By: Meyer Wolman
Dear Clients and Friends:
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. In order to identify areas that may benefit your strategic tax planning, we have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end.
Not all actions will apply in your particular situation, but you (or a family member) may benefit from many of them. We can narrow down the specific actions that you can take, once we meet with you to tailor a particular plan. In the meantime, please review the following list, and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
Year-End Tax Planning Moves for Individuals:
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
- Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- Estimate the effect of any year-end planning moves on the Alternative Minimum Tax (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, and miscellaneous itemized deductions. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.
- You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70- 1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that 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 and who are not subject to the kiddie tax.
- Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter 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 an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).
Year-End Tax-Planning Moves for Businesses & Business Owners :
- 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.
- 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.
- 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.
- 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.
These are just some of the year-end steps that can be taken to save taxes. Factors that might challenge some of these options include turbulence in the stock market, overall economic uncertainty, and Congress’ 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). For individuals, these breaks include:
- 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.
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
- The 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
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. For more information, you can reach Tax Director Meyer Wolman by email at firstname.lastname@example.org, or by phone during regular business hours at (410) 727-5735.
Mr. Wolman is a Director in the Tax Department of Ellin & Tucker, Chartered. He heads the Real Estate Division of the firm and is a member of the firm’s Health Care Services and the Estate Tax Planning and Compliance Groups. He is responsible for providing accounting and tax services for many major clients of the firm. He has extensive experience in the areas of real estate development and management, health care, construction, investment management, advertising, legal, manufacturing, wholesale distribution, retail, auto dealerships, vehicle and equipment leasing, and professional service organizations. Represents businesses before Federal and state agencies in matters pertaining to income taxes, sales and use taxes, and personal property taxes. Testifies as an expert witness on tax matters. He is involved with planning for income, gift and estate taxes and wealth transfer for high net worth clients.