Year-End Tax Planning for Individuals

 

1040.jpgTax planning for the year ahead presents similar challenges to last year due to the unknown fate of the numerous tax extenders that expired at the end of 2014.

These tax extenders, which include the mortgage insurance premium deduction and the sales tax deduction that allows taxpayers to deduct state and local general sales taxes instead of state and local income taxes, may or may not be reauthorized by Congress and made retroactive to the beginning of the year.

In the meantime, let’s take a look at some of the tax strategies that you can use right now, given the current tax situation.

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Year-End Tax Planning for Businesses

Company tax planningWhile the fate of several business-related tax extenders such as Research & Development tax credits, bonus depreciation, and Section 179 expensing that expired at the end of 2014 is uncertain, there are still a number of end of year tax planning strategies businesses can use to reduce their tax burden for 2015.

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What Employers Need to Know About the ACA

The healthcare law contains tax provisions that affect employers. The size and structure of a workforce–small or large–helps determine which parts of the law apply to which employers. Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates during the year.

The number of employees an employer has during the current year determines whether it is an applicable large employer for the following year. Applicable large employers (ALEs) are generally those with 50 or more full-time employees or full-time equivalent employees. Under the employer shared responsibility provision, ALEs are required to offer their full-time employees and dependents affordable coverage that provides minimum value. Employers with fewer than 50 full-time or full-time equivalent employees are not applicable large employers.

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Individual Shared Responsibility Provision

The Affordable Care Act includes the individual shared responsibility provision that requires you, your spouse, and your dependents to have qualifying health insurance for the entire year, report a health coverage exemption, or make a payment when you file.

Who is subject to this provision?

All U.S. citizens living in the United States, including children, senior citizens, permanent residents and all foreign nationals are subject to the individual shared responsibility provision.

Children are subject to the individual shared responsibility provision.

  • Each child must have minimum essential coverage or qualify for an exemption for each month in the calendar year. Otherwise, the adult or married couple who can claim the child as a dependent for federal income tax purposes will generally owe a shared responsibility payment for the child.

Senior citizens are subject to the individual shared responsibility provision.

  • Both Medicare Part A and Medicare Part C (also known as Medicare Advantage) qualify as minimum essential coverage.

All permanent residents and all foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes are subject to the individual shared responsibility provision.

  • Foreign nationals who live in the United States for a short enough period that they do not become resident aliens for federal income tax purposes are not subject to the individual shared responsibility payment even though they may have to file a U.S. income tax return.
  • Individuals who are not U.S. citizens or nationals and are not lawfully present in the United States are exempt from the individual shared responsibility provision. For this purpose, an immigrant with Deferred Action for Childhood Arrivals status is considered not lawfully present and therefore, is eligible for this exemption even if he or she has a social security number. Claim coverage exemptions on Form 8965, Health Coverage Exemptions.
  • U.S. citizens living abroad are subject to the individual shared responsibility provision.
  • However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country or countries for an entire taxable year are treated as having minimum essential coverage for that year.
  • All bona fide residents of the United States territories are treated by law as having minimum essential coverage.

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Time to Check Withholding

Income tax is often withheld from wages and other types of income such as pensions, bonuses, commissions and gambling winnings. Ideally, taxpayers should try to match their withholding with their actual tax liability. If not enough tax is withheld, they will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, they will lose the use of that money until they get their refund.

The earlier in the year you check your withholding, the easier it will be to make sure the correct amount of tax withheld. Here are a few tips:

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Tax Relief to Drought-Stricken Farmers

FarmersFarmers and ranchers who previously were forced to sell livestock due to drought, like the drought currently affecting much of the nation, have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales.

The one-year extension of the replacement period generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes due to drought. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, and poultry are not eligible.

Farmers and ranchers in these areas whose drought sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2015, in most cases, will now have until the end of their next tax year. Because the normal drought sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2011. But because of previous drought-related extensions affecting some of these localities, the replacement periods for some drought sales before 2011 are also affected. Additional extensions will be granted if severe drought conditions persist.

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Accounting for Time in QuickBooks

Small businesses that sell products have to do a constant balancing act. Keep too much inventory on hand, and you’re sitting on potential profits. If you don’t order enough and you run out, your customers may go to a competitor. QuickBooks provides tools and reports that can help you manage this ongoing challenge.

Selling time and services is a different story. There’s no real inventory tracking involved — except in terms of knowing how much manpower you have available at any given time. But just like you wouldn’t want customers to walk off with merchandise they haven’t bought, you don’t want any billable minutes or hours to be ignored. Both scenarios eat into your profits.

Gone are the days when you had to count on employees to fill out detailed timecards and hope that they remembered to document everything. QuickBooks can help ensure that you’re getting paid for all time and services rendered.

Building Your Records

Before you can ask employees to start tracking the hours they put in, you need to create a record for every time-based activity so that QuickBooks knows how much to charge when billable time is entered. The software creates and stores these, in the same way, it builds records for physical inventory items.

Start by clicking on the Items & Services icon on the home page (or go to Lists | Item List). Click the down arrow next to Item in the lower left of the screen that appears, and then select New from the menu (or right-click in the main part of the screen and select New).


Figure 1: Once you’ve created a record for a service item, you can use it throughout QuickBooks.

A list of options will drop down under TYPE. Select Service. Type in the Item Name/Number and click in the box to the left of Subitem of if the time item should be grouped under another. In this example, the relationship is Labor/Removal (labor). U/M Set is not an option in your version of QuickBooks.

Note: If you will be working with subcontractors, let us help you set up these services. It’s a little more complicated.

Enter a description for your service and a rate, then click on the drop-down arrow and select a tax rate if appropriate (click on to create one on the fly). Select an Account from the list. It should be some kind of income; in this case, it’s Construction Income. Click OK when you are done and this service will appear in your Item List.

Tracking Time

When you want to create a record for a work session, click the arrow to the right of Enter Time on the home page and select Time | Enter Single Activity (or open the Customers menu and select the same). Make sure the date for the activity is correct; you can click on the calendar and select if it’s not. Click on the arrow in the field below to select the correct employee.


Figure 2: You can either start the timer to record an activity’s duration or simply enter it in the box.

Click the arrows next to the CUSTOMER:JOB and SERVICE ITEM fields to open those drop-down menus and select the desired options. If you want to time the activity, use the Start, Stop, and Pause buttons below the duration box, or simply enter the amount of time it took. The CLASS and NOTES fields are optional.

If the time spent is billable, be sure that there’s a check in the box next to Billable in the upper right corner. If it’s not, click on the box.

Data you enter here will automatically appear on timesheets. You can enter time directly on timesheets by clicking Enter Time | Use Weekly Timesheet.

When you start an invoice for a customer who has accumulated billable time, you’ll see this message:


Figure 3: If you’ve entered billable time for a customer, this message will appear the next time you create an invoice for him or her.

Make sure that your employees understand the importance of documenting every billable minute. Lost time can eat into profits, and that has an impact on everyone in the company.

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