There’s an App for That - Mileage Tracking Solutions: Part I

By: Justin Ash

As many self-employed individuals know, you can take a deduction on your income tax return for the number of miles you drive for business purposes and are not reimbursed for. There are deductions allowed for miles driven not only for business purposes, but also to obtain medical care, to volunteer your time, and to move to another home in order to accept new employment. The amount that is deductible for 2016 varies as depicted below.

The IRS requires that you be able to substantiate the number of miles driven if asked to do so. The recommended approach is to maintain a mileage log in your vehicle which documents the date and destination of each trip, the starting and ending mileage, and the purpose of the trip.

With the proliferation of smartphones, there are many apps that can track your mileage right on your phone saving you time and headache. Please see below for our comparison of three popular mileage apps available for iPhone and Android operating systems. All of the following have predominantly positive customer review ratings and can be synced to the cloud to safeguard your mileage information even if your phone is lost or stolen.

Mile IQ:

Mile IQ can log all of your trips automatically and calculate each trip’s value. This means you don’t have to push a start and stop button, you just go about your business and classify the miles later. Additionally, you are able to classify each trip for different purposes. This is useful if you track mileage for both your day job and a side gig, and also if you occasionally volunteer your time. You can also log additional data such as tolls, parking, and hotels paid out of pocket for each trip. As far as getting information out of the app, you can print or export personalized mileage logs and/or expense reports. Lastly, Mile IQ’s website boasts that they never use pop up ads. Mile IQ is free for up to 40 trips each month. After that the fee is $6 monthly or $60 annually. Remember that due to the automatic tracking feature, you will be billed once you exceed 40 trips in one month.

Track My Drive:

Track My Drive offers essentially all of the same options as Mile IQ. The difference is, the user interface isn’t quite as pretty, there is no feature to track out of pocket expenses such as tolls, and the price tag is lower. Additionally, Track My Drive allows you to either track your miles with the GPS as you drive, or to input the beginning and ending address (much like using MapQuest for directions) to calculate the miles driven after the fact. This app also has a convenient feature that allows you to quickly save or delete each trip using one swipe of your finger. Track My Drive is free for up to only 10 trips per month, or $8.99 per year for unlimited trips.

Mile Bug:

Mile Bug charges a one-time $2.99 flat fee and offers many of the same features discussed above. This app requires that you push a start button to begin tracking mileage for each trip and from there the GPS on your phone will track mileage until you tell it to stop or until you stop driving. Alternatively, you can add trips manually by entering the starting and ending odometer readings. This app also allows you to add expenses like tolls and parking. Customer reviews are a little less glowing for this app, citing that it is a bit more cumbersome to work through. However, for the significant decrease in cost, this app is the best bang for my buck. The lower price tag is well worth the clunkier user interface in my opinion.

The Health Care Penalty Will Rise for the Upcoming 2017 Filing Season

By Rick Dickson

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The 2016 health care penalty, which is payable with the 2016 return filed in 2017, will rise again for the upcoming filing season. For the 2016 tax year the penalty is a minimum of $695 per adult and $347.50 per child with a household maximum of $2,085. This penalty amount will be adjusted upwards for inflation in future years. There are numerous exceptions to paying this penalty, the most obvious one being to simply obtain health coverage.  Firstly, you can be exempted from the penalty if health coverage is simply unaffordable, meaning that the premiums are in excess of 8.05% of your household income. Next, you are exempt from the penalty if you experienced a short coverage gap, defined as a gap in coverage of less than three months, which is typically experienced when changing jobs. Lastly, if your income is below the filing threshold the penalty does not apply. This is the case whether or not you file a return, as there are reasons to file even if you are not required to. 

The filing thresholds in 2015 were $10,300 for single individuals, $13,250 for head of household, and $20,600 for married filing jointly. Keep in mind that these thresholds are adjusted upwards every year for inflation and the 2016 thresholds were not yet released at the time of this publication.

All of the above exceptions are simply calculated when you prepare your tax return. There are other exceptions referred to as “hardships.” These hardship exceptions are not blanket exceptions of the penalty like the ones listed above. The IRS will ask for documentation to substantiate your hardship and, if approved, will only waive the penalty for the portion of the year that the hardship existed.

Hardships include, but are not necessarily limited to, being homeless, being evicted within the last six months, receiving a shut off notice from a utility company, experiencing the death of a family member, or filing for bankruptcy. The submission of a hardship application takes time to process. However, taxpayers are allowed to submit the hardship application and file their return assuming the hardship is granted by entering, “pending” on the Form 8965 which is used to claim the health coverage exemptions and get you out of paying the penalty. This will likely prolong the processing time of the return but can potentially save you around $2,000.

If you have questions regarding the health care penalty or need assistance obtaining health coverage please contact us. Our in-house insurance expert, Richard Dickson, can help you sign up for coverage.

Will Raffle Tickets Create Taxable Income for your Non-Profit?

By Justin Ash

Non-profit organizations, particularly churches and small 501(c)(3)s, typically use gaming activities as a way to solicit cash donations from the public. Whether it be bingo at the church or a 50/50 raffle for the local boosters club, these gaming activities have long been somewhat of a gray area when it comes to taxation. The IRS has recently issued some new guidance intended to clarify the rules regarding what type of gaming is subject to a special tax levied on some non-profits. This guidance should shed some light on what has historically been thought of as a “no man’s land.”

Firstly, non-profit organizations are granted an exemption from taxation only on activities that are substantially related to their exempt function, even if such an activity is considered a trade or business. Any other trade or business carried on that is not substantially related to its exempt purpose may be subject to tax. In other words, if you apply to be a 501(c)(3) for the purposes of running a little league for the local town your exemption from taxation does not automatically extend to the concession stand where you sell candy and popcorn. This is because the sale of concessions does not further your exempt purpose of running the local little league. It does not matter that the proceeds from the sale of the concessions are used for your exempt purpose. Furthermore, for certain types of non-profits, if unrelated business income grows too large in relation to donation income the non-profit could lose its status as a 501(c)(3).

 In the above example the income generated from the sale of concessions is referred to as “Unrelated Business Income” commonly referred to as “UBI”. This income is subject to tax and is reported on the Form 990-T which is attached to the non-profit’s regular tax return. The newly issued IRS guidance clarifies the rules regarding what is and is not considered unrelated business income fornon-profits with regard to gaming and also clarifies some broad exceptions to this type of tax.

Before a non-profit’s activity is classified as unrelated, there are three requirements that must be met. First, the activity must be considered a trade or business (gaming is generally considered a trade or business if it generates revenue). Next, the activity must be regularly carried on (gaming conducted only annually at a fundraiser is not considered regularly carried on). Third, the activity must not be substantially related to the organization’s exempt purpose (simply using the proceeds from such an activity for the exempt purpose does not make them substantially related).

Even if the activity satisfies all of the above criteria, making it unrelated, there are still some broad exceptions that can get a non-profit out of paying tax on the income. If the organization conducts bingo as defined by the IRS, then that income is exempt as long as the activity does not violate local law and as long as for-profit entities cannot regularly carry on bingo in any part of the same jurisdiction. Also, gaming that is conducted with substantially all volunteer labor is exempt from paying tax on gaming income. There are additional exceptions, but the aforementioned are two of the most common.

For example, let’s assume that the non-profit that runs the little league mentioned above has an annual fundraiser dinner. At this dinner, volunteers conduct 50/50 raffles and sell tickets for drawings to win prizes, all of which are donated. Because these activities are conducted only once per year and they are conducted with an all-volunteer labor force, the non-profit does not have to calculate unrelated business income or pay tax on the gaming net income. Conversely, if the non-profit conducts 50/50 raffles weekly at every little league game throughout the season and the individuals conducting the gaming are paid for their services, then the non-profit would likely be required to file a schedule 990-T to report the gaming income and pay income tax on the net income from gaming.

If you are unsure if a non-profit you are involved with should be reporting unrelated business income please contact us. We can analyze the situation and advise you as to the best course of action.

 

Tax Consequences of a Doctors Across New York (DANY) Grant

by Justin Ash

The risks and rewards of becoming a physician are both numerous and daunting. Becoming a medical doctor can take between eleven and sixteen years from the time of high school graduation depending on whether the physician chooses to specialize. Of course the compensation of physicians is one major reason to become a medical professional. Regardless of the economic benefits there are still severe shortages of physicians in the United States, most of them occurring in rural areas. One such under-served area is Otsego County, NY. To alleviate this doctor shortage there are programs that provide grants to medical doctors who agree to relocate to an under-served area and work in their chosen field for a minimum time commitment. Two of the major grant giving organizations are Doctors across America, and Doctor’s across New York. These organizations provide up to $100,000 to physicians to be applied against their student loans in exchange for their services in an under-served area. This is a welcome incentive considering that most physicians are $500,000 in the hole before they hit their early thirties.

The receipt of these grants begs the question, “What are the tax consequences of a DANY grant?” The IRS has issued guidance regarding these grants that exclude them from income as long as the physician applies them against student loans and completes the term of service stated in the agreement between the doctor and

the grant-giver. However, the treatment of these grants by State taxing authorities is a bit more vexing. 

In NYS there is almost a complete lack of guidance as to how to treat these grants for NYS income tax purposes. NYS is a pickup state, meaning that it starts with Federal adjusted gross income and makes adjustments to it, in order to reflect NYS law. The correct treatment depends on how the physician uses the funds. As long as the funds are indeed applied against the physicians student loans (which must be substantiated) and the physician completes the agreed upon term of service, it should not be added back to taxable income on the NYS return. In other words, as long as the doctor holds up their end of the bargain, then these funds are tax-free on a Federal and NYS level. Please note that every state has different rules.

There are numerous other issues that can affect the taxability of these types of grants and that could also affect planning opportunities further down the road. If you are considering accepting a DANY grant or if you have included these types of grants in your income in the past three years we may be able to amend your return and request a refund of the tax paid. Please contact us so that we may fully analyze your unique situation and advise you as to the best course of action.

Sporadic Activity May Not Trigger Self-Employment Tax

By Justin Ash

At year-end nearly all taxpayers drop off a bundle of paper work to their preparers and wait for the bill. One item of income however should receive some special consideration and planning. If you receive a Form 1099 reporting income from self- employment, the self-employment

tax bite is about 15% of the net income from the business (more if the business income triggers the net investment income tax). This is in addition to the regular income tax on the same amount. This makes it especially important to ensure that income is categorized correctly. Whether or not income is subject to

self-employment tax is dependent on all the facts and circumstances surrounding the issue. Engaging in a trade or business is characterized by ongoing efforts to earn a profit. Therefore, sporadic efforts, or activities that are unlikely to recur may escape the self- employment tax.

For example, let’s assume that Joe is a college student studying law. Joe is also very handy and was asked by his friend, Chris, to install a fence around Chris’ business premises for a price of $2,000. Joe does not hold himself out to be in the business of installing fences, he does not advertise his services, nor does he pursue fence installation through ongoing efforts to earn a profit. In this case, Chris would be required to issue a 1099-MISC to Joe with the amount of $2,000 reported as non- employee compensation in box 7 of that form. In this case Joe should be

able to avoid the self-employment tax on this amount because he is not engaging in ongoing efforts to earn a profit at fence installation.

Once you have determined that you are legitimately not subject to the self-employment tax there are a

couple of options when it comes to filing your return. You can report the income on line 21 of your 1040 as “other income not subject to self- employment tax”.

The safer alternative is to report the income as self-employment income, pay the tax, then amend your return and request a refund. This option is probably not necessary under most scenarios. However, it does offer the most protection because you are complying with the law and timely paying your tax, then subsequently requesting the refund after the government has time to analyze the situation. Under this option the worst that can happen is a denial of the refund. However, if you do not report the self-employment income as such and the IRS later re- characterizes it, you will be on the hook for interest, penalties, and potentially an additional penalty for under-reporting your income.

Keep in mind that a small change in the facts and circumstances surrounding the situation can have a large effect. Let’s assume that in our second example Joe is apprenticing under a general contractor to learn the construction trade and has taken out advertisements in a free local publication offering his handyman

services for hire. Joe also maintains a license with his local public works office authorizing him to install fencing (among other construction and repair type activities). Under this scenario Joe is liable for the self- employment tax and should report the income as gross receipts on his schedule C and deduct any ordinary and necessary business expenses against that income.

If you receive a 1099 and are unsure how to treat it please contact us. We can assist you with determining the proper treatment of the income and reducing any tax liability associated with it. 

High Income Roth IRA Contributions – The Back Door to Obtaining a Tax Benefit for Those Phased Out of ROTH IRA Contributions Due to Income

by Donald Benson CPA, CFP

Many Americans have taken advantage of the tax benefits of contributing to IRAs. They are a great way to save for retirement while taking advantage of tax benefits simultaneously. If you’re a little rusty on the basic IRA rules here they are: 

1) If you contribute to a traditional IRA you may get a tax deduction now and pay tax on the distributions from the account after it has grown over time. 2) A Roth IRA is the exact opposite. You make contributions without any tax break now and withdraw the earnings tax free after it has grown over time.

These benefits are available to most Americans. If you are not covered by an employer retirement plan you can make deductible Traditional IRA contributions regardless of income. However, if you are covered by an employer retirement plan and your adjusted gross income (AGI) is high enough ($71,000 for single individuals and $118,000 for married filing joint in 2015) you are not allowed to make deductible Traditional IRA contributions. Additionally, if your adjusted gross income (AGI) is higher than ($131,000 for single individuals and $193,000 for married filing joint in 2015), you are not allowed to make Roth IRA contributions.

How then can high-incomers fund a Roth IRA account? One technique is called the “back door Roth IRA”. This is a two-step transaction which allows you to make non-deductible contributions to a Traditional IRA, then roll them over to a Roth IRA. Once the funds are within the Roth IRA account they will grow tax-free and can be withdrawn tax free upon retirement. This “back door” to making Roth IRA contributions is perfectly legal and highly effective, allowing those working hard for the American dream to obtain the same tax benefits when saving for retirement as everyone else.

Remember that you must report any income earned between the date of the contribution to the traditional IRA and the date of the rollover to the Roth IRA. However, considering that you can conduct this transaction on a recurring basis the benefits are well worth the extra time necessary to effect the transactions.

 

Fantasy football battle is heating up

By Justin Ash

Fantasy football has been rapidly gaining in popularity as of late. Most of our readers have probably played at least once and many likely play in multiple leagues (hopefully not at work). Some fantasy football leagues are played on paid sites like DraftKings or FanDuel, and these sites claim to pay out millions in winnings every year. How is this not illegal gambling, you may ask? It’s because these sites operate within a perfectly legal loophole allowing wagering on games of skill (wagering on games of chance is illegal in nearly every U.S. state). There will likely be a crackdown on these sites, as Federal agencies are beginning to take notice and question whether or not these sites should be required to obtain gambling licenses much like a Las Vegas casino. Look for conservative politicians to take a stand against these sites on a bully pulpit as well.

Following a cease and desist order mandating that the sites stop accepting money from New Yorkers a New York Supreme Court justice has allowed the sites to continue operating until the matter can be fully examined. This is likely just the first step in a long legal battle over what constitutes illegal gambling. This hinges on how the courts will classify fantasy sports; as either a game of chance or a game of skill. We expect other states to follow suit soon.

If you are a weekend fantasy football warrior, don’t worry. We expect the Feds to focus their attention on the paid sites and not on those of us that play occasionally for fun with a few friends. However, there are some potential pitfalls to avoid. Don’t forget that these winnings are fully taxable, whether they are considered gambling winnings or not. If you receive a Form 1099 reporting your winnings you must report that income on your tax return in order to avoid an IRS notice. Lastly, if your winnings are substantial then paying estimated tax is advisable.

If you have fantasy football or gambling winnings and are unsure of how much to pay in to cover the taxes, contact us so that we may prepare a comprehensive plan for you and advise you if any estimated payments are necessary.

Don’t get scammed; Identity Theft Prevention Tips

 

By Justin Ash

As tax season approaches, we expect an increase in phone scams in which scammers may contact individuals via phone, demanding payment with a credit card to settle a bogus outstanding tax liability. In most cases the callers will threaten police action, revocation of professional licenses, inability to apply for student loans, and other idle threats. DO NOT fall for this. The IRS or state taxing authority will never call you to demand immediate payment, nor will they call you about taxes owed unless they have first contacted you by mail. They will also never demand payment of taxes without the opportunity to appeal the amount you owe. Furthermore, they will never require a specific form of payment such as a debit or credit card, nor will they ask for debit or credit card information over the phone. Legitimate calls from the IRS and the state taxing authority can be verified by referencing the bill that you will receive in the mail in advance. The caller should be able to provide you with a badge or some identification number and should also be able to provide you with the assessment or notice ID number printed on the bill that you received in the mail. Those with elderly parents should remain especially vigilant as scammers often target the elderly for these and other scams. If you believe that you or a loved one have been contacted by a scammer, you can report the incident to Federal authorities by contacting the Treasury Inspector General at https://www.treasury.gov/tigta/contact_report_scam.shtml.

If you believe you’ve been the victim of identity theft in New York, you may report it to NYS, who will then flag your social security number, requiring human eyes to review tax returns that you file in the near future. While this will prolong the processing time for future returns, it should also prevent scammers from obtaining your refund by filing an erroneous tax return in your name. More information can be found at: https://www.tax.ny.gov/help/contact/identity_theft.htm

In the state of Georgia you may file a fraud referral form at https://dor.gerogia.gov/webform/fraud-referral-form.

This Georgia form must be filed electronically. Include in the description that you believe you may be the victim of identity theft. More information can be found at http://dor.georgia.gov/press-releases/2015-11-23/irs-states-team-combat-fraud.

Taxpayers should also be on guard against scam artists masquerading as charitable organizations to solicit donations from unsuspecting contributors. Your first line of defense before giving is to ensure that the organization is indeed a charitable organization. This can be checked by using the IRS’ Exempt Organization Select Check tool found at https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. The IRS also advises that taxpayers be especially wary of solicitations following a major disaster, as it is common for scammers to impersonate legitimate charities.

If you believe you have been the victim of identity theft, or if you would like information on our elder care program to assist with the financial affairs of your aging loved ones, please contact us. Our elder care program can be customized to suit any needs and also provides much needed peace of mind.

 

It pays to update the Health Insurance Marketplace when your income or family size changes

by Justin Ash

The Affordable Care Act has implemented some major changes to the tax code. That said, many of the procedural idiosyncrasies of the Act are still being ironed out. Some of the most common pitfalls are presented below.

If you purchase your health insurance through the NYS Marketplace then you are likely receiving an advance premium tax credit (a discount on your insurance bill every month). At the end of the year you are required to reconcile your estimated advance premium tax credit with your actual income for the year on your tax return. If your income is higher than estimated your credit calculated on your tax return may be smaller than the advanced premiums you received resulting in a balance due.

Updating your information on the New York Marketplace website such as changes in family size, income level, and employment status can significantly reduce this mismatch and lessen the tax bite. In some circumstances it can even make the coverage more affordable.It is important to remember that the penalties for not maintaining health insurance are doubling for the upcoming tax filing season (they will double again next year.) The enrollment period to obtain health coverage for 2016 on the New York exchange expires on December 15, 2015. A special enrollment period applies if you lost your coverage due to a major life event like losing a job that had coverage, birth of a child, divorce, etc . . . . 

The IRS has stated recently that many of the returns filed in 2014 included penalties for not maintaining health coverage all year. They have gone on to state that a large portion of those penalties were not valid and that the taxpayer paid them simply because they did not understand the rules. The IRS has promised to implement a program to refund those penalties.The health insurance mandate is relatively new and in most cases requires professional help to navigate. If you are unsure if you will be subject to a penalty or if you qualify for less expensive coverage in the New York Marketplace, please contact our office. We can also analyze your prior year return to determine if you paid a penalty erroneously and get it back for you.