Last-Minute Tax Tips to Check Before You File Your 2016 1040
Don’t give Uncle Sam more of your money than you have to. Review these tax tips before you file your 2016 tax return. How many could apply to you and save you some money – now or down the road? And what else do you need to know?
Business and Employment-Related Expenses
- Did you purchase depreciable assets for your business during 2016? If so, you can benefit from bonus depreciation and expensing allowed by Internal Revenue Code (“IRC”) Section 179. These provisions allow you to deduct up to $500,000 of certain tangible property and leasehold improvements placed in service during the year, as well as the ability to deduct half of the cost of any additional eligible property.
- Did you incur work expenses that your employer didn’t reimburse you for? Expenses, such as uniforms or work clothes you can’t wear anywhere else besides work, vehicle expenses, dues to professional societies, chamber of commerce membership dues, continuing education – even damages you paid to a former employer for breach of an employment contract may all be deductible. The Internal Revenue Service (“IRS”) has a long list of expenses that employees can list as miscellaneous itemized deductions on their Schedule A (Form 1040).
- If you regularly use an office in your home for business purposes, you may be entitled to claim a home office deduction. In recent years, taxpayers have been able to claim office deductions up to a maximum deduction of $1,500 using an optional safe harbor provision.
- If you looked for a job during 2016, costs related to your search can be claimed as itemized deductions. Whether or not you were successful in your search doesn’t matter. Qualifying expenses can be deducted, as long as your miscellaneous itemized expenses exceed 2 percent of your adjusted gross income (“AGI”). Deductible expenses include, but are not limited to, transportation, lodging, 50 percent of certain food costs, employment agency fees, and costs related to printing resumes and business cards.
- Did you relocate for your job in 2016? Even if you don’t itemize deductions, you may be allowed to claim a deduction for unreimbursed moving expenses. These expenses include the cost of moving your household goods and certain lodging and transportation costs. To qualify, your new job must be 50 miles from your old residence, and you must work in the new location for at least 39 weeks.
Make sure you get the full benefit of your contributions to qualified charities. In addition to cash contributions, you can also deduct contributions of property and any out-of-pocket expenses incurred while doing volunteer work last year. If you used your car when volunteering for a charity, the IRS allows you to deduct 14 cents per mile traveled, along with any parking and toll costs.
If you are over 70 and a half years old and used your IRA to directly fund a contribution to a qualified public charity, you may be able to exclude the amount contributed from your AGI. Because AGI affects limitations on other tax deductions, this may result in a lower tax bill than reporting the income and corresponding deduction.
Make sure you have receipts for your donations, because contributions totaling $250 or more require documentation from the charity you helped support (a cancelled check is not enough). A qualified appraisal needs to be attached to your tax return in order to deduct certain non-cash contributions, including art with a value of more than $20,000, certain conservation easements, certain household goods or clothing worth more $500, and most contributions of property worth more than $500,000. Documentation also needs to be attached to your return in order to deduct contributions of cars, boats or airplanes.
You may also be required to disclose contributions of syndicated conservation easements that affect your 2016 income tax return. (For more information, read the alert, “Certain Deductions of Conservation Easements Now Require IRS Notification.”)
Child and Dependent Care
If you’re a working parent or full-time student, you could qualify for a tax credit for up to 35 percent of your qualified child care costs, depending upon your AGI. You may generally claim up to $3,000 of child care expenses for one child or up to $6,000 worth of expenses for two or more children. If you did not claim the maximum credit on your 2015 return because some of the costs were not paid by the end of the year, you may be able to take a current credit based on the amount paid during 2016.
The child and dependent care credit can even apply to expenses related to the care of a spouse or other dependent, if the person is physically or mentally unable to take care of himself or herself. Remember to include expenses for child care during the summer, including day camps but not overnight camps or summer school.
Any child care expenses you paid for with money from a company-sponsored account that uses pre-tax dollars cannot be used in calculating your tax credit. However, if you maxed out your company-sponsored flexible spending plan by funding it with $5,000, but you’re eligible for the full $6,000 credit, you are allowed to claim up to $1,000 of additional expenses in order to get the full credit amount.
Were you in college, or did you have a dependent in college? The American Opportunity Credit offers a maximum annual tax break worth up to $2,500 per eligible student. This amount is based on 100 percent of the first $2,000 spent on qualifying college costs and 25 percent of the next $2,000 spent. The full credit is available for individuals with a modified AGI of $80,000 or less ($160,000 or less for married couples filing jointly).
The Lifetime Learning Credit is also available to students and their parents. The credit is worth up to $2,000 annually and is based on 20 percent of up to $10,000 spent on qualifying post-high school classes. The credit is reduced if your modified AGI exceeds $55,000 ($110,000 if you are married filing jointly) and eliminated if your AGI exceeds $65,000 ($131,000 if you are married filing jointly).
Alternatively, up to $4,000 of qualified tuition and related higher education expenses incurred before 2017 may be deducted. However, this deduction is scaled back for high income taxpayers and does not generally yield as much tax savings as a credit.
You may be eligible for a tax credit if you adopted a child in 2016. Any expense that relates directly to the adoption of your child may qualify towards this credit, including adoption fees, court costs, attorney fees and travel.
The maximum benefit is $13,460 per child and is limited if your modified AGI exceeded $203,540 in 2016. If you adopted a special needs child who is a U.S. citizen or resident, you can claim the full credit even if your expenses are less than $13,460. This credit is nonrefundable, meaning you can use the credit to reduce your tax to zero, but you can’t use any leftover amount to get a refund. You can, however, carry any unused credit forward to the next year for up to five years or until the credit is used up, whichever comes first. This credit is allowed in addition to any amounts excluded from your income if your employer helped pay for the adoption through a written qualified adoption assistance program. If your employer has such a plan, you may also be able to exclude up to $13,460 of assistance from your income. But you cannot claim the credit for any expenses reimbursed by the plan.
Energy-Saving Home Improvements
Did you go green last year? If so, you may benefit from various credits available to encourage people to make energy-efficient upgrades to their homes, including the following:
- The Residential Energy Efficient Property Credit provides a credit of 30 percent of the cost of qualified solar electric systems, qualified solar water heaters, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pumps. While the credit related to qualified fuel cell property is limited to $500 per ½ kilowatt of capacity, the amount related to the other items is generally only limited to your income tax liability for 2016. Unused amounts can be carried forward to offset your 2017 income tax liability.
- The Nonbusiness Energy Property Credit provides tax breaks if you installed any qualified residential alternative energy equipment such as insulation, high-efficiency furnaces and boilers, air conditioners and heat pumps, windows, doors and roofs during 2016. Tax savings for such home improvements might be worth up to 10 percent of the amount spent but are limited to $500 during an individual’s lifetime.
Most people realize that they can deduct legal fees related to the production of income or to estate planning. However, you may not realize that a portion of legal fees related to a divorce may also be deductible. Because any alimony you receive is taxable, you can deduct the part of any lawyer’s fee that is attributable to setting the amount of alimony or tax advice. You must itemize deductions to realize these tax savings, and these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2 percent of your AGI. Make sure your attorney provides a detailed statement that breaks down the fee, so you can tell how much of it may qualify for a tax-saving deduction.
Taxpayers 65 or younger must generally incur qualifying medical costs in excess of 10 percent of their AGI in order to claim a deduction, while taxpayers over 65 can claim medical expenses that exceed 7.5 percent of their AGI. Generally these expenses are deducted on Schedule A of your return as itemized deductions; however, if you are self-employed, you may be able to deduct 100 percent of the insurance premiums you pay (including Medicare premiums), subject to certain limitations, on page one of your return.
While most people know that they can deduct costs related to medical or dental visits, eyewear and prescriptions, the following are among the many other expenses that can be deducted under certain circumstances:
- Improvements to, or special equipment installed in, a home, if the main purpose of the improvements is to assist with medical care for you, your spouse, or your dependent and the improvements do not increase the value of the home;
- Acquisition, training or maintenance of a service animal;
- Home health care costs, including the costs of assisting a chronically ill individual with personal care due to his or her disabilities;
- In vitro fertilization;
- Inpatient addiction treatment, including room and board;
- Long-term care insurance premiums;
- Payments to a retirement home that specifically relate to medical care;
- Travel costs, including airfare, if consultation or treatment is incurred away from home and was the primary purpose of the trip; and
- Tuition, meals, and lodging at a school that furnishes special education to help a child overcome learning disabilities, if recommended by a doctor.
As important as it is to know what can be deducted, it is equally important to know that there are many costs that cannot be deducted, such as those related to cosmetic surgery or that are reimbursed by flexible spending accounts, health savings accounts or insurance.
- Do you own a boat or mobile home that was purchased on credit? If so, interest paid on debt secured by the boat or motor home may be deductible, if the boat or home has sleeping, cooking and toilet facilities that would allow it to be treated as a second residence. Interest paid on a mortgage is generally deductible to the extent that it is secured by a principal or second residence and was incurred to purchase or improve the residence.
- Mortgage interest expense paid on a home equity line that would otherwise not be deductible because the amount of debt exceeds $100,000 may also be deducted as investment interest, if you can trace the use of the loan to investments that are currently in your portfolio.
- When you refinance your home, you can deduct the points on your new loan over the life of the mortgage. More importantly, if you paid off your mortgage, you can generally deduct all points that have yet to be deducted. However, a refinancing through the same mortgage lender is not treated as a repayment of the loan, and the points paid on the most recent deal get added to what is left over from the previous refinancing and are deducted over the life of the new mortgage.
- If you paid for private mortgage insurance (PMI), your PMI premiums may also be deductible, if your AGI does not exceed $109,000.
You can claim a 2016 deduction for certain contributions made to employer-sponsored or self-employed retirement plans by the extended due date of your income tax return. Even if the plan did not exist as of December 31, 2016, there is still time to establish one if you act now. An added bonus is that money saved in these retirement plans generally grows tax-free. Tax is only paid when money is withdrawn from the account.
Even if you can’t fund an employer-sponsored retirement plan now, you can still make a contribution to a new or existing traditional IRA account by April 18, 2017, and receive a deduction on your 2016 tax return. Deductible contributions for individuals who are active participants in an employer’s retirement plan are phased out for individuals with modified AGI of more than $71,000 ($118,000 for married individuals who file jointly). Individuals (including spouses) who are not active participants in an employer plan may be entitled to deduct contributions, even if their modified AGI exceeds these amounts.
If you are an eligible lower-income taxpayer (generally, an individual with an AGI of $61,000 for taxpayers filing jointly) and have a traditional IRA, Roth IRA, or workplace retirement plan, you can also claim a Retirement Savings Contribution Credit worth up to 50 percent of the first $2,000 you contribute to such accounts. This means you can lower your tax liability by up to $1,000.
Property, Sales and Income Taxes
Taxes based on the value of property held for personal or investment purposes are generally allowed as an itemized deduction. This deduction is allowed regardless of whether the tax is imposed by a state, municipality or foreign country.
You can also choose between deducting your state income taxes or the state sales taxes that you paid. If you reside in a state that does not impose state income taxes on individuals (e.g., Florida), this deduction is particularly important.
The IRS has tables showing how much you can deduct for sales taxes based on your income and residence, so you don’t need to keep receipts for everything you buy during the year. Additionally, if you bought a vehicle, boat or airplane, you can add the sales tax paid on that item to the amount presented for your state in the IRS table.
If you deduct state income taxes, make sure to consider any amounts that you paid during 2016 with respect to your 2015 state income tax liability.
If you pay foreign income taxes, you can choose between deducting them as an itemized deduction and claiming a credit to offset the portion of your income taxes that relates to foreign income.
If you have bank accounts or investments in foreign countries, or if you are an owner of an entity established in a foreign country, you may be subject to special reporting obligations. Receipts of gifts or bequests from foreigners and transfers to or from foreign trusts must also be disclosed. The penalties for failing to disclose foreign assets or activities can be substantial and can far exceed the amount of any potential income that would need to be reported.
Many of the tax benefits discussed in this alert are subject to limitations that need to be taken into account before claiming them. With careful planning and proper record keeping, these and many other credits and deductions can become part of your filing routine every tax season.
If you have questions about your specific situation, start the conversation with your local Cherry Bekaert advisor. We’re happy to help you to uncover any available tax breaks and provide you with guidance in filing your Form 1040 and other forms.