however, that in certain situations these strategies might not make sense. For example,if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year,taking some of these steps could have undesirable results.If you’re unsure whether these steps are right for you, consult us before taking action.

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Avoid a 50% Penalty: Take Retirement Plan RMDs by December 31, 2015

After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.

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Don’t Miss Your Opportunity to Make 2015 Annual Exclusion Gifts

Recently, the IRS released the 2016 annually adjusted amount for the unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption: $5.45 million (up from $5.43 million in 2015). But even with the rising exemptions, annual exclusion gifts offer a valuable tax-saving opportunity.The 2015 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. (The exclusion remains the same for 2016.)The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes.But you need to use your 2015 exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you and your spouse don’t make annual exclusion gifts to your grandson this year, you can’t add $28,000 to your 2016 exclusions to make a $56,000 tax-free gift to him next year.Questions about making annual exclusion gifts or other ways to transfer assets to the next generation while saving taxes? Contact us!

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Reduce Taxes on Your Investments With These Year-End Strategies

While tax consequences should never drive investment decisions, it’s critical that they be considered — especially by higher-income taxpayers, who may be facing the 39.6% short-term capital gains rate, the 20% long-term capital gains rate and the 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

  • Use unrealized losses to absorb gains.
  • Avoid wash sales.
  • See if a loved one qualifies for the 0% rate (or the 15% rate if your rate is 20%).

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.
These are only a few of the year-end strategies that may help you reduce taxes on your investments. For more ideas, contact us.

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