2015 Year-End Tax Planning for Individuals

2015 Year-End Tax Planning for Individuals

Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2015 even though you will not pay the bill until 2016. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.

To avoid capital gains, you may want to consider giving appreciated property to charity.

Regarding charitable contributions please remember the following rules: (1) no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better; (2) the IRS may deny a deduction for any item with minimal monetary value; and (3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return. Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.

A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual who has reached age 701/2. Note that this provision expired at the end of 2014 and unless Congress acts before the end of 2015 to reinstate the benefit, it will not be available on your 2015 tax return.

Equipment Purchases: If you are in business and purchase equipment, you may make a “Section 179 Election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2015, the allowable deduction is limited to $25,000 (much lower than in previous years). Note that if Congress acts before the end of the year to reinstate the higher deductible amounts, it will be to your advantage to expense more equipment.

In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2015. In general, under the “half-year convention,” you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.)

A popular strategy in recent years is to purchase a vehicle for business purposes that exceed the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $3,160 for 2015; $3,460 in the case of vans and trucks. Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.

NOL Carryback Period: If your business suffers net operating losses for 2015, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2013. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.

Bonus Depreciation: The bonus depreciation rules ended in 2014. Without late year legislation extending the bonus depreciation rules under §168(k) for assets purchased and placed in service in 2015, no benefit exists.

Capitalization v. Expensing for Materials and Supplies and Repairs: Under regulations that went into effect in 2014, a deduction is allowed for materials and supplies that have an acquisition or production cost of $200 or less. Also, a de minimis safe harbor states that for repairs to be deductible, among other requirements, the unit of property must cost less than $5,000 per invoice or item substantiated by the invoice for taxpayers with applicable financial statements and $500 per invoice for taxpayers without applicable financial statements.

Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year’s return. In order to qualify for 2015, the taxpayer must be allowed a dependency deduction for the qualifying child. Another qualifying determination is that the qualifying child must be younger than you. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers. These amounts are not adjusted for inflation. A portion of the credit may be refundable. The threshold earned income level to determine refundability is set by statute at $3,000 for tax years 2009 through 2017.

Credit for Adoption Expenses: For 2015, the adoption credit limitation is $13,400 of aggregate expenditures for each child, except that the credit for an adoption of a child with special needs is deemed to be $13,400 regardless of the amount of expenses. The credit ratably phases out for taxpayers whose income is between $201,010 and $241,010.

Education Credits: Back in 2009, significant changes were put in place for the Hope credit, including a name change to the American Opportunity Tax Credit. Due to legislation in early 2013, these changes continue through 2017. The maximum credit for 2015 is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer’s spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the student’s post-secondary education. For 2015, the credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers. Forty percent of the credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes. The term “qualified tuition and related expenses” includes expenditures for “course materials” (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance). One way to take advantage of the credit for 2015 is to prepay the spring 2016 tuition. In addition, if your child’s books for the spring 2016 semester are known, those can be bought in 2015 and the costs qualify for the credit for 2015.

The Lifetime Learning credit maximum in 2015 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the Hope (American Opportunity Tax Credit in 2015) credit, eligible students include the taxpayer, the taxpayer’s spouse, or a dependent. For 2015, the Lifetime Learning credit is phased out at modified AGI levels between $110,000 and $130,000 for joint filers, and between $55,000 and $65,000 for single taxpayers.

Coverdell Education Savings Account: For 2015, the aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account. The limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. The AGI amounts are not indexed for inflation. The contributions to the account are nondeductible but the earnings grow tax-free.

Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any “qualified education loan.” The maximum deduction is $2,500. The deduction for 2015 is phased out at a modified AGI level between $130,000 and $160,000 for joint filers, and between $65,000 and $80,000 for individual taxpayers.

Kiddie Tax: The kiddie tax applies to: (1) children under 18 who do not file a joint return; (2) 18-year-old children who have unearned income in excess of the threshold amount, do not file a joint return, and who have earned income, if any, that does not exceed one-half of the amount of the child’s support; and (3) children between the ages of 19 and 23 if, in addition to the above rules, they are full-time students. A parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” One of the requirements for the parental election is that a child’s gross income is more than $1,050 but less than $10,500 for 2015. If a child has more than $2,100 for 2015 in interest, dividends, and other unearned income, and the income is not or cannot be reported on a parent’s return by filing Form 8814, part of that income may be taxed to the child at the parent’s tax rate instead of the child’s tax rate.

Achieving a Better Life Experience (ABLE) Accounts: This is a new type of savings account for individuals with disabilities and their families. For 2015, taxpayers can contribute up to $14,000. Distributions are tax-free if used to pay the beneficiary’s qualified disability expenses.

Residential Energy Efficient Property Credit: Until 2016, tax incentives are available to taxpayers who install certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. A credit is available for the expenditures incurred for such property up to a specific percentage, except that a cap applies for fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs. If you have made improvements to your home or plan to by the end of 2015, please contact me to discuss the amount of the credit you may qualify for.
Business Credits

Small Employer Pension Plan Startup Cost Credit: For 2015, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% in qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.

Employer-Provided Child Care Credit: For 2015, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility and for resource and referral expenditures.

Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. This gives your business an expanded opportunity to employ new workers and be eligible for a tax credit against the wages paid. The credit is determined based on first-year wages paid for employees hired on or before December 31, 2014. Thus, unless Congress acts to extend the credit into 2015, the benefit will not exist for workers hired in 2015.

The following rules apply to most capital asset transactions in 2015:Capital gains on property held one year or less are taxed at an individual’s ordinary income tax rate.

• Capital gains on property held one year or less are taxed at an individual’s ordinary income tax rate.
• Capital gains on property held for more than one year are taxed at a maximum rate of 20% (0% if an individual is in the 10% or 15% marginal tax bracket; 15% for individuals in the 25%, 28%, 33% and 35% brackets).

Continuing from enactment in 2013, a 3.8% tax is levied on certain unearned income. The tax is levied on the lesser of net investment income or the amount by which modified AGI exceeds certain dollar amounts ($250,000 for joint returns and $200,000 for individuals). Investment income is: (1) gross income from interest, dividends, annuities, royalties, and rents (other than from a trade or business); (2) other gross income from any business to which the tax applies; and (3) net gain attributable to property that is not attributable to an active trade or business. Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax. This rule applies mostly to passive businesses and the trading in financial instruments or commodities. With this additional tax, the maximum net capital gains rate is 23.8% in 2015. Because distributions from qualified retirement plans are not subject to the tax, taxpayers may want to invest in retirement accounts, if possible, rather than taxable accounts.

Timing of Sales: You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income. When and whether to recognize such losses should be analyzed in light of the possible future changes in the capital gains rates applicable to your specific investments.

Dividends: Qualifying dividends received in 2015 are subject to rates similar to the capital gains rates. Therefore, qualifying dividends are taxed at a maximum rate of 20% (23.8% if subject to the net investment tax). Qualifying dividends include dividends received from domestic and certain foreign corporations.

Nonqualifying dividends are subject to ordinary income rates (up to 43.4% (39.6% income tax rate and 3.8% net investment income tax rate).
Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as “small business stock” under §1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. For stock sold in 2015, the five-year look-back period is to 2010. A 50% exclusion applies for stock acquired before February 18, 2009, and after December 31, 2014. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. A 100% exclusion applies for stock acquired after September 27, 2010, and on or before December 31, 2014. For stock acquired in 2015, only 50% of the gain is excluded from gross income (after the five-year holding period is met). Congress may act before the end of 2015 to reinstate the 100% exclusion for stock acquired in 2015 (and held for at least five years). Thus, if you have not yet acquired any qualifying stock, it makes sense to hold off until we know what Congress does.

Installment Sales: Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received. So if you are expecting to sell property at year-end, and it makes economic sense, consider selling the property using the installment method to defer payments (and tax) until next year or later.

Selling Your (Underwater) Home: If you are currently underwater on your home and you are considering selling or getting a loan modification, you might want to wait a little longer. Without extending legislation for 2015, qualified mortgage debt relief from your lender discharged in 2015 will be considered income and taxes will be owed on the amount forgiven.

Social Security: Depending on the recipient’s modified AGI and the amount of Social Security benefits, a percentage — up to 85% — of Social Security benefits may be taxed. To reduce that percentage, it may be beneficial to defer receipt of other retirement income. One way to do so is to elect to receive a lump-sum distribution from a retirement plan and to rollover that distribution into an IRA. Alternatively, it may be beneficial to accelerate income so as to reduce the percentage of your Social Security taxed in 2016 and later years.

Other Tax Planning Opportunities: We also can discuss the potential benefits to you or your family members of other planning options available for 2015, including §529 qualified tuition programs.

Individual Mandate: Under the 2010 health care reform law, sometimes called Obamacare, in 2015, there is an individual mandate requiring individuals and their dependents to have health insurance that is minimum essential coverage or pay a penalty unless they are exempt from the requirement. Many people already have qualifying coverage, which can be obtained through the individual market, an employer-provided plan or coverage, a government program such as Medicare or Medicaid, or an Exchange. For lower-income individuals who obtain health insurance in the individual market through an Exchange, a premium tax credit and cost-sharing reductions may be available to offset the costs.

Health Care Savings Accounts: For 2015, cafeteria plans can provide that employees may elect no more than $2,550 in salary reduction contributions to a health FSA.

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the general 10% of AGI floor.
Health Savings Accounts: A health savings account (HSA) is a trust or custodial account exclusively created for the benefit of the account holder and his or her spouse and dependents, and is subject to rules similar to those applicable to individual retirement arrangements (IRAs). Contributions to an HSA are deductible, within limits. For 2015, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,350; for an individual with family coverage under a high deductible health plan is $6,650. For 2015, a “high deductible health plan” is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage.

Individual Mandate: Under the 2010 health care reform law, sometimes called Obamacare, in 2015, there is an individual mandate requiring individuals and their dependents to have health insurance that is minimum essential coverage or pay a penalty unless they are exempt from the requirement. Many people already have qualifying coverage, which can be obtained through the individual market, an employer-provided plan or coverage, a government program such as Medicare or Medicaid, or an Exchange. For lower-income individuals who obtain health insurance in the individual market through an Exchange, a premium tax credit and cost-sharing reductions may be available to offset the costs.

Health Care Savings Accounts: For 2015, cafeteria plans can provide that employees may elect no more than $2,550 in salary reduction contributions to a health FSA.

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the general 10% of AGI floor.
Health Savings Accounts: A health savings account (HSA) is a trust or custodial account exclusively created for the benefit of the account holder and his or her spouse and dependents, and is subject to rules similar to those applicable to individual retirement arrangements (IRAs). Contributions to an HSA are deductible, within limits. For 2015, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,350; for an individual with family coverage under a high deductible health plan is $6,650. For 2015, a “high deductible health plan” is a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage.

For 2015, the alternative minimum tax exemption amounts are: (1) $83,400 for married individuals filing jointly and for surviving spouses; (2) $53,600 for unmarried individuals other than surviving spouses; and (3) $41,700 for married individuals filing a separate return. Also, for 2015, nonrefundable personal credits can offset an individual’s regular and alternative minimum tax, and capital gains will be taxed at lower favorable rates for AMT. For 2015, the amount of AMTI above which the 28% rate applies is $92,700 for married taxpayers filing separate returns and $185,400 for married individuals filing joint returns, single taxpayers (other than surviving spouses), and estates and trusts.

If you have a stock holding due to the exercise of an incentive stock option during this year that is now below the value at the exercise date (underwater), consider selling the shares before the end of the year to avoid the AMT tax due on the original exercise of the option.
Some of the standard year-end planning ideas will not reduce tax liability if you are subject to the alternative minimum tax (AMT) because different rules apply. Because of the complexity of the AMT, it would be wise for us to analyze your AMT exposure.