November/December, 2015 Newsletter
Yes, we are into the Holiday Season already! So a very Merry Christmas, Happy Chanukah, and Happy New Year to everyone!
Before I get into the details and tax savings available, there some office updates I am delighted to share with everyone:
- If you have not booked an appointment for 2015 tax analysis review, there is still time to book that now. An alternative is to mail in the basic information, or inform us ahead of time if you expect any unexpected things (i.e. winning the lottery, collecting on BINGO, or just having a really good year for more income). Just CALL the office and we will take care of the rest.
- We have added another convenient payment option on our website. (henrykulik.com) You may now pay invoices via e-check (electronic debit—not immediate ACH) or via debit or credit card. We now accept Discover, MC/Visa, American Express and even Diner’s Club.
- Corporate and LLC/S-Corp clients: If at all possible, please get us as much information as possible in early January! QuickBooks files, source documents (loans and bank statements, etc.) so we can get an early start. That avoids your corporate work being pushed into the February/March individual tax return rush!! Use our convenient online web-portal that only active clients of this firm have access to. (Virtually anything can be uploaded to us using this method- electronic files (QuickBooks, Peachtree) and zipped and unzipped documents. Even if everything is similar to the prior year, please let us know that too!
- Electronic individual tax organizer will be released to the web portal (along with an email announcement) the week before the last week of the year.
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. Factors that compound the challenge 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. (My other research materials claim that all or most of these tax breaks will be reinstated again!- but no guarantees) 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 (Section 179)
- the research tax credit
- 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% 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).
Henry’s 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. Note, however, that in some cases, it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will 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.
- 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.
- It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.
- Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.
- 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 the alternative minimum tax (AMT) in 2015.
- *We can also prepare extra vouchers for you if you really expect to owe and do not want a balance due April 15!
- 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.
- 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 be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
- 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.
- 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.
- Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
- If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.
- 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.
Henry’s Year-End Tax-Planning Moves for Businesses & Business Owners
- Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions in 2015.
- 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.
- *The depreciation issues above are the same as last year. Then, at the last minute everything worked out!
- 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.
- (For C Corporations only)—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, if you are a debtor, 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.
These are just some of the year-end steps that can be taken to save taxes. 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!
Other Miscellaneous Tax Items
- Firms that reimburse workers directly for health insurance or Medicare bought separately are in for a surprise The IRS will fine you $100 per day, per employee you reimburse. Wow! That can add up quickly…
- NO increase in social security wage base. It will remain at $118,500 subject to FICA tax. After that, only the Medicare tax is charged.
- IRS will stop seizing Social Security disability payments for unpaid taxes. Other Social Security income can be grabbed up to 15% of the amount paid.
- If you self-insure your employees, the “special tax” increases to $2.17 x the number of employees, dependents, and spouses (all lives)
- Right here in MA, a court ruled the IRS had to use a CPA’s calculations for basis on 200 old stocks and securities sold. You can’t beat a good CPA!!
- States are considering a tax on electronic cigarettes to raise revenue. Watch those E-Cigs!
- IRS is going after (auditing) entertainers, including songwriters, musicians, and producers. *AUDIT ALERT* IRS is also closely looking at TIP income re: hotels, restaurants, hair salons, etc. Be sure to report every $ earned by wages, tips, or cash- just like you do now.
- IRS did fewer personal (individual) audits during 2014. In 2010 the rate was 1.11%; now its .86% But the “red flags” still can trigger a review/exam, even if a correspondence exam. But the IRS has 22% less revenue agents than 5 years ago.
- ACA/HEALTH INS: The penalty has again increased if you refuse insurance. In 2016 the amounts are $695 per adult and $348 per child. Family ceiling is $2,085. The other fine is 2% to 2.5% of gross family income; whichever is larger of the 2 methods is due.
- RMD- If you turn 70-1.2 this year you can delay your 2015 payment until April 1, 2016.
- President Obama’s MY-IRA plan is expanded- now nationwide. They work similar to a Roth, but the principal is Government insured, like a bank. There are income limits and other restrictions. Check out www.myira.gov
- If you owe more than $50,000 in federal taxes, your passport could be seized! Taxpayers who are compliant with a payment plan are OK..for now.
Very truly yours,
Henry C Kulik, Jr. CPA LLC