Richard Goldstein
Richard Goldstein
November is just around the corner, which means it’s time to start thinking about 2016 taxes. I know many have just filed 2015 personal tax returns and are still in the tax-thinking mode. This month the column will review year-end planning and several key, recent developments that may be of interest.

Mortgage payments made on behalf of ex-spouse were deductible alimony

A divorced couple’s divorce agreement called for the ex-wife to continue to live in a house that was originally co-owned by her ex-husband. The ex-wife was responsible for the mortgage owed to a credit union. However, the actual mortgage payments were made by her ex-husband. The mortgage payments were treated as alimony by the ex-husband on behalf of the ex-wife. The IRS claimed the mortgage payments did not qualify as deductible alimony because the ex-husband still co-owned the residence and remained liable for the mortgage debt.

The case was heard by The North Carolina Bankruptcy Court that found the ex-husband had no equitable interest in the house because he had relinquished any ownership under the terms of the divorce decree and had nothing to gain form making the mortgage payments, except for the tax savings from claiming payments an alimony deduction.

Internal use software

Computer software that is developed by or for the benefit of the taxpayer for internal use is not considered eligible for the research credit. However, the IRS has issued regulations that provide that certain internal use software is eligible for the research credit if it satisfies a high threshold of innovation test. The IRS clarified that this test applies only to the software developed in use in general and administrative functions that facilitate or support the conduct of the taxpayer’s business and to dual function software. These rules are effective October 4, 2016.

The rule is important if software developed by a PR firm is eligible for the credit. In certain circumstances, the credit can reduce payroll taxes if the company is not profitable. Generally, this offset is available to companies that have gross receipts for five years or less and is not eligible if it generated gross receipts in 2012; less than $5 million of gross receipts in 2016 and for each subsequent year the credit is elected; and qualifying research activities and expenditures were made. You need to speak to your tax advisor on this to see how the tax law change may impact you.

Private debt collection to begin next spring

The IRS has announced that it will begin collecting taxes due next spring. The IRS will use designated contractors to collect outstanding “inactive” tax receivables. Written notices will be sent from the IRS that taxpayer accounts are being transferred to a private collection agency. The contractors are bound by the consumer protection provisions for the Fair Debt Collection Practices Act and must respect taxpayer’s rights. It seems to me now is the time to resolve any taxes that may be due. Taxpayers may very well qualify for a substantial reduction in taxes due the IRS based on individual financial circumstances.

Form W-2 and form 1099-MISC

When your PR firm pays nonemployee compensation aggregating to $600 or more to a single payee in the tax year, the firm must file an information return using Form 1099-MISC to report these payments. Firms that pay wages to employees report on Form W-2. Before changes made by the tax law, these forms were required to be supplied to payees and employees by January 31 of the following year, and copies were required to be filed with the IRS and Social Security Administration (SSA) by the last day of February, or by March 31 if filed electronically.

The above due dates for filing have been accelerated. Calendar year 2016 forms due in 2017 that are filed with the IRS and SSA are now due January 31 of the following year, and the March 31 due date for electronic filings is no longer available. So 1099-MISC and Form W-2 is now due the same dates for both employees and the government: January 31, 2017. Penalties will result if these dates are missed!

Tax planning

Here are five money saving ideas for your consideration (Sorry I cannot give an in depth review of these ideas. You need to speak to your tax advisor or send me an email. If I can assist, I will be happy to do so.)

If your PR agency offers a flexible spending account arrangement for out-of-pocket medical or child care expenses, or a health savings account for medical expenses, make sure you are maximizing the tax benefit.

If you own a partnership or S corporation that is expected to generate a loss this year, you may want to make a capital contribution (or in the case of an S corporation, a loan) before year end to ensure you have sufficient basis to claim the loss deduction.

By this time, you should be preparing an estimate of your tax refund or balance due for 2016. Consider increasing withholding (both Federal and State) from your paychecks now through the end of the year or deposit an additional amount before the end of the year. You just may save on penalties by doing this because the withholding is considered made as of the beginning of the year regardless of when the withholding is withheld.

If you have reached age 701/2, consider making charitable donations directly from your IRA. The donations are tax-free to you, which equates to a 100 percent write-off (up to $100,000 per individual IRA owner per year), without having to itemize deductions. Caution: to get this tax break, the funds must go directly form the IRA to the charity.

If you own any securities that are all but worthless with little or no hope of recovery, consider selling them before the end of the year to capitalize on the loss this year. The loss will be a write-off up to $3,000, $1,500 for married filing separately, or offset gains.

Feel free to email me if you are interested in more.

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Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants. He can be reached at [email protected].