A Timely Postmark on Your Tax Return may not be Enough to Avoid Late-filing Penalties

Because of a weekend and a Washington, D.C., holiday, the 2016 tax return filing deadline for individual taxpayers is Tuesday, April 18. The IRS considers a paper return that’s due April 18 to be timely filed if it’s postmarked by midnight. But dropping your return in a mailbox on the 18th may not be sufficient.

An example

Let’s say you mail your return with a payment on April 18, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared.

You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

Avoiding penalty risk

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

• DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope,
• FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
• UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.

Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.

Another option

If you’re concerned about meeting the April 18 deadline, another option is to file for an extension. If you owe tax, you’ll still need to pay that by April 18 to avoid risk of late-payment penalties as well as interest.

If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.

We can help you determine if filing for an extension makes sense for you — and help estimate whether you owe tax and how much you should pay by April 18.

© 2017

Audits don’t have to be stressful with proper preparation.

Yeo & Yeo has streamlined its approach to audits. We have implemented procedures to complete the audit efficiently using state-of-the-art technology and our knowledge of ever-changing audit and accounting standards. Our approach balances compliance with providing superior services at competitive pricing.

Download my presentation, Preparing for a Headache-free Audit, to become familiar with the audit process and learn tips and trick for preparation.

If your organization receives federal funds, whether from a pass-through entity, such as the State of Michigan, or directly from the federal government, you need to be aware that the Uniform Grant Guidance 2 CFR 200 is now applicable. I encourage you to stay informed and not to fear because UGG can be more streamlined than you originally believed.

Download my presentation, Don’t Say UGH! to UGG Procurement, for a brief summary of the changes.   

Kati Krueger of Yeo & Yeo’s Medical Billing affiliate, a provider of practice management consulting and medical billing services, attended the Medical Billing Executive Conference held March 13-15, 2017, in New Orleans.

The three-day conference provided medical billing executives with an in-depth understanding of important industry developments including:

• New Medicare quality payment program and 2017 billing updates
• How to maximize medical practice revenue
• Physician revenue cycle management 2020 – a three-year outlook
• Performance benchmarks for physician practices

“The conference provided benchmarks for medical billing service providers and their clients, updates, and insight as to what services we may offer our clients in the future. Attending conferences of this caliber increases our depth of knowledge and is critical for us to proactively advise our clients,” says Krueger, vice president of Yeo & Yeo’s Medical Billing affiliate. 

More than 50 medical billing executives from throughout the country attended training sessions to help them manage their medical billing companies more effectively, discuss critical issues and share best practices and solutions.

Yeo & Yeo CPAs & Business Consultants, a leading Michigan accounting firm, has been named one of West Michigan’s Best and Brightest Companies to Work For by the Michigan Business & Professional Association for the thirteenth consecutive year.

The annual competition is a program of the Michigan Business & Professional Association (MBPA) and identifies organizations that display a commitment to exceptional human resources practices and employee enrichment. Organizations are assessed based on categories such as communication, employee engagement and retention, education and development, compensation and benefits, diversity, work-life balance, community initiatives and more. This year, 627 companies completed the entire application process. The winning companies will be honored at MBPA’s annual Workforce Symposium & Awards Luncheon on May 3 in Grand Rapids.

“We are honored to be recognized as one of the Best and Brightest Companies to Work For. We are especially proud because we were compared to not only prominent companies in the greater Kalamazoo area, but also those in many other large Michigan cities such as Lansing, Grand Rapids and Mt. Pleasant,” says Carol Patridge, CPA, managing principal of Yeo & Yeo’s Kalamazoo office.

Mark Perry, CPA, managing principal of Yeo & Yeo’s Lansing office says, “We are very proud of our dedicated employees and our positive work environment. I am happy to see our employees are reporting that they are engaged and enriched through their work.”

Yeo & Yeo offers rewarding careers for individuals who have the desire and drive to grow as leaders in the accounting profession. More than 200 employees in offices throughout Michigan take pride in the firm’s reputation for personal service, commitment to clients and community support.

Yeo & Yeo has a culture of developing future leaders through its in-house training department, professional development training and formal mentoring while sustaining work-life balance. The firm also offers an award-winning CPA certification bonus program. Yeo & Yeo employees benefit from collaboration across offices and teams and have access to advisors and resources that help them succeed.

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

• If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
• If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

• Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

• Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

• If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

© 2017

Do you love playing slots at the casino, but state taxes are cutting into your fun? Perhaps the daily winnings method for reporting slots winnings is for you.

Using the daily winnings method, taxpayers report winnings only from gambling sessions in which they have a real economic gain.

For example, Joe goes to the casino on Friday and plays slots until midnight. He spends $2,000, hits one big jackpot for $1,500, and ultimately spends that, going home with only a 1099-G for $1,500. Under the “ordinary” method, Joe would report the $1,500 on his tax return and pay state income tax on that amount. In Michigan, this would be $64. Using the daily winnings method, he would report $0 in winnings for that session of gambling, since for economic purposes he actually lost $2,000.

Now let’s say that Joe goes back to the casino the next week and plays on and off for a few days. His ins and outs activity is as follows:

In the chart above, you can see that overall Joe lost $4,000 with his slots activity; however, for income tax purposes, he has $9,200 in income to report. Doing this in the “normal” way for his federal taxes he would have $9,200 in additional income included on the front of his return at line 21. He would then subtract that $9,200 as part of his itemized deductions on Schedule A. But what if he doesn’t itemize? What if he would normally take the standard deduction? If that is the case, he is being taxed on his losses! And for state income tax purposes, he will probably be paying tax on the full $9,200. In Michigan, this amounts to nearly $400!

Using the alternative daily winnings method, Joe would instead report just the Monday and Wednesday winnings, totaling $1,500. If he itemizes, he would have offsetting losses on his Schedule A. For state taxes, he would pay tax on just the $1,500, which in Michigan would translate to a little over $60.

To report in this way, a taxpayer will need the detailed daily ins/outs report that tracks play electronically from each casino. For the occasional slot-player, this method may not make a huge difference, but for those who play regularly, using this method can result in significant savings.

Note that this material has been prepared for informational purposes only. Additional technical requirements apply, so please consult a tax professional to assist you in using this method.

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

© 2017

Your donors are currently in the middle of filing their tax returns – it is very important to make sure that your organization is following the IRS’s donation substantiation rules so that your benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that your donors do not have any future problems with the IRS.

Legal precedents exist

Case law generally supports the IRS. In the court ruling Durden v. Commissioner, a church had received $25,171 in contributions from a married couple. The taxpayers had canceled checks documenting these 2007 donations, and the church sent them a written acknowledgment of receipt. But the acknowledgment did not note whether the taxpayers had received any goods or services in exchange for their contributions. The IRS requires such a statement, so it disallowed the taxpayers’ deduction.

The taxpayers then obtained a second receipt from their church, stating that they had not received any goods or services in exchange for their donations. The second receipt was dated June 21, 2009, and the IRS rejected it for failing to meet the “contemporaneous” requirement, which requires the notification to be obtained at the time of the gift.

The taxpayers appealed the IRS decision. Concluding that the couple had “failed strictly or substantially to comply with the clear substantiation requirements of Section 170(f)(8),” the Tax Court upheld the IRS’s disallowance of the deduction.

What is required by the IRS?

For donors’ charitable contributions to be eligible for deductions on their income tax returns, they must follow the IRS substantiation rules. These requirements vary with the nature and amount of the donation but clearly state that, if a taxpayer fails to meet the substantiation and recordkeeping requirements, no deduction will be allowed.

For cash gifts of under $250, a canceled check or credit card receipt is sufficient substantiation. If, however, any goods or services were provided in exchange for a cash gift of $75 or more, the charity must provide a contemporaneous written acknowledgment that includes a description and good-faith estimate of their value.

For cash gifts of $250 or more, as well as noncash gifts, the rules also require a contemporaneous written acknowledgment from the charity, which must include these four elements:

1) the donor’s name,

2) the amount of cash or a description of the property contributed (separately itemized if one receipt is used to acknowledge two or more contributions),

3) a statement explaining whether the charity provided any goods or services in consideration, in whole or in part, for the gift, and

4) if goods or services were provided, a description and good-faith estimate of their value.

If the only benefit the donor received was an “intangible religious benefit,” this must be stated. Goods or services of “insubstantial value,” such as address labels or other small incentives in a fundraising campaign, do not need to be taken into account.

The requirements for noncash donations valued over $500 include attaching a completed Form 8283 to the donor’s tax return and, if valued over $5,000, include obtaining a qualified appraisal of the donated property. Before you accept such donations, it may be wise to confirm with the donors that they are aware of the requirements and have obtained an appraisal, if necessary.  

Quid pro quo

A donation at the end of the year might be your supporters’ holiday gift to your nonprofit. Make sure that you reciprocate by giving them credit and verifying that their donations are properly documented.

© 2014

Many nonprofit organizations believe that since the IRS has granted tax-exempt status, the organization is exempt from all taxes. However, that is not the case, and Michigan sales tax is one significant area that impacts most nonprofit organizations. The default treatment for sales tax for a nonprofit organization is the same as for a for-profit organization unless there is an exemption. As a result, there are many situations in which a nonprofit organization should pay sales tax on items it purchases and charge sales tax on items it sells.

Paying sales tax on purchases

When a nonprofit organization makes a purchase, it can claim an exemption from paying sales tax only if all of the following four conditions are met:

1. The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).

2. The item being purchased is tangible personal property.

3. The item being purchased will be used or consumed primarily in carrying out the organization’s exempt purposes.

4. The transaction does not fall under an exception.

To illustrate the first three conditions, consider an organization that is purchasing cards and dice for a Las Vegas Night fundraising event. The organization is a 501(c)(3) and the items being purchased are tangible personal property. However, the items will not be used in carrying out the organization’s exempt purposes. Even though fundraising is a necessary activity for most nonprofits, it is a means to achieve financial goals and not itself an exempt purpose. The organization should not claim an exemption and should pay sales tax on this purchase.

Once an organization has met the first three conditions, the exceptions described in the sales tax rules should be carefully reviewed for any large transactions that are being considered. For example, purchasing a vehicle costing more than $5,000 that will be used primarily for fundraising would result in the organization owing sales tax, even if the other conditions are met.

If an organization meets all four conditions, then a sales tax exemption can be claimed by providing the vendor with a completed Michigan Form 3372, Sales and Use Tax Certificate of Exemption, and a copy of the IRS determination letter.

It is important to note that items purchased by a nonprofit organization for resale are subject to the same rules as for a for-profit organization. The organization can claim a sales tax exemption on the purchase by filing Michigan Form 3372 with the vendor (a copy of the IRS determination letter is not necessary since the exemption is being claimed for resale instead of for use in the nonprofit’s exempt purpose), but will need to collect sales tax on the sale of those items according to the guidelines outlined next.

Collecting sales tax on sales

A nonprofit organization must register for sales tax with the Michigan Department of Treasury before selling tangible personal property, regardless of whether or not an exemption will apply. Once registered, a nonprofit organization is subject to the same filing requirements that a for-profit organization is, even if no sales tax is due.

When a nonprofit organization sells taxable goods, it is exempt from collecting sales tax only if all of the following three conditions are met:

1. The organization has been granted tax-exempt status as a 501(c)(3) or 501(c)(4).

2. The organization has aggregate retail sales of tangible personal property in the calendar year of less than $5,000.

3. The transaction does not fall under an exception.

To illustrate the first two conditions, consider an organization that is selling open bags of popcorn at a carnival. The organization is a 501(c)(3) and the items being sold are taxable goods because they are food for immediate consumption. The organization estimates that aggregate retail sales in the calendar year will be less than $5,000, so they choose to not collect sales tax. If their estimate is correct, then the organization can claim an exemption and no sales tax will be due to the state. However, if sales exceed $5,000, then the organization is required to pay sales tax on all sales and will need to remit this amount to the state.

If the organization described above estimates that sales will exceed $5,000, then they should collect sales tax. The organization is required to remit any sales tax that is collected to the state, regardless of whether they meet the $5,000 sales threshold for exemption.

This example is less complex than many other sales activities in which a nonprofit organization may get involved. It is critical that an organization carefully review the sales tax rules before conducting any sales of tangible personal property, including serving meals at a fundraising event or holding an auction. These types of activities have special rules and additional recordkeeping that may be required, so appropriate steps should be taken prior to the actual event.

Planning ahead ensures compliance

The Michigan sales tax rules can be confusing for general taxpayers, and the exemptions and exceptions that apply specifically to nonprofit organizations only make them more complex. Nonprofit organizations should take the necessary steps to understand these rules in order to ensure compliance with the state. In addition, if the organization has transactions in other states, those sales tax rules may be different from the Michigan rules discussed here.

For more information, please contact any member of Yeo & Yeo’s Nonprofit Services Group or visit the Sales and Use Tax section of the Michigan Department of Treasury website, http://www.michigan.gov/taxes/.

Gift taxes

Generally, a federal gift tax return (Form 709) is required if you:

• Make gifts to or for someone during the year (with certain exceptions: for example, gifts to U.S. citizen spouses are excluded) that exceed the annual gift tax exclusion (currently $14,000),
• Make gifts of future interests, even if they are less than the annual exclusion amount, or
• Split gifts with your spouse, regardless of amount.

The return is due by April 15 of the year after you make the gift, but the deadline may be extended to October 15. Being required to file a form does not necessarily mean you owe gift tax. You will owe tax only if you have already exhausted your lifetime gift and estate tax exemption (currently $5.49 million for 2017).

In some cases, it is a good idea to file a gift tax return even if you are not required to do so. For example, suppose you give $10,000 worth of closely held stock toeach of 10 family members, for a total of $100,000. Each gift is within the annual exclusion amount, so you do not file a gift tax return. However, 10 years later, the IRS determines that the value of each gift was actually $20,000 and assesses penalties for failure to file a gift tax return (plus taxes, penalties and interest if you have exhausted your lifetime exemption).

Had you filed a properly completed gift tax return at the time you made the gifts, it would have triggered the three-year limitations period for auditing your return. Without a return, there is no time limit on how long the IRS can wait to challenge the valuation of your gifts.

Estate taxes

If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.

Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceed the exemption. A return is required even if there is no estate tax liability after taking all applicable deductions and credits.

Even if an estate tax return is not required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it is not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.

Preparing an estate tax return can be a time-consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there is a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.

Handle with care

Determining whether a gift or estate tax return is necessary or desirable can be complicated. When in doubt, consult your estate tax advisor to discuss your options.

© 2016

Yeo & Yeo’s Amy Buben, a Certified Fraud Examiner, recently spoke to members of the Great Lakes Bay Manufacturers Association about Fraud and internal controls. She described the different types of fraud that occur in businesses and why internal controls are important to help combat fraud risks. She shared examples of fraud that she has encountered as well as current data about the leading fraud schemes and various fraud detection methods, by the size of the organization.

Amy spoke about how to decrease fraud risk by increasing internal controls and the warning signs to watch for that signal possible fraudulent activity.

Download Amy Buben’s Powerpoint presentation.        

For more information on internal controls, read The Four Cornerstones of Internal Controls by Christopher Sheridan, CPA and Yeo & Yeo’s Internal Control Checklist.

Some trendsetting manufacturers have successfully integrated social media into their marketing campaigns to drive traffic to their websites, build brand loyalty and attract new talent. Here’s how.

Stand out

The first questions to ask before jumping on the social media bandwagon are:

• What differentiates your company?
• What will customers and prospective employees react to?
• What do you hope to accomplish?

The answers will guide your company’s social media strategy. Posts should focus on what makes your company special, be relevant on a personal level and encourage people to act in a way that accomplishes your goals.

For example, a small consumer products manufacturer uses social media to boast about its “Made in America” competitive edge. It creates compelling posts about making quality products that are “safe for families to use.” So far, the manufacturer has more than 10,000 Facebook friends, including many employees who were recently hired. Its posts also include hyperlinks that drive traffic to the company’s website.

Another manufacturer wants to position itself as a leader in technology. It uses videos and Twitter-casts to demonstrate its latest product innovations, research efforts and equipment upgrades. It encourages customers to chat with service reps through links on LinkedIn and Twitter.

Examples of other issues that manufacturers promote through social media include green manufacturing practices, involvement in Project Lead the Way programs, safe and flexible work environments, and employee participation in charitable events.

Keep it simple

Creating social media content isn’t that hard to do. Most business-to-business social media posts consist of just a picture and a couple of sentences — possibly less if your company connects directly with consumers. A clever infographic or a short video may take more time to create than text, but it can be very effective at grabbing people’s attention.

There’s no rule for how often companies should post new content. But anyone who is active on social media knows that there is a limit to how many times you can post without becoming a nuisance. You want customers to remember your company, but sometimes, less is more.

Remain active

Social media requires ongoing attention. In addition to creating new posts, you’ll need to continuously watch for inappropriate comments and block social media “trolls” looking to cause mischief. You can also contact your financial advisors about how to measure click-through rates and evaluate the return on investment from your social media activities, so you can adjust your strategy as needed.

© 2016

During the life cycle of a manufacturing company – as it changes and grows — management may decide it is time to restructure and improve the accounting department, including reporting. The company may reach a stage where it becomes imperative to optimize existing software or even replace or expand leadership within the finance or accounting function.

Implementing these kinds of major changes can be daunting, but it is not something that you need to tackle alone. Yeo & Yeo is positioned to help its manufacturing clients who need assistance with transitional accounting and staffing.

Yeo & Yeo is partnered with ProNexus LLC, a management consulting and professional services firm that enables us to offer our clients customized accounting and staffing solutions in support of the offices of the C-Suite. ProNexus professionals get to know a business right up front and have the experience to provide support without significant ramp-up time.

Read a case study to find out how ProNexus was able to find a solution for the accounting pains of a small manufacturer.

Yeo & Yeo is excited to announce that in summer 2017 we will unveil our inaugural Accounting Summer Leadership Program.

The program offers undergraduate accounting students the opportunity to experience a day in the life of a Certified Public Accountant (CPA) and learn about the unique culture of our firm.

Yeo & Yeo strongly believes that nurturing and mentoring our professionals from day one of their career will help them achieve their career goals and aspirations. We provide our professionals with mentorship, career advocacy, and skill development through a variety of programs – now including a Summer Student Leadership Program. The firm’s Career Advocacy Team empowered our group of young professionals to create an informative and enjoyable summer program that will benefit college students majoring in accounting.

Read, Advocating for Yeo & Yeo’s Employees, to learn more about our firm’s Career Advocacy Team.

As a young professional at Yeo & Yeo, I feel honored to be a pioneer with this program. We have made it our top priority to construct a program that will provide up-and-coming accounting students with exposure to the opportunities in public accounting and give them an inside view of the culture of our firm. Not only do we want to offer students a perspective on the life of an accountant, but we also wish to build relationships and help them develop to prepare for post-graduation.

Over the course of the two-day program we have organized activities and events that will engage and challenge the students. The first day of the program will be fun-filled with dinner and entertainment to provide time for the students to meet key members of our team including partners, and professionals from our offices throughout Michigan.

On the second day, students will have the opportunity to shadow our professionals in their day-to-day work environment, hear career testimonials, and perform a client case study. The students will also have the chance to participate in an interview panel which will allow them to polish their interviewing skills.

To be considered for the Summer Leadership Program, you must have at least one year of college experience and have a demonstrated interest in a career in public accounting. We ask that you submit a current resume and cover letter that addresses your interest in the program by May 5, 2017.

Apply to Yeo & Yeo’s 2017 Summer Leadership Program today.

It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.

Basic qualifications

For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

Factors to consider

Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the financial burden

Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

© 2017

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

Changing the tax treatment

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.

© 2017