October 22, 2015
2015 YEAR-END PLANNING
Planning ahead always is a smart idea, and that’s especially true when it comes to your taxes. As 2015 draws to a close, there’s still time to make the most of strategies that can help reduce your tax bill April 15 and allow you to reap other potential financial benefits.
Please contact us at your earliest convenience to discuss your tax outlook and develop an individualized approach designed to address your unique financial concerns. Some of the many tax savings and compliance actions we can explore with you are described below.
Don’t Miss Valuable Deductions and Credits
It’s always a good idea to claim all the deductions or credits for which you qualify. Maximizing your retirement contributions, for example, offers two benefits:
- Depending on the type of plan, you may be able to deduct those contributions from your income.
- At the same time, of course, you also add to your retirement nest egg.
Charitable gifts also can lower taxable income, and are not subject to the Alternative Minimum e Tax.
Depending on your adjusted gross income, the child and dependent care credit may help reduce your costs for care regardless of your income. These are all possibilities to explore now to decrease the tax you’ll have to pay when you file your return in 2016. In addition, you still can qualify for numerous other overlooked or misunderstood deductions and credits that can lower your tax bite.
If you have been a real estate professional, please consider taking actions to make sure that you qualify for that tax-reducing benefit in 2015. Among the requirements, please maintain a log of your real estate work to make sure you can substantiate the 750-hour minimum standard.
Prepare for Possible Loss of Certain Tax Deductions
Unless Congress extends certain tax benefits, they will go away this year and cannot be claimed on your next return. For example, in 2014 a taxpayer could deduct the higher of his or her state income tax or state sales tax. If the sales tax deduction is not renewed, your tax liability could increase significantly, especially if you live in a state with no income tax and you are accustomed to deducting sales taxes.
In addition, if the law is not changed by the end of the year, taxpayers:
- Can no longer use an above-the-line deduction for tuition and related expenses for college or graduate school; this deduction was helpful for those with higher incomes who cannot qualify for education credits
- Over age 70½ can no longer exclude from income any distributions made from individual retirement accounts to qualified charities
- Whose homes have gone through a foreclosure or short sale will now have to pay taxes on the amount of any mortgage forgiveness (if you are insolvent, contact us for more information on how this rule applies in your situation)
Plan for the Alternative Minimum Tax (AMT)
It’s estimated that nearly 4 million taxpayers were subject to the AMT in a recent year, and that number is expected to grow. There is a wide range of AMT triggers that could subject you to the tax, including many factors associated with substantial deductions. The AMT exemption rose for 2015, to $53,600 for single taxpayers and to $83,400 for married couples filing jointly.
The good news is that there are ways to plan around the AMT, including accelerating or delaying income or expenses if you’ll be subject to the tax in one year but not another; lowering taxable income through retirement account contributions; or managing when you receive capital gains or dividends. Be aware that accelerating 2016 payments of state income or property taxes into 2015 could create an AMT liability.
Review Your Approach to Health Insurance Costs and Coverage
- Do you have health insurance coverage for each member of your family? If not, you will likely face a penalty. Under the Affordable Care Act, the amount you had to pay for failure to have coverage started out relatively low, up to a maximum of $285 per family in 2014. It jumped to a maximum of $975 this year, and it’s set to more than double again in 2016, to a maximum of $2,085 for each family.
- Besides avoiding the penalty, another way to lower your taxes is to take advantage of medical flexible spending accounts (FSAs), which allow you to set aside pretax dollars to cover unreimbursed medical bills. This year, you can contribute up to $2,550 to an employer-sponsored FSA. And, unlike in the past, instead of losing all of your FSA contributions if you don’t use them by year-end, you can now carry over as much as $500 from one year to the next.
- If you are enrolled in what the IRS defines as a high-deductible health plan, you might be eligible to contribute to a health savings account, which can offer you a pre-tax option for covering your deductible. In 2015, the contribution limits are $3,350 for individuals and $6,650 for a family. And there’s no time limit on when you can use your contributions to cover unreimbursed qualified medical expenses. You are eligible for higher contributions if you are over age 55.
Now is the time to review and update your health insurance status as necessary to maximize your options and avoid any last-minute surprises when you file your taxes.
Minimize the Bigger Tax Bite for Affluent Taxpayers
High-income taxpayers have had an even greater incentive to lower their taxable income in recent years. Not only has the top tax rate risen, but there also is a higher Medicare tax on wages, a new tax on investment income, and increased dividend and capital gain tax rates. At the same time, some popular tax deductions and personal exemptions are now off limits for affluent taxpayers. That’s why it’s important to act now to ensure that you can take full advantage of opportunities to minimize your income and benefit from tax-advantaged options.
Sort Out Capital Gains and Losses
If you are expecting to face capital gain taxes this year, loss harvesting can help reduce what you’ll pay. It involves selling any investment that has declined in value before year-end, including stocks, bonds and mutual funds, so that the capital losses you report can offset your capital gains. You might also want to sell these investments as part of your overall investment strategy if, for example, there have been changes in the markets or in your investment goals during the year and you want to rebalance you portfolio to better reflect your financial needs. Keep in mind, too, that you can deduct up to $3,000 of capital losses each year from your other taxable income. Selling losing investments before year-end can be a smart move even if you don’t need to reduce capital gains taxes this year.
And don’t neglect the potential tax consequences of mutual fund capital gain distributions, especially since many funds schedule their distributions around year-end. If you’re considering reorganizing your investments and one of your funds will make a distribution soon, you may want to ensure you sell that fund in time to avoid a taxable gain.
Avoid a Growing Problem: Tax-Related Identity Theft
Nearly 3 million people were the victims of tax-related identity theft in a recent year, according to a report from the U.S. Treasury Inspector General for Tax Administration. In a typical case, scammers use your Social Security number to get a fraudulent refund. You may not be aware that it’s happened until you file your own return and are told by the IRS that another return has already been filed in your name. (This happened in 2014 to some of our clients.) In the meantime, the scammer has collected your refund. In other cases, taxpayers receive collection notices from the IRS for taxes they don’t owe or refer to employers they never worked for. Victims of these scams should act immediately, contacting law enforcement, the Federal Trade Commission and the credit rating agencies. In addition, we can offer advice on how to respond to any tax notice you receive and on how to avoid falling prey to identity theft. See the information that is attached to this letter.
Prepare for the Next Rounds of Affordable Care Act Implementation
- Employers should keep in mind that health reimbursement arrangements (HRAs) and similar plans generally have been eliminated except when used for selected benefits, including dental and vision care, long-term care and disability coverage. The penalties for employers that continue to offer these arrangements are steep, so be sure your plan complies.
- Significant new reporting, disclosure and notification rules related to continued implementation of the Affordable Care Act become effective next year. Reviewing and planning now for these requirements may save you time and money in 2016.
Plan for New Regulations That Will Affect Your Business
- New tangible property regulations apply to all taxpayers who buy, sell, improve or dispose of depreciable assets for tax years beginning on or after Jan. 1, 2014. These rules affect a tremendous variety of property, e.g., laptops, copiers, roofs, and likely apply to your business.
- A law passed this summer sets new due dates for partnership and C corporation returns, as well as for foreign account reporting and several IRS information returns. These new dates will not take effect until the 2017 filing season, and we will advise you well in advance of any deadline changes that affect you. See the attached table.
Make the Most of Retirement Plan Opportunities to Lower Taxes
If you are not taking full advantage of the special retirement saving options for small business owners, you may be missing out on valuable tax deductions. A Simplified Employee Pension Plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) and Solo 401(k)s feature contribution thresholds that can be significantly higher than those for other kinds of IRAs. In some cases, you can establish these types of plans for yourself and also offer them to employees.
Participants can contribute up to $53,000 to SEP IRAs and Solo 401(k)s in 2015, and those 50 or over can make additional catch-up contributions. For a SIMPLE IRA, the 2015 contribution limit is $12,500, and participants who are age 50 or older also can make catch-up contributions. These plans all feature a minimum of paperwork, maintenance and cost, so they’re worth investigating while it’s still possible to make 2015 contributions.
Address New Uncertainty About Expired Tax Benefits
Many taxpayers will remember past years when Congress waited until the last minute to decide if it would extend provisions set to expire at year-end. This time, several popular provisions expired at the end of 2014. Over the summer, a proposal emerged in Congress to renew many of these provisions for 2015, including these for businesses:
- Bonus depreciation — Amount of deductible depreciation that is permitted above and beyond what would normally be available
- Increase in the maximum amount and phase-out of the section 179 threshold — Allows a taxpayer to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated
- Research and Experimentation Tax Credit, also known as R&D Tax Credit — Helps companies that incur research and development costs
- Work Opportunity Credit — Available to employers who hire individuals from certain target groups who consistently have faced significant barriers to employment.
Reap the Benefits of Going Green
Have you taken steps to make your business more energy efficient this year? If so, you may be eligible for a variety of tax credits, including ones for:
- Contractors who build energy efficient homes
- Owners or lessors of commercial buildings who install energy efficient lighting systems, heating, cooling, ventilation systems or building envelope
- Companies that buy hybrid, electric and alternative fuel vehicles
Many of your questions may be answered by reviewing our helpful tax documents at https://bearlaketax.com/helpful-tax-documents/. The password is available by emailing me Please sign up as a user of the website.
Although we have not seen a great deal of major new tax legislation this year, the uncertainty surrounding expired tax breaks, new reporting rules and growing challenge to minimize taxes make it important to act now. Attached to this messages are articles/info that I thought would be of general interest to my clients.
Bruce Warner, CPA
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