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Higher Social Security taxes for many in 2017, small increase in benefits for recipients

From CCH tax news:

The Social Security Administration (SSA) has announced that Social Security and Supplemental Security Income (SSI) benefits will increase by 0.3 percent in 2017. The rates for Old-Age, Survivors and Disability Insurance (OASDI) and Medicare Hospital Insurance (HI) taxes will remain at a combined 7.65 percent in 2017. Because of the increase, the maximum taxable earning for OASDI purposes will increase from $118,500 to $127,200.

The SSA cost-of-living adjustments (COLAs) are based on the rise in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2014 through the third quarter of 2016. Because of the increase in the CPI-W during that period, the law increases benefits to help offset inflation. As a result, monthly Social Security and SSI benefits for over 65-million Americans will increase 0.3 percent in 2017.

Comment. The Social Security wage base for 2017 will be $127,200. According to the SSA, of the estimated 173-million workers who will pay Social Security taxes in 2017, some 12 million will pay more because of the increase in the wage base. The SSA explained on its website that the formula for determining the wage base is set by law. The formula is applicable only if a cost-of-living increase becomes effective for December of the year in which a determination of the base would ordinarily be made. Because there is a cost-of-living increase for December 2016, the formula is applicable, the SSA explained.

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The Department of Labor issued final regulations on May 18th on new overtime rules.  These rules will become effective 12-1-2016.

Under these rules, more employees will be subject to overtime pay than under current law.

From the news release today from the DOL:
Key Provisions of the Final Rule
The Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt. Specifically, the Final Rule:
Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
1. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally
($134,004); and
2. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective
tests for exemption.
3. Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.
Final Rule: Overtime – Wage and Hour Division (WHD) – U.S. Departme… https://www.dol.gov/whd/overtime/final2016/index.htm

The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.


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Finally, Tax Breaks coming for 2015

It appears that Congress will pass and the President will sign the “Protecting Americans from Tax Hikes” Act.

For businesses, this will make permanent the $500,000 section 179 deduction and will extend bonus depreciation through 2019 as well as allow for a 15 year depreciation life for certain leasehold improvements and restaurant property.

For individuals, the Bill extends permanently the ability to make to $100,000 of charitable contributions directly from an IRA. Other tax benefits such as the $250 educator expense deduction and the American Opportunity Tax Credit for college tuition were also made permanent.

Good news for taxpayers, it is a shame that Congress waited until the last two weeks of December to finally address this.

On another note, the IRS has issued the standard mileage rates for 2016.

2016 Standard Mileage Rates Released (IR-2015-137; Notice 2016-1)

The IRS has released the 2016 optional standard mileage rates that employees, self-employed individuals, and other taxpayers can use to compute deductible costs of operating automobiles (including vans, pickups and panel trucks) for business, medical, moving and charitable purposes.

The 2016 standard mileage rate has decreased to 54 cents per mile for business uses and 19 cents per mile for medical and moving uses. It remains at 14 cents per mile for charitable uses. For purposes of computing the allowance under an FAVR plan, the standard automobile cost may not exceed $28,000 ($31,000 for trucks and vans).

The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2016, and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2016.

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2015 Planning Issues for Individuals

Overlooked tax issues

With the end of each year there are issues to be considered which vary with each individual’s circumstance.   Some overlooked issues are listed below.

Retirement Distributions:  The requirement to take minimum distributions from retirement accounts begins the year a taxpayer reaches the age of 70½. This first distribution may be delayed but no later than April 1 of the following year but, if delayed, it will mean that two distributions will be received in one year. The balances of all retirement accounts should be considered in determining the required minimum distribution; however, the distribution can be taken from one or all accounts. Failure to take the required amount can result in a penalty of 50% of the amount that was not distributed.

Medicare:  An individual becomes eligible for Medicare at age 65 even though they have not yet reached the age to receive full Social Security benefits. There is a 7 month enrollment period which is the 3 months prior to, the month of, and the 3 months following the month of obtaining age 65. If this enrollment time frame is missed, unless special circumstances apply, enrollment would take place during the general enrollment period of January 1 through March 31 of each year with coverage beginning July 1. Late enrollment may result is higher premiums for both Part A and Part B.

Beneficiaries:  Reviewing the designated beneficiaries listed for retirement accounts and life insurance proceeds should be done periodically. The designated beneficiary on the account, whomever that may be, is entitled. There have been many instances where beneficiaries should have been changed due to a change in circumstances but were not. The review should also include bank and brokerage accounts for payable upon death beneficiaries. Beneficiary designations override any instructions left in a will.


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2015 Charitable Donations and NC Medical Deductions

Charitable Donations:   Donations must be made to a qualified IRS tax-exempt organization in order to be deductible. There is an on-line IRS tool (http://tinyurl.com/a72f74x) available to check the status of an organization. Churches will not be listed since they are automatically exempt. Donations to individuals are not deductible.

 NC Taxes:  The NC 2015 personal income tax rate is 5.75% which is a small drop from the 2014 rate of 5.8%. Medical expenses were not allowed as an itemized deduction on the 2014 returns but changes to the tax law in 2015 have again allowed these deductions against income for the 2015 returns. Itemized deductions for the NC return are

  • charitable contributions as allowed under federal rules
  • property taxes plus home mortgage interest limited to $20,000
  • medical expenses that are deductible under for federal tax purposes
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2015 Tax Issues – Continued

Additional year-end information for small businesses.

Tangible Property Expensing: On November 24, the IRS raised the safe harbor threshold for expensing eligible capital acquisitions from $500 to $2,500. This increase applies to businesses that do not have audited financial statements. The threshold applies to any item that is substantiated by an invoice and is effective for the 2016 tax year. However, use of the new $2,500 threshold by eligible businesses for prior years will not be challenged by the IRS (audit protection).

W-2s: NC has changed the due date for Form W-2 to be filed with the Department of Revenue. The new due date is January 31 which is the same date the forms must be delivered to employees. The reason behind the change is identity theft and its use to file fraudulent returns with refunds being issued.

Worker Classification: In July 2015, the U.S. Department of Labor issued guidance (http://www.dol.gov/whd/workers/misclassification/AI-2015_1.htm) to assist in classifying a worker is an independent contractor or an employee. Improper classification of workers could result in an employer’s liability for unpaid payroll taxes plus interest and penalties. It could also change whether or not the employer was required to provide certain benefits for which penalties could be substantial.

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2015 Tax issues

With only about seven weeks left until we turn the calendar to 2016, what do small business owners need to consider for the rest of the year and for 2016.

Here are some items to think about:

Sales Tax:  North Carolina changed its sales tax rules effective March 1, 2016, for repair services to be subject to sales taxes.  Currently, separately stated labor charges on repairs are not subject to sales tax.  Parts are subject to sales tax.  This expansion of the sales tax base will affect any business that performs repairs. Businesses will have to adapt their invoicing to capture the additional sales tax.  From a consumer standpoint, your car repairs, your appliance repairs, your equipment repairs, will all cost more with sales tax added on labor costs.

Section 179 and Business Fixed Asset Purchases: Current law ( as of 11-12-15) limits the expensing of new equipment to $25,000.  For 2014,  Section 179 allowed a business to write off up to $500,000 of business personal property additions.  Hopefully, Congress will extend this provision for 2015 and make it retroactive.  This has been done in the past as last-minute December  tax bills.  We recommend that business owners proceed with purchasing needed fixed assets based on the hope that the $500,000 limit will be allowed for 2015.  If the increased Section 179 is not extended, a business could still take regular depreciation on the assets and expense a portion of the costs in 2015.

Obama Care Reporting: All businesses with more that 50 full-time equivalent employees (related party entity rules apply) will have to provide their employees with IRS Form 1095-C which will list information about health insurance coverage paid by the company. This form will have to be provided to employees by January 31, 2016.

Obama Care Penalties: The penalties for large employers (those with more than 50 FTE employees) who do not offer health insurance will affect more businesses.  For 2016, the employer may incur a penalty for each full-time employee over a 30 employee threshold. This threshold was 80 for 2015.