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. A few unknown factors 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. 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:
- 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
- the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence
- 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
Higher-income earners have unique concerns to address when mapping out year-end plans. The 3.8% net investment income (NII) tax and the 0.9% Medicare tax on wages are still in effect. Both taxes come into play when income levels reach $250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case.
Social Security loophole ending May 1, 2016 – The “file and suspend” loophole is a combination of Social Security rules that provides a legal benefit-claiming strategy for married couples where one partner is at least 66 years old. It essentially allows one spouse to claim the Social Security spousal benefit, while their other spouse’s retired worker benefit continues to grow in value by 8% a year until they claim the maximum benefit at the age of 70. After May 1, recipients will be able to claim whichever payment is higher (the retiree or the spousal benefit), but not game the system by switching from one to the other.
Employer Health Insurance Mandate
- For the 2015 plan year, employers with 100 or more full time and FTE employees must offer coverage to 70% of full time employees and dependents to age 26.
- For the 2016 plan year, the requirement changes to employers with 50 or more full time and FTE employees and the coverage must be offered to 95% of full time employees and dependents to age 26.
- As of July 1, 2015, employers are no longer allowed to reimburse employees for individual health coverage. The penalty is $100 per day or $36,500 per year, per employee. An employer who doesn’t have a group plan but still wishes to help employees with the cost of health insurance are recommended to increase that employee’s salary by the annual cost of health insurance.
South Carolina Tax Credits – for those of you in alternative minimum tax (AMT) that won’t benefit from a deduction of state taxes paid, you might want to consider paying your SC liability via a SC tax credit. And even those that aren’t in AMT, some of the available credits have charitable purposes and some can be purchased at discounts. Below are some of the credits and when they are available:
- Transferable tax credits like the SC Textile Mills Credit – can be purchased at reduced rates. Taxpayers that qualify for the credit but cannot use the credit are granted permission to sell the credits to interested investors. The investors purchase the credits at a discount. Many of these sell out by year-end.
- Community Development Tax Credit – invest cash or property into Community Development Corporations (CDC) or Community Development Financial Institutions (CDFI) and receive a tax credit and Federal charitable contribution in some instances.
- SC Educational Credit for Exceptional Needs – allows you to donate to special needs programs, receive a Federal charitable contribution deduction, and a SC credit. This credit was sold out in a few weeks from its release in July 2015.
- SCRA Industry Partnership Fund – allows you to donate to SC’s high-tech economy, receive a Federal charitable deduction, and a SC credit. This credit sells out in a day. The 2016 fund will open at 9 am on January 4th, 2016.
Additional Tax Planning Actions to Take Before December 31, 2015
- Realize losses on stock while substantially preserving your investment position. With the market fluctuations in 2015, many portfolios had the opportunity to harvest losses to offset other investment gains.
- Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill to enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income.
- 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 adjusted gross income for 2015.
- 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 AMT in 2015.
- 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.
- 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.
- 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 ($14k for 2015) before the end of the year and thereby save gift and estate taxes.
Businesses and Business Owners
- Businesses should buy machinery and equipment before year end. Although the machinery and equipment 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.
- 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.
- Consider year-end bonuses for employees’ vs salary increases to boost salary deductions 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.
These are just some of the year- end steps that can be taken to save taxes. We will keep you updated on Congress’ decision to extend expired tax breaks. If you would like for us to prepare any year-end projections or discuss any of these strategies, please give us a call.