2016 Year-End Tax Planning for Individuals & Businesses
2016 Year-End Tax Planning for Businesses (Client Letter)
2016 Year-End Tax Planning for Individuals (Client Letter)
Does the New Surtax Apply to You?
Starting from January 1, 2013, there is a new 3.8% net investment income tax on some categories of passive investment income for individuals, trusts and estates that exceed certain income thresholds. Capital gain from sale of your property or business is also included.
As a result, it is in your best interest to identify these income sources and adopt strategies to lower your modified adjusted gross income or your net investment income to avoid the surtax.
If you think the new tax may apply to you, we can explain your choices and help you pick the best strategy to reduce your tax bill.
Why do you need a competent CPA to prepare your tax returns?
1. Tax return preparers are critical to helping taxpayers comply with complex and changing tax laws.
Tax law can be too complex for the average taxpayer to navigate without a tax professional. The number of Form 1040 and 1040A returns filed during the past 20 years has increased by 21% and 57%, respectively, while filings of Form 1040EZ, the simplest individual tax return, have decreased by 3%. Even before the “fiscal cliff” tax code changes, there were 4,680 tax code changes since 2001. Tax reform could simplify filing, but many taxpayers will require a well-informed tax return preparer to navigate the changes.
All tax practitioners need continuing education to practice effectively. Licensed professionals (CPAs, attorneys, and enrolled agents) all must meet annual education requirements and pass rigorous exams. Without tax return preparer regulation, more than half of all professionals registered with the IRS to prepare tax returns would not be required to complete continuing education or testing.
Studies show that tax return preparers without education requirements prepare a high number of incorrect returns. In a 2008 investigation, the Treasury Inspector General for Tax Administration (TIGTA) audited returns prepared by 28 unlicensed, unenrolled tax return preparers. TIGTA found that 17 out of the 28 returns were incorrect and that six of the preparers acted willfully or recklessly during return preparation.
2. Tax professionals are critical to small business compliance.
Small businesses represent the biggest challenge to voluntary compliance. In its 2012 tax gap study, the IRS estimated that the government loses $141 billion a year to small business underreporting. Small businesses have a misreporting rate of 57%, and the IRS knows that 80% of small businesses use a paid preparer to file their returns.
The IRS cannot audit its way to voluntary compliance on these returns due to a lack of resources; the IRS audits only 1% of all tax returns. Knowledgeable tax return preparers—who are reminded each year through education requirements to conduct effective due diligence on small businesses—can have a much greater impact on compliance than IRS auditors.
If you are currently filing as a sole owner or single-member LLC on schedule C, incorporate or elect to be taxed as an S Corporation.
Then, 1) You can SAVE self-employment taxes on the portion of your profit in excess of your reasonable salary and
2) You can REDUCE AUDIT CHANCES according to the most recently published IRS statistics.
In the end, it’s all about winning the game without breaking the rules!