You can be subject to penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are some strategies to protect yourself:

Know the minimum payment rules. Your estimated payments and withholding must equal at least 90% of your tax liability for 2014 or 100% of your 2013 tax (110% if your 2013 adjusted gross income was over $150,000 or, if married filing separately, over $75,000).

Use the annualized income installment method. This may be beneficial if you have large variability in monthly income due to bonuses, investment gains and losses, or seasonal income (especially if it’s skewed toward the end of the year). Annualizing computes the tax due based on income, gains, losses and deductions through each estimated tax period.

Estimate your tax liability and increase withholding. If you’ve underpaid, have the tax shortfall withheld from your salary or year end bonus by Dec. 31. Withholding is considered to have been paid ratably throughout the year, whereas an increased quarterly tax payment may still leave you exposed to penalties for earlier quarters.

Let us know if you have questions about underpayment penalties and how to avoid them.

If you’re a “large” employer, time is running out to prepare for the Affordable Care Act’s (ACA’s) shared responsibility provision, commonly referred to as “play-or-pay.” It’s scheduled to go into effect in 2015.

Under transitional relief the IRS issued earlier this year, for 2015, large employers generally include those with at least 100 full-time employees or the equivalent, as defined by the ACA. However, the threshold is scheduled to drop to 50 beginning in 2016, and that threshold will apply beginning in 2015 for the ACA’s information-reporting provision.

The play-or-pay provision imposes a penalty on large employers if just one full-time employee receives a premium tax credit. The credit is available to employees who enroll in a qualified health plan through a government-run Health Insurance Marketplace and meet certain income requirements — but only if:

• They don’t have access to “minimum essential coverage” from their employer, or
• The employer coverage offered is “unaffordable” or doesn’t provide “minimum value.”

The IRS has issued detailed guidance on what these terms mean and how employers can determine whether they’re a large employer and, if so, whether they’re offering sufficient coverage to avoid the risk of penalties.

If your business could be subject to the play-or-pay provision and you haven’t yet started preparing, do so now. For more information on play-or-pay — or on the information reporting requirements — please contact us.

With summer drawing to a close, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences:

• If you rent it out for less than 15 days, you don’t have to report the income. But expenses associated with the rental won’t be deductible.

• If you rent it out for 15 days or more, you must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

Rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

Nonrental property. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

Look at the use of the home year-to-date to project how it will be classified for tax purposes. Adjusting either the number of days you rent it out or your personal use between now and year end might allow the home to be classified in a more beneficial way.

For assistance, please contact us. We’d be pleased to help.

Now’s the time of year when many young adults are about to head back to college — or to enter their first year of higher education. If you have a grandchild who’ll be in college this fall and you’re concerned about gift and estate taxes, you may want to consider paying some of his or her tuition.

Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.34 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.34 million GST tax exemption.

But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers.

This is only one of many strategies for funding college costs while saving gift and estate taxes. Please contact us for more ideas.

Many expenses that may qualify as miscellaneous itemized deductions are deductible for regular tax purposes only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.”

So now is a good time to add up your potential deductions to date. If they’re getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:

• Deductible investment expenses, including advisory fees, custodial fees and publications

• Professional fees, such as tax planning and preparation, accounting, and certain legal fees

• Unreimbursed employee business expenses, including travel, meals, entertainment and vehicle costs

But keep in mind that these expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2014 if you might be subject to the AMT. Also, if your AGI will exceed certain levels ($254,200 for singles and $305,050 for married filing jointly), be aware that your itemized deductions will be reduced.

If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.

A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. An installment sale also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.

But an installment sale can backfire on the seller. For example:

• Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
• If tax rates increase, the overall tax could wind up being more.

Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.

If you have a traditional IRA, you might benefit from converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

There’s no income-based limit on who can convert to a Roth IRA. But the converted amount is taxable in the year of the conversion. Whether a conversion makes sense for you depends on factors such as:

• Your age,
• Whether the conversion would push you into a higher income tax bracket or trigger the 3.8% net investment income tax,
• Whether you can afford to pay the tax on the conversion,
• Your tax bracket now and expected tax bracket in retirement, and
• Whether you’ll need the IRA funds in retirement.

We can run the numbers and help you decide if a conversion is right for you this year.

Would you like to benefit charity while reducing the size of your taxable estate yet maintain an income stream for yourself? Would you also like to divest yourself of highly appreciated assets and diversify your portfolio with minimal tax consequences? Then consider a CRT. Here’s how it works:

• When you fund the CRT, you receive a partial income tax deduction and the property is removed from your estate.
• For a given term, the CRT pays an amount to you annually.
• At the term’s end, the CRT’s remaining assets pass to charity.

If you fund the CRT with appreciated assets, it can sell them without paying tax on the gain and then invest the proceeds in a variety of stocks and bonds. You’ll owe capital gains tax when you receive CRT payments, but much of the liability will be deferred. Plus, only a portion of each payment will be attributable to capital gains. This also may help you reduce or avoid exposure to the 3.8% net investment income tax and the 20% top long-term capital gains rate.

For more ideas on tax-smart gifts to charity, minimizing estate taxes, maintaining an income stream or diversifying your portfolio tax efficiently, contact us.

Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these two tax pitfalls:

1. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
2. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.)

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, we’d be pleased to help you assess the potential tax impact and suggest ways to minimize your tax liability.

Dear Clients and Friends:

With significant tax-related provisions of the Affordable Care Act (ACA) now affecting many taxpayers — not to mention continued uncertainty about tax reform — tax planning is more complicated yet more important than ever. To save the most, you need to understand how recent tax legislation affects you and take advantage of every tax break you’re entitled to.

This is exactly what our  Tax Planning Guide is designed to help you do. To view it, simply click on the link above to visit our website, where you can navigate to the guide and learn about important tax law changes and ways to minimize your income tax liability.

As you look through the guide, please note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then call us with any questions you may have about these or other tax matters.

At Steiner & Gelber PA, our professionals are thoroughly familiar with the latest tax laws and tax-reduction strategies, and are eager to help you take full advantage of them. So please send a reply email or call us today at to schedule a time to talk about ways to lighten your tax burden and better achieve your financial objectives.

Sincerely,

Steiner & Gelber, PA