As 2015 draws to a close and we enter the holiday season, it is a good time to start thinking of possible planning moves that can help lower your tax bill for this year (and possibly the next).
In recent years, Congress has waited until close to the end of the year having us worry about the fate of several tax breaks (so called “tax extenders”) that we have utilized to reduce our tax bills each year. However, unlike earlier years, Congress actually passed the PATH Act of 2015 to give us some time this year and some certainty next year with several tax laws have now been extended for 2016 or have now been made permanent (see attached summary – New Legislation Makes Many Tax Provisions Permanent).
In order to discuss some of the tax breaks you should focus on before year end, I have included the summary below that can be used by individuals and/or small business owners.
For individuals, these breaks include:
- The option to deduct state and local sales and use taxes instead of state and local income taxes (very important in Texas where we have no state income tax to deduct).
- 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.
- 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
- The 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
For those of you that are higher income earners, you also have unique concerns to address when mapping out year-end plans. They must be cautious of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax (see earlier article on 3.8% Obamacare 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). The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
Here is a list of some of our top year-end actions that may help you save tax dollars:
Year-End Tax Planning Moves for Individuals
- Realize losses on stock while substantially preserving your investment position (tax-loss trading) – don’t forget to review the “wash sale rules” where you cannot buy back a “substantially identical” position within 30 days.
- Review your non-retirement mutual funds NOW for any unexpected taxable distributions. You may have some funds that you have losses in this year that could make taxable distributions in December.
- Max-out your available employer retirement plans and/or any IRAs you are eligible for. And if you are over age 50, don’t forget your “make-up” contributions.
- Where possible, postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- 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.
- Estimate the impact 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.
- 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.
- Making charitable donations (even better if you can use appreciated assets).
- 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.
- Don’t forget to use any remaining balances in flexible spending accounts that could be lost if not used.
- Don’t forget to utilize your annual gifting exclusions of up to $14,000 per person. You can give up to $14,000 to as many individuals as you like before Dec. 31, 2015 without filing a gift-tax return. If you’re married, you and your spouse can give up to $28,000 per recipient.
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.
- 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 (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.
- 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.
- For small businesses (or independent contractors), you can consider setting up a retirement plan(401k, SEP IRA, SIMPLE IRA or a Defined Benefit Plan). These may allow you to defer taxes on income of anywhere from around $12,500 to $53,000 (or possible much more if you use a Defined Benefit plan).
These are just some of the year-end steps that can be taken to help you save taxes. These or other tax planning strategies can be discussed with your CPA and Financial Team before the holidays.
Financial Planning and Investment Advice offered through Avidian Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. As always, a copy of our current written disclosure statement discussing our services and fees continues to be available for your review upon request.
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