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How the ACA Tax Penalty Works
Five Tax Tips Small Business Owners Can Benefit from before the New Year
Tax Increase Prevention Act of 2014
Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31
Top Four Year-End IRA Reminders
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How the ACA Tax Penalty Works

For 2014, if you don't have health insurance and you don't qualify for an exemption, you'll have to pay a penalty of $95 per adult plus $47.50 per child (up to a maximum of $285 for a family) or 1% of your household income, whichever is greater. The flat dollar amount is reduced by 50% for dependents under the age of 18.

The fee increases each year until you get co...verage. For 2015, penalty is $325 per adult plus $162.50 per child (with a family maximum of $975) or 2% of annual family income. And in 2016, the fee will be $695 per adult plus $347.50 per child (with a maximum of $2,085) or 2.5% of family income.

For purposes of determining the penalty, "income" is defined as what your household earns in excess of the income-tax filing threshold. (For 2014, the threshold is $10,150 for an individual and $20,300 for married couples filing jointly.) For instance, if you are a single individual who earns $45,000 in 2014, the penalty will be based on $34,850 of your income (AGI). One percent of $34,850 is $348.50. Because that amount is greater than $95, your penalty will be $348.50.

Five Tax Tips Small Business Owners Can Benefit from before the New Year

Health Care Tax Credit for Small Employers. Part of the Affordable Care Act, this provision enables qualifying small businesses to get a tax credit for health premiums paid on behalf of employees. Employers can apply to receive a tax credit on their annual business tax return (or Form 990-T for tax-exempt businesses). In 20...14, the maximum amount of the potential credit increased to 50 percent (35 percent for tax-exempt businesses) of an employer’s contributions to health coverage. Additionally, beginning in 2014, the small business tax credit is limited to two consecutive years and only available to eligible businesses that offer coverage to employees through the Small Business Health Options Program (SHOP).

• Business-Friendly Tax Extenders. Several of the small business-friendly “tax extenders,” such as Section 179 accelerated depreciation for equipment, bonus depreciation for qualified property placed into service in the tax year, and the work opportunity tax credit, have been eliminated or scaled back in 2014. Even so, the possibility exists that these may be reinstated by Congress, perhaps retroactively, so it’s worth monitoring.

• Energy Investment Tax Credits. If a small business purchases an energy system such as solar panel, fuel cell, or wind, they may qualify for business energy tax credits. The Energy Improvement and Extension Act of 2008 extended by eight years the Business Energy Investment Tax Credit (ITC), meaning credits are available for systems placed into service on or before December 31, 2016. To take advantage of this credit in the current year, a qualifying energy system would need to be installed before December 31, 2014.

• Start a New 401(k) Plan. Small businesses that start a new 401(k) plan can claim a federal tax credit for the first three years of the plan to offset plan startup costs. Eligible startup costs include those necessary to set up and administer the plan, as well as those to educate employees about the plan. A percentage of contributions made by the employer are tax deductible as well.

• Deduction for Working from Home. If you run your business out of your home, you may qualify for a home office deduction. Last year, the IRS introduced a streamlined option which reduced many of the recordkeeping requirements for this tax credit. However, if you are willing and able to maintain the paperwork substantiating all your expenses, you can still apply for a bigger deduction.

Tax Increase Prevention Act of 2014

Tax Increase Prevention Act of 2014, was passed by Congress on December 16, 2014, and awaits enactment by the President. At this time, there has not been official word on when the President will sign the bill. The bill will extend over 50 expiring tax provisions relating to individuals, businesses and the energy sector. Extended individual provisions would include:

•$250 educator expense deduction....
•Tuition and fees deduction.
•Itemized deduction for state and local general sales tax.
•Itemized deduction for mortgage insurance premiums.
•Qualified principal residence indebtedness exclusion for debt discharge income.
Extended business provisions would include:

•Increased dollar limit to $500,000 for §179 expensing.
•$250,000 qualified real property §179 expense limit.
•15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvements.
•50% bonus depreciation.

Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31

The Internal Revenue Service today reminded taxpayers born before July 1, 1944, that they generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.

Known as required minimum distributions (RMDs), these payments normally must be made by the end of 2014.... But a special rule allows first-year recipients of these payments, those who reached age 70½ during 2014, to wait until as late as April 1, 2015 to receive their first RMDs. This means that those born after June 30, 1943 and before July 1, 1944 are eligible for this special rule. Though payments made to these taxpayers in early 2015 can be counted toward their 2014 RMD, they are still taxable in 2015.

The required distribution rules apply to owners of traditional IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2014 RMD, this amount was on the 2013 Form 5498 normally issued to the owner during January 2014.

The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2013 (born after June 30, 1942 and before July 1, 1943) and received the first required payment on April 1, 2014 must still receive the second RMD by Dec. 31, 2014.

The RMD for 2014 is based on the taxpayer’s life expectancy on Dec. 31, 2014, and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS Dot Gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590.

For most taxpayers, the RMD is based on Table III (Uniform Lifetime) in the IRS publication on IRAs. So for a taxpayer who turned 72 in 2014, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.

Though the RMD rules are mandatory for all owners of traditional IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Top Four Year-End IRA Reminders

Individual Retirement Accounts are an important way to save for retirement. If you have an IRA or may open one soon, there are some key year-end rules that you should know. Here are the top four reminders on IRAs from the IRS:

1. Know the limits. You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. In some cases, you may need to reduce your deduction for traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level. You have until April 15, 2015, to make an IRA contribution for 2014.

2. Avoid excess contributions. If you contribute more than the IRA limits for 2014, you are subject to a six percent tax on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2014 tax return (including extensions).

3. Take required distributions. If you’re at least age 70½, you must take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2014. That deadline is April 1, 2015, if you turned 70½ in 2014. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out.

4. Claim the saver’s credit. The formal name of the saver’s credit is the retirement savings contributions credit. You may qualify for this credit if you contribute to an IRA or retirement plan. The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.

New Standard Mileage Rates Now Available; Business Rate to Rise in 2015

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:
•57.5 cents per mile for business miles driven, up from 56 cents in 2014
•23 cents per mile driven for medical or moving purposes, down half a cent from 2014
14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Understanding Capital Gains Tax

Capital gains are simply the profits earned when a capital asset is sold at a higher price than what it was purchased for. A capital loss occurs when a capital asset is sold at a lower price than what you originally paid. Gains and losses are unrealized -- meaning they're considered "paper" gains or losses -- until the investment is sold, at which point gains and losses are realized. For the purposes of this article, we're talking about realized gains and losses on investments (although other property, like cars and furniture, also counts as capital assets).

Capital gains taxes apply to investments held in taxable accounts -- not to investments held in individual retirement accounts or 401(k)s. The buying and selling that creates capital gains and losses can be done by the fund manager or by the investor holding the fund.

Capital gains are taxed in one of two ways. If you hold an investment for a year or less before selling, any gains will be treated as short-term capital gains. If you hold the investment longer than a year before selling, any gains will be classified as long-term capital gains. All realized capital gains must be reported to the IRS.

Generally, long-term capital gains are taxed at a lower rate than short-term capital gains. You pay your ordinary income tax rate on short-term capital gains, while long-term capital gains are taxed between 0% and 20% based on your tax bracket. Those in the highest tax bracket could be hit with an additional 3.8% Medicare surtax, effectively raising their capital-gains tax rate to 23.8%. Taxpayers in the lowest income brackets often have no tax liability on long-term capital gains, so the length of time you hold your investments can make the difference between paying substantial taxes and paying none at all.

3 Year-End Tax Tips for Small Businesses

Expensing and bonus depreciation

As a business owner, you may already know the benefits of Code Sec. 179 expensing and bonus depreciation, which allows you to deduct the cost of certain types of property on your income tax return as an expense. Uncertainty over the ultimate fate of enhanced Code Sec. 179 expensing and bonus depreciation impacts 2014 year end planning, particularly as business owners contemplate purchases of equipment and supplies.

For tax years beginning in 2012 and 2013, the Sec. 179 dollar limitation was $500,000, and the investment limitation was $2 million (both indexed for inflation). These and other enhanced amounts expired after 2013; Congress will likely extend them, though exactly when in the last weeks of this midterm election year is uncertain.

Bonus depreciation also generally expired under current law. This applied to qualified property acquired after Dec. 31, 2007, and placed in service before Jan. 1, 2014 (before Jan. 1, 2015, for certain property). This depreciation could be extended for two years (with retroactive application for 2014) and, if extended, most likely at a 50 percent depreciation allowance.

Using expired breaks

The research tax credit, credit for employer-provided child care, and other tax breaks expire on Dec. 31, 2014. As with Sec. 179, taxpayers may not know the fate of these incentives until late 2014 or early 2015.

Other business-tax breaks expired after 2013, including: the Work Opportunity Tax Credit; the employer wage credit for activated military reservists; 15-year straight line recoveries for qualified leasehold improvements, restaurant property or retail improvements; and the recognition period for S corporation built-in gains, among others specific to industries, energy-efficiency and ethnic workforces.

Affordable Care Act requirements

Few laws have affected tax planning in the way the Affordable Care Act (the ACA, aka Obamacare) has.

Businesses with fewer than 50 “full-time equivalent (FTE)” employees are exempt from the ACA employer mandate. Larger businesses do fall under the mandate (meaning they must offer health insurance to employees) and other requirements, but midsize employers are exempt from the employer mandate for 2015. Employers qualify as “midsize” if they have an average of at least 50 to 100 FTE employees, but they must also satisfy other requirements to qualify for this transition relief. Under current rules, transition relief is only available for 2015, but Congress could extend it.

Plan for how other types of workers may affect your company’s liability for the mandate. Remember to count seasonal and student workers, on-call employees, and others to calculate your number of full-time employees.

Larger businesses also face new ACA reporting requirements; these employers must tell the Internal Revenue Service if they offer health insurance to employees, among other criteria. (Small employers exempt from the employer mandate are also exempt from this reporting.)

If you own a small business, don’t overlook a tax credit to help offset costs of providing health insurance to your employees. To qualify, your business must have fewer than 25 FTE employees for the tax year; average annual wages of employees for the year must be less than $50,000 per FTE; and you must pay the premiums under a qualifying arrangement. A pro-rated reduced credit is also available.

Bank Products

We are pleased to once again offer bank products for this coming tax season through Santa Barbara Bank. Our fees for this service are much lower than the national tax franchises in the area.
 

Still Time to Act to Avoid Surprises at Tax-Time

-...4 form. You usually can have less tax withheld by increasing your withholding allowances on line 5.

Report changes in circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may receive advance payments of the premium tax credit in 2014. It is important that you report changes in circumstances to your Marketplace so you get the proper type and amount of premium assistance. Some of the changes that you should report include changes in your income, employment, or family size. Advance credit payments help you pay for the insurance you buy through the Marketplace. Reporting changes will help you avoid getting too much or too little premium assistance in advance.

•Change taxes with life events. You may need to change the taxes you pay when certain life events take place. A change in your marital status or the birth of a child can change the amount of taxes you owe. When they happen you can submit a new Form W–4 at work or change your estimated tax payment.

•Be accurate on your W-4. When you start a new job you fill out a Form W-4. It’s important for you to accurately complete the form. For example, special rules apply if you work two jobs or you claim tax credits on your tax return. Your employer will use the form to figure the amount of federal income tax to withhold from your pay.

•Pay estimated tax if required. If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay the tax four times a year. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay the tax.