As the end of the year approaches, there is still time to reduce your 2015 tax bill and plan ahead for 2016. This letter highlights several potential tax-saving opportunities for you to consider. We would be happy to meet with you to discuss specific strategies.
For 2015, factors that compound the challenge of year-end tax planning include turbulence in the stock market, overall economic uncertainty, and Congress’s failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).
These breaks include, for individuals:
- the option to deduct state and local sales and use taxes instead of state and local income taxes;
- the above-the-line-deduction for qualified higher education expenses;
- tax-free IRA distributions for charitable purposes by those age 70-1/2 or older;
- and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.
For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include:
- 50% bonus first- year depreciation for most new machinery, equipment and software;
- the $500,000 annual expensing limitation;
- the research tax credit;
- and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% net investment income tax (NIIT) and the additional 0.9% Medicare tax.
The net investment tax is 3.8% on the lesser of net investment income (NII) or the amount by which the taxpayer’s modified adjusted gross income (MAGI) exceeds a threshold amount. That threshold amount is $250,000 for married filing jointly or surviving spouses, $125,000 married filing separately, and $200,000 for all others. The most common examples of income subject to NIIT include: taxable interest and dividends, net capital gains, annuities, royalties, rents and income from other passive activities. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI. It may be advisable for us to meet to discuss year-end strategies to eliminate or minimize your exposure to NIIT.
The .09% Medicare tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount. That threshold amount is $250,000 for married filing jointly, $125,000 married filing separately, and $200,000 for all others. The .09% Medicare tax may require some year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.
Under the 2010 health care reform law, sometimes called Obamacare, in 2015, there is an individual mandate requiring individuals and their dependents to have health insurance that is minimum essential coverage or pay a penalty unless they are exempt from the requirement. Many people already have qualifying coverage, which can be obtained through the individual market, an employer-provided plan or coverage, a government program such as Medicare or Medicaid, or an Exchange. For lower-income individuals who obtain health insurance in the individual market through an Exchange, a premium tax credit and cost-sharing reductions may be available to offset the costs.
U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. For 2015, the due date was June 30, 2015, however, for taxable years beginning after December 31, 2015, the due date is the same as the U.S. tax filing deadline of April 15 (unless extended by a weekend or holiday), with a maximum six-month extension to October 15.
Year-End Tax Planning Moves for Individuals
Most people think of April 15 as the key deadline for taxes. Although that is the due date for filing your tax return, when it comes to minimizing taxes, the key date is December 31. To take advantage of most tax breaks—for retirement savings, charitable giving, and more— we suggest our clients to act before year-end.
In evaluating the most suitable approach, one of the first things to consider is whether tax rates will go up or down next year. Currently, no significant change in tax rates is expected in 2016. Thus the marginal tax rates should remain the same, with the top rate being 39.6%.
Typically, if you expect to be in a lower bracket in the future, it generally makes sense to defer income into later years and accelerate deductions into the current year. This strategy can help move you into a lower tax bracket in the current year. It can also help you avoid crossing the threshold at which you are subject to the net investment income tax or subject to losing all or part of certain deductions, credits, and tax breaks (e.g., student loan interest, child tax credits, higher education tax credits and personal exemptions). In addition, lowering the income and accelerating expenses into the current year can make it easier to deduct expenses subject to the 2%-of-adjusted-gross-income threshold, when itemizing deductions.
Alternatively, if you expect a substantial increase in income or anticipate using less favorable tax filing status in the next year, accelerating income into the current year or deferring deductions to the following year may be an appropriate strategy to lessen your tax bill next year. Accelerating income into the current year and lowering income in 2016 can result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
Some actions to consider in postponing income and accelerating deductions are:
- Pushing the sale of a gain-generating asset into the next year;
- Structuring the sale of a gain-generating asset as an installment sale;
- Deferring any year-end bonuses;
- Maxing out retirement plan contributions;
- Making HSA contributions if eligible;
- Prepaying property taxes due the following year;
- Prepaying January’s mortgage in December;
- Bunching medical expenses and other itemized deductions;
- Moving future charitable donations into the current year;
- Using a credit card to pay deductible expenses before the end of the year.
Some actions to consider in accelerating income and deferring deductions are:
- Moving up planned retirement plan distributions to the current year (assuming the 10% penalty tax on early distributions does not apply);
- Making a Roth IRA rollover distribution;
- Settling any legal disputes that might result in taxable income before next year;
- Selling gain-generating assets this year;
- Bunching deductions (e.g. charitable contributions, expenses for medical and dental visits and surgery, property taxes, etc.) into the following year;
- Postponing the sale of loss-generating property.
Other tax planning actions available to individuals:
- If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.
- If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion – that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
- Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.
- Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year- end to pull the deduction of those taxes into 2015 if you won’t be subject to alternative minimum tax (AMT) in 2015.
- Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.
- You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
- Until 2016, tax incentives are available to taxpayers who install certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. A credit is available for the expenditures incurred for such property up to a specific percentage, except that a cap applies for fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs. If you have made improvements to your home or plan to by the end of 2015, please contact us to discuss the amount of the credit you may qualify for.
- You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income. When and whether to recognize such losses should be analyzed in light of the possible future changes in the capital gains rates applicable to your specific investments.
- Stock acquisitions that qualify as “small business stock” under 1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. For stock sold in 2015, the five-year look-back period is to 2010. A 50% exclusion applies for stock acquired before February 18, 2009, and after December 31, 2014. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. A 100% exclusion applies for stock acquired after September 27, 2010, and on or before December 31, 2014. For stock acquired in 2015, only 50% of the gain is excluded from gross income (after the five-year holding period is met). Congress may act before the end of 2015 to reinstate the 100% exclusion for stock acquired in 2015 (and held for at least five years). Thus, if you have not yet acquired any qualifying stock, it makes sense to hold off until we know what Congress does.
- If you are currently underwater on your home and you are considering selling or getting a loan modification, you might want to wait a little longer. Without extending legislation for 2015, qualified mortgage debt relief from your lender discharged in 2015 will be considered income and taxes will be owed on the amount forgiven.
Year-End Tax-Planning Moves for Businesses & Business Owners
- Businesses should buy machinery and equipment before yearend and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership
- Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
- Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500 in 2015. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015; however, keep in mind the new IRS announcement raising the de minimis threshold to $2,500 for tax years beginning on or after Jan. 1, 2016.
- A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.
- A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
- A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for 2015. This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.
- If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.
- To reduce 2015 taxable income, consider deferring a debt-cancellation event until 2016.
- To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.
- If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.
Health Care Planning for Businesses & Business Owners
- SHOP Exchanges: In 2016, the Small Business Health Options Program is available for employers with 100 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working 30 or more hours per week. Each exchange will offer its own SHOP marketplace. Self-employed persons with no employees cannot use the SHOP Exchange.
- Premium Health Care Credits: Small businesses with less than 25 employees may qualify for health care tax credits using the health insurance marketplace. These premium tax credits can cover up to 50% of the cost of employee health insurance. The uncovered amount can be deducted from your taxes as usual. The tax credits are available through plans offered on the SHOP marketplace exclusively.
- Pay to Play Excise Tax: For the 2016 plan year, if you have 50 or more employees, you could be subject to an excise tax, which could be as much as $2,000 per employee, for failure to provide an adequate health care plan to your employees. The first 30 workers are excluded from the penalty excise tax. Larger employers, should be considering their health care plan needs in light of this potential excise tax liability.
- Health Care Reporting: The first mandatory filings for 2015 Forms 1095-C, 1095-B, 1094-C and 1094-B are due in early 2016. Paper filings are due February 29, 2016, or March 31, 2016, if filing electronically. Employee statements are due February 1, 2016.
These are just some of the tax topics and the year-end steps to help you to plan for the current year and 2016 ahead. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event that Congress revives expired tax breaks to assure that you don’t miss out on any resuscitated tax-saving opportunities.
Very truly yours,
MWH Group, PC