2015 Year-End Tax Planning
Individuals and businesses that have engaged in year-end tax planning know that as 2016 approaches, it is time to develop, finalize and undertake a year-end tax planning strategy. Individuals and businesses that have not yet explored year-end tax planning should take an immediate inventory of their situation and develop a year-end 2015 tax strategy. Our office is ready to assist you, whether it be refining past plans or delivering new plans, or a combination of both.
Traditional year-end planning techniques have been refined over past years and should be explored as year-end 2015 approaches. These techniques include (if practicable) selling appreciated assets, postponing the redemption of U.S. savings bonds, receiving bonuses after December, completing installment sales that defer gain, taking advantage of like-kind exchange treatment, accelerating bill payments into 2015, and more –all depending upon how your net taxable income forecasts are looking for both 2015 and 2016. Taking inventory of gains and losses at this time to map out a year-end buy, sell or hold strategy later may also be instructive. Keep in mind that an immediate downturn in the stock markets does not necessarily translate into tax losses. Spikes in income, may push capital gains tax to 20 percent (discussed below). Spreading the recognition of certain income between 2015 and 2016 may help accomplish the overall goal of net tax reduction for both years.
Along with reviewing traditional techniques, individuals should examine carefully the potential impact of the Net Investment Income (NII) tax, capital gains and dividends, alternative minimum tax (AMT), Additional Medicare Tax, “kiddie tax,” and more. For some taxpayers, year-end strategies to keep income below certain thresholds may be valuable, such as the thresholds for the NII tax, the Additional Medicare Tax, the Pease limitation, and others. Of course, the nuances of every individual’s situation must be taken into account. For example, not all capital gains are treated the same, or taxed the same. The maximum tax rate on qualified capital gains and dividends increases from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set for the 39.6 percent rate. The maximum tax rate for all other taxpayers remains at 15 percent; except that a zero-percent rate applies to qualified capital gains and dividends for taxpayers with income below the top of the 15- percent tax bracket. The maximum tax rates for collectibles and unrecaptured Code Sec. 1250 gain are 28 and 25 percent, respectively.
Individuals with qualified retirement plans (as well as traditional individual retirement accounts) must satisfy a required minimum distribution (RMD) requirement in which distribution of an employee's or IRA owner's interest in the plan or IRA must begin by the “required beginning date." Two year-end deadlines should be kept in mind: (1) The RMD for any given year is based on the retirement account balance on December 31 of the calendar year immediately before the year of distribution; and (2) The RMD for any year generally must take place by December 31 of that current year.
Equally important is not to overlook new tax legislation. So far in 2015, only a handful of tax bills have been passed by Congress and signed into law by President Obama. Two new laws affect public safety officers. A trade bill also makes a change to the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. Congress also renewed the Health Care Tax Credit for qualified individuals. Congress has not (as of the date this letter was prepared) renewed the so-called tax extenders. Many individuals have used the extenders, such as the state and local sales tax deduction, higher education tuition and fees deduction, Code Sec. 25C residential energy credit, IRA distributions to charity, and many more to maximize tax savings. As in past years, it’s a waiting game. For year-end planning purposes, it is generally anticipated that Congress will renew these popular tax breaks, making them available for 2015. It is unclear if Congress will also extend them into 2016. Our office will keep you posted of developments.
Businesses, like individuals, must develop a year-end tax plan that reflects their particular needs and objectives. Businesses, especially small businesses, are often structured based on their owner’s needs, whether the business is operated as a partnership, sole proprietorship, LLC, or other entity. Some general year-end considerations do cross many of these business types.
Among the top two incentives for small businesses are bonus depreciation and the Code Sec. 179 small business expensing provision. Under current law, 50 percent bonus depreciation generally expired after 2014 and enhanced Code Sec. 179 expensing also expired after 2014. The two incentives are expected to be renewed by Congress for 2015 as part of an overall “extenders” package, making them valuable additions to a year-end tax planning strategy. Along with these two incentives are a host of other business extenders, including the research tax credit, Work Opportunity Tax Credit, Employer wage credit for activated military reservists, Indian employment credit, and many others. Like bonus depreciation and Code Sec. 179 expensing, these incentives are, under current law, unavailable for 2015 unless renewed by Congress.
One incentive that is definitely available for 2015 is the Code Sec. 199 domestic production activities deduction. This deduction is over 10 years old but the number of taxpayers claiming the potentially valuable deduction is smaller than the other two incentives. In 2015, the IRS issued guidance that fleshes out the types of activities that may qualify for the deduction. The types of activities are many and varied. Our office can review your business activities and help you ascertain if the deduction may be worthwhile.
Another incentive not to be overlooked is the de minimis safe harbor threshold amount under the final "repair regs.” The de minimis safe harbor under the repair regs allows taxpayers to deduct certain items that cost $5,000 or less (per item or invoice) and that are deductible in accordance with the company’s accounting policy reflected on their applicable financial statement (AFS). IRS regulations also provide a $500 de minimis safe harbor threshold for taxpayers without an applicable financial statement.
Affordable Care Act
For both individuals and businesses, the Affordable Care Act (ACA) must be part of year-end tax planning. The ACA touches everyone and every business, in some form, even if the individual or business is generally exempt from its main provisions. On their 2015 returns, individuals must report if they had minimum essential health coverage or make a shared responsibility payment, unless exempt. Businesses, if they qualify as applicable large employers (ALEs), may be liable for an employer shared responsibility payment. These are just two of the many ACA-driven factors that must be reflected in a year-end tax plan. Our office can identify the particular ACA provisions that affect you, your family and/or your business.
Year-end tax planning can appear to be a daunting task but our office is ready to work with you. Please contact us for more information.