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Tax Planning Letter 2016


November 21, 2016

Dear Clients and Friends,

Happy Holidays!  As I write this, Thanksgiving is just three days away.  You may be thinking turkey.  I am thinking about Trump and tax changes. (I can’t help it).  He has plans, and for the first time in years, there is a real opportunity for tax reform. 

Trump has promised to help the middle class and create jobs.  Tax policy is perhaps the most important lever available to government to affect the economy, though it is a blunt one, and often yields unintended consequences.  But the new administration seems determined to use it to try to increase growth, which will create jobs.     

There are a number of proposals out there.  Don’t bet on any of them until they are passed – you just never know what the final law will say.  But a lowering of rates and reduction of brackets for individuals seems likely, and with that elimination of certain itemized deductions and a larger standard deduction.  It is also likely that the penalty tax for not having health insurance will go away, as well as the requirement that employers provide health insurance to employees.  The taxes enacted by Obamacare, like the net investment income tax and the additional Medicare tax on high earners may also go away.  There is even talk of eliminating the alternative minimum tax.  But right now, it is all talk.  I think there will be a new tax law, and there will be significant changes.  Will it be retroactive to January 1, 2017?  Will it be phased in over time?  Who knows?

Let’s talk about what we need to think about now.

Records, Records!  If you want to survive IRS questions without writing a check, there is no substitute for detailed records.  A detailed business mileage record is the most common record that people could beef up, but a record of the hours spent in your real estate business to substantiate your participation is another area.  Are you sharing custody of minor children and expect to take the dependency exemption?  Then you need to keep a record on your calendar of the nights the child(ren) spent in your home during the year.  You need detailed records of your charitable contributions.  Basically, you need to be able to substantiate everything on your return.

For Business Owners, Landlords and Trusts - The IRS is Making Their Problem Our Problem:  For years, Congress has given the IRS grief about the “Tax Gap” – the difference between taxes collected and taxes actually owed.  Most of the tax gap is due to underreporting of income.  The IRS matching program, where W-2s and 1099s filed by payers are automatically matched with tax returns filed, has been a successful, efficient way to keep underreporting at a minimum.  So naturally, IRS wants more of it.

New this year, Forms 1099 and W-2s are due to the IRS, as well as the payees, January 31.  We used to have until February 28 to get them to IRS; no more.  The penalty for not filing a required 1099 form has been increased to $500 per form.  You are required to file a 1099 for sole proprietors, LLCs, partnerships, trustees and attorneys to whom you pay more than $600 for the year.  In order to do that, you need their name, address and tax ID#, as well as what you paid them.  If you don’t have that info, have them complete a form W-9, available at  I suggest that you get the W-9 completed by the contractor before you issue the check, if you have not already done so.  You tend to get a quicker response that way.  We will prepare your 1099 forms for you if you would like.  Please get that information to us right away in January.

About Your Investments:  In the last couple of years, many of our clients with taxable funds were surprised by the high capital gain distributions passed out by many mutual funds.  Sadly, you could have capital gains even on funds that have not done well in 2016.  Many funds have already determined what capital gains distributions will be passed out to their investors this year.  You can look at your mutual funds’ websites to review that information.  You can also get information on, which is free.  If you have a fund with a big capital gain coming, you might want to consider disposing of the fund before the ex-dividend date, if you can.  Be sure to consult with your investment advisor.

We remind you that the end of the year is the right time to examine your investments (winners and losers over the course of the year).  Reviewing your portfolio's records for the year can make a difference in not only what you might buy or sell in December but what estimated tax you will need to pay (or not pay) for the fourth quarter of 2016.

If you have some capital gains, perhaps you also have some losers that you can sell to offset the gains and reduce your taxes for 2016.  If you have a capital loss carryforward from prior years, you can harvest some gains without additional taxes due.

This is where your investment professional can really help you strategize.  We urge you to consult with your trusted professional before you jump.  But – they are going to be really, really busy, so don’t wait until the last minute!  And we can work with your investment professional to project taxes under different scenarios, and to make sure alternative minimum tax is considered if it applies.

Taxpayers in the 15% and under ordinary income tax brackets still pay long-term capital gains tax of 0% in 2016.  Capital losses, including carryforward losses from prior years, can be used to fully offset capital gains. Losses taken in excess of gains can also be used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately).  Losses over the $3,000 limit can be carried forward to future years until used up. 

In calculating gain or loss for purposes of balancing your gains and losses at year end, remember that, for tax purposes, it's not how much your stocks have gone up or down for the year but rather how much gain or loss you've realized since purchasing them.

If you have mutual funds that are in a tax loss position, you need to sell them if you want to realize (and use) the loss.  One strategy would be to exchange the fund for a similar fund in the same “fund family” (mutual fund company).  Thus you maintain the same diversification and management, but realize a loss you can use now against gains already realized elsewhere.  These exchanges, within the same fund family, are generally done without commission cost to you, though you should verify that with your financial planner or broker before acting.

Mileage Rates:  The 2016 standard mileage rate for business miles is $.54 per mile.  The medical mileage rate for 2016 is $.19 and for charitable miles is  $.14  The IRS requires good  records to substantiate your mileage deduction.  There is no substitute for a mileage log to prove business miles.  There are apps available for your phone that will make tracking your business miles a breeze.  The simplest log is to record your miles on your calendar.

Retirement Contribution Limits:  The allowable IRA contribution limit for 2016 and 2017 remains at $5,500, with an extra $1,000 if you are age 50 or above.  There are income limitations for contributions to both deductible IRAs and Roth IRAs.  Recently we have had clients make contributions to these plans, only to find that their income was too high to be eligible.  Give us a call for further information and planning help. 

The allowable retirement plan contribution for a Simple IRA is $12,500 for 2016 and 2017, with an extra $3,000 if you are age 50 or above.  The 401(k), 403(b) and 457 plan employee contribution limits are $18,000 for 2016, plus an extra $6,000 if you are age 50 or above, and remains unchanged for 2017.

We urge everyone to review their IRA beneficiary forms to make sure that they are up-to-date.  Please be aware that upon your death the IRA beneficiary form controls where the IRA goes, not your will or trust, so making sure these forms are accurate is essential.  In order to “stretch” your IRA payouts, your IRA needs to have a designated beneficiary.  Beneficiary forms for other retirement plans and insurance policies should also be reviewed. 

Trust as Beneficiary:  Yes, your trust can be your IRA beneficiary.  But we are finding some practical difficulties with that upon implementation, particularly in the case of multiple trust beneficiaries.  The trust may have to remain open as long as the IRA exists, for example.  The life of the oldest beneficiary has to be used for minimum required distributions and this can be another drawback.  Having individual beneficiaries for IRAs seems to work much better in many cases.  You may want to reconsider whether the practical consequences of having your trust as your beneficiary are what you really intend. 

Minimum Required Distributions:  Be aware that reaching age 70 1/2 is a big milestone.  You must begin taking required minimum distributions from your retirement plans, including IRAs. 

Inherited IRAs have required minimum distributions, too, and if you want to take them over your lifetime, then they begin in the year following the date of death of the account owner, no matter how old you are. There are special rules for how these accounts are titled, and other distribution options.  Be sure to call us if you have inherited an IRA to be certain you know the particulars.  You don’t want to pay tax on the account prematurely because you were unaware.

Flex Plans at Work?  Sometimes people do not realize the wonderful tax savings that can go into their pockets if they make use of available cafeteria plans at work, and thus they don’t bother with them.  If you have a flexible spending plan for dependent care or medical expenses, please consider those benefits.  For the investment of an hour or so to get it set up at work, you could save literally thousands of tax dollars over the course of a year.  Do yourself a huge favor – don’t let this go by.  You must have better things to do with your money than to let Uncle have it.

Don’t forget to spend your balance in your health flexible spending account by year-end. 

Itemized Deductions:  As we head into the holiday giving season, please know that all cash donations to charity must be documented – no exceptions.  You do not necessarily have to provide all supporting documents to us, but you must have them in your files.   You are no longer allowed any write-offs for contributions of cash or other monetary gifts unless you retain either a bank record such as a cancelled check, or a written statement from the charity.  For donations of over $250, the cancelled check is not enough – you must have the statement from the charity.

Also, for clothing and household item donations to Goodwill and other charities, we need you to create an itemized list and value each item.  This is the documentation the IRS requires.  We have available some lists with suggested “thrift shop” values for your use.  We have them on our website.  Call if you want us to mail them to you.

Items donated to charity must be in “good or better” condition.  We suggest that when you drop off items, have someone from the charity look them over and sign a statement that the items donated are in “good or better” condition.

Don’t forget to include your charitable mileage in your tax information – including those trips to drop stuff at Goodwill!  Do you volunteer at church or school?  More miles!  Medical miles to the doctor are also deductible, if you qualify for a medical deduction.  You will need a log of your miles driven.

Foreign Bank and Brokerage Accounts:

If you have any foreign bank and/or brokerage accounts with a combined value greater than $10,000 on any day of the year, or you hold specific foreign financial assets (excluding land) greater than $50,000 at the end of the tax year, you are required to report them.  The IRS is hitting this hard (a revenue hunt), and the penalties for failure to file the forms are stiff. 

Also, be sure to tell us about any income generated by these accounts, even if no 1099 is issued.

Scam Reminder:  The IRS does not contact taxpayers by email or directly by phone without snail mail first. Emails and initial contact by telephone purportedly from the IRS are scams.  If in doubt, send it to us to look at or call us.  We get these scam items from clients often.  Be wary.  And because even genuine IRS correspondence is often wrong, please let us see it before you act or pay them. 

2016 Tax Return Due Date Change:  For 2016 returns due in 2017, the due date for partnership tax returns is moved forward from April 15 to March 15.  The intent is so that K-1s will be received in time to file individual returns by April 15.

An Opportunity:  I have been the treasurer of the Southwest Michigan Land Conservancy (SWMLC) for some years now.  The Conservancy protects land in the nine county southwest Michigan area, with, among other goals, an emphasis on protecting land in area watersheds to help maintain water quality for consumption and recreation, and an emphasis on protecting endangered species in our area.  SWMLC is also working with area communities to continue to make several SWMLC preserves more accessible to the public – places to help us remember and experience what our home has looked like since time began, before development. 

I will purchase a one-year membership for anyone (not currently a member) who has an interest and wants to become more acquainted with the Conservancy.  You would receive their terrific newsletter and opportunities to attend various events that sometimes include visits and walking tours of area easements and preserves.  If you would like to take advantage of this opportunity, please give our office a call.  Each year some clients take advantage of this opportunity. 


Talk to us!  We find over and over that the more we know about our clients, the more we can help them.  We need you to tell us about new businesses, marriages, second homes, children in college, how many months a year you spend in Florida (where there is no income tax) and so on.  If you have a life event and you wonder if it might affect your taxes, shoot us a quick email, or give us a call.  And be sure to send us any correspondence you see from IRS or Michigan.  It is not payable until we say it is.  The mistakes IRS makes on these notices are sometimes unbelievable. 

We could go on and on about taxes – sometimes we do!  We are never bored with taxes, but we recognize that we are different like that.  We also recognize that our readers are busy with other things besides taxes, and accordingly we try to keep our letter concise.  Therefore, if we have missed something that you have a question about, give us a call or send an email. 

Our 2016 tax organizer will arrive in January.  Returning clients will receive a personalized organizer which will contain information from last year’s return.  We hope the organizer will make it easier to collect this year’s information.  New clients will receive a generic organizer for their use. 

Thank you for allowing us to be your tax professionals.  We would be delighted to provide a free initial consult to any friends or relatives if they are looking for people like us to help them.  We meet some of the nicest people that way.      

Have a wonderful Holiday Season!  We look forward to hearing from you soon. 

Very truly yours,