For most people, using IRA dollars for charity is a two-step process. You take money from your IRA, reporting taxable income. Then, you donate it to the charity or charities of your choice, perhaps claiming a tax deduction for the contribution.

Another alternative is to make charitable contributions directly from your IRA. This is called making a qualified charitable distribution (QCD) which goes directly from your IRAs to recipient charity. QCD’s are available only to IRA owners age 70½ or older. Such individuals can use QCDs every year now, up to $100,000 per year.

Once IRA owners reach age 70½, they usually must take certain amounts of required minimum distributions (RMDs) each year or pay a 50% penalty on any shortfall. QCDs count toward RMDs.

Example:
Joyce Harris, age 72, has a 2016 RMD of $20,000. If Joyce, who gives $5,000 to charities each year, makes those donations directly from her IRA, that $5,000 counts toward her RMD for the year, so she’ll only have to withdraw another $15,000 from her IRA in 2016. She’ll report only $15,000 of taxable income, not $20,000, but she won’t get a tax deduction for the $5,000 flowing from her IRA to charities.

Why would Joyce do this? There are several situations in which using a QCD could pay off. Perhaps most important, Joyce will be able to satisfy her $20,000 RMD obligation yet only report $15,000 of income, thus, reducing what otherwise would be her adjusted gross income (AGI) by $5,000. For some taxpayers, QCDs can eliminate any addition to AGI from their required IRA distributions. A lower AGI, in turn, can offer many benefits throughout your tax return. Our office can go over your specific situation to see if using an IRA for donations after age 70½ would be tax effective for you.

Taxpayers who itemize deductions on Schedule A of IRS Form 1040 can deduct some state and local tax payments including state income taxes and real estate taxes. In situations where the taxpayer’s resident state does not impose income taxes, tax payers may deduct sales taxes where the amount of state and local income taxes is less than sales taxes.

Example:
Marge and Nick Palmer usually itemize deductions on their joint tax return. Generally, the Palmers deduct the state income tax they pay. In 2015, though, their income fell, and so did the state income tax they paid. The Palmers also have made some large purchases, paying steep amounts of sales tax. For 2015 and future years, the Palmers can deduct the sales tax they paid instead of the state income tax they paid, if the amount of sales tax exceeded their income tax. This tax provision obviously helps people who live in a state with no income tax; other taxpayers also may benefit. A taxpayer may deduct the actual amount of sales taxes paid during the year or, alternatively, can use tables created by the IRS to determine the allowable deduction. If a taxpayer uses the tables to determine the deduction, he or she can add the tax paid on certain items (cars and boats, for example) to the amount from the IRS tables.

Approximately 55 million people receive social security benefits and of those 15 million people pay taxes on their social security benefits. Demographically 40 million of the beneficiaries are age 65 or older.

Determining if your benefits are taxable is complicated and depends on your other income and filing status.

The first step in calculating whether your social security benefits are taxable is to determine what your ”Combined Income” is which is the sum of your “Adjusted Gross Income” plus Nontaxable Interest plus one half of your Social Security Benefits.

If your “Combined Income” exceeds $44,000 up to 85% of your Social Security Benefits may be taxable.

One of the best available tax breaks for individuals (not corporate, trust or partnership entities) was created in the Taxpayer Relief Act of 1997 which allows qualifying individual taxpayers to exclude all or a portion of the gain from the sale of their home (principal residence) from income taxes. Basically under Section 121 of the Internal Revenue Code, single taxpayers may exclude up to $250,000 of gain ($500,000 of gain for joint returns).

In order to qualify for the tax free treatment on the gain the individual taxpayer must satisfy an ownership, use, and frequency test. The ownership test requires that the individual taxpayer own the home (the deed is in your name) for at least two (2) out of the past five (5) years. The use test requires that the individual taxpayer uses the home as his or her principal residence (you live in and occupy the home as opposed to renting the home). The frequency test means that the exclusion can only be used once every two years.

There are special rules for joint returns. The joint $500,000 exclusion is available if:
a. Either spouse meets the ownership test; and
b. Both spouses must meet the use test; and
c. Neither spouse excluded a gain in the last two (2) years.

A reduced exclusion is available where the ownership and use test is not met. The reduced exclusion is available where the sale of your home was due to a change in employment, bad health, or unforeseen circumstances.

You must report the sale of your home on your tax return if you:
a. Receive a Form 1099-S, Proceeds From Real Estate Transactions or
b. A portion of the gain is taxable or not excluded.

If neither of the above applies then you do not have to report the gain from the sale of your home.
If the amount of the gain on the sale of your home exceeds the $250,000 or $500,000 exclusion then the excess gain is reported as a long term capital gain on your Schedule D and receives the favorable benefit of the lower long term capital gain tax rate. Unfortunately, if you experience a loss on the sale of your home the loss is not deductible on your tax return since the IRS considers it a personal loss.

Dependents are a great way to lower your tax liability. The IRS gives an allowance for reduced tax payments for tax payers that provide monetary support to others (dependents).

Dependents can include qualifying children. In order to claim a qualifying child several requirements must be met.

The individual must bear a specific relationship to the tax payer. The relationship requirements are defined as a child of the tax payer, a brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendent of these relatives.

The next requirement is age. The qualifying child must be younger than the tax payer and under the age of 19 as of the end of the calendar year.

If the qualifying child is currently a full time student for five months out of the year, the age limit moves up to under 24 years old as of the end of the calendar year.

There is no age requirement if the child is permanently and totally disabled.

The next requirement is that the qualifying child must live with or have their principal address listed as the tax payer’s for more than half of the tax year.

Finally, the qualifying child cannot provide over half of his own support during the year. An individual who is married and files a joint return cannot be considered a qualifying child.

Even though an individual is not a qualifying child, they still may meet the requirements of a qualifying relative.

If you made energy efficient improvements to your home in 2015 you may be eligible for significant tax credits on your income tax return.  To qualify for the credit the energy improvements must be to your home which must be located in the United States.  The credit is equal to 30% of the cost of qualified improvements.

The 30% residential energy efficient property credit pertains to five (5) types of qualified improvements which consist of:

1. Qualified solar electric property that uses solar energy to generate electricity for use in your home.
2. Qualified solar water heating property
3. Qualified small wind turbines, up to $4,000  cost ,  used  to generate electricity for use in your home
4. Qualified geothermal heat pumps which use ground water as a thermal energy source to heat or cool your home
5. Qualified fuel cell property that converts a fuel, like natural gas, into electricity using an electrochemical process (There are limitations based on kilowatt power capacity}

The credit is used to offset your regular income tax liability and any excess credit can be carried over to tax year 2016.

What is an annuity?

An annuity is an insurance product where you receive payments for the rest of your life. You pay the insurance company a lump sum amount, and they agree to pay you periodic payment for the rest of your life. These can be called payouts. The payments you receive can be monthly, quarterly, of annual.

You can choose to start the payments immediately or at a later date which will allow the annuity to grow tax free. If you live a long life your periodic payments can exceed your purchase cost and you win. Since the periodic payments end at the end of your life you should strongly consider your life expectancy since if your expectancy is short then your periodic payments may be less than the cost of your upfront investment or cost and any unrecovered cost is usually lost.

How is an annuity taxed?
The taxation of the periodic payments that you receive will depend on your cost of the annuity contract.
The annuity payments to you are taxed only when you start to receive the monthly, quarterly or annual periodic payments. They may be fully or partially taxable.
If you have no tax cost in the annuity contract the annuity payments you receive are fully taxable as ordinary income on your tax return. When you have a cost in the annuity contract the periodic payments are partially taxable.
There are two methods to determine how much of your periodic payment is tax-free. Which method to use depends on whether the annuity is a qualified or non-qualified annuity. A qualified annuity is usually acquired through your employer. A non-qualified annuity is usually where you purchase it directly from an insurance company.
Qualified plans use the IRS Simplified Method and for nonqualified plans use the IRS General Rule. For example, under the Simplified Method if you are age 55 or under and you paid $36,000 for the annuity contract then $1,200 of the annuity is tax free for the next 30 years. The excess over $1,200 is taxable. After 30 years you have recovered your cost and the annuity payments are fully taxable.
The tax-free part of the annuity payment payouts and how annuities are taxed depends on whether you purchased the annuity with pre-tax or after-tax dollars.

If you purchase a bond on May 31, and the next scheduled interest payment is June 30, you fall between interest payment dates and you have to pay the seller the portion of the next interest payment he is due, based on how many days into the payment period the seller owns the bond, say 60 days. This amount is called accrued interest and is included in the sales price.

At the end of the tax year, the accrued interest is usually included in the Form 1099-INT that the buyer receives. For the buyer, this amount is not taxable, instead it is treated as a return of capital investments, which reduces his tax cost of the bond. The accrued interest is taxable to the seller. The seller must report the part of the sales price which represents accrued interest as ordinary interest income, even though a Form 1099-INT is not received.

The Obamacare requirements for employers to provide heath insurance to employees are new and complex. One of the significant provisions is the requirement that employers are subject to what is called “Employer Shared Responsibility”

However the IRS web site says the following:
“To be subject to the Employer Shared Responsibility provisions for a calendar year, an employer must have employed during the previous calendar year at least 50 full-time employees …….”

In this context, it seems that small business is defined as having less than 50 employees.

We see the word “SMALL” in government programs such as bidding on Federal Government Contracts, Small Business Association programs, HUD (Housing and Urban Development) programs, and many others.

The Office of Management and Budget maintains a table labeled “Table of Small Business Size Standards Matched to North American Industry Classification System Codes” (NAICS). There are more than 1,000 different types of business listed.

There are generally two types of categories identifying small businesses; average annual revenue running from $750,000  to $38,500,00, and number of employees from 100 to 1500.

The Small Business Administration has identified various classifications of business that are eligible for favorable treatment:

• Small Business Set Aside Program
• Small Disadvantaged Business (SDB) Certification Program
• 8 (a) Business Development Program
• HUBZone Empowerment Contracting Program (Historically Underutilized Business Zone)
• Service-Disabled Veteran-Owned Small Business (SDVOSB)
• Veteran-Owned Small Business (VOSB)
• Women-Owned Small Business (WOSB)

For a business to qualify for one of these programs, there are additional requirements having to do with control, net worth, and personal experience. But they are all defined as SMALL.

It seems therefore that the term “Small Business” is defined in context, and for many government rules and opportunities, much research is needed.

When checking a tax issue or other government regulation, you often see the term “Safe Harbor”.

For example, the IRS requires that tax payers file estimated taxes on a quarterly basis, if there is going to be income tax liability not covered by employee withholding.

What choice does a taxpayer have if she expects that taxable income in 2016 is greater than 2015, and that 2016 taxes will also be greater than the tax liability for 2015?

If you pay enough estimated taxes in 2016 to bring your total tax payments greater than 110% of your total tax liability for 2015, you can be considered to be in “safe harbor”, that is you will not have penalties

for underpayment of your 2016 tax liability even though you will owe additional taxes when you file your 2016 tax return.

Example #1

Frank and Katie Brown are a married couple who filed jointly on their 2015 tax return. Their adjusted gross income (AGI) for 2015 was $90,000, and their total tax liability for 2015 was $18,000.  In 2016, Mr. and Mrs. Brown need to pay the smaller of $18,000 or 90% of their expected tax for 2016 to avoid any underpayment penalty.

If Frank and Katie’s AGI is over $150,000, they need to pay $19,800 (110% of $18,000) or 90% of their expected tax for 2016 in order to stay in safe harbor.

The dictionary says that “A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. It is usually found in connection with a vaguer, overall standard.”

Potential “Safe Harbor” rules that affect residential lending institutions.

The “Consumer Financial Protection Bureau”, (CFPB), a new federal agency was created by the Dodd Frank Act, and issues regulations designed to prohibit abusive lending practices.

One of the rules defined by the CFPB is a “Qualified Mortgage”, which includes:

• No Excessive Upfront Points and Fees – not in excess of 3% of the amount borrowed.
• No Toxic Loan Features
• No interest-only loans
• No negative-amortization loans. These are loans where the principal amount borrowed increases over time, even as monthly payments are being made.
• No terms beyond 30 years.
• No Balloon Loans. unless the lender is considered a “small creditor”
• Limits on Debt-to-income Ratios no higher than 43%. The debt to income ratio compares the amount of money a person earns each month to the amount he or she spends on recurring debt obligations.

CFPB maintains a web site where prospective borrowers can read a section “Shopping for a Mortgage? What you can expect under federal rules” This is an 18 page section which emphasizes the benefits of a Qualified Mortgage..

However, on the CFPB web site labeled “Basic Guide for lenders, What is a Qualified Mortgage?”  there is the following:

“Extra Note: Even if a loan is not a qualified mortgage, it can still be an appropriate loan. You can originate any mortgage (whether or not it is a QM) as long as you make a reasonable, good-faith determination that the consumer is able to repay the loan based on common underwriting factors. You can continue to rely on your sound, tested underwriting guidelines that you have used in the past to make loans that have generally performed well, as long as you document the information you consider.”

Small Creditor Qualification

If the lending organization has assets below $2 billion at the end of the last calendar year and originated 500 or fewer first year first-lien closed-end residential mortgages, then the lender may be treated as a Small Creditor. In 2016 the number of mortgages has been raised from 500 to 2000, and excludes the loans that the creditor or its affiliate keep in their portfolio..

However after January 16, 2016 there is an additional question: Were over 50% of your organization’s first lien covered transactions in the prior year secured by properties in rural or undeserved areas?

Is everyone confused?

As with many tax and other government benefits and regulations, it takes expert interpretation to determine whether safe harbor rules exist, how they are defined, and have they recently changed.