As 2015 draws to a close, 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. Turbulence in the stock market, overall economic uncertainty, and Congress’ failure to act on a number of important tax breaks that expired at the end of 2014 have made matters more complicated. 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. For individuals, 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
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.
Higher-income earners 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. 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 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.
- 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.
- 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.
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.
- 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.
- 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 help you save taxes. Again, by contacting us, we can tailor a plan that will work best for you. We will also 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.