2015 Year End Tax Planning Tips
As we near the end of 2015, there are various strategic tax planning moves you may want to consider to minimize your 2015 and future tax liabilities. This letter is intended to provide some ideas for planning to consider before year end and for future years.
There are 52 significant tax law changes due to tax provisions that expired at the end of 2014. Although Congress has yet to reinstate them, there is still hope they will be extended between now and year-end.
The more popular individual provisions that have expired include:
- above-the-line deduction for classroom expenses incurred by school teachers
- deduction of state and local sales taxes
- above-the-line deduction for tuition and related expenses
- deduction for mortgage interest insurance premiums
- provision allowing IRA distributions to charity
Some of the more popular expired business provisions include:
- Research and Development tax credit
- Work Opportunity tax credit
- bonus depreciation
- higher Sec. 179 depreciation expensing deduction
Given the potential significant impact of the tax law changes, it is important to be diligent in evaluating your personal and business tax planning strategies. The following are various tax saving ideas to consider as part of your overall tax strategy. As always, we are available to assist with evaluating which techniques make the most sense for your situation and to assist in implementation.
Individual Tax Planning Considerations
Lessen your exposure to the 3.8% surtax on your investment income. The tax law imposes an additional 3.8% surtax on your investment income if your adjusted gross income (AGI) is above certain thresholds: $200,000 for single/head of household, $250,000 for married filing jointly, or $125,000 for married filing separately. There are several considerations that lessen your exposure:
- Consider installment sales when selling appreciated property or real estate. With an installment sale, you can spread your gain over several years lowering your current year AGI.
- Invest in tax-exempt municipal bonds, which are not included when calculating your AGI and not subject to the surtax.
- Convert passive income into active income by increasing the number of hours you participate in the entity or activity. Normally, the threshold is 500 hours, but it can be less under certain circumstances.
Evaluate your investment portfolio for unrealized capital gains and losses. If you currently have capital losses from prior years or even realized current year losses, you may consider selling highly appreciated securities to offset those losses. Also, for most taxpayers the federal tax rate on long-term capital gains is still much lower than the rate on short-term gains. As such, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term capital gains tax rate. However, if you currently have realized capital gains for 2015, search your investment portfolio for any stocks you can potentially sell at a loss. You can always buy-back this security after 30 days if you feel the stock will increase in value again. Selling stocks at a loss will help lower your taxable gains and AGI, which could help to avoid the 3.8% surtax on your investment income.
Secure a deduction for nearly worthless securities. If you own any securities that have little hope of recovery, you might consider selling them before the end of year end to capitalize on the loss this year.
Contribute the maximum amount to your retirement account. Above-the-line deductions such as simplified employee pension plan contributions or deductible individual retirement account (IRA) contributions can also help reduce your AGI. These retirement plan contributions could help lower your AGI below the threshold helping you avoid the 3.8% surtax.
Don’t forget to take your required minimum distributions from your retirement accounts. The tax law generally requires individuals with retirement accounts to take withdrawals – based on the size of their account and their age – every year after they reach age 70 ½. Failure to take a required withdrawal can result in a 50% penalty of the amount not withdrawn.
If you turned age 70 ½ in 2015, you can delay your 2015 required minimum distribution to 2016; however, delaying will result in two distributions in 2016: the amount required for 2015, plus the amount required for 2016. While deferring income is normally a sound tax strategy, here it results in bunching income into 2016 and possibly putting you into a higher tax bracket.
Spend funds in your Flexible Spending Account (FSA). Generally, all funds inside your FSA need to be used for 2015 medical expenses otherwise you will need to forfeit the “leftover” funds back to your employer. The year-end date could be December 31 or could have a grace period ending March 15, 2016. Be sure to check with your employer on timing and use up your funds within the time allotted to avoid being forfeited.
Health Savings Account (HSA). If you have a high-deductible medical plan, you can fund your 2015 HSA contribution at any time before the due date of your tax return (extensions not included). The maximum HSA contribution for individual coverage is $3,350 or family coverage $6,650. If you are age 55 or older you can contribute an additional $1,000. Unlike an FSA, these accounts do not have to be used by year end, so there is no disadvantage to contributing the maximum amount as any “leftover” funds are not forfeited.
Consider a Roth IRA conversion. If you have significant ordinary losses from other sources, it may make sense to convert your Traditional IRA to a Roth IRA to use up those losses. Converting to a Roth IRA makes it taxable today instead of when the funds are withdrawn, and any future growth in the Roth IRA is tax-free.
Watch out for the alternative minimum tax (AMT). Because of the higher tax liabilities generated by the new tax law, fewer taxpayers will be snared by the dreaded AMT; however, it is still a vitally important component when conducting any tax planning moves. If you are not subject to the AMT in 2015, it may be helpful to prepay your state and local income taxes and/or your 2015 real estate taxes that are normally paid in January 2016. If you are concerned about whether the AMT will be an issue for you, contact us to discuss options.
Make charitable gifts of appreciated stock. If you’ve held appreciated stock for more than a year and plan to make significant charitable contributions before year-end, keep your cash and donate the stock instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities while receiving a new stepped-up basis, you can immediately buy-back a like number of shares.
It is not recommended to give depreciated stock directly to charity as your donation will equal the fair market value of the stock, not how much you paid for the stock. Instead, consider selling the stock, report the capital loss, and then donate the cash proceeds to charity.
Bunch expenses. There are several expenses that are only deductible to the extent they exceed a certain percentage of your AGI. For example, medical expenses incurred and paid are only deductible to the extent they exceed 10% of your AGI (7.5 % if age 65 or over). You can postpone 2015 medical and dental expenses until 2016 to help get over the AGI hurdle for next year (assuming you will incur similar expenses in 2016). This can also help with insurance deductibles.
There is a similar deduction for miscellaneous expenses such as investment expenses, employee business expenses, tax preparation fees, professional dues and subscriptions. These expenses are deductible to the extent they exceed 2% of your AGI.
Take advantage of estate and gift tax opportunities. The annual gift exclusion amount is $14,000 per person. If you are trying to lower your total estate, the annual gift exclusion can be very beneficial. The lifetime gift and estate tax exemption is at $5.43 million for 2015.
Business Tax Planning Considerations
Maximize tax breaks for purchasing equipment and software. If you’re planning to purchase any business computers, software, equipment or furniture or make certain property improvements, consider doing so before year-end to capitalize on the anticipated generous depreciation rules for 2015. The 2014 depreciation rules we anticipate being renewed are:
- Large Section 179 Deduction. Under Section 179, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions (however limits still apply to most non-commercial vehicles). Assuming renewal of the 2014 amount, the maximum Section 179 deduction should be $500,000.*
- 50% First Year Bonus Depreciation. Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31.*
*Please keep in mind, the Section 179 and bonus depreciation provisions have not yet been implemented for 2015. Above analysis is based on 2014 amounts being renewed, which is
likely to be included in the tax extenders bill, but we are still waiting on Congress to be sure.
Take advantage of partial disposition rules included within Repair and Maintenance Regulations. If you have completed or are considering a building improvement project, be sure to take advantage of the partial disposition rules. For example, if you add a new roof or HVAC equipment, you are permitted to identify the cost of the old roof or HVAC unit and write off the remaining un-depreciated cost.
Consider opportunities for tax credits. Businesses should review potential opportunities from tax credits, including the Research and Experimentation Tax Credit (R&D Credit) and Fuels Tax Credit. The R&D Credit is available to businesses with expenses incurred in qualifying areas such as developing new products, techniques and processes. The Fuels Tax Credit may be available for various instances. Two common examples are:
- When gasoline or diesel is purchased with the inherent tax included, but the fuel is used for a non-taxable purpose.
- An alternative fuel is purchased and consumed, such as propane used for tow motors.
Review accounting methods for opportunities. Consider reviewing your tax methods of accounting to determine if you are using the optimal methodologies to maximize deductions. Some common areas of opportunity include deducting certain prepaid items, accelerating deductions for company paid payroll taxes and reviewing all depreciation methods.
Bunch expenses if on cash method. Many businesses, especially service-based businesses, utilize the cash method of accounting. These businesses should accelerate deductions into the current year by bunching expenses to the extent possible.
Utilize an IC-DISC. A business that has export sales and utilizes an IC-DISC can create a tax benefit in which a portion of its income is taxed at the long-term capital gains tax rate. If your business has foreign sales, provides engineering or architectural services for construction projects outside the United States, or lease or rent property used by the lessee outside the United States, consider utilizing an IC-DISC.
Be mindful of state and local taxes. States are becoming increasingly aggressive in trying to capture tax revenue from out-of-state businesses, and we are seeing changes from both a legislative approach and audit approach. Specific state and local tax areas include income tax, sales and use tax, payroll tax and property tax. Please let us know if you have questions about filing responsibilities in the states in which you conduct business.
Retailers and restaurants should consider new safe harbor for remodeling costs. The IRS just released guidance for restaurants and retailers whereby they can use a safe harbor method for deducting and capitalizing costs incurred for remodeling. Use of the safe harbor eliminates the need on administrative time and effort spent in determining which costs should be expensed and which capitalized. It also mitigates the risk of future challenges of the allocations by the IRS. Please contact us to discuss whether costs incurred by your business this year may qualify.
Other Significant Tax News
Tax extenders. Each year, Congress waits until the last minute to extend many tax breaks that expired in the previous year. We are still waiting for these extenders to be passed for 2015. Stay tuned for more information on these extenders.
Changes in Ohio’s taxation of business income. Starting in 2015, Ohio sourced “business income” is taxed at a flat 3% tax rate. All other income will be subject to the taxpayer’s tiered tax rates. Ohio business income includes all Ohio sourced income received in the course of a trade or business. In computing a taxpayer’s taxable business income, an exclusion of 75% of a taxpayer’s business income up to a maximum of $187,500, is provided. A safeguard is in place to prevent taxpayers who are subject to a tiered tax rate of less than 3% from paying more tax in 2015 than in prior years.
In 2016, the amount of the exclusion from business income increases to 100% of your business income or $250,000, whichever is less. We will issue a more detailed analysis on this topic within the forthcoming weeks – stay tuned.
Reduction in Ohio income tax rates. For 2015, Ohio’s highest personal income tax rate is reduced from 5.333% to 4.997%.
Tax deadlines changing in 2017. Some tax deadlines for business returns filed in 2017 (for the 2016 tax year) will change. Partnerships will have an original filing date of March 15, and C corporations will have an original filing date of April 15. The S corporation filing date of March 15 remains unchanged. Partnerships, S corporations and C corporations will all continue to have an extended filing deadline of September 15.
Increased filing penalties. Congress recently passed legislation increasing the penalties for late filing or not filing information returns, such as Forms W-2, 1099 and others. Depending on how quickly (or whether) the corrected returns are filed after the original deadline, penalties can range from $50 to $500 per return. When multiplied by the number of Forms W-2 or 1099 required, these penalties can add up fast.
Please contact us if you would like to review any of the items we’ve mentioned, would like to schedule a tax planning strategy session or to discuss potential implications of the various tax law changes.
Cindy H. Mitchell?>
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