Year-end tax planning for individuals, trusts and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments. As in past years, individuals and businesses need to question the status quo, explore new strategies, and evaluate potential plans – most of which is done best before the current tax year closes. This letter explores some of the traditional year-end planning techniques and how events in 2016 may impact this planning. We are ready to help you plan efficiently and effectively for 2015 and future years.
Traditional Year-End Planning Techniques
While new and pending developments play a critical role in year-end tax planning, traditional year-end planning techniques should not be overlooked. These techniques principally hinge upon the goal of smoothing out taxable income between the year about to close and the next year as best as can be predicated. In turn, such planning relies on strategies to accelerate or deferred income and expenses as required. Some of the most common techniques include:
Income Acceleration into 2015 (for deferral to 2016, delay the following actions):
- Selling outstanding installment contracts
- Receive bonuses before January
- Sell appreciated assets
- Redeem U.S. Savings Bonds
- Declare special dividend
- Complete Roth conversions
- Accelerate debt forgiveness income
- Maximize retirement distributions
- Accelerate billing and collections
- Avoid mandatory like-kind exchange treatment
- Take corporate liquidation distributions in 2015
Deductions/Credit Acceleration into 2015 (for deferral to 2016, take contrary actions as appropriate):
- Bunch itemized deductions into 2015/Standard deduction into 2016
- Don’t delay bill payments until 2016
- Elect Expanding/accelerated depreciation
- Pay last state estimated tax installment in 2015
- Dont delay economic performance
- Watch AGI limitations on deductions/credits
- Watch net investment interest restrictions
- Match passive activity income and losses
You should discuss with your accountant if you are contemplating any of these actions.
Georgia Tax Credits
The State of Georgia has several credits that can be used to offset Georgia income taxes. One of these is the Education Expense Tax Credit. This tax credit is for contributions made to Georgia Student Scholarship Organizations. These organizations provide scholarships for students to attend primary and secondary private schools. Each year the State sets aside a specific amount of money which is available to taxpayers who are pre- approved to participate in the program. A married taxpayer filing a joint return can claim up to $2,500, and a single taxpayer up to $1,000. The benefit to an S corporation shareholder, LLC member or partner of a partnership can even be greater – up to $10,000, limited to 6% of the related income. Since there is only a finite amount available, the 2016 fund will be utilized early in 2016. It is important to apply early in order to take advantage of this program. Many of the Student Scholarship Organizations are currently accepting “pre-registration” for the 2016 credits. This credit is a win/win since the contribution is deductible on your federal income tax return, and a dollar for dollar tax credit is allowed as an offset to your Georgia income tax.
The film industry is entitled to a special Film Tax Credit for film production in Georgia. The Georgia law allows for these credits to be transferred to other taxpayers. As a result, unused credits are sold by the film companies at a discount and you can purchase the credits to satisfy your Georgia income tax liability. Additionally, you get a full itemized deduction for the gross amount of the credit but you must report the discount as a capital gain.
Qualified Land Conservation Contributions
Another tax planning opportunity exists for a charitable contribution deduction for the donation of a land conservation easement to a government unit or charity for conservation purposes. The amount of the charitable deduction is the difference between the appraised value of the land before and after the conservation easement. The deduction is limited to 50% of the donor’s adjusted gross income with a 15 year carryover of any unused deduction. These rules were made permanent for all years beginning after December 31, 2014, by the Conservation Easement Incentive Act of 2015. You do not need to contribute your own land in order to benefit from the conservation easement charitable deduction – the benefit is also available by investing in syndicated conservation easement partnerships. If interested in learning more, please contact our office for additional information.
Georgia also has a state tax credit under the Georgia Conservation Tax Credit Program. A state income tax credit is allowed for property donated for conservation purposes by approved qualified donors up to the lesser of $250, 000 or 25% of the value of the donation for individuals. Any unused credit can be carried over for 10 years. Qualified landowners are also allowed to sell the income tax credit to other taxpayers, subject to certain regulatory restrictions.
Year-End Individual Planning
Assessing current income or expenses, gains and losses, to map out a year-end buy, sell or hold strategy makes particular sense as markets, and the economy in general, continue to make adjustments.
Income and Capital Gains/Dividends
Spikes in your income, whether capital gains or other income, may push capital gains into either the top 39.6 percent bracket (for short-term gains), or the 20 percent capital gains bracket (for long-term capital gains). Spreading the recognition of certain income between 2015 and 2016 may minimize the total tax paid for the 2015 and 2016 tax years. And those individuals finding themselves in the 15 or 10 percent tax brackets should consider recognizing any long-term capital gain available to the extent that, with other anticipated income, will not exceed the top of the 15 percent bracket ($74,900 for joint filers and $37,450 for singles in 2015).
Net Investment Income Tax (“NII”)
Since creation of the 3.8% NII tax, individuals have learned that NII encompasses more than capital gains and dividends. NII includes income from a business in which the taxpayer is a passive participant. Rental income may also be considered NII unless earned by a real estate professional. The NII threshold amount is equal to: $250,000 in the case of joint returns or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. These threshold amounts are not indexed for inflation.
Along with reviewing traditional techniques, individuals should examine carefully the potential impact of the NII tax, capital gains and dividends, alternative minimum tax (AMT), Additional Medicare Tax, “kiddie tax”, and more. For some taxpayers, year-end strategies to keep income below certain thresholds may be valuable, such as the thresholds for the NII tax, the Additional Medicare Tax, the Pease limitation on exemptions and itemized deductions, and others. Of course, the nuances of every individual’s situation must be taken into account. For example, not all capital gains are treated the same, or taxed the same. The maximum tax rate on qualified capital gains and dividends increases from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set for the 39.6 percent rate ($464,850 for joint filers and $413,200 for singles in 2015). The maximum tax rate on qualified taxable gains and dividends for all other taxpayers remains at 15 percent; except that a zero-percent rate applies to taxpayers with income below the top of the 15 percent tax bracket. The maximum tax rates for collectibles and unrecaptured Code Sec. 1250 gain are 28 and 25 percent, respectively.
New Legislation and Tax Extenders for Individuals
Equally important is not to overlook new tax legislation. So far in 2015, only a handful of tax bills have been passed by Congress and signed into law by President Obama. Two new laws affect public safety officers. A trade bill also makes a change to the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. Congress also renewed the Health Care Tax Credit for qualified individuals.
Congress has not (as of the date of this letter) renewed the so-called tax extenders. Many individuals have used the extenders, such as the state and local sales tax deduction, higher education tuition and fees deduction, Code Sec. 25C residential energy credit, IRA distributions directly to charities, and many more to maximize tax savings. As in the past years, it’s a waiting game. For year-end planning purposes, it is generally anticipated that Congress will renew these popular tax breaks, making them available for 2015. It is unclear if Congress will also extend them into 2016. Our office will keep you posted of developments.
Estate and Gift Taxes
The maximum federal unified estate and gift tax rate is 40 percent with an inflation-adjusted $5,000,000 exclusion (up to $5.43M for gifts made and estates of decedents dying during 2015 and $5.45M for 2016). The annual use-it-or-lose-it gift tax exclusion allows taxpayers to gift up to an inflation-adjusted $14,000 to any individual ($28,000 for married individuals who “split” gifts) tax free and without counting the amount of the gift toward the lifetime $5,000,000 exclusion (adjusted for inflation) and, with proper planning, double for married couples who share the exclusion.
Affordable Care Act (“ACA”)
Unless exempt, the ACA requires that all individuals carry minimum essential coverage or make a shared responsibility payment. Individuals with health insurance coverage should ascertain that their coverage satisfies the ACA’s minimum essential coverage requirements. Individuals without minimum essential coverage may be liable for a shared responsibility payment unless exempt. Individuals who obtain health insurance coverage through the ACA Marketplace may be eligible for the Code Sec. 36B premium assistance tax credit.
Planning For Retirement
Year-end is a good time to review if your retirement savings plans and tax strategies compliment each other. Individuals can contribute up to $5,500 to an IRA or Roth IRA for 2015. If they qualify, individuals can also make an additional so-called “catch-up contribution” of an additional $1,000. This treatment is targeted to individuals age 50 and older. Keep in mind that the maximum amount that can be contributed to a Roth IRA begins to decrease once a taxpayer’s adjusted gross income crosses a certain threshold. For example, married couples filing jointly will begin to see their contribution start to phase out when their AGI is $183,000. Once their AGI reaches $193,000 or more, they can no longer contribute to a Roth IRA. For single filers the corresponding income thresholds for 2015 are $116,000 and $131,000. Please note that individuals have until April 18, 2016, to make an IRA contribution for 2015.
Traditional IRAs and Roth IRAs are very different savings vehicles. A traditional IRA or Roth IRA set up years ago may not be the best savings vehicle today or for the immediate future if employment and other personal circumstances have changed. Some individuals may be contemplating rolling over a workplace retirement plan into an IRA. Very complex rules apply in these situations and rollovers should be carefully planned. The same is true in converting a traditional IRA to a Roth IRA. Every individual has unique goals for retirement savings and no one plan fits all.
Retirement – Higher Deduction Options
Business owners seeking to make significant pension contributions should consider a Cash Balance Plan for their company. In the right situation, an owner/employee can contribute up to 100% of their annual compensation limited to $210,000 for 2015. However, skilled assistance is required to set up this type of plan and the plan requires annual administration not required for many defined contribution plans (401K, SEP, etc.). For a 2015 deduction, the plan must be established by December 31, 2015, even though the actual contribution can be deferred until the due date of the tax return with extensions.
Marriage, the birth or adoption of a child, the purchase of a new residence, a change in filing status, retirement, and many more life events impact year-end tax planning. Of course, timing is a factor. In some cases, a life event may be planned; in others, events occur unexpectedly. The possibility of significant changes and/or significant or unusual items of income or loss should be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future, into 2016, and predict, if possible, any events that could trigger significant income or losses, as well as a change in filing status.
Year-End Trust Planning
Many of the tax planning strategies for individual taxpayers are also applicable to trusts. As with individuals, spreading the recognition of income between tax years may minimize trust taxes. Another tax minimization strategy for a trust is to shift trust income from a high rate trust to a lower rate beneficiary.
Income and Capital Gains/Dividends
The tax brackets for trusts are more compressed than the tax brackets for individuals. For example, in 2015, the 39.6% tax bracket for individuals filing jointly begins at $464,850 of taxable income, but for trusts the 39.6% bracket begins at only $12,300 of taxable income. As a result, shifting trust income to the beneficiary may produce significant tax savings. One way this can be achieved is by making distributions from the trust to the beneficiary.
Net Investment Income Tax
While the 3.8% NII tax threshold for individuals is $250,000 for married filing joint and $200,000 for individuals filing single, the 2015 NII tax threshold for trusts begins at only $12,300 of taxable income. This can result in a substantial amount of trust income being subject to the additional 3.8% NII tax. However, trust exposure to the NII tax may be reduced through distribution planning (See the following paragraph).
Beneficiary Distributions & The 65 Day Rule
When distributions are made from the trust to the beneficiary, the trust is allowed a deduction for the distribution of certain classes of income. The income is then included on the beneficiary’s individual income tax return. In many cases, the beneficiary’s individual income tax rate is lower than the income tax rate for the trust. This results in less total income tax on the trust income.
A trust can elect to treat distributions made in the first 65 days of the tax year as a distribution of current year or prior year income. Therefore, a distribution made by March 5, 2016, can be treated as a distribution of 2015 trust income. This allows some additional time to determine the income for the trust and determine if a distribution should be made to the beneficiary.
The decision on whether to make a distribution, and the amount of the distribution, should be reviewed each year. The tax related factors can change from year to year and there are also other non-tax factors that should be considered.
Year-End Business Planning
As in past years, business tax planning is uncertain because of the expiration of many popular but temporary tax breaks that have been part of an “extenders” package of legislation. Also added to the mix is the far-reaching ACA. Other changes to the tax laws in 2015 made by new regulations and other IRS guidance should also be considered in assessing year-end strategies.
Code Sec. 179 Expanding
Code Sec. 179 property includes new or used tangible property that is depreciable under Code Sec. 1245 and is purchased to use in an active trade or business. Under enhanced expensing, for 2014 and prior years, businesses could write off (“expense”) up to $500,000 in qualifying expenditures. This $500,000 cap was not reduced unless total expenditures exceed $2,000,000. Until the enhanced provisions are extended, businesses can write off up to $25,000 of qualifying expenditures. This cap is reduced if total expenditures exceed $200,000.
Congress provided for 50% bonus depreciation through 2014 (through 2015 for certain transportation and other property). Legislation introduced in Congress in 2015 would extend bonus depreciation through 2016 or, alternatively, make bonus depreciation permanent.
A potentially beneficial provision in final, so-called “repair” regulations is the de minimis safe harbor. The safe harbor enables taxpayers to routinely deduct certain items whose cost is below the specified threshold. The de minimis safe harbor is an annual election, not an accounting method, so it can be made and changed from year to year. The current threshold is set at: $5,000 for taxpayers with an applicable financial statement (taxpayers with an AS should have a written policy in place by the beginning of the year that specifies the amount deductible under the safe harbor); and $500 for taxpayers without an AS.
Domestic Production Activities Reduction
One incentive that is definitely available for 2015 is the Code Sec. 199 domestic production activities deduction. This deduction is over 10 years old, but the number of taxpayers claiming the potentially valuable deduction is smaller than the other incentives. In 2015, the IRS issued guidance that fleshes out the types of activities that may qualify for the deduction. The types of activities are many and varied. Our office can review your business activities and help you ascertain if the deduction may be worthwhile.
Vehicle Depreciation Limits
The IRS released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also increased the 2014 first-year limitations by $8,000 to reflect passage of the Tax Increase Prevention Act of 2014, which retroactively extended bonus depreciation for 2014 late last year. It is uncertain whether anticipated 2015 extenders legislation will make the same retroactive adjustment for 2015.
Other Business Extenders
Many other beneficial tax provisions for businesses are up for consideration in extenders legislation for 2015 and beyond. These include the research tax credit; small business stock; S corp built-in gains; New Markets Tax Credit; Work Opportunity Tax Credit; employer wage credit for activated military reservists; Subpart F provisions; enhanced deduction for contributions of food inventory, empowerment zones; Indian employee credit; low-income credits for subsidized new buildings and military housing; treatment of regulated investment companies (RIBS); and basis reduction of S corporation stock after donations of property.
Small Business Health Care Tax Credit
Small employers with no more than 25 full-time equivalent employees may qualify for a special tax credit to help offset the cost of health insurance for their employees. The employer must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement.
Due to changes in the tax laws and other events, some deadlines will be changing starting in 2016; with others starting for 2016 returns filed in 2017. As a result, planning at year-end 2015 might start factoring in some of these deadlines when setting out schedules and strategies at the start of 2016. Notably, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, partnerships will be subject to an earlier March 15 deadline and C corporations generally will move to an April 15th deadline starting for 2016 tax year returns. Extensions-to-file are also adjusted. The FBAR deadline for reporting a financial interest or signature authority over a foreign financial account also will move, from June 30 to April 15.
A Washington, D.C. holiday, Emancipation Day, will shift the filing and payment deadline for 2015 individual returns from April 15, 2016 to April 18, 2016.
Estate Tax Uniform Basis Reporting
The IRS delayed new uniform basis reporting requirements for estate tax property until February 29, 2016. The delay was provided to give the IRS time to issue guidance to executors, beneficiaries, and others on how to comply with the new reporting requirements.
Year-end tax planning can appear to be a daunting task, but our office is ready to work with you. Please contact our office. Together, we can create a customized tax strategy tailored to you.