Tax Planning for the End of 2015
Author: Donna Bruce
As we approach year-end, you should review your current taxable income and projected tax while you can still make changes to reduce your overall tax liability. Once 2015 comes to a close, there are few opportunities to reduce the 2015 tax.
Whether you’re an employee with W-2 wages, self-employed or retired, there are options available for timing income and deductions in 2015 or 2016. First, project what your tax rate will be for 2015. Unless you expect a significant drop in 2016, you likely should defer income into 2016 and accelerate deductions into 2015. We don’t expect any significant change in tax rates for 2016, so marginal rates should remain the same with the top tax rate of 39.6 percent.
Here are a few options to consider related to income timing:
- Accelerate capital losses into 2015 to offset capital gains or postpone an asset sale if you expect a gain. Remember, only $3,000 of capital losses in excess of capital gains can be used to offset other income each year. If you expect to buy back the security, be careful of the wash sale rules that prohibit claiming a loss if you acquire the same security within 30 days.
- Structure the sale of a gain-generating asset as an installment sale, postponing tax liability until future years when proceeds are collected.
- Consider a like-kind exchange if you’re selling business or investment property. The gain on eligible business or investment property can be deferred by reducing the basis of the replacement property by the gain otherwise recognized.
- Consider delaying year-end bonus payments until 2016, if possible.
- Delay the collection of outstanding receivables until early 2016 (applicable for cash-basis taxpayers only).
- Maximize your contributions to retirement plans. If you’re at least age 50 by year-end, you may make a catch-up contribution (these amounts vary based on account type).
On the deduction side, first consider whether you’re subject to alternative minimum tax (AMT), as many personal deductions aren’t allowed under the AMT structure.
Here are some deduction issues to consider:
- Charitable donations are allowed for those itemizing deductions in an amount up to 50 percent of your adjusted gross income (AGI) for cash contributed.
- Consider donating appreciated stock to a charity, which allows you to avoid capital gain tax—and, if applicable, net investment income tax (NIIT)—on the appreciation in the security. The property must have been held for more than 12 months and must be capital gain property. There’s generally a 30 percent AGI limit on these contributions.
- Consider accelerating real estate tax payments into 2015, even if they’re not due until 2016. AMT must be considered, as this isn’t deductible for AMT purposes.
- Consider paying your fourth-quarter state estimated income tax payment in December. Again, this may not be beneficial if you’re subject to AMT.
- If you’re self-employed, consider deductions such as supplies, repairs, maintenance or employee bonuses that can be paid in 2015 to claim the tax deduction this year.
- Consider acquiring new business property in 2015 that’s eligible for the Section 179 expensing election. Note that the limit on assets available for this election will be $25,000 this year unless Congress extends the expiring provision.
As you proceed with year-end planning for your tax liability, remember that a number of tax provisions expired at the end of 2014, including:
- State and local sales taxes deductions in lieu of actual state income taxes paid
- Tuition and fees deduction
- Increased Sec. 179 expensing limit for business assets
- Bonus depreciation—an allowance of 50 percent of the cost of eligible business assets placed in service
- Deductions for IRA-related charitable contributions
- Various energy efficiency tax provisions
Congress has acted late in recent years to extend these provisions, but it’s unclear if they’ll be made available for 2015. Consider how you can take advantage of these provisions late in the year—if they’re extended—to increase your 2015 tax benefits.
In planning for your 2015 taxable income, consider how your AGI affects more than your current income tax liability. Your AGI amount can determine whether you’re subject to NIIT, which was effective beginning in 2013. If your AGI exceeds $200,000 for single taxpayers, or $250,000 for married taxpayers filing jointly, your investment and passive income could be subject to an additional 3.8 percent tax. The NIIT is based on the lesser of net investment income or the amount by which modified AGI exceeds the threshold amount.
Another item potentially affected by your AGI is the Medicare Part B health insurance and prescription drug coverage premium. If your AGI exceeds $170,000 for married filing jointly, or $85,000 for single filers, your premium will be increased from the base amount. Your 2015 AGI will affect the amount of your 2016 Medicare premiums. As you plan for timing your income between 2015 and 2016, keep in mind the impact on your future Medicare premiums.
If you have a health flexible spending account (FSA), review expenses to avoid losing unspent funds. In general, FSA funds not used on qualified medical expenses prior to year-end are forfeited. Beginning in 2014, an employer may let participants roll over up to $500 of unspent funds to the next calendar year, or the employer can extend the time period to incur qualified expenses up to 2½ months past year-end. These two options are at the employer’s discretion, so review your employer’s FSA policy to avoid forfeiting these pre-tax dollars.
Keep an eye on your expected tax liability and know how to structure transactions so you can avoid a surprise tax liability on April 15.