2016 Standard Mileage Rates for Business, Medical and Moving Announced

WASHINGTON — The Internal Revenue Service today issued the 2016 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 54 cents per mile for business miles driven, down from 57.5 cents for 2015
  • 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
  • 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51. Notice 2016-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.


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How Do I Compute Payroll Taxes as an Employer

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

The employer next must select a withholding method. The amount of taxes withheld can be determined using the percentage method; the wage bracket method; the alternative formula table method; or any other method that produces substantially the same amount as the wage bracket method. These methods are based upon tables produced by the IRS and available in IRS publication Circular E, Employer’s Tax Guide.

Percentage Method

The employer must select one of eight tables, based on the payroll period used by the employer, such as weekly, monthly, annually, etc. If the employer does not use a payroll period, it should use the daily or miscellaneous table. Each table is divided into two parts: one for single people, and one for married people.

After determining the appropriate table, the employer must determine the amount of wages to use as the base calculation. This amount is determined by subtracting the number of withholding allowances from the employee’s total gross wages for the payroll period. The result is net wages subject to withholding. The result is used in the withholding tables to determine the withholding amount.

Wage Bracket Method

For each employee, the employer again must determine the payroll period, wages paid during the period, withholding exemptions, and marital status. The wage bracket tables calculate the income tax to deduct and withhold by using gross wages, with no deduction for an exemption amount. This method is supposed to produce similar results to the percentage method.

The wage bracket method cannot be used if the payroll period is quarterly, semiannual, or annual, because there are no tables for these periods.

Other methods

The third method—alternative formula tables—is for employers using computerized accounting systems. The fourth method is allowed if it produces substantially similar results to the wage bracket method. The IRS provides a table for determining whether a result is substantially similar.

Other Employment Taxes

Employers must also determine FICA (Federal Insurance Contributions Act [Social Security]) and Federal Unemployment Tax Act (FUTA) taxes.

FICA consists of two taxes: the old-age, survivors and disability insurance (OASDI) tax, equal to 6.2 percent on both the employer and employee; and the hospital insurance (HI) tax, equal to 1.45 percent on both the employer and the employee. FICA taxes thus have a combined rate of 7.65 percent. The OASDI tax is subject to a wage limit, set at $118,500 for 2015 and 2016, but subject to increase. Wages above that limit are exempt from the OASDI tax. However, there is no limit on the HI tax; all wages are taxed 1.45 percent. The IRS provides tables to determine FICA taxes.

If the employee has wages in excess of $200,000, the employer must also withhold the Additional 0.9 percent Medicare tax from all wages above that threshold.

FUTA tax is 6 percent of all wages paid during the calendar year, up to a $7,000 wage limit. These amounts are owed by the employer and are not deducted from the employee’s wages. The employer can claim a credit for contributions to state unemployment insurance funds. The maximum credit is 90 percent of the 6 percent rate, or 5.4 percent.

If you need any assistance with the above info or if you need assistance in setting up or administering your small business payroll, contact our office.


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Top Year-End IRA Reminders

Individual Retirement Accounts, or IRAs, are important vehicles for you to save for retirement. If you have an IRA or plan to start one soon, there are a few key year-end rules that you should know. Here are the top year-end IRA reminders:

  • Know the contribution and deduction limits.  You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. You have until April 18, 2016, to make an IRA contribution for 2015. In some cases, you may need to reduce your deduction for your traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level.
  • Avoid excess contributions. If you contribute more than the IRA limits for 2015, you are subject to a six percent tax on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2015 tax return (including extensions).
  • Take required distributions.  If you’re at least age 70½, you must take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2015. That deadline is April 1, 2016, if you turned 70½ in 2015. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out.
  • IRA distributions may affect your premium tax credit. If you take a distribution from your IRA at the end of the year and expect to claim the PTC, you should exercise caution regarding the amount of the distribution.  Taxable distributions increase your household income, which can make you ineligible for the PTC.  You will become ineligible if the increase causes your household income for the year to be above 400 percent of the Federal poverty line for your family size. In this circumstance, you must repay the entire amount of any advance payments of the premium tax credit that were made to your health insurance provider on your behalf. 

If you need assistance in making an IRA contribution or setting up a new IRA plan, please contact our office for help.


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Tax Extenders for the 2015 Tax Year

On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The new law extends several tax provisions retroactive to the beginning of 2015, and also makes some provisions permanent.

The list that follows identifies tax extender items that have been reinstated retroactive to January 1, 2015, along with a brief description of the provision.

Additional Child Tax Credit. The refundable portion of the Child Tax Credit had an income threshold amount of $10,000, indexed for inflation. The extender legislation permanently sets the threshold at an unindexed $3,000, which will allow for a higher credit for taxpayers who qualify.

Enhanced American Opportunity Tax Credit (Hope Credit). The American Opportunity Tax Credit (AOTC) is an enhanced version of the Hope Credit, allowing a credit of up to $2,500 for four years of post-secondary education. The new law makes the enhanced AOTC permanent.

Enhanced Earned Income Credit (EIC). As an extender item, the EIC credit amount was temporarily increased for taxpayers with three or more children, and the marriage penalty was reduced by increasing phaseout ranges. The new law makes the enhanced EIC permanent.

Educator expenses. The new law makes the adjustment to income for qualified expenses of elementary and secondary school teachers permanent. The law also indexes the current expense cap of $250 for inflation beginning in 2016.

State and local general sales taxes. The provision allowing an itemized deduction for state and local general sales taxes instead of state and local income taxes on Schedule A, Form 1040, expired and was extended several times in the past. The new law makes the provision permanent.
Charitable contributions of IRA distributions. A qualified charitable contribution (QCD) from an IRA is nontaxable if made directly to an eligible charitable organization. This lowers the taxpayer’s AGI, reducing the negative effect of AGI phaseouts. A QCD was dependent on extender legislation in prior years. The new law makes the provision permanent.

Qualified leasehold improvements, restaurant buildings and improvements, and retail buildings and improvements. Recovery periods for qualified leasehold improvements, restaurant buildings and improvements, and retail buildings and improvements were temporarily set at 15 years under extender legislation instead of requiring longer recovery periods. The 15-year recovery period for these assets was made permanent.

Enhanced Section 179 expense. A temporary Section 179 expense limit of $500,000 and investment limit of $2 million before phaseout was made permanent. Note: Beginning in 2016, the $250,000 cap on the Section 179 expense for qualified real property was eliminated. The provision allowing a Section 179 expense for off-the-shelf computer software was also made permanent.

Special depreciation allowance. The provision extends the special depreciation allowance for property acquired and placed in service during 2015 through 2019. The special depreciation percentage is 50% for property placed in service during 2015, 2016, and 2017, and phases down to 40% in 2018 and 30% in 2019.

Discharge of principal residence indebtedness. The provision allowing exclusion from income for discharge of qualified principal residence indebtedness was extended through 2016.

Itemized deduction for mortgage insurance premiums. The provision allowing mortgage insurance premiums to be deducted as an itemized deduction on Schedule A of Form 1040 was extended through 2016.

Tuition and fees deduction. The provision allowing an above-the-line deduction for tuition and fees paid for the taxpayer, spouse, or dependents and claimed as an adjustment to income, was extended through 2016.

Nonbusiness energy property. The credit for purchases of nonbusiness energy property was extended through 2016.

Additional extender items for individuals include:

  • Increased monthly exclusion amount for transportation benefits.
  • Charitable contributions of capital gain real property for conservation purposes.
  • Exclusion for gain on sale of small business stock.
  • Five-year recognition period for built-in gains for S corporations.

Additional extender items for businesses include:

  • Extension of research and development (R&D) tax credit.
  • S corporation basis adjustment from charitable contributions of property.
  • Employer wage credit for active duty members of the uniformed services.
  • Low-income housing credit rates for non-federally subsidized buildings.
  • Military house allowance exclusion for low-income housing tax credit buildings.
  • New markets tax credit.
  • Work opportunity tax credit.
  • Indian employment tax credit.
  • Qualified zone academy bonds.
  • Race horses as three-year property.
  • Seven-year recovery period of motorsports entertainment complexes.
  • Accelerated depreciation for business property on an Indian reservation.
  • Empowerment zone tax incentives.
  • Moratorium on medical device excise tax for sales during 2016 and 2017.
  • Alternative fuel vehicle refueling property.
  • Credit for energy-efficient home manufacturers.
  • Energy-efficient commercial buildings deduction.
  • Qualified fuel cell motor vehicles.

For assistance on how these tax law changes affect your particular situation, please contact our office.

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Happy Holidays from NFS

Your friends at Northeast Financial Strategies want you to know how much your loyalty and friendship are appreciated this year and in all years past. At the holiday season, our thoughts turn gratefully to those who have made our success possible. It is in this spirit we say … thank you and best wishes for the holidays and a happy new year.

From all of us here at NFS, THANKS!!