By Steven G. Horn, CPA and Tax Partner
Astonishingly, we have less certainty in year-end tax planning than we did this time last year. So far, Congress has not passed any legislation that would extend a host of individual and business provisions that expired last December 31. While we expect Congress to address the so called “Extenders” (discussed below), it is difficult to plan when current law might or might not change retroactive to January 1, 2015. Nevertheless, there are some traditional strategies that we can consider in hopes of reducing current taxes, and always, we stand ready to help our clients with their specific situations.
“Extenders” Need Extending: As noted above, Congress has yet to extend more than 50 temporary tax provisions that expired at the end of 2014. On the individual side, these include (among others):
- Child tax credit
- Dependent care credit
- Certain tuition credits and deductions
- Exclusion of income from cancellation of mortgage debt
- IRA distributions for charity for those older than 70-1/2 years old
- State and local sales tax deduction
- Certain energy credits
On the business side, the extenders we are hoping to see action include:
- Research tax credit
- Work opportunity tax credit
- 100% exclusion for gain on sale of qualified small business stock
- Reduced recognition period to 5 years for S Corporation built-in gains tax
There is a groundswell of support to make some of these provisions more permanent but the Senate and House cannot seem to agree on which ones. We would be happy if they would at least provide some guidance for 2015 and 2016 for starters.
Once again, tax depreciation questions remain at the top of the list when talking about extenders. Will the Section 179 expensing deduction for certain fixed asset acquisitions be increased to $500k like we had in 2014 or will it remain at $25k as currently written? Will the 50% bonus depreciation rule return retroactive to the beginning of 2015 for many fixed asset acquisitions or is that rule a happy memory? Such uncertainties are making it difficult for our clients to plan how to spend current capital dollars to optimize tax deductions.
Investment Income Strategies: For taxpayers with taxable income above $413,200 ($464,850 for joint filers), the top federal rate for long-term capital gains and qualified dividends is 20% in 2015. For those under these thresholds, the maximum federal rate is 15%. Managing income to stay under the thresholds, if possible, might be beneficial. Also, selling investment assets to realize capital losses before year-end and managing holding periods to avoid short-term gains remain good strategies for many. The stock market has been on a wild ride this year, but now is the time to talk to your money manager to identify tax saving opportunities. However, make sure you do not run afoul of the “wash sale” rules that prohibit you from taking capital loss deductions if, within 30 days of selling your loss shares, you buy those positions back.
As a reminder, dividends are generally eligible for the lower tax rates as “qualified dividends” if they are received from a domestic corporation or a qualified foreign corporation on which the underlying stock is held for at least 61 days within a specified 121-day period.
The 25% tax rate for certain real estate gains and the 28% tax rate for sales of collectibles remain unchanged.
Limitation on Itemized Deductions and Exemptions: High income taxpayers have to reduce certain otherwise allowable itemized deductions by 3% of the amount by which their adjusted gross income (AGI) exceeds an applicable threshold. They also have their personal exemptions phased out by 2% for each $2,500 of AGI in excess of the applicable threshold. The applicable AGI thresholds for 2015 are $310k for joint filers, $284k for heads of households and $258k for singles. For those affected, this is a hidden tax increase. Since AGI is the driver, one strategy is to manage AGI, if possible, by keeping it down and spreading income over a number of years. Bunching itemized deductions into 2015 or 2016 might also be helpful.
Estate and Gift Planning: To reduce your estate, you can give up to $14,000 tax-free in 2015 to as many donees as you want without reducing your estate and lifetime gift tax exclusion amount. In addition, because spouses may combine their exemptions in a single gift from either spouse, married givers may double the amount of the exclusion to $28,000 per donee. Qualifying tuition payments and medical payments do not count against this limit. The annual exclusion will be $14,000 in 2016 as well. Plus, the lifetime exclusion will increase to $5.45 million in 2016 from $5.43 million, enabling those who had previously gifted the lifetime maximum to gift another $20k in addition to the annual exclusion amounts.
Planning For Healthcare Provisions: The individual mandate penalties for noncompliance has kicked into high gear for 2015. The penalties for not having health insurance that meets minimum coverage are the greater of 2% of household income or $325/adult + $162.50/child (capped at $975/family), unless otherwise exempt. For 2016, the penalties increase even more so you should be shopping for health insurance now if you could otherwise be subject to the penalties.
Employees should be considering employer cafeteria plan options going into 2016. They should be reminded of the use-it or lose-it nature of health flexible savings accounts. Health savings accounts (HSAs) also remain available for deductible contributions for those with “high deductible health plans.”
For employers, 2016 will bring more compliance issues. Much of the compliance burden will fall on insurance companies, but those employers who self-insure should be gearing up now for the added requirements.
Changes to Repair/Capitalization Regulations: In 2014, we were introduced to new regulations explaining when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible business property. There is a deminimis safe harbor election that allows taxpayers to routinely deduct items whose cost is below a specified threshold. Generally, for companies that have their financial statements audited by a top rated CPA firm such as WBL, the threshold is $5,000. For all others, the threshold is $500, but will increase to $2,500 starting in 2016 as announced by the IRS last week. See our summary of these regulations with other important information at www.wblcpa.com.
Optimizing Retirement Plan Contributions: For 2015, up to $18,000 can be contributed to a 401k plan with an additional $6,000 catch-up provision for people 50 years and older. Up to $53,000 can be contributed to qualified profit sharing plans. IRA (Traditional and Roth) contribution limits in 2015 are $5,500 for those under 50 years old and $6,500 for all others. These are not expected to change in 2016.
Other “Typical” Tax Savings Strategies: Given that income tax rates for 2016 are expected to be comparable to 2015, most taxpayers will generally benefit from the typical tax strategies we have discussed in previous years. For example, we have suggested strategies for deferring income and accelerating expenses for cash basis businesses, taking advantage of one or more of the many retirement vehicles available, paying state income taxes before year-end if beneficial and “bunching” certain expenses such as medical expenses into one year if doing so will put you over the limits to enable a tax benefit. For taxpayers who plan to make charitable contributions before year end, consider donating appreciated securities rather than cash. You reap the benefit of the same charitable contribution deduction, subject to certain limitations, without recognizing the gain on securities for tax purposes. Also, it continues to be important to monitor the impact of the alternative minimum tax (AMT) with its parallel tax system that disallows certain expenses, such as real estate taxes, while taxing certain otherwise tax-free income, such as interest from municipal private activity bonds. Investments in strategies that provide charitable deductions for conservation easements and other land donations continue to create a buzz among some taxpayers, but with an eye toward what appears to be increasing IRS scrutiny. Your WBL professionals are available to explain all of these in more detail, help weigh the risks, if applicable, and run the numbers.
Georgia Incentives Require Quick Action: Because Georgia has capped the total amount of certain tax credits that it will provide, taxpayers are encouraged to get applications filed as soon as possible before the credits get used up in 2016. These include the credit for contributions made to Student Scholarship Organizations (SSO), the gaming film credit, if applicable, and the angel investment credit. Contact WBL or see our website at www.wblcpa.com for more information about these and other tax incentives.
Tax Filing Bonus: Procrastinators will be happy to know that the filing deadline this year for individuals (if no extension is filed) will be April 18, 2016 instead of April 15. This is because April 15 is Emancipation Day in Washington, DC, which the IRS respects as a holiday for all. Because that day is a Friday, the due date becomes Monday, April 18.
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There are other year-end strategies that might be more specific to your situation. If you have any questions or if we can help in any way, please contact us. In the meantime, we will continue to monitor the tax impact of what goes on in Washington.