Benefits of credit card use

I'm sure you've heard about some of the benefits offered by credit card companies via commercials, junk mail, etc. However you may not realize the full extent of the available benefits and the protection that credit cards can offer. Benefits can be earned on money spent on everyday purchases, and in many cases these benefits are considered non-taxable discounts by the IRS. In addition, the use of credit cards can reduce your personal asset exposure. There are some precautions to take before making the change to using credit cards, but if done properly there are great benefits to be gained.

• Assess your spending - It is extremely important to assess one’s level of discipline in spending before pursuing increased credit card use. Be honest with yourself about your spending habits because only you know how you (and your spouse) approach spending. If there is any doubt, don’t risk getting into credit card debt and instead stay with what works for you now. If misused, the benefits that come from credit card use will be quickly erased by paying credit card interest and fees, so make sure that you always have sufficient funds available to pay your off credit cards accounts in full each month. If you determine that you are sufficiently disciplined and financially sound, then there are a few items to consider in choosing your card and benefit/reward program (see the next bullet).

• Choose your benefits - Before choosing a credit card, check to see where the most benefit will be for you. Points towards travel related costs offer the greatest benefit for many. If you go on vacation every year and stay at the same place, or enjoy staying with certain hotel brands, then choose a card that offers reward points toward your particular hotel taste. If you fly home for the holidays, are planning a trip in the future with substantial airline costs, or you like to travel but are impartial to specific hotels, then consider looking into a card that offers rewards towards flights.  For some, a rewards program that pays cash is the best option.

• Consider the fees - It is important to assess the fees that are associated each card option. There are a number of cards that offer significant benefits with very low fees.  If you choose a card offering 1 point for every dollar spent and your weekly budget for groceries is $200, then you can expect to earn about 10,400 points ($200 x 52 weeks) per year just on groceries. This might not sound like much, but when you actually make a list of all expenses that can be paid by credit card it adds up quickly. Other significant expenses that usually accept credit cards are gas, restaurants, vacation costs not covered by points, cell phones, utilities, home furnishings, etc. Take into account how many points you feel you will generate in one year, see what value those points would get you, then compare that value to the card's annual fee.  In many cases, a couple years of stock-piling points can earn you an entire vacation trip of lodging for a fraction of the actual cost.

• Monitor - Keep in mind that over time companies may change reward policies - such as increasing the number of points or miles needed for certain services. Make sure you stay informed and monitor your reward status as you plan how to use the benefits you have earned. Remember that it doesn’t take more spending to gain the benefit - just a good financial grip on what you already spend and good judgment in assessing the overall benefit.

One additional benefit to using credit cards is that it reduces the risk that your personal bank account will be compromised in everyday spending. When you use a check card or some form of payment that drafts directly from your account, then your personal monetary assets are directly at risk in each transaction. If you use a credit card and do not setup the auto draft feature, then you can confirm each transaction at month end before paying the bill. Usually, the credit card company's money is tied up during the administrative process if there is a fraudulent activity, as opposed to yours.

The use of credit cards is certainly not for everyone.  With prudent use and sound management, however, there are many great benefits to be gained.

Jon Holcomb

Get an Identity Protection Personal Identification Number (IP PIN)

Identity theft is one of the fastest growing crimes nationwide, and preventing tax refund fraud caused by identity theft remains a top priority as one of the biggest challenges facing the IRS. The IRS is focused on preventing, detecting and resolving tax-related identity theft cases as quickly as possible.  The IRS Identity Protection PIN (“IP PIN”) is a 6-digit number assigned to victims of identity theft whose cases have been resolved. The IP PIN allows affected individuals to avoid delays in filing returns and receiving refunds.  Each taxpayer (even those who are not victims of identity theft) can voluntarily be assigned their own IP PIN.  If one person receives an IP PIN, their spouse does not need a separate number in order to file their tax return.  This 6-digit IP PIN can sometimes be confused with the 5-digit E-file PIN; however, they're not the same and are not interchangeable.

As part of a pilot program to help determine taxpayer demand for the IP PIN and the Service's ability to issue the IP PIN to a larger number of taxpayers, the IRS is again offering the IP PIN to all taxpayers who filed their federal tax returns last year from Florida, Georgia and the District of Columbia.  These locations have been chosen for the pilot program since they’ve experienced the highest per-capita percentage of tax-related identity theft.

Taxpayers who wish to take advantage of this pilot opportunity for additional filing protection should visit www.irs.gov/getanippin.  The IRS can’t issue an IP PIN to a taxpayer unless their identity has been verified online, which involves answering a series of questions that in most cases, can only be answered by the taxpayer.  Therefore, your accountant will most likely be unable to obtain the IP PIN alone on your behalf.    

Once issued an IP PIN, taxpayers will need to use it to confirm their identities on ALL federal income tax returns filed during the 2016 calendar year and future tax years. Taxpayers will receive a new IP PIN each December by postal mail.  For your protection, if you e-file your return and your IP PIN is missing or incorrect, the e-filing system will reject your return.  Filing a paper return with a missing or incorrect IP PIN also will result in delays in the processing of your tax return. Please contact us for more information and assistance with applying for your IP PIN.

Kris Braxton, CPA

Applicable large employers - information reporting extension

The IRS has recently provided transitional relief from the information reporting requirements applicable to insurers, self-insuring employers and certain other providers of minimum essential coverage under Code Sec. 6055 and to applicable large employers under Code Sec. 6056 under the Affordable Care Act. 

The deadline for filing Form 1095-B, Health Coverage, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage has been extended from February 1, 2016 to March 31, 2016. The deadline for filing Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, is extended from February 29, 2016 to May 31, 2016 for non-electronic filers and from March 31, 2016 to June 30, 2016 for electronic filers.

Employers and other coverage providers that fail to meet these extended due dates are subject to penalties for failure to timely furnish and file. In view of the extensions provided, the provisions regarding automatic and permissive extensions of time for filing information returns and permissive extensions for furnishing statements will not apply to the extended due dates. However, the IRS will consider the extent to which an employer or other coverage provider files and furnishes these statements when determining whether to abate penalties for reasonable cause. It will also consider whether reasonable efforts have been made to prepare for reporting the required information and the extent to which the employer or other coverage provider is taking steps to ensure it is able to comply with these requirements for 2016.

If you have any questions related to the transition relief or the healthcare mandates, please call our office. We are here to assist you.

Kris Braxton, CPA

Non-cash charitable giving

As the year comes to an end you may find yourself looking in the closet, attic, or garage for items that can be donated and taken as a tax deduction.  Below are a few things you may want to keep in mind when donating household items, cash, and volunteered time.  Donations of other items such as artwork, securities, real estate, etc. have different guidelines.  Please consult your tax advisor with questions.

Who can I donate to?

While giving clothing directly to someone in need would be a quick and efficient way to give, unfortunately it would not qualify as a charitable deduction for tax purposes.  These items must be donated to a qualified charitable organization (QCO) approved by the IRS to operate as such.  You can check if an organization is a QCO at this site.

What can I deduct?

Deductible contributions are those made to a QCO and are intended to be used by said organization towards achieving their core objective.  The organization may choose to use the item for their operations or liquidate the item for cash.  Either way, you should be entitled to a deduction.  Donating an item to a qualified organization knowing someone within the organization is planning to set aside the item for personal use does not qualify as a charitable deduction. 

How much can I deduct?

The amount that can be deducted on a taxpayer's return is equal to the fair market value (FMV) of the item.  If the donation is cash, then it's simple – the FMV is the amount of cash given.  For newly purchased items, the FMV is the amount that was paid.  However, if the items are used, it can be difficult to determine the FMV as there is no fixed formula or method for determining FMV of used household items.  However Goodwill Industries International has published a valuation guide of household items.  Please note: deductions for charitable contributions generally cannot exceed 50% of adjusted gross income (AGI) and in some cases, 20% and 30% limitations may apply.  However, contributions in excess of AGI limits can be carried forward for 5 years.

How about contributions with benefits?

Let's say at donor attends an evening fundraiser for a qualified organization that includes a dinner for a cost of $100 per person.  Since a benefit (dinner) was received from the organization, the amount that can be deducted would be $100 minus the value of the meal.  Organizations usually makes this easy by informing the donor of the amount considered to be deductible for tax purposes.  However, if you receive a small token item for participating in a fundraiser, such as a lapel pin or bumper sticker, the contribution does not have to be reduced. 

Can I deduct the time I spend volunteering?

Even though we all know time is money, the IRS will not allow a deduction for time spent volunteering.  However, a deduction of $0.14 per mile is allowed for miles traveled while volunteering for a charity.

What about out-of-pocket expenses while I'm volunteering?

Certain expense paid in connection with volunteering may be deductible.  The key question to ask yourself is "Can I use this item for other, non-charitable activities?"  For example, if a volunteer is required to wear a specific type of uniform (i.e. nurse's scrubs) and they are not able to use the uniform afterwards, the cost of the uniform can be deducted.  However, if a volunteer purchases a commonly used tool to help with a charitable construction project, they should think twice before deducting the cost of the tool (unless you donate the tool) since it has utility beyond the charitable project.  In addition, expenses such as childcare or meals (if local) while volunteering are also not deductible. 

Again, these are guidelines and should not be interpreted as written advice.  Please consult your tax advisor if you have any questions regarding charitable giving.  For a more in-depth explanation of deducting charitable contributions on your tax return, see the IRS guidance here.

Brad Williamson, CPA

Senior Staff Accountant

The cost of doing business will increase by October 15, 2015

If you haven't recently received a new credit or debit card from your bank, you will.  When you get it, pay attention to the holographic-looking computer chip (called an "EMV" chip - see below) on the face of the card.   U.S. banks are migrating to an embedded chip instead of the traditional magnetic strip to capture and process card-present transactions.   Beginning October 15, 2015, the liability for fraudulent card-present transactions will shift from the issuer of the card (Visa, Mastercard, American Express, etc.) to the business or non-profit organization.

Recent high-profile breaches of credit card data (Target, for example) have compelled credit card companies to seek a more secure method of data transfer.   The industry's answer to this issue is the Europay, MasterCard, and Visa (EMV) chip.  The new  technology requires that the credit card remain in the card reader during the entire transaction to allow interaction with the chip, making it much more difficult to steal consumer data.  The new readers will continue to read magnetic strips to accommodate cards that only have a magnetic strip, and cards with the new chip will also have a magnetic strip to accommodate businesses that have not adopted the new readers.

Businesses will have to weigh the cost of the new hardware, software and implementation with the benefit of fraud liability protection.  Whatever the decision, the cost of processing card-present transactions will increase on or before October 15, 2015.

Daria A. Cruzen, CPA

The Trouble with Children (Part 3 of 3): You can be a student, too!

(This is part 3 of a 3-part series of related blogs. Part 1 discussed child related credits; Part 2 discussed tax on children’s income.)

If you have (or are) a college student you may qualify for a Higher Education Tuition Credit. There are two different credits allowed -- depending on whether the student is in the first four years of college or pursuing additional education beyond four years, such as a Master’s degree. Of course, you may not take both credits for the same student in the same year.

The American Opportunity Tax Credit (AOTC, formerly the Hope credit) is allowed up to $2,500 per year for each eligible student. It is computed as 100% of the first $2,000 of qualified educational expenses, and 25% of the next $2,000. Qualified educational expenses generally include tuition, fees, and course materials, but not room and board, books (unless required for enrollment), student health fees or transportation. Expenses are reduced by any scholarships, grants, or employer provided educational assistance received by the student. A qualifying student can be the taxpayer, spouse, or dependent enrolled at least half-time in a degree program at a college or university. There is a 40% refundable portion of this credit. Note that the credit phases out when a single taxpayer’s adjusted gross income exceeds $80,000 ($160,000 for married filing joint) and is eliminated when AGI reaches $90,000 ($180,000 MFJ). Another important point is that the AOTC may not be taken by married taxpayers filing separate returns.

The Lifetime Learning Credit is allowed up to a maximum of $2,000 per taxpayer per year. It is computed as 20% of the first $10,000 of qualified educational expenses for all eligible students. Qualified expenses are the same as for the AOTC above, except materials and textbooks qualify also if they are required to be purchased from the university. Also like the AOTC, a qualifying student can be the taxpayer, spouse, or dependent, however, there is no requirement for at least half-time enrollment or a degree program. This credit is not refundable, and phases out between $55,000 and $65,000 of AGI for single taxpayers, or $110,000-$130,000 for married filing joint. As with the AOTC, taxpayers who are married filing separate returns cannot take this credit.

One item to consider is that if the student is a dependent child, the child can file a separate return and claim the credit themselves. Higher income taxpayers who would reach the AGI phaseout amounts can waive claiming the child as a dependent, allowing the child to file a separate return and claim the education credit, assuming they have enough tax liability for the credit to offset. The child is not eligible for the refundable portion of the AOTC. The child is also not entitled to claim a personal exemption on their own return.

Another consideration is coordination of these credits with educational savings accounts, such as Coverdell accounts, Qualified Tuition Programs, 529 plans, Series EE bonds, or educational IRAs. Please consult your tax advisor to determine the most favorable tax treatment of any qualified educational expenses.

Melissa Gregg

The Trouble with Children (part 2 of 3): I have to pay tax on what?!

(This is Part 2 of a 3-part series of related blogs. Part 1 discussed various tax credits for children and child care expenses.  Part 3 will discuss the credits available for higher education expenses for college students.)

There are important tax issues to consider if your child has earned income, like from an after school or summer job for example, or investment (unearned) income such as interest and dividends. Generally, if a child has earned income in excess of the standard deduction ($6,300 for 2015), unearned income over $1,050, total income exceeding the larger of $1,050 or the standard deduction for that year, or self-employment income of $400 or more, they must file their own return. If any tax has been withheld from their income, whether earned or unearned, they must file a return to get a refund of the tax withheld.

Tax on a child’s income is computed as for any other taxpayer, with limits on the personal exemption (because they are claimed as a dependent by someone else), and a lower standard deduction. Some children with investment income may be taxed on this income at their parents' highest marginal tax rate. This is known as the “kiddie tax”, and applies if the child is required to file a tax return, does not file a joint return for the year, and has investment income of more than $2,100 (for 2015). The child must also be under 18, under 19 and not provide more than half their support from earned income, or under 24, a full-time student, and not provide more than half their support from earned income.

If a child has only unearned income from interest and dividends, the parent may elect to include the child’s income on the parent’s return to avoid the kiddie tax. The election is made on Form 8814 and the child must meet the following requirements:

• Is required to file a return and would be subject to the kiddie tax
• Only has income from interest and dividends
• Income is more than $1,050 and less than $10,500
• Made no estimated tax payments, including overpayments from the prior year, and
• Is not subject to backup withholding

The parents are then taxed on the child’s income in excess of $2,100, plus an additional tax of $105 if the child’s taxable income is more than $1,050, or 10% of taxable income under $1,050.

In short, if your child has earned or unearned income, you should consult your tax advisor to determine your filing requirements and limitations.  

Melissa Gregg