2015 Year End Tax Preparation
Dear Clients & Friends:
As the year draws to a close, we find ourselves in all too familiar territory. The so-called extenders package still hasn’t made its way out of the House Ways & Means Committee, which means there is much uncertainty, especially for businesses, about the tax laws applicable to 2015. We nevertheless hope to provide some helpful year-end planning tips along with a few other pieces of information worth sharing.
Year-end planning for individuals
Determine your marginal tax bracket – In order to evaluate the effects of year-end maneuvers, there is no single piece of information more important than one’s marginal tax bracket. The regular 2015 federal tax rates can be found at http://taxfoundation.org/article/2015-tax-brackets. These rates apply to federal taxable income. If however one is subject to the alternative minimum tax (AMT) the marginal rate may be 26% or 28%. Furthermore, a whole slew of deductions and credits are phased out as income increases yielding even higher effective marginal tax rates. Throw in the 3.8% tax on net investment income (NIIT) if applicable, and the top Oregon marginal rate of 9.9% and it’s conceivable to have an effective marginal tax rate of well over 50%. In that case, if for example, you donate $10,000 to charity or spend another $10,000 on business expenses, you may only be out of pocket for half of the cost.
- Contribute to an IRA by April 15th to lower your 2015 tax bill. Note that the deduction phases out as income increases if one or both spouses (if married) are covered by an employer plan. That aside, maximum contributions for 2015 are $5,500 plus another $1,000 catch-up contribution for those who are age 50 or older. You must have earned income to contribute.
- Contribute to a Roth IRA – If you are willing to forego a current tax deduction, consider a Roth IRA instead. Although you won’t save any taxes today, the earnings in the account are never taxed, even upon withdrawal, if you follow the rules.
- Convert your traditional IRA to a Roth – If your tax bracket is unusually low this year, consider converting a traditional IRA to a Roth IRA – especially if the investments in your IRA are down in the current market.
- Consider bunching your itemized deductions in one year instead of spreading them over two years or more.
- Sell lose stocks before year-end, especially if you expect net capital gains for the year.
- Recognize long-term gains – Net long-term capital gains and qualified dividends are subject to a favorable federal tax rate. The maximum federal rate is 20% (plus the 3.8% NIIT if applicable) but drops to 15% for those in the 25%, 28%, 33%, and 35% regular tax brackets. It drops to 0% for those in the 10% or 15% regular tax brackets. Therefore, if your taxable income is reasonably low, you might be able to create long-term capital gain income at no federal tax cost. Oregon taxes will of course apply.
- Pay state taxes before year-end – If you expect to owe state income taxes for 2015 next April, consider paying them prior to December 31st to avail yourself of the deduction unless you expect to be subject to AMT in which case the deduction would provide no benefit.
- Contribute to an FSA – If your employer offers a flexible spending account, sign up!
- Consider an installment sale of property vs an outright sale for cash in order to spread revenue over multiple years.
- Consider disposing of passive activities with suspended losses to unrelated parties prior to year-end.
- Make charitable donations of appreciated stock held for longer than one year. This avoids taxation of the gain and yields a full fair market value deduction.
- Consider donating to the Oregon Cultural Trust – If you donate up to $500 on a single return or $1,000 on a married filing joint return to qualifying cultural organizations, you can donate a like amount to the OCT and receive a 100% Oregon tax credit. This has the potential to save you more than the donation amount! More info is available at www.culturaltrust.org.
Year-end planning for businesses
Among the many expired tax provisions that may or may not get extended retroactively back to 1/1/2015 are the:
- 15 year recovery period for qualified leasehold, restaurant, and retail improvements
- 50% first-year bonus depreciation deduction for new assets
- $500,000 section 179 deduction for qualifying property purchases (which phases out dollar for dollar as total qualifying purchases exceed $2 million)
- 100% exclusion for qualified small business stock
- Basis adjustment for stock in an S corporation making charitable contributions of appreciated property
- Reduction in the recognition period for S corporation built-in gains to 5 years
- Work opportunity tax credit
There are numerous other expired business and individual tax provisions which are not listed here.
Hopefully, we’ll have a bill in time for businesses to make informed decisions about their capital purchases. Under current law, the section 179 expensing limitation is only $25,000 with a phase-out level of $200,000.
We did get a bit of good news just last week. The “de minimis safe harbor election” now allows businesses without a qualifying financial statement (audit, SEC, governmental statements, etc.) to elect to expense up to $2,500 per item of tangible personal property (e.g. furniture or equipment), up from $500. The new limit was published in Notice 2015-82 and applies to tax years beginning on or after January 1, 2016 but the IRS said it will not raise the issue of whether a business can utilize the increased amount in years ending prior to that. For the election to be valid, the business must have at the beginning of the taxable year accounting procedures in place treating such amounts as an expense.
- If your business is on the cash method of accounting, consider deferring revenues into next year by delaying client billings and/or accelerating expenses into 2015 by paying expenses before year-end. If you expect your tax bracket to be higher in 2016 than in 2015, consider the opposite.
- Create basis to absorb owner losses – Make sure the owner(s) of an S corporation or partnership have ample basis to deduct losses prior to year-end.
- Set up a retirement plan for employees. Many qualified plans must be in place by year-end to provide a 2015 tax benefit.
- Consider whether your business activities in another state create “nexus” requiring the filing of a state tax return and payment of the taxes that go along with it. It is sometimes possible to manage activities so that nexus is not created; each state’s rules are different. It is worth noting that states have increasingly abandoned the physical presence nexus standard in favor of an economic presence nexus standard, making it more likely for your business to have a filing requirement there.
Estate & gift environment
The United States has a unified transfer tax system which limits the amount one can transfer to others during their lifetime and at death combined without paying transfer taxes. For 2016, the estate and gift tax exemption is $5,450,000 and the top federal estate and gift tax rate is 40%. The top Oregon estate tax rate is 16%. Note that Oregon has no gift tax! During 2015 and 2016, an individual can make gifts of $14,000 per donee without using any of the exemption amount. If your net worth is over the $5,450,000 threshold, it makes great sense to consider making annual gifts to whittle some of the excesses away.
In early 2013, Congress made the estate tax portability rules permanent. This means that if one spouse dies without using up all of their exemption amount, the unused amount can if an election is made, be used by the surviving spouse upon their death.
Other notable information
Remember that the Affordable Care Act (ACA) “pay to play” penalties and employer reporting requirements are in full swing. If your business had on average over 50 full-time equivalent employees (based on a 30 hour work week) in 2014, you are subject to the new reporting requirements even if you don’t expect to be subject to a penalty and even if you didn’t provide health care insurance. The employee reporting deadline is February 1, 2016. Also, your business could be subject to the penalties for failure to provide health insurance in 2016 at these same employment levels. And remember, all businesses under common control must be included in the employee count computations.
Terminate non-conforming employer payment plans – The Treasury department’s interpretation of the ACA’s market reforms regarding the prohibition on annual limits and the requirement to provide certain preventive care without cost sharing is troubling to say the least. In brief, the new rules cause dire consequences if a business pays outright or reimburses an employee for the cost of a health care policy purchased in the individual marketplace. There is a transition rule still in existence for 2% S corporation shareholders but otherwise, businesses should not be participating in such arrangements which are known as employer payment plans.
The Treasury department issued proposed regulations applicable to partnership guaranteed payments in 2015 which are not final. Still, the regulations suggest some exciting changes for service partners who would prefer to take a wage rather than a guaranteed payment. The regulations would look to the presence or absence of “entrepreneurial risk” and the likelihood of the amounts actually being paid. Under the right circumstances, partners should be able to be treated as W-2 employees if these regulations are finalized as is. Furthermore, the preamble to the regulations suggests that they are consistent with legislative history which perhaps indicates that partnerships currently employing such practices are on safer ground than they thought.
You might have heard of the significant changes made to social security benefits last month in the budget deal. The “file and suspend” and “restricted application” strategies have been eliminated. Both are available for a short window of time for those who qualify. If you are considering using either of these strategies, you need to act quickly! There are many informative articles available on the internet discussing these strategies and the timetables to use them. If you are nearing social security age, please go take a look.
We hope the year has been happy and prosperous for your family and loved ones. We are grateful for our client and business relationships and hope we can meet your expectations and give you the service and attention you deserve.
Zirkle, Long & Associates, LLC